Income Tax Appellate Tribunal - Amritsar
Income-Tax Officer vs Model Institute Of Education & Research on 11 May, 2000
Equivalent citations: [2001]77ITD375(ASR)
ORDER
G.L. Garoo, Accountant Member.
1.The revenue has filed appeal against the order passed by the CIT(A) in A. No. 2-W/93-94/W-5 dated 16-12-1993 and taken following grounds of appeal:
"1. On the fads and in the circumstances of the case, the Id. CIT(A) has erred in holding that the assessee is enlitled to exemption under section 10(22) of the Income-lax Act as it is solely existing for educational purposes and not for profit."
2. The Id. CIT(A) has not appreciated that the profit has been utilised for promoting the business of M/s. Compumates Pvt. Ltd., Jammu, in which the Directors of the assessee-company have substantial interest. This clearly implied that the directors are deriving commercial benefit from the profits of the assessee-company or making profitable use of the assessee-company's funds for furthering their own commercial prospects. So much so, the directors of the assessee-company namely Dr. Arun Gupta and Mrs. Shanti Gupta have received direct advances from the profit of the assessee-company and further, three of its directors are getting handsome salaries. It is quite natural that such advances result in profit to the directors personally. These facts demolish the assessee's contention of its existing solely for educational purposes by several notches. The obligation under section 10(22) of the Institution's existing solely for educational purposes is unalloyed and even slightest variation from that would render the Institution disentitled to the claim of exemption under section 10(22). Here, the explanation of the Institution's profits/ funds by the Directors of the Company is an eloquent proof of the assessee-company's existing not solely for educational purposes.
3. The Id. CIT(A) has further erred in holding that the Assessing Officer had not established any nexus between the purposes of the Institute and non-profit-making objectives on the one hand and the loans having advanced to the directors of the company.
The Id. CIT(A) has not been able to appreciate that the situation does not warrant the establishment of any nexus. The advancing of loans to the directors is a clear manifestation of the assessee-eompany's existing not solely for educational purposes."
2. The assessee is a Company which is running School, College of Education, Centre of Continuing and Distance Education, and Post-Graduate Courses. During the assessment proceedings, the Assessing Officer required from the assessee that the assessee should define the status of the Institute because the Institute was claiming legal status as company limited by guarantee and was approved under section 35(1)(III) of the Income-tax Act. The Assessing Officer also observed that the status in the Income-tax return was shown as A.O. P. The Assessing Officer also issued notice as to why the income of the Institute should not be assessed under provisions of sections 11 and 12 of the Income-tax Act, 1961. The Assessing Officer observed that the Institute was not registered under section 12A of the Income-tax Act. The Counsel of the assessee replied that the assessee is claiming exemption under section 10(22) and for claiming exemption under section 10(22), no separate form is required to make claim of exemption. The Assessing Officer observed that the assessee was also accumulating profits from earlier years including the profits of the year under consideration. The assessee explained that he could accumulate profits upto 2096 which comes to 9.40 lacs as against total accumulation of 7.14 lakhs. The Assessing Officer also objected that the Institute was mainly for Education purpose. The Assessing Officer observed that the assessee was indulging in profit-making business particularly he mentioned that he has made profit in the transactions with M/s. Compumaters (P.) Ltd., Jammu, which is a concern controlled by Dr. Arun Gupta and his wife. He, therefore, observed that the assessee is not entitled for exemption under section 10(22) of the Income-tax Act. Regarding decision given by the ITAT for the assessment year 1976-77, the Assessing Officer observed that the Assessing Officer is not bound to the decision of the ITAT because the same cannot become a precedent and principle of res judicata is not applicable on the facts and circumstances of the case. Aggrieved against the order, the assessee filed an appeal before the Id. CIT(A). The Id. CIT(A) gave his finding in paras 6 to 9 which is reproduced as follows:
"6. In view of the legal and factual position as stated by the learned counsel and emerging from the assessment order, I feel that it is necessary that the issue of taxability of the appellant under the Income-tax Law should first be dealt with and the remaining grounds of appeal should be taken up only, if necessary. I have carefully considered the submissions of the learned counsel and gone through the relevant record and also the case laws.
After considering the same, I hold that the appellant's contention regarding the exemption of income as per the provisions of section 10(22) deserves to be accepted. My reasons for supporting the stand taken by the appellant are discussed in the following paragraphs.
