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TMI Blog1981 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ool and Mahadevi Birla Sishu Vihar. The ITO rejected this claim on the ground that the section applied only to educational institutions. It would be proper in view of the controversy that we have to decide in this case to refer to the relevant portion of the, order of the ITO. He observed, inter alia, as follows : " In Part IV of the return the assessee has claimed exemption under section 10(22) in respect of the income of Rs. 17,374 from Mahadevi Birla Girls' High School and Mahadevi Birla Sishu Vihar. 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 assessee is neither a University nor an educational institution. The assessee, being trust, cannot avail of the exemption, since the section applies to an educational institution and not to a trust. The section exempts any 'income of' an educational institution and not any income from an educational institution. This shows that an educational institution must be the owner of the income. But, in the present case, the trust is the owner of the income and the educational institutions (schools) are the sources of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was not entitled to exemption under s. 10(22) of the Act. Incidentally, we may mention that there was another question relating to allowability of certain depreciation allowance. The ITO had held against the assessee on this point. As this question has not been referred to us, we are not dealing with this aspect of the matter of depreciation. The AAC was, however, of the view that s. 10(22) of the Act applied to the facts and circumstances of this case as the trust was entitled to an exemption in respect of the schools' income and it was not necessary that only the educational institution by itself was entitled to such exemption. Being aggrieved by the order of the AAC, the revenue went up in appeal before the Tribunal. The Tribunal on this aspect after discussing the relevant clauses of the deed referred to the decision of the Supreme Court in the case of Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 and also in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 and observed as follows: "The trustees have also the powers similar to those described in the case of Birla Sanskriti Trust by the Tribunal in its order dated 29-6-76. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for the purposes of the trust or otherwise. It is only after the total income of the trust is computed according to the Act that the further question will arise as to how much will be taxable under section 11. It is for that purpose that capital expenditure, among others, has to be deducted from the total income for the purpose of finding out how much has been accumulated by the assessee. Viewed in this context, it would be clear that there is no double deduction as referred to by the Income-tax Officer and the departmental representative before us. We would, therefore, direct the Income-tax Officer to allow depreciation to the trust as such and according to law. Out of this order of the Tribunal, the question, as indicated before, has been referred to this court. As we have mentioned before, the Tribunal mainly relied on the fact that the owner of the income or rather the recipient of the income was neither a university nor an educational institution but a trust. The Tribunal referred to the fact that the trust deed under which the trust functioned permitted investment or application of the trust money or trust income to objects, though charitable, other than an educati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cities, towns and villages, or for both. (22A) any income of a hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring, medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit." Section11(1)(a) may in this connection be, referred to. The said section reads as follows: "11. Income from Property held for charitable or religious purposes.(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income (a) income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India : and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property. In order to get exemption, therefore, under s. 10 we must bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance-Bill, 1970, as follows: "Sub-clause (a) seeks to insert a new clause (20A) in section 10 of the Income-tax Act retrospectively from the 1st April, 1962, i. e., the date of commencement of the Income-tax Act. The effect of the proposed amendment is that income of the Housing Boards or other statutory authorities setup for the purpose of dealing with or satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages will be exempt from income-tax. Sub-clause (b) seeks to insert a new clause (22A) in section 10 of the Income-tax Act. The effect of the proposed amendment will be that the income of hospitals or other medical institutions will be completely exempt from tax, notwithstanding that such income is not fully spent during the year in which it is earned." Reference may also be made to the memorandum explaining the provisions in the Finance Bill, 1970, wherein it was observed as follows : "34 Exemption from tax of the income of hospitals and other medical institutions. At present, universities and other educational institutions existing solely for educational purposes and not for purposes of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... institution will be subject to tax. However, there may be cases where the educational institutions may be owned by the trusts or societies to whom the provisions of section I I may be applicable. Where all the objects of these trusts are educational, and the surplus, if any, from running the educational institution is used for educational purposes only, it can be held that the institution is existing for educational purposes and not for purposes of profit. However, if the surplus can be used for non-educational purposes, it cannot be said that the institution is existing solely for educational purposes and such institutions will not be liable for exemption u/s. 10(22). But, in such cases, the applicability of section 11 can be examined and if the conditions laid down therein are satisfied, the income will be exempt U/s. 11. 4. What has been stated in respect of educational institutions will equally apply to hospitals and other institutions referred to in section 10(22A). In the case of hospitals and similar institutions, if the surplus is used for philanthropic purposes, the income of the institution will be eligible for exemption u/s. 10(22A). It is not necessary that the surplu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh learned advocate for the revenue drew our attention to that here. In that case it was the income of the educational institution, that is to say, the Board of Secondary Education, and it was not the income of a trust or other parson which was entitled to divert its income to purposes other than education, though charitable in nature., But, that distinction, in our opinion, makes no difference. Before the Allahabad High Court in the case of Katra Education Society v. ITO [1978] 111 ITR 420, it Was observed that s. 10(22) of the I.T. Act, 1961, exempted the, income of " a university or other educational institution existing solely for educational purposes " from income-tax. The word " institution " had not been defined in the Act according to the Allahabad High Court. There was, therefore, no reason why an educational society could not be regarded as an educational institution if that educational society was running educational institutions. Before the House of Lords this question arose in a slightly different context in the case of Ereaut (Inspector of Taxes) v. Girls' Public Day School Trust Ltd. [1930] 15 TC 529 (HL). There the question arose whether: the exemption under Sch. