Madras H.C : Whether, on the facts and circumstances of the case, the decision of the Tribunal that s. 10(22) of the IT Act does not apply and that ss. 11 to 13 of the Act alone have to be applied is justifiable in law ?

Counsel Appeared

S.V. Subramaniam, for the Assessee : C.V. Rajan, for the Revenue

BHASKARAN, J.:

At the instance of the assessee, the following question of law has been referred to this Court for its opinion :

“Whether, on the facts and circumstances of the case, the decision of the Tribunal that s. 10(22) of the IT Act does not apply and that ss. 11 to 13 of the Act alone have to be applied is justifiable in law ?”

For the asst. yr. 1966-67 (period of assessment is from 1st July, 1965 to 31st March, 1966), the assessee was assessed under s. 143(3) r/w s. 147 of the IT Act (hereinafter referred to as “the Act”), as a public charitable trust by the ITO, Virudhunagar. The ITO determined the total income at Rs. 1,61,182 and allowed 25% to be accumulated, i.e., Rs. 40,295 and out of the net balance of Rs. 1,20,887, he deducted a sum of Rs. 1,16,532, being expenditure incurred towards charitable purposes, viz., towards schools and hostels, and found a sum of Rs. 4,355 as excess of income over expenditure. Therefore, he held a sum of Rs. 4,360 as taxable income and levied tax of Rs. 350 on the same.

The assessee appealed to the AAC contending that the entire income of the trust is exempt from tax under s. 10(22) of the Act. The AAC held that the trust has been in existence for more than half a century, that the object of the trust is running of educational institutions, that he is satisfied that the trust satisfies the requirements of s. 10(22) of the Act and that once s. 10(22) of the Act is applicable, there is no question of consideration of the income under ss. 11 to 13 of the Act. In view of the applicability of s. 10(22) of the Act, the entire income is exempt from tax and, consequently, he allowed the appeal.

The Revenue appealed to the Tribunal against the order of the AAC and contended that even if the assessee is a charitable trust, it does not automatically qualify to be treated as a university or an educational institution, that as per the scheme framed by the High Court for the said educational trust, a portion of the income has to be applied for religious purposes, that, therefore, it cannot be said that the trust exists only for educational purposes and that, therefore, s. 10(22) of the Act will not apply. On behalf of the assessee, to support the order of the AAC, it is contended that the judgment of the High Court regarding the administration of the trust is not relevant for the purpose of determination of the present question since the school has been established even before the inception of the trust, that the income from the trust, which is by way of lease of shandy, etc., is spent only for the running of the school and that it satisfies the requirements of s. 10(22) of the Act.

Before the Tribunal, the assessee relied on the decision reported in Secondary Board of Education vs. ITO (1972) 86 ITR 408 (Ori) : TC32R.757. The Revenue distinguished that case stating that the assessee in the instant case is not purely an educational institution but is a trust having income from shandai, cinema theatre, etc., only to read the educational institution itself whereas in the case cited, the assessee is a secondary board school (sic). The Tribunal considered the various contentions, extracted the relevant portions of the scheme regarding the administration of the trust and also took note of the factual position in the instant case and held that during the relevant financial year only a small portion of the order of the Tribunal runs thus : “The accounts are, therefore, for the period 30th June, 1965, and up to 31st March, 1966. In the income and expenditure statement up to 30th June, 1965, the gross receipts amounted to Rs. 94,898. They are from shandai lease, shandai rubbish lease, godown lease, cinema theatre lease, community contribution, daily market shops rent, miscellaneous receipts and sale of condemned weights and measures. Of the various expenses, the amount spent as contribution to Girls High Schools amounted to Rs. 5,591 and to the Higher Secondary Schools Nos. 1 and 2 to the extent of Rs. 3,400. The excess of income over expenditure was Rs. 63,479. For the period up to March, 1966, the gross receipts amounted to Rs. 75,184 from more or less the same sources. Contribution to he Higher Elementary Schools amounted to Rs. 10,094. The surplus was Rs. 27,023. This would clearly show that the trust which is a public charitable trust was carrying on a business under lease of shandies and cinema theatre and from out of that income was maintaining two schools. The income of the trust cannot be said to be the income of the educational institutions which alone is exempt under s. 10(22). Secondly, the educational institution for qualifying for exemption under s. 10(22) should exist solely for educational purposes. It is true that the schools exist only for educational purposes, but the income is the income of the trust which does not exist solely for educational purposes. From what we have stated above, it would also appear that only a small portion of the income has been applied to the educational institution and in the circumstances s. 10 (22) does not apply in the assessee’s case.”