7. The appellant must succeed in view of the past history of the case. It is an established fact that the appellant is an educational Institution in the form of a company incorporated under the Companies Act. The said incorporation under section 25 of the Companies Act clearly shows that the Central Government had satisfied itself that the company was formed for promoting its main object i.e., spread of education. Such a company is prohibited from makingany payment by dividends to its members, and cannot alter any provision of the Memorandum of Association in respect of its objects except with the previous approval of the Central Government. Further, for such a company, there are no beneficiaries and the company is limited by guarantee only. Thus, the profits cannot be distributed neither when the same are being earned nor at the winding up of the company. As all the conditions are fulfilled by this company, the contention of the appellant regarding its activities and the utilisation of the surplus profits cannot be doubted.
8. The main objection of the department had been on account of surplus at the end of the year. But, the existence of profit does not prove that the institute was existing for purposes of profit. Profit here does not mean private profit or profit arising to any particular person. It only refers to the surplus receipt over expenditure in the hands of the Institute and this surplus is meant for utilisation for its own objects. The Hon'ble ITAT while deciding the case of the appellant for the assessment year 1976-77 in ITA No. 749/1980 dated 18-10-1982 had dealt with the main objects of the company as per Memorandum of the Association. The Hon'ble members had also referred to the incidental and ancillary objects which were noted to be aimed at the manner in which the main objects were to be achieved. Considering all these objects, the Hon'ble Bench had held that the appellant was entitled to the exemption under section 10(22) of the Act. So far as the surplus was concerned, the Hon'ble Bench had observed as under:--
'. . . merely because there was a surplus it could not be said that the institute was run for purpose of profit so long as no person or individual was entitled to any portion of the said profit and for the promotion of the objects of the institution.
15. The Madras High Court considered this question in the case of Aditanar Educational Institution 118 ITR 235. The Institution had started a college and had utilised the entire donation receipt by it for managing that college. The High Court held that the institution running the college itself would be educational institution within the meaning of section 10(22) of the Income-tax Act.
16. Recently, the question had been considered by the Calcutta High Court in the case of Birla Vidya Vihar Trust'1982 Tax Law Review, page 1826. This trust was deriving income from the running of Mahadevi Birla Girls High School and Mahadevi Birla Shishu Vihar. The question was whether the trust was an educational institution in so far as the income from the above schools was concerned. It was held that the recipient of the income may be a Trust for an individual person and if the source generating income exists solely for the purpose of education and not for private profit, not in the sense of surplus of receipt over expenditure, but the source of income not to be diverted to persons other than the educational institution, then section 10(22) would be attracted."
In view of the discussion above, it is evident that the predominant object of activity in the case of the appellant was promotion of education and the surplus arising from the activities did not come in the way of the claim of exemption under section 10(22) of the Act. The observation of an authority of tax laws as made by the Hon'ble Bench in their decision, referred to supra as under is also relevant in this regard:
"Funds are necessary to run an organisation. As such, earning of income by itself will not be the basis for judging whether it is or it not, for profit. One has to ascertain whether the primary object is to earn by means of running an educational institution or to run the institution for the own sake, income being incidental, even if the term 'Profit' in section 10(22) were considered to bear the same meaning as in section 2(15).
9. So far as objections of the department are concerned, the same include the appellant's alternative plea for exemption under section 11 of the Act and non-utilization of the accumulated funds for the purposes of education. The departmental view that the appellant had claimed exemption under section 11 of the Act is not tenable as the appellant's claim had always been for exemption under section 10(22) of the Act. The past record and the decision of the ITAT in their case, as referred to above, supports this view. This also becomes clear from the asstt. order itself whereby the Assessing Officer as discussed the stand of the appellant as since there is no form meant specifically for claiming exemption under section 10(22), it was deficiency shown as for educational institution for purposes of section 10(22), no specific return is prescribed. Further, vide Para 5, the counsel of the assessee intimated that this being the case of section 10(22) in fact need not be computed as per sections 11 to 13 of the Income-tax Act."
3. The Id. D.R. pleaded that the case is neither covered under section 10(22) nor has fulfilled any of the conditions laid under sections 11 and 12 of the IT Act and income is to be taxed in accordance with sections 12 and 13 of the IT Act. The Id. D.R. pleaded that the Institute is run for the purpose of profit whereby family members who are Directors and family concerns are deriving advantage and benefit from the Educational Institution. The Id. D.R. pleaded that they are not fulfilling the condition for exemption under section 10(22). The Id. DR further pleaded that for making claim of exemption under section 11, the Trust has accumulated profits beyond 25% as is discussed by the Assessing Officer in his order.