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancillary institutions, to encourage research and study in the concerned faculties in the college, to institute additional courses and post-graduate courses, to organise and maintain hospitals, clinics, laboratories, etc., for clinical teaching and research and training of the students. On a writ petition filed by the society it was held that the assessee-society was not different from a medical college. It was only because of the pendency of the petition for exemption from the stamp duty and registration fees, which was pending with the Government, that the construction of the buildings had to be undertaken in the name of the Medical Educational Society. Further, there was no distinction between the petitioner-educational society and the college and the society was an educational institution with no motive of private or personal profit. Merely because certain surplus arose from the society's operations, it was held by the Andhra Pradesh High Court that it could not be said that the institution was run for the purpose of profit so long as no person or individual was entitled to any portion of the said profit and the said profit was utilised for the purpose of and for the promotion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution if the society was running an educational institution. All the income of a society running a college would not be exempt under s. 10(22). Only the income which has a direct relation or is incidental to the running of the institution, as such, would qualify for exemption. On the facts, the Tribunal was right; it was held by the Madras High Court, in its conclusion that the assessee was eligible for the exemption under s. 10(22). There at p. 240 of 118 ITR of the report the High Court observed as follows: "The further contention was that the institution, in order to qualify for the exemption under s. 10(22), should itself be the educational institution and that it was not enough if it ran an educational institution it was pointed out that the assessee could assist colleges and that in case it merely rendered assistance, it would be in the nature of a financial body, which did not itself impart education. It is difficult to accept the argument that, in the present case, the assessee is not the educational institution. The assessee has come into existence for the purpose of establishing, running, managing or assisting colleges, schools and other educational organisations. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee, gave a categorical, answer to a question as to whether an assessee like the present one could merely by running an institution for educational purposes, get exemption for all its income, whether it related to the educational purpose or not. Quite fairly, and in our opinion rightly, he stated that the expression 'existing', used in s. 10(22) clearly showed that the matter would have to be investigated in each year, and so long as it was found that the institution existed for educational purposes in the relevant year, and so long as its profit is incidental to the purpose of education, the income would be exempt, and not any income, however remotely connected with the educational institutions. A society by merely running college cannot utilise this provision as an instrument for exemption in respect of all its sources of income which had no connection with its educational authority, There must be some correlation between the income earned and the educational institution. For instance, it is well known in this part of the country, that educational institutions, before they are granted affiliation, are required to deposit a substantial sum, and that such deposits are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have referred to, which objects though charitable in nature, were not solely or exclusively for education; but that is only relating to the trust and that guides the recipient or, the owner of the income. But, so far as one of the clauses of the trust deed, that is to say, cl. 2(a) and (b) of the trust deed is concerned, that is to permit the trust to establish and start, aid, run, maintain or manage schools, colleges or educational institutions of all kinds for boys and girls and adults and reading rooms, libraries, museums, and boarding houses and hostels, and similar other institutions for the benefit of the public. It is not the entirety of the income of the recipient the trust in this case but the income of the particular source, namely, the educational institution, that comes within the purview of sub-s. (22) of s. 10 of the Act. The next question of the matter which requires consideration is whether the educational institution, in the facts and circumstances of this case, was existing solely for the purpose of education and not for the purpose of profit. Now, here, unless there is an income, that is to say, a surplus of receipt over the expenditure, no question of not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was credited separately in a building account and out of this amount the assessee constructed a building. The Tribunal held that, the primary purpose for which the assessee was established was to promote commerce and trade in art silk, silk yarn and cloth as set out in cl., (a) and the other objects in cls. (b) to (e) were merely subsidiary objects; that the primary purpose was plainly advancement of an object of general public utility and did not involve carrying on of any activity for profit within the meaning of s. 2(15) of the I.T. Act, 1961. Because, whatever activity was carried on by the assessee, the fulfilment of the primary purpose was for the advancement of an object of general public utility and not for profit; and that, therefore, the assessee's income was exempt from tax under s. 11(1). Since there was a conflict of opinion between the High Courts regarding the interpretation of the words " not involving the carrying on of an activity for profit " within s. 2(l5) of the Act, the Tribunal at the instance of the revenue had stated a case directly to the Supreme Court under s. 257 of the Act. In this connection, it would be relevant to refer to s. 2(15) of the Act w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted, the Supreme Court noted, where profit making was the predominant object of the activity, the: purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arose from the activity. The exclusionary clause did not require that the activity must be carried on in such a manner that it did not result in, any profit. It would indeed be difficult, the Supreme Court observed, for persons in charge of a trust or institution to so carry an the activity that the expenditure balanced the income and there was no resulting profit. That would not only be difficult of practical realisation but would also reflect, unsound principle of management. The Supreme Court, therefore, was unable to accept the conclusion and the views expressed in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC), which was, therefore, overruled. The observations of Mr. Justice Khanna and Mr. Justice Gupta in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor of having large surplus in any particular year, nor the solitary fact of diverting some income of the source concerned to objects charitable but not educational by itself would be decisive of the matter and in that context the facts relevant to the relevant year would be very material though not conclusive. But in this case except that there was one solitary instance in one of the prior years when there was the application of some income to non-educational purposes, there was no other fact. That by itself, in our opinion, would not be very material. If, however, an educational institution as a source of income was generally or usually used as means of earning income to be utilised for non-educational purposes, then other considerations would apply. In that view of the matter we are of the opinion that the Tribunal was in error in not allowing the assesses the benefit of s. 10(22) of the Act. The trust which owned the educational institution may have other charitable though not educational purposes but if taking all the relevant factors, the educational institution generating the income was existing for only educational purposes then the assessee was entitled to exemption under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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