The Tribunal has also distinguished the case cited by the assessee and consequently held that the case of the assessee does not fall under s. 10(22) of the Act and reversed the order of the AAC in view of the fact that the AAC has held that s. 10(22) of the Act will apply in the case of the assessee and that he did not consider the applicability of ss. 11 to 13 of the Act. While allowing the appeal, the Tribunal directed the AAC to consider the issue regarding non-compliance with the provisions of s. 11(2)(a) and (b) of the Act.

6. Thereafter, the assessee required the Tribunal to refer the following four questions to this Court for its opinion : “1. Whether, on the facts and circumstances of the case and having regard to the objects of the Rao Bahadur A.K.D. Dharmaraja Educational Charity Trust, the decision of the Tribunal that s. 10 (22) did not apply to this case is justifiable in law ? Whether, on the facts and circumstances of the case, the Tribunal and all the lower authorities had any jurisdiction to assess or deal with these matters of assessment in view of the applicability of s. 10(22) of the IT Act ? Whether the Hon’ble Tribunal was justified in concluding that ss. 11, 12 and 13 would be applicable in place of s. 10(22) ? Whether the applicability of s. 10(22) would oust the jurisdiction of ss. 11,12 and 13 ?” However, the Tribunal referred to this Court the question of law which was extracted in the first paragraph for the opinion of this Court.

7. Learned counsel for the assessee submitted that the fact that the assessee is different from the educational institution does not disqualify the assessee from claiming exemption of its income from tax under s. 10(22) of the Act, so long as the income derived is for the purpose of educational institution. He also submitted that it is not necessary that the assessee itself should be an educational institution when the primary object of the trust is for educational purposes. The fact that the income of the trust is derived by running shandai, etc. and not from educational institution or anything connected therein does not disentitle the trust to claim exemption. He further submitted that a small expenditure spent out of the income for other religious purposes also will not deprive the trust to claim the eligibility of the benefits of the section. He submitted that the applicability of the income is not relevant once it is found that the trust is intended for the purpose of the educational institution. He, therefore, prayed for reversing the order of the Tribunal and restoring the order of the AAC. In support of his contentions, learned counsel for the assessee referred to a number of decisions.

8. On the other hand, learned counsel for the Revenue submitted that the income should be derived from the educational institution itself to attract the benefit of s. 10(22) of the Act. He further submitted that having regard to the income and expenditure of the trust, as stated in the order of the Tribunal, the income cannot be exempted from tax under s. 10(22) of the Act since it is only a case of a trust and, therefore, it has to be considered whether the income is exempt from tax under ss. 11 to 13 of the Act, and if so, to what extent. The Tribunal has rightly referred the matter to the AAC for considering that question and, therefore, it does not call for any interference by this Court.

9. In the decision reported in Secondary Board of Education vs. ITO (supra), which was also referred to and dealt with by the Tribunal, the assessee was the Board of Secondary Education, Orissa. One of the sources of income of the Board is profits from compilation, publication, printing and sale of text books. The entire expenditure is to be directed towards development and expansion of educational purposes. Even if there is some surplus, that also should be devoted to the cause of education as and when necessary. The contention of the Revenue was that since on of the sources of income is earning profits by compilation, publication, printing and sale of text books, this will not be eligible for exemption under s. 10(22) of the Act.

