Andhra Pradesh H.C : Whether exemption under section 10(22) is correct to trust?

High Court Of Andhra Pradesh

CIT Vs. Gurukul Ghatkeswar Trust

Assessment Year : 1983-84 to 1985-86

Section : 10(22),11,13

V.V.S. Rao And Ramesh Ranganathan, JJ.

Referred Case No. 35 Of 1996

October  8, 2010

JUDGMENT

Ramesh Ranganathan, J. – The questions, referred for our opinion under section 256(1) of the Income-tax Act, 1961, are :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee-trust is entitled for exemption under section 10(22) of the Income-tax Act ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the assessee-trust had not violated the provisions of sections 11 and 13 of the Income-tax Act in investing a portion of its funds in M/s. B.K. Industries, Nizamabad and with Smt. Janaki Devi, one of the trustees and widow of the founder of the trust ?”

2. The assessee M/s. Gurukul Ghatkeswar Trust, hitherto ran an educational institution at Ghatkesar in the outskirts of Hyderabad. In response to the notices, issued under section 148 of the Act, it filed nil returns claiming that its income was exempt from tax under section 10(22) of the Act. The Assessing Officer rejected the assessee’s claim, for the assessment years 1983-84 to 1985-86, and completed the assessments. On appeals being filed, the Commissioner of Income-tax (Appeals), (CIT(A)), allowed the assessee’s claim for exemption under section 10(22) of the Act for all the three assessment years. Aggrieved thereby, the Revenue carried the matter in appeal to the Tribunal.

3. The Tribunal, in its order dated August 11, 1995, noted that the primary and dominant object of the trust was to run educational institutions in “Gurukul” style to provide value based education to children in these parts; the trust owned acres 647 of land in addition to other properties ; a Gurukul type of school was established and run at Anantagiri, Rambagh, Hyderabad ; a few years thereafter the trust shifted the Gurukul to a place near Ghatkesar ; the said school was imparting education to students and was functioning as a regular educational institution ; after the death of the founder on 2-9-1956, his erstwhile associates continued to run the educational institution ; a trust deed was executed in the year 1956 enumerating the objects of the trust ; the income derived from acres 647 of land was meagre, insufficient to achieve the objects of the trust, and to maintain the institution ; hence the trustees sold away acres 627 of land to third parties ; after paying a share of the sale consideration to the protected tenants, the assessee-trust got, as its share, Rs. 28 lakhs which was kept partly in fixed deposits in certain banks, a major part thereof was advanced to M/s. B.K. Industries, Nizamabad, (a firm in which the president of the trust was interested), by way of loan on interest ; Rs. 1 lakh was given by way of loan to the founder’s widow Smt. Janaki Devi who was also one of the trustees of the assessee-trust ; during the previous year, relevant to the assessment year 1983-84, the assessee received Rs. 3,52,790 by way of interest ; the assessing authority assessed the said interest as income from other sources rejecting the assessee’s claim for exemption under section 10(22) of the Act on the ground that the assessee, instead of utilizing the sale proceeds for school buildings etc., and, without keeping the said proceeds in the investments specified under section 11(5) of the Act, had lent a major portion of the sale proceeds to M/s. B.K. Industries, and had advanced money to another trustee Smt. Janaki Devi in violation of sections 11 and 13 of the Act ; the assessing authority held that the assessee could not be said to be existing solely for educational purposes and they were, therefore, not entitled to claim exemption under section 10(22) of the Act ; likewise, for the assessment years 1984-85 and 1985-86, the Income-tax Officer had denied exemption under section 10(22), and had completed the assessment ; on appeal, the Commissioner held that the assessee was an educational institution existing solely for educational purposes and not for profit ; it need not be a school or college ; it was sufficient if it ran an educational institution and existed solely for educational purposes ; and the assessee-trust was entitled to claim exemption under section 10(22) of the Act.

4. The Tribunal held that the assessee came into existence solely for the purpose of running an educational institution ; there was no element of business or profit motive involved in the running of the educational institution by the assessee-trust ; section 10(22) did not prohibit investment with private individuals ; it was not a case where the assessee had diverted its surplus into the pockets of the trustees ; it was only the corpus of the trust which was diverted from one specie viz., land into another specie i.e., cash and invested ; the assessee was an educational institution existing solely for educational purposes, and not for the purpose of profit ; and, hence, the income of the assessee-trust was exempt under section 10(22) of the Act. Consequent thereto, the questions aforementioned have been referred to us for our opinion.