4. The Id. Counsel of the appellant pleaded that Modern Institute of Education of Research Ltd. is a Company whose registered office is stated at Jammu. The Company is incorporated by the Registrar of Companies vide certification of Incorporation No. 405 of 1975-76. The Board of Directors include eminent persons, the list of the Directors is filed at page 2 of the paper book. The Id. counsel pleaded that the Institute is based MIER and has three wings namely:
1. Experimental School (Model Academy)
2. MIER College of Education
3. Child and Social Welfare Wing (CSWW).
The Id. Counsel has drawn attention of the Bench to various documents showing the activities of the School in the field of Education. The Id. Counsel pleaded that only one transaction regarding purchase of Computer was mentioned by the Assessing Officer which according to him was made base for treating and denying this Institute the benefit of exemption under section 10(22). The Id. Counsel pleaded that the amount paid to M/s. Compumates Pvt. Ltd., Jammu was against the purchase of Computer, Computer software and accessories. The Id. Counsel pleaded that the said company was paid advance and in lieu thereof, it was agreed to between the parties that they should give discount of 5% on hardware items and 10% on accessories and the amount was paid from time to time against the purchases. The Id. Counsel pleaded that the transaction was normal business transaction and the account with the party is nothing but a current and running account and no undue benefit whatsoever was passed on to the M/s. Computers Pvt. Ltd. by the assessee. The Id. Counsel laid stress on the fact that the purchase price made from the said company is less than the market rate and in support they filed few bills along with the paper book.
5. We have heard the controversy. The Assessing Officer is insisting on two issues. The first issue relates to the fact as to whether or not the assessee-company is entitled to exemption under section 10(22) of the Income-tax Act.
6. Section 10(22) of the Income-tax Act lays down that any income of the University or other educational institution, existing solely for educational purposes and not for purposes of profit, will be entitled to the exemption from income. The essential ingredients of the section are therefore that the person who will make claim should be either a University or Educational Institution. There is abundant literature available in the paper book that the Institution is running school where the students are getting education upto Class-12. The Educational Institution is running college of education including Post-Graduate Education by impartint B.Ed., M.Ed. and Research facilities in the field of Education. It is, therefore, established beyond doubt that the Company is an Educational Institution. The word 'Institution' should not be linked with the status provided in the Act. The Institution can have any status, can be Company, Trust, Firm or any other situation. The Hon'ble Allahabad High Court in the case of Katra Education Society v. ITO [1978] 111 ITR 420 has observed that the liberal interpretation should be given to the word 'Institution'. The Institution for tax purpose may have status defined by the Income-tax Act but is not linked with any particular status.
7. The second ingredients is that the Institution should solely be for Educational purposes. It is amply clear from the activities and growth chart of the Institution that the Institution is mainly imparting education and diversification is undertaking only in different fields for imparting education. The Directors, apart from Dr. Arun Gupta, his wife and mother are eminent educationists. There is no evidence whatsoever available on record which will suggest that the Institution is also doing an activity for the purpose of profit.
The Educational activities arc like running of Schools or Colleges as defined by the Hon'ble Gujaral High Court in the case of Gujarat State Cooperative Union v. CIT [1992] 195 ITR 279 as activities for education. The concept of education also requires a wider meaning and should not be explained in a very narrow conception.
