Commissioner of Income Tax vs Paramakalyani Education Society

G. Ramanujam, J.—Since all these tax cases are inter-connected, they are dealt with together . As the decision in TC Nos. 405 to 407 of

1978 will mainly depend upon the decision we render in TC Nos. 595 and 596 of 1978, we propose to deal first with TC Nos. 595 and 596 of

1978. The assessee in TC Nos. 595 and 596 of 1978 is one Shri Paramakalyani Education Society, Madras. For the assessment years 1971-72

and 1972-73 it claimed the benefit of exemption u/s 11 of the income tax Act, 1961 (''the Act''), in respect of its income on the ground that it is a

charitable institution which is not carrying on any activity for profit. The ITO rejected the assessee''s claim on the ground that in view of section

13(3), read with section 13(2)(a), of the Act, the assessee cannot claim the benefit of exemption u/s 11. In the further appeal filed by the assessee

to the AAC, an alternative claim was also put forward by the assessee. The contention of the assessee was that even if it was not entitled to the

benefit of exemption u/s 11, it could clearly claim relief on the basis of sections 10(22) and 10(22A) of the Act as an educational institution existing

solely for educational purposes and not for purposes of earning profit. The AAC, after referring the claim of the assessee both u/s 11 as well as u/s

10(22) and 10(22A), held that the assessee was not entitled to the benefit of exemption u/s 11. However, he did not give his view on the question

as to whether the assessee was entitled to the benefit of sections 10(22) and 10(22A). Thereafter the assessee went before the Tribunal. Though

the memorandum of appeal was filed it did not contain any ground based on the applicability of section 10(22) or section 10(22A); the Tribunal

considered that question, having regard to the fact that the assessee had raised that alternative ground both before the ITO and before the AAC.

The Tribunal took the view that the assessee might not be entitled to the benefit of section 11, in view of the advances made from the trust funds to

persons falling u/s 13(3). The Tribunal, however, upheld the assessee''s alternative claim for exemption based on sections 10(22) and section

10(22A). Before the Tribunal, the revenue contended that the exemption u/s 10(22) can be claimed only by the educational institution itself and it

cannot be claimed by other agencies which run universities or colleges. The Tribunal rejected the said contention of the revenue, relying on its

earlier decision relating to a similar institution in IT Appeal Nos. 720 of 1972-73 and 383 and 384 of 1973-74 dated 22-4-1974, and holding that

the assessee would come within the expression ''other educational institution'' occurring in section 10(22). The said earlier decision of the Tribunal

was the subject-matter of a reference before this Court in Additional Commissioner of Income Tax Vs. Aditanar Educational Institution, . In that

case this Court has specifically held that the provision in section 10(22) will apply not only to educational institutions as such but also other

agencies running educational institutions. As already pointed out, after considering a similar contention advanced by the revenue in this case, the

Tribunal upheld the assessee''s claim for exemption based on section 10(22) and section 10(22A).

As against the decision of the Tribunal holding that the assessee is not entitled to the exemption u/s 11, the assessee has sought for and obtained

a reference on the following five common questions in TC Nos. 593 and 594 of 1978 :

Whether, on the facts and in the circumstances of the case, the applicant''s case fell within the scope of provisions of section 13 of the income

tax Act, 1961 ?

Whether the Tribunal was justified in its conclusion that the security offered for the advance was not adequate ?

Whether the Tribunal was justified in its conclusion that the provisions of section 13(1)(c)(ii) were straightaway applicable and the appellant''s

case fell within the provisions of section 13(2)(a) ?

Whether the Tribunal was justified in its conclusion that the second proviso to section 13(1)(c) would not be available to the assessee ?

Whether the income of the trustee is not exempt from taxation ?

Aggrieved by the decision of the Tribunal holding that the assessee is entitled to the benefit of exemption u/s 10(22) and 10(22A), the revenue

has sought for and obtained a reference to this Court in TC Nos. 595 and 596 of 1978 on the following common question :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is an institution falling u/s

10(22) of the income tax Act, 1961 and, therefore, its income is totally exempt from tax ?

If the assessee is held entitled to the benefit of exemption u/s 10(22) or section 10(22A), it will be unnecessary to go into the question as to

whether the assessee will be entitled to exemption u/s 11 or not, as the exemption u/s 10(22) is of much wider scope than the one u/s 11.

