2004 (11) TMI 277 - AT - Income Tax

Issues Involved:
1. Exemption under Section 10(22) of the Income-tax Act.
2. Investment of funds by the school and its impact on exemption.
3. Application of income for non-educational purposes.
4. Eligibility of the trust for exemption under Section 11 of the Income-tax Act.
5. Enhancement of assessment by the CIT(A).

Detailed Analysis:

1. Exemption under Section 10(22) of the Income-tax Act:
The primary issue in this case is whether the assessee-trust, running a school, is entitled to exemption under Section 10(22) of the Income-tax Act. The Assessing Officer (AO) denied the exemption, arguing that the trust was incurring expenditures on non-educational purposes and earning profits, thereby not existing solely for educational purposes. The AO's decision was based on the Supreme Court's ruling in McDowell & Co. Ltd. v. Commercial Tax Officer [1985] 154 ITR 148. The CIT(A) upheld this decision. However, the Tribunal noted that in previous and subsequent years, similar exemptions were granted to the assessee under identical circumstances. The Tribunal also considered the Supreme Court's ruling in Aditanar Educational Institution v. Addl CIT [1997] 224 ITR 310, which stated that incidental surplus from lawful educational activities does not negate the institution's primary educational purpose. The Tribunal directed the AO to allow the exemption under Section 10(22).

2. Investment of Funds by the School:
The AO and CIT(A) both noted that the school had made investments in equity shares of companies associated with the trustees, which they argued was for profit and not for educational purposes. The Tribunal, however, referred to Circular No. 712 dated 25-7-1995 issued by the CBDT, which clarified that educational institutions exempt under Section 10(22) are not required to invest funds in the modes specified under Section 11(5). The Tribunal found that the investments did not affect the exemption under Section 10(22) as long as the primary purpose remained educational.

3. Application of Income for Non-Educational Purposes:
The AO found that a significant portion of the trust's expenses was on aids and donations for non-educational purposes. The Tribunal examined the details of these expenses and found that most of them were related to educational or cultural activities, except for a small amount given for medical relief. The Tribunal concluded that these expenditures did not disqualify the trust from the exemption under Section 10(22).

4. Eligibility of the Trust for Exemption under Section 11:
The CIT(A) denied the exemption under Section 11, arguing that the trust violated the provisions of Section 11(5) and Section 13(1)(d) by making unauthorized investments and not filing Form No. 10 for accumulation of income. The Tribunal noted that the income of the school, which was exempt under Section 10(22), should not be included in the trust's total income. Therefore, the trust's income was primarily from the school, and after excluding the school's income, the trust had no significant taxable income. The Tribunal found that the trust was entitled to exemption under Section 11.

5. Enhancement of Assessment by the CIT(A):
The CIT(A) enhanced the assessment, determining the total income of the trust at Rs. 84,05,370 as against the returned loss of Rs. 90,82,933 and the AO's assessment of Rs. 83,62,580. The Tribunal disagreed with this enhancement, stating that the CIT(A) did not properly consider the application of income for educational purposes and the previous Tribunal orders granting exemption under similar circumstances. The Tribunal directed the AO to follow the earlier Tribunal's orders and allow the exemption.

Conclusion:
The Tribunal concluded that the assessee-trust is entitled to exemption under Section 10(22) of the Income-tax Act for the income of the school, as the primary purpose of the trust is educational. The investments made by the school did not affect this exemption, as clarified by the CBDT Circular. The Tribunal also found that the trust is entitled to exemption under Section 11, as the income from the school, which is exempt under Section 10(22), should not be included in the trust's total income. The enhancement of the assessment by the CIT(A) was not justified. The appeal was allowed in favor of the assessee.

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