Rajasthan H.C : Assessment proceedings for levy of tax on the income of assessee which is claimed to be exempted from payment of tax under s. 10(22)

High Court Of Rajasthan

CIT vs. Lal Bahadur Shastri Education Society

Section 10(22)

Asst. years 1983-84, 1984-85, 1985-86, 1986-87, 1987-88

Rajesh Balia & Sunil Kumar Garg, JJ.

DB IT Ref. No. 105 of 1995

16th February, 2001

Counsel Appeared

Sandeep Bhandawat, for the Petitioner : None, for the Respondent



Heard learned counsel for the Revenue. No one appeared on behalf of respondent in spite of service.

2. The Appellate Tribunal has referred following questions of law said to be arising out of its consolidated order passed in five appeals relating to asst. yrs. 1983-84 to 1987-88 arising out of assessment proceedings for levy of tax on the income of assessee which is claimed to be exempted from payment of tax under s. 10(22) of the IT Act, 1961, as the education institutions solely existing for the educational purpose not for the purpose of profit and two appeals for the asst. yrs. 1985-86 and 1987-88 arising out of penalty appeals under s. 221(1) of the Act. “1. Whether, on facts and in the circumstances of the case and Hon’ble Tribunal was legally correct in holding that the income of the assessee was exempt under s. 10(22) of the IT Act, 1961 ? Whether, on the facts and in the circumstances of the case the Tribunal was legally justified in cancelling the penalty levied under s. 221 of the IT Act, 1961 ?”

The facts as emerging from the statement of case are that the assessee is a registered society which was formed some times in 1966 and was duly registered under the Registration of Society Act vide Registration Certificate dt. 15th June, 1966. The objects of society were mentioned as under : “(a) To promote educational values and provide facilities to acquire education through schools, colleges, training centre, research centre, libraries, reading rooms and lectures, etc. (b) To carry out institutions to attain humanitarian, democratic and patriotic values. (c) To enroll on subscription basis without any discrimination of caste, creed or sex.”

After its inception in 1966, the assessee-society opened six educational institutions from time to time since its formation until 1984. The assessee-society had undertaken the activities known as Seekho Kamao Yojna (in short “SKY”) The SKY was a programme of the Education Department and this scheme was started by the assessee- society in its Lal Bahadur Sahastri School at its stance. Under this scheme, the students were taught to manufacture steel, furniture, etc. which was used to be sold to various schools under the District Education Officer (DEO) at Jodhpur and other institutions.

The stone crushing unit was a unit undertaken by the society. The scheme was envisaged by the Central Social Welfare Board and was intended to provide employment to 400 poor ladies belonging to SC/ST community. The said project of stone crushing lasted for two years for the year ended on 31st March, 1986, and 31st March, 1987. The AO was of the view that had all steel furniture prepared by the students under SKY was sold directly to the other institutions, the school would have earned profit but the same has been sold to one M/s Atex Industries which was owned by son of Z.H. Iraqi Trustee Secretary, and also the society was running a stationery shop under the name of M/s Jodhana Suppliers in the premises of the society. The books and other stationary items were supplied to the students and thus another son of said Mr. Z.H.Iraqi was deriving income from his dealings in the society premises.

The AO was further of the view that while accounts of stone crushing were audited but accounts of SKY were not audited. From the aforesaid two facts ITO draw the inference that the society does not exist solely for educational purposes but it is diverting its profit to the sons of Z.H. Iraqi through other activities and made additions of the profit made by M/s Atex Industries as declared by him in the income of the assessee and brought the income of the assessee under charge of the tax. Penalty under s. 221(1) for non-payment of tax in respect thereof was also levied. In appeals against that said order those orders passed were also dismissed by CIT(A). He affirmed the finding of the AO that the society is not existing solely for educational purposes but also for the purposes of profit and such profits have been diverted directly or indirectly for the benefit of family members of the secretary Z.H. Iraqi. The Society is, therefore, not entitled to exemption of its income under s. 10(22). Consequently the penalty orders were also sustained.