Question No. 1

5. Under section 10(22 ) of the Income-tax Act, any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit, is required not to be included in the total income of the assessee. An educational society, or a trust, or other similar body running an educational institution, solely for educational purposes, and not for the purpose of profit, can be regarded as “other educational institution” coming within section 10(22 ) of the Act. The purpose for which, and the object with which, the institution is established and the source from which the income is earned are relevant considerations to determine whether the income earned by the assessee is exempt from tax under section 10(22) of the Act. In using the expression “existing solely for educational purposes and not for the purpose of profit” the Legislature has made it clear that it intends to exempt the income of institutions established solely for educational purposes and not for commercial activities. Such a provision is meant to encourage institutions engaged in educational activities, and is not intended to benefit institutions engaged in commercial activities with the intention of earning profit. – Oxford University Press v. CIT [2001] 247 ITR 658 / 115 Taxman 69 (SC).

6. The language of section 10( 22) of the Act is plain and clear and the availability of the exemption thereunder is required to be evaluated each year to ascertain whether the institution existed, during the relevant year, “solely for educational purposes and not for the purposes of profit.” After meeting the expenditure, if any surplus results incidentally from the activity, lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether, on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity – Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310/ 90 Taxman 528 (SC).

7. The requirement of investing the proceeds only in the modes specified in section 11(5) would apply only to the properties of a charitable institution under section 11, and not to an educational institution under section 10(22) of the Act. The test is not whether the assessee is a charitable institution (for, if it is, it may fall within the ambit of section 11 of the Act), but whether its very existence is solely for educational purposes. Judicial dictionary by Justice L. P. Singh, (Second Edition), defines the word “solely” to mean “exclusively” – Himachal Road Transport Corpn. v. Bhanno Mull & Sons AIR 1992 HP 37. Webster’s Dictionary (3rd new International Edition) defines “exist” to mean : to have been; being in any specified condition or place or with respect to any understood limitation ; to continue to be ; maintain being. Chambers Dictionary defines “exist” to mean to have actual being; to live ; to occur, and “existence” to mean the state of existing. Actual existence of the educational institution is a pre-condition for submitting an application for grant of initial approval under section 10(22) of the Act. The test is regarding the character of the recipient of the income. Under section 10(22), the prescribed authority is required to examine the nature, activities and genuineness of the institution; its objects ; its source of income and its utilisation. Even if one of the objects enables the institution to undertake commercial activity, the institution would not be entitled to approval under section 10(22) of the Act. – American Hotel & Lodging Association Educational Institute v. CBDT [2008] 301 ITR 86/ 170 Taxman 306 (SC).

8. It is only if the objects of the trust reveal that the very being of the assessee-trust, as an educational institution, is exclusively for educational purposes, and not for profit that the assessee would be entitled for exemption under section 10(22) of the Act. The objects of the trust, as is referred to in the order of the Tribunal, read as under :

1. To run, aid, and assist Gurukul Ghatkesar ;

2. To establish, maintain, manage, takeover, and conduct schools, colleges, multipurpose schools, hostels, libraries, Vyayamshala, reading room, clubs, guest house, college and small scale industries of all kinds including soap manufacturing, oil manufacturing, match industry, spinning and weaving, honey making, carpentry, blacksmithy and all allied crafts and industries thereto ;

3. To aid and assist all kinds of educational and philanthropic institutions and/or undertakings by students and/or teachers and/or undertaking by students and/or teachers and/or employees of Gurukul Ghatkesar or of any other institutions of similar nature ;

4. To aid and assist poor, grief stricken, destitutes, and/or persons and animals suffering from any calamity ;

5. The main object of the Gurukul is to produce citizens of high calibre with fundamental knowledge based on Vedic religion as interpreted by Swami Dayanand Saraswati and Arya Samaj. Such knowledge of Vedic religion and western science will be imparted to the children on Gurukul system i.e., by keeping them in the Gurukul as full time boarders and giving them training and education under the guidance and supervision of learned and spiritual teachers who will mould their character and personality on Vedic lines so as to be top-ranking citizens of the world by dint of their services to the Indian Nation and to the humanity at large ;

6. To prepare and coach students and persons so that they may become true and independent citizens after learning arts, crafts, industries and other kinds of vocations and studies ;

