2011 (2) TMI 725 - HC - Income Tax

Exemption under Section 10(22) - What is pertinent to be taken note of is that there is no finding or allegation of any diversion of these funds for the purpose other than carrying on educational activity. There is no diversion of funds to the individual members or taking away of profits for some other activity. The opinion is completely based on surmises and conjectures as it seems to suggest that merely because funds were in a private bank, there may have been divergence of funds to the members of the Society. Similarly, the factum of construction being carried out by Ahluwalia Construction Co.(Pvt.) Ltd, stated to be a family concern of the President, was not material as there was no allegation of any inflated cost of construction or unreasonable profits being derived from the same by third parties as a mode of divergence of funds. It is not in dispute that the Society was duly registered under Section 12A of the said Act on the basis of its Memorandum of Association - There has been no change in the Memorandum of Association - The Society continues to run the schools which is the object with which the Society was set up - The exemption under Section 10(22) of the IT Act has been available to the respondent/assessee for a number of years prior to the assessment years in question and even for the subsequent years as stated by learned counsel for the assessee - It is in these circumstances that the legal position set out on the principle of consistency would come into play as observed in Commissioner of Income Tax v. Lagan Kala Upvan 2002 -TMI - 12203 - DELHI High Court - Decided in favour of assessee.

Issues Involved:
1. Denial of exemption under Section 10(22) of the Income Tax Act, 1961.
2. Examination of whether the institution existed solely for educational purposes and not for profit.
3. Evaluation of the rule of consistency in granting exemptions.
4. Analysis of the legality of funds collected under different heads (Admission Fee, Corpus Fund, and Loans from parents).

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(22) of the Income Tax Act, 1961
The primary issue was whether the respondent/assessee was entitled to exemption under Section 10(22) of the IT Act for the Assessment Year 1993-94. The Assessing Authority and CIT(A) denied the exemption, but the ITAT's majority opinion favored the respondent/assessee. The High Court framed the question of law as: "Whether the claim of the respondent for exemption under Section 10(22) of the Income Tax Act, 1961 was allowable?"

2. Examination of Whether the Institution Existed Solely for Educational Purposes and Not for Profit
The Assessing Officer scrutinized three components: Admission Fee, Corpus Fund, and Loan from parents. The assessment order highlighted that the Society carried on educational activities but raised funds in a manner suggesting it was a "money-making machinery rather than a charitable institution." The CIT(A) upheld this view, noting that funds were collected from parents under the guise of education, despite the respondent/assessee having substantial fixed deposits and bank balances. The ITAT's Judicial Member agreed with this view, but the Accounting Member and the President of ITAT found that the institution existed solely for educational purposes, as evident from its objects and the application of funds towards educational infrastructure.

3. Evaluation of the Rule of Consistency in Granting Exemptions
The respondent/assessee had been granted exemption under Section 10(22) for preceding and subsequent years. The Department argued that the principle of res judicata does not apply to assessment proceedings, but the rule of consistency does. The High Court noted that the rule of consistency should be maintained, especially when there was no change in the facts or the Memorandum of Association of the Society. The Court referred to several judgments emphasizing that an educational institution should not be denied exemption merely because it generated surplus, as long as the surplus was used for educational purposes.

4. Analysis of the Legality of Funds Collected Under Different Heads
The Assessing Officer questioned the treatment of Admission Fee, Corpus Fund, and Loans from parents. The CIT(A) and the Judicial Member of ITAT viewed these collections as indicative of profit motives. However, the Accounting Member and the President of ITAT found these collections to be within the powers given under the Memorandum of Association and used solely for educational purposes. The High Court noted that there was no evidence of funds being diverted for non-educational purposes or personal gains. The Court also found that the provisions of the Delhi School Education Act, 1973, cited by the Department, were not applicable to unaided institutions like the respondent/assessee.

Conclusion:
The High Court concluded that the respondent/assessee was entitled to exemption under Section 10(22) of the IT Act. The Court emphasized that the institution existed solely for educational purposes and not for profit-making. The rule of consistency was upheld, and the funds collected were found to be used for legitimate educational purposes. The appeal of the appellant/Department was dismissed, affirming the majority opinion of the ITAT.

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