2003 (4) TMI 505 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to exemption under section 10(22) of the Income-tax Act, 1961.
2. Whether the assessee exists solely for educational purposes and not for profit.
3. Whether the ancillary objects of the assessee affect its eligibility for exemption.
4. Whether the assessee's activities and usage of surplus funds align with educational purposes.
5. Whether the assessee's failure to claim exemption in earlier years affects its current claim.
6. Whether the absence of registration under section 25 of the Companies Act, 1956, and the potential for dividend distribution impact the exemption claim.
7. Whether the Department's partial appeal affects the finality of the first appellate authority's order.

Detailed Analysis:

1. Entitlement to Exemption under Section 10(22):
The primary issue across all appeals was whether the assessee qualifies for exemption under section 10(22) of the Income-tax Act, 1961. Section 10(22) exempts "any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit." The Tribunal had to determine if the assessee, engaged in printing and publishing textbooks, fits this definition.

2. Solely for Educational Purposes and Not for Profit:
The assessee argued that its main object is educational, as it prints and publishes textbooks for school students, and thus should be exempt under section 10(22). The Department contended that the assessee's memorandum of association includes various ancillary objects that are not strictly educational. However, the Tribunal found that the assessee's activities were restricted to printing and publishing textbooks and that any surplus was reinvested in these activities, not distributed as dividends or bonuses. The Tribunal relied on precedents where similar organizations were granted exemptions, such as the Tamil Nadu Textbook Society and the Rajasthan State Textbook Board.

3. Impact of Ancillary Objects:
The Department argued that the ancillary objects in the assessee's memorandum of association indicated a profit motive. The Tribunal, however, concluded that as long as these ancillary objects were not actively pursued and the primary activity remained educational, the exemption under section 10(22) could not be denied. The Supreme Court's decision in Asst. CIT v. Thanthi Trust was cited, stating that business activities incidental to achieving the educational objectives do not disqualify an institution from exemption.

4. Activities and Usage of Surplus Funds:
The Tribunal examined whether the surplus funds were used for educational purposes. It was found that the surplus was reinvested in printing and publishing textbooks, and no dividends or bonuses were issued. An affidavit from a senior officer of the assessee confirmed that no dividends had been or would be distributed. This reinforced the assessee's claim of existing solely for educational purposes.

5. Failure to Claim Exemption in Earlier Years:
The Tribunal noted that the assessee had not claimed the exemption in earlier years due to ignorance. However, this did not preclude its eligibility for exemption in the years under appeal. The Tribunal emphasized that each year's eligibility for exemption should be evaluated independently.

6. Registration under Section 25 of the Companies Act and Dividend Distribution:
The Department argued that the assessee's lack of registration under section 25 of the Companies Act and the potential to distribute dividends disqualified it from exemption. The Tribunal, however, focused on the actual activities and intentions of the assessee, noting that no dividends were distributed and the surplus was used for educational purposes. The Tribunal held that the potential for dividend distribution was not material as long as it did not occur.

7. Partial Appeal by the Department:
The Tribunal observed that the Department had not appealed against the first appellate authority's order for the assessment year 1993-94, which granted exemption. This created a finality for that year, and the Tribunal held that the Department could not selectively challenge the order for other years without providing a valid explanation.

Conclusion:
The Tribunal concluded that the assessee is entitled to exemption under section 10(22) of the Income-tax Act, 1961, as it exists solely for educational purposes and not for profit. The appeals filed by the assessee were allowed, and the Department's appeals were dismissed. The Tribunal emphasized that the exemption should be evaluated annually to ensure compliance with the educational purpose requirement.