7. To prepare and coach students and persons so that they may become preachers of Vedic religion, culture and civilization as interpreted by Swamy Dayanand Saraswati ;

8. To train and educate people for spiritual, social, cultural and allied purposes.

9. The objects, afore-extracted, include establishing small scale industries of all kinds including soap manufacturing, oil manufacturing, match industry, spinning and weaving, blacksmithy, carpentry etc. and to aid and assist the poor, the grief stricken, the destitutes, and persons and animals suffering from calamities. These objects are alien to educational purposes and, since the exemption under section 10(22) is available only if the assessee-trust is an educational institution existing solely for educational purposes and not for purposes of profit, and as the existence of the assessee-trust is not solely for educational purposes, the benefit of section 10(22 ) of the Act would not be available to them.

10. The first question must, therefore, be answered in the negative, against the assessee -trust, and in favour of the Revenue.

Question No. 2

11. On the second question, section 11 relates to income from property held for charitable or religious purposes and, under sub-section (1) thereof, subject to the provisions of section 60 to section 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 ‘fifteen per cent.’ of the income from such property ;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of ‘fifteen per cent’ of the income from such property ;

(c) income derived from property held under trust

(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India :

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income ;

(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.”

12. Section 11(2) provides that, where “eighty-five per cent” of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the conditions prescribed therein are complied with. Section 11(2)(b) stipulates that the money so accumulated or set apart should be invested or deposited in the forms or modes specified in sub-section (5). Section 11(5) provides that the forms and modes of investing or depositing the money, referred to in clause (b) of sub-section (2), shall be :

“11.(5) (i) investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959 (46 of 1959), and any other securities or certificates issued by the Central Government under the Small Savings Schemes of that Government ;

(ii) deposit in any account with the Post Office Savings Bank ;

(iii) deposit in any account with a scheduled bank or a cooperative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).

Explanation.—In this clause, ‘scheduled bank’ means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934) ;

(iv) investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) ;

(v) investment in any security for money created and issued by the Central Government or a State Government ;

(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government ;

(vii) investment or deposit in any public sector company :

Provided that where an investment or deposit in any public sector company has been made and such public sector company ceases to be a public sector company,—

(A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company ;

(B) such other investment or deposit shall be deemed to be an investment or deposit made under this clause for the period up to the date on which such investment or deposit becomes repayable by such company ;

(viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ix) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36;

(ixa) deposits with or investment in any bonds issued by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for urban infrastructure in India.

Explanation.—For the purposes of this clause, –

(a) ‘long-term finance’ means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years ;

(b) ‘public company’ shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956) ;

(c) ‘urban infrastructure’ means a project for providing potable water supply, sanitation and sewerage, drainage, solid waste management, roads, bridges and flyovers for urban transport ;

(x) investment in immovable property :

Explanation.—’Immovable property’ does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth ;

(xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964) ;

(xii) any other form or mode of investment or deposit as may be prescribed.”

13. Section 13 stipulates that section 11 shall not apply in certain cases. Under section 13(1)(c)(ii ), nothing contained in section 11 shall operate so as to exclude from the total income of the previous year of the person, in the case of a trust for charitable purposes, if any part of such income or any property of the trust or the institution is, during the previous year, used or applied directly or indirectly for the benefit of any person referred to in sub-section (3). Under section 13(3)(a) and (cc) the persons, referred to in section 13(1)(c), are the author of the trust or the founder of the institution ; and any of the trustees. It is only the income from property held for a charitable or religious purpose which is entitled for exemption under section 11 of the Act provided that the money accumulated or set apart is invested or deposited in the forms or modes specified under section 11(5) of the Act. The amount advanced by way of loan on interest to M/s. B. K. Industries, Nizamabad (a firm in which the president of the trust was interested), and Rs. 1 lakh was given by way of loan to the founder’s widow Smt. Janaki Devi, who was also one of the trustees of the assessee-trust, does not fall within any of the forms or modes of investment or deposit of money as referred to in section 11(5) of the Act. Such loans also fall foul of section 13(1)(c) of the Act. It is evident that the assessee has violated the provisions of sections 11 and 13 of the Income-tax Act in giving a loan on interest to M/s. B. K. Industries, and to Smt. Janaki Devi, widow of the founder of the trust. The second question must also be answered in the negative, against the assessee, and in favour of the Revenue.

14. The RC is disposed of accordingly.

[Citation : 332 ITR 611]

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