Aggrieved with these orders, the assessee preferred appeals before the Tribunal. The Tribunal recorded its findings on the question of the purpose of existing of society, as under : “After detailed discussion of the facts and the law applicable thereto, the Tribunal found and held that the assessee-society was formed by a group of individuals of whom Shri Z.H. Iraqi and his wife Smt. Zefrinissa were the founder members. Lal Bahadur Shastri Middle School was established on 1st July, 1966 as a primary school and other institutions were also established in due course of time. Shri Iraqi and other members of his family property for running the school. The Tribunal pointed out that taking into account the past history of the society as also its activities and contribution in educational field the learned CIT(A) had himself admitted the position that the assessee-society was established with the sole aim of promotion of education and in that process the society had opened as many as six school all of which were recognised by the Education Department and four out of them were also getting grant-in-aid. The Tribunal held that looking to the objects and the past history of its activities the character of the assessee-society as an educational institution cannot be doubted.

The Tribunal examined the merits of Revenue’s objection regarding the functioning of “Seekho Kamao Yojana” “Stone Crushing Unit” started and undertaken by the assessee-society under the directions and supervision of the State Education Department and Central Society Welfare Board and held that regular and complete accounts in respect to these activities were duly maintained and that no part of the aid or donation received by the educational institutions of the society was ever diverted to the said scheme or to the secretary or the members of his family. After appreciating the relevant facts regarding the supply of books and other stationery items by Shri Parvez Iraqi S/o Shri. Z.H. Iraqi to the institutions of the society and the alleged financial interests of the secretary and/or the members of his family the Tribunal held that there was nothing on record to show that the students were obliged to purchase their books or other stationery items from the shop of Mr. Parvez Iraqi and that the relationship between the members of the family of the secretary and the society was that or landlord and tenant respectively and in their dealings as such the members had derived no benefit from the society instead they had helped it from time to time by advancing loans in the hours of need. Finally the Tribunal summed up its findings and conclusions in para 28 of its order in the following manner : “To sum up, the above discussion leads us to conclude that looking to the past history of the assessee in obtaining the various objects in the field of education and its running several educational institutions it cannot be said that the society had changed its character from an educational institution to that of a profit-making institution. The SKY was carried on by it in the direction of educating the students in making certain items used in the educational institutions. The stone crushing unit was also not established for the purposes of making any profits or earning income. The intention to run the SKY and the crushing unit was only to make the students self-dependent in life and also to give confidence to the members of SC/ST communities and there was no profit earning motive of the society in running such allied or educational institutions. We, therefore, held that the assessee-society existed as an educational institution in the years under consideration solely for educational purposes and not for any profit-earning purpose and, therefore, it is entitled to exemption under s. 10(22) of the Act.” Sec. 10(22) reads as under : “Clause (22) : Any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.”

We are of the opinion that finding recorded by the Tribunal on circumspect view of the material before it taking into consideration that since the establishment of society, the society has installed as many as six educational institutions, took into consideration the modus operandi of its dealing with the finances inter se between the schools and society. It also found that engaging the students of the institution in the activity of manufacturing furniture was relevant and the incidental activity of running a school for making the students self-reliant, that the activity was undertaken under the auspices of Education Department of the State and sale of furniture prepared by students were under the direct supervision of DEO. Such activity could not be held to be deviation from the object of society. Likewise, stone crushing activity was also run only for two years in the context of scheme sponsored by Central Welfare Board and that would not detract from the fact that the institutions existed solely for the purpose of educational purposes and not for the purposes of profit. All these findings are pure findings of fact and do not involve any application of legal principles. No questions of law arise out of order of Tribunal in our opinion, so far as regular assessment proceedings are concerned, and need not be answered. Question No. 2 is merely consequential to follow the result of answer to question No. 1.

We, therefore, decline to answer the same also. No order as to costs.

[Citation : 252 ITR 837]

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