8. The Institution may have profit which is in the shape of excess of income over expenditure. If such excess called profit, is distributed to the persons without any consideration then under those circumstances, it will be held that the Institution is for the purpose of profit. If the excess over expenditure of income is subsequently spent within the institution directly and indirectly for the development of various fields and branches closely linked with the system of imparting education then under such. circumstances, it cannot be held that the institution is run for the purpose of profit. The basic test for determining the institution for profit is the application of profit. In this case, the application of profit by and large is for the purpose of education. The Id. Counsel has amply cleared the factual position that the transaction with M/s. Compumates Pvt. Ltd., Jammu is normal business transaction and in fact they have discounted the sales to the assessee. This will not under any circumstances be treated as diversion of profit and cannot become basis to come to the conclusion that the institution is indulging in the activities of profit. We do not find that there were any different circumstances than prevailing in the assessment year 1976-77 where the Hon'ble ITAT has given their opinion on this issue. The ITAT has given the decision on the issue in ITA No. 749 (ASR)/ 1980 in the case of the assessee and concluded in para 20 at page 26 which is reproduced as follows:
"20. Before we conclude, we may reproduce the comments by the learned author Shri M.P. Aggarwal in his book Taxation of Charity' while dealing with the scope of section 10(22):
"While in the case of a Charitable Society the criterion for judging whether it is with a profit-motive in terms of section 2(15) would be with reference to a particular object of general public utility involving an activity for profit, in the case of an educational institution the basis for consideration, whether it is solely for educational purpose, or for purposes of profit, ould be with reference to the main activity of the institution or, at best, all the activities taken together. Even in the case of a Charitable Trust, Section 2(16) docs not have an exception to an activity for profit as far as the object of education is concerned. On the other hand, section 13(1)(bb) categorically exempt a society, institution or trust which carries on a business in the course of the actual carrying out of its primary purpose of education. This wouldlend support to the view that it would be unrealistic tohair split various activities of an educational institution to fret out if any one of them by itself involves profit-making.' "Funds are necessary to run an organisation as such, earning of income by itself will not be the basis for judging whether it is or it not, for profit. One has to ascertain it whether the primary object is to earn by means of running an educational institution or to run the institution for its own sake, income being incidental, even if the term 'profit' in section 10(22) were considered to bear the same meaning as in section 2(15)."
9. The discussion made by the Assessing Officer in his order regarding fulfilment of the conditions provided by section 11 of the Income-tax Act, to our mind is not relevant, if a finding is given that the assessee can claim exemption under section 10(22) of the Income-tax Act. The Hon'ble Karnataka High Court in the case of CIT v. Saraswath Poor Students Fund [1984] 150 ITR 142, has discussed the issue. The Hon'ble High Court has given the opinion that seclion 11 and section 10(22) are separate sections in operation. The section 11 may be applicable in one set-up of the situation. But that will not become basis for allowing exemption under section 10(22). Similarly, once exemption under section 10(22) is granted section 11 and its applicability becomes irrelevant and remains only of academic nature. The Hon'ble Madras High Court in the case of CITv. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485, has discussed this issue in a very detailed manner. The Hon'ble High Court has held that accumulations of profits envisaged in seclion 11 of the Income-tax Act are not relevant for determining whether or not Educational Institution is entitled for exemption under section 10(22) of the Income-tax Act, The Hon'ble High Court has given following finding:
"We may take up question Nos. 2 and 3. These two questions deal with the surplus derived from running the two schools, one at Trivellor and the other at Perambur. These two schools are admittedly educational institutions. Section 10(22) provides that any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit should be excluded from the total income. The accounts of these two institutions arc available as annexurcs. From a perusal of these accounts, it is clear that substantially the incomeis by way of grants from the Government and the expenses are in running the two institutions. There is some surplus but the surplus would be referable to the educational institutions as such. Section 10(22) would exempt the whole of the income. We had occasion to consider this question in our judgment reported in Addl. CIT v. Aditanar Educational Institutiona [1979]--118 JTR 235 (Mad.). We pointed out that the income from such educational institutions would be wholly exempt even though such institutions were run by another trust. Though the schools themselves do not appear to be held in trust, they are institutions brought into existence by the trust and, therefore, the income would be eligible for exemption. In fact, in the present case, there is a finding by the Tribunal that the trust was not carrying on any business of running these schools. In view of this finding the exemption in its full amplitude as contemplated by section 10(22) would apply. The Tribunal has unfortunately not noticed this provision. It is for the ITO to consider this provision in the light of the judgment in AddL CIT v. Aditanar Educational Institution [l979] 118 ITR 235 (Mad.), and the opinion we have expressed above.
The Tribunal has held that the income from these institutions could be taken as income from other sources which is wrong and is inconsistent with the exemption available under section 10(22). The direction of the Tribunal that the income from these schools will have to be assessed under the head "Other Sources" will also be erroneous in the light of the above observations made by us while considering section 11 .Thequestion of 25 per cent accumulations would, therefore, have no relevance in the context of section 10(22). The second question is answered in the negative and in the light of the directions given above. The third question is also answered in the negative."
10. Keeping in view all the decisions of the ITAT in the case of the assessee for the assessment year 1976-77 and the fact that the assessee is fulfilling all the conditions laid down under section 10(22) of the Income-tax Act, we find no merit in the appeal of the Revenue. Consequently, the appeal of the Revenue is dismissed.
11. In the result the appeal of the Revenue is dismissed.