10. Sec. 10(22) of the Act reads as follows :— “Incomes not included in total income.—In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—……(22) any income of a University or other educational institution, existing solely for educational purposes and not for purposes of profit.”

11. In the above cited decision, the High Court has pointed out that earning profits by publication, printing and sale of text books is only for applying the income for development and expansion of educational purposes and, therefore, it is not a case of a trust making income or making profits but only for educational purposes. In that view, the High Court held that the assessee is entitled to the benefits of s. 10(22) of the Act.

12. In the decision reported in Katra Education Society vs. ITO (1978) 111 ITR 420 (All) : TC32R.709, the assessee is Katra Education Society, which is running an Intermediate College and which is recognised under the Uttar Pradesh Intermediate Education Act. That society claimed exemption under s. 10(22) of the Act. The ITO rejected the assessee’s claim holding that it did not come within the ambit of s. 10(22) of the Act. In a writ petition filed by the assessee, the Allahabad High Court allowed the claim of the assessee holding as follows: “The word ‘institution’ has not been defined in the Act. There is no reason why an educational society cannot be regarded as an educational institution if that educational society is running an educational institution or institutions. The ITO has placed too narrow a construction on s. 10(22) of the Act and the interpretation placed by him is manifestly erroneous.”

13. In the decision reported in Addl. CIT vs. Aditanar Educational Institution (1979) 118 ITR 235 (Mad) : TC32R.710, the assessee is a society registered under the Societies Registration Act, 1960. It had as its objects to establish, and run, manage, or assist colleges and other educational organisations existing solely for educational purposes. The assessee received donations from a trust, viz., “Thanthi Trust”. During the previous year relevant to the asst. yr. 1965-66, it received as donation a sum of Rs. 15,71,370, another sum of Rs. 5,62,432.25 during the previous year relevant to the asst. yr. 1966-67 and yet another sum of Rs. 4,78,899.67 during the previous year relevant to the asst. yr. 1967-78. The assessee field returns for all these three assessment years stating that “its taxable income was nil as it was an educational institution existing solely for educational purposes”. The ITO closed the assessments stating that since there was no taxable income, the question of granting the exemption under s. 10(22) of the Act did not arise. The CIT revised the order under s. 263 of the Act holding that the principle of ejusdem generis would apply in the construction of s. 10(22) of the Act and that the section would apply only to exempt the income of a college, academy or school. In other words, the point sought to be made was that the exemption under s. 10(22) would apply to the educational institutions, as such, and not to anyone else, who might be financing for running such an institution. On appeal to the Tribunal by the assessee, the Tribunal held that the assessee was an institution existing for educational purposes and not for purposes of earning any profit and that the assessee itself could be termed as an educational institution so as to come within the ambit of s. 10(22) of the Act. On a reference by the Revenue to the Madras High Court, the High Court answered the question in favour of the assessee and confirmed the order of the Tribunal granting exemption under s. 10(22) of the Act, holding as follows :”An educational society could be regarded as an educational institution if the society was running an educational institution.” This Court also approved the argument of learned counsel for the assessee in the following words : “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.”

This Court has further observed as follows : “A society by merely running a 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…… It would not be possible or proper to lay down in any precise terms as to what would be the income of the educational institution which would qualify for exemption under s. 10(22) and what would be outside the exemption. The answer would depend upon the facts in each case. What can possibly be stated is that any income which has a direct relation or is incidental to the running of the institution as such would qualify for exemption.” From the aforesaid two decisions, it is clear that, to claim exemption under s. 10(22) of the Act, it is not necessary that the assessee itself should be an educational institution and so long as the profits of an institution or society, which exists for educational purposes, is incidental to the purpose of education, the income of such institution or society is exempt from tax under s. 10(22) of the Act.

