2006 (3) TMI 239 - AT - Income Tax

Summary

Issues Involved:
1. Denial of exemption under Section 10(23C)(iiiad) of the Income Tax Act.
2. Determination of whether the assessee society exists solely for educational purposes and not for profit.
3. Examination of the utilization of surplus funds.
4. Consideration of donations received as income from other sources.
5. Evaluation of payments made to family members of the society's president.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 10(23C)(iiiad):
The assessee society appealed against the orders denying exemption under Section 10(23C)(iiiad) of the IT Act for the assessment years 2001-02 and 2002-03. The AO denied the exemption, concluding that the society was formed to earn profit and utilized surplus funds to acquire assets, which contradicted the requirement of existing solely for educational purposes.

2. Determination of Purpose:
The AO observed that the society received substantial donations from students, which were not mentioned in the society's minutes or object clause. The AO noted that the president and his family members received benefits from the society, indicating a profit motive. The CIT(A) upheld this view, agreeing that the society's activities were commercial in nature and aimed at profit.

3. Utilization of Surplus Funds:
The assessee claimed that the surplus funds were used for the society's objectives, such as building construction, land purchase, furniture, and computers. The Rajasthan High Court's decision in the case of Asstt. CIT vs. Rajasthan State Text Book Board was cited to support that surplus utilization for educational purposes does not negate the exemption.

4. Donations as Income from Other Sources:
The AO treated donations as income from other sources, not related to educational services. The society's minutes mentioned classwise fees but not donations, suggesting that donations were separate from educational receipts. The AO argued that the donations were forced receipts from students, not genuine voluntary contributions.

5. Payments to Family Members:
The AO noted payments to the president, his wife, and father, as well as loans to the president and his wife. The CIT(A) found these payments indicative of profit diversion to family members. The assessee argued that these payments were reasonable and justified, but the AO could disallow unreasonable expenses. However, this did not affect the determination of the society's purpose.

Conclusion:
The Tribunal upheld the AO's decision, concluding that the society did not exist solely for educational purposes but also aimed at profit. The donations were considered income from other sources, and the exemption under Section 10(23C)(iiiad) was rightly denied. The appeals were dismissed, confirming the assessment orders for the respective years.