14. In the decision reported in CIT vs. Bimetal Bearings Ltd. (1984) 40 CTR (Mad) 141 : (1985) 152 ITR 85 (Mad) : TC32R.721, the Madras High Court has considered the claim of an educational society for exemption with reference to the objects as found in its memorandum. The society was formed to provide high quality education and to promote the formation of, and continue the management of, Sri Parama-Kalyani High School, Alwarkurichi, Thirunelveli District. The object also provided for collecting funds by way of subscriptions, donations or other means for the purpose of running the school. One of the clauses in the memorandum is to manage any other allied or auxiliary institution including automobile workshop, driving school, printing press, etc., and to run them if need be on a commercial basis in order to make them self-supporting. The Revenue’s contention was that, in view of this clause which enables the assessee to carry on a commercial activity for profit, the assessee should be taken to exist not only for educational purposes but also for purposes of carrying on the various commercial activities referred to in that clause. Negativing that contention, this Court has held as follows: “……that cl. (d) does not provide for any commercial activity for purposes of earning profit. Having regard to the language used in cl. (d) that the institutions referred to therein should be treated as allied or auxiliary institutions and should be run on a commercial basis, not to earn profit, but to make themselves self-supporting, the said clause cannot be taken to be a clause providing for an activity for earning profit.”

15. In the decision reported in Birla Vidhya Vihar Trust vs. CIT (1981) 24 CTR (Cal) 307 : (1982) 136 ITR 445 (Cal) : TC32R.734, the Calcutta High Court held as follows : “The condition precedent for claiming the exemption under s. 10(22) of the IT Act, 1961, is that the university or educational institution must exist solely for educational purposes and not for purposes of profit. If this condition is fulfilled, then the fact that the recipient or owner of the income is a person other than the educational institution or university would not affect the position…..the fact that there was a solitary instance of application of income from the schools for non-educational purposes in a prior year was not very material.”

16. Learned counsel for the Revenue relied on the above decision in support of his contention that the assessee itself should be an educational institution. In that case, the educational institution is an assessee. It does not say that any other institution which runs educational institutions is not exempt from tax. All the decisions clearly lay down the proposition that the assessee and the educational institution can be different but it can claim exemption subject to the satisfaction of the conditions laid down in s. 10(22) of the Act. From the aforesaid decision, it follows that an institution which runs an educational institution and applies its income solely for educational purposes can be exempt from tax under s. 10(22) of the Act. There is no quarrel with regard to this proposition laid down in the above cited decisions.

17. However, on the facts, as extracted in the order of the Tribunal, we agree with the Tribunal that, in the instant case, the object f the trust is to provide not only for running educational institutions but also for spending some money for religious purposes regarding two temples. The Tribunal has also extracted in its order paragraphs 15 and 16 of the judgment of this Court in C.S. No. 29 of 1956, which run as follows : “15. The income from the properties of the trust shall be realised and after contributing the prescribed sums for the conduct of Sri Ramaswami Temple at Rajapalayam and for the 5th day festival in Panguni Agnikuli festival in Droupathi Amman Temple, all or any expenditure requisite and necessary or incidental to the administration and carrying on of the educational institutions and the maintenance of the properties of the trust shall be met.

16. A sum up to Rs. 150 is authorised to be spent by the trustees for the Sri Ramanavami and Krishna Jayanthi festivals in Sri Ramaswami Temple at Rajapalayam and a sum up to Rs. 200 per annum is authorised to be spent

by the trustees for the 5th day festival in the Panguni Agnikuli festival in Droupathi Amman Temple. The conduct of the festival or the expenditure of the money of the festivals must be supervised by the trustee/manager for the time being. The abovesaid sums may be varied suitably by the District Judge, Ramanathapuram, on application made for that purpose.” Further, it is seen that factually only a small amount had been spent for educational purposes leaving a huge surplus for other charitable purposes. In those circumstances, it cannot be said that the institution is solely for educational purposes so as to attract s. 10(22) of the Act. Therefore, the Tribunal is right in holding that this case does not fall under s. 10(22) of the Act and directing the AAC to consider the application of ss. 11 to 13 of the Act.

In the result, we answer the reference in the affirmative and in favour of the Revenue and against the assessee. The assessee to pay the costs of the Revenue Counsel’s fee Rs. 500.

[Citation :182 ITR 80]