Therefore, the main question that has to be gone into now is whether the assessee could claim exemption u/s 10(22), as has been held by the

Tribunal. The Tribunal has set out the objects for which the assessee-society has been established. The relevant objects of the assessee-society,

which was registered on 15-6-1960, as seen from the memorandum of association, are as under :

(a) to foster ideals that have an objective to provide high quality education the best possible mental, physical and social education, etc., to the

nation''s children and youth;

(b) to promote the formation of and continue the management of Sri Paramakalyani High School, Alwarkurichi, Tinnelvelly District;

(c) to further the cause of promotion of greater education opportunities to the growing needs of the community in the suburbs of Sri Paramakalyani

High School by developing the nucleus of the present school into a full- fledged college or polytechnic, depending on- the results of the active

participation of the people for whose benefit this institution is sponsored;

(d) to manage any other allied or auxiliary institution including any adjunct such as automobile workshop and driving school and printing press, etc.,

and to run them if need be on a commercial basis in order to make them self-supporting;

(e) to run a dispensary for the benefit of the pupils of Sri Paramakalyani High School, Alwarkurichi, and allied and auxiliary institutions including

any adjuncts referred to in clause 2(d) supra that may be sponsored by or come under the control of Sri Paramakalyani Education Society and the

indigent public of the locality;

(f) to raise or collect funds by subscriptions, donations or other means for the furtherance of the above objects and in particular for the acquisition

of immovable and movable properties for Sri Paramakalyani High School, Alwarkurichi, and the allied and auxiliary institutions referred to above

and such other adjuncts as detailed in clause (2)(d) supra and the dispensary referred to in clause 2(e) supra;

(g) to subscribe or contribute or otherwise assist humanitarian, charitable, benevolent, educational, scientific, national public or any other useful

institution, objects or purposes.

It is only with reference to the above objects, we have to find out whether the assessee-society is an educational institution existing solely for

educational purposes and not for the purposes of profit as contemplated by section 10(22).

Section 10(22) is extracted below :

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;

Having regard to the above provision, any university or other educational institution existing solely for educational purposes and not for purposes of

profit is entitled to claim exemption in respect of its income. The Tribunal has held that having regard to the objects for which the assessee-society

was established, the assessee should be taken to come within the expression, ''other educational institution'' which exists solely for educational

purposes. Before the Tribunal, a contention was urged by the revenue that one of the objects of the assessee-society being to run other allied or

auxiliary institutions including any agency such as automobile workshop, driving school, printing press, etc., it will take the assessee-society outside

the purview of section 10(22), for the object of establishing commercial institutions such as automobile workshop, driving school and printing press

will show that the assessee-society does not exist solely for educational purposes. However, the Tribunal has rejected that contention on a short

ground, namely, that it is an allied object and that object should be taken in conjunction with the other objects set out in the memorandum of

association and, therefore, the assessee-society should be deemed to be an educational institution existing solely for educational purposes. Before

us Mr. Jayaraman, the learned counsel for the revenue, has advanced arguments in detail in support of his submission that clause (d) of the objects

referred to above will take the society out of the purview of section 10(22). According to the learned counsel, if one out of the many objects for

which the institution was established is to run an activity for profit, then the institution cannot be said to exist solely for educational purposes and it

should be taken to exist partly for educational purposes and partly for purposes of profit. In support of his submission that if an educational

institution has, as one of its objects a commercial activity for earning profit, then that institution cannot claim the benefit of exemption u/s 10(22).

He has referred to the decision of the Supreme Court in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers

Association, . That case lays down the well established proposition of law that if a charitable institution has, as one of its objects, an activity for

profit, then that institution cannot claim exemption u/s 11. The Court in that case also held that the fact that a commercial activity was not in fact

carried on by that institution was immaterial so long as such charitable institution had been found for the objects, one of which was carrying on of

an activity for profit. Thus, according to the Supreme Court, the actual earning of profit or the actual carrying on of an activity for profit is not

necessary and if one of the objects of the institution is to carry on an activity for profit, that will take the institution out of the purview of section 11,

even though such an activity was not actually carried on by the educational institution, as originally intended. Relying on the said decision, the

learned counsel for the revenue submits that even if the assessee-society has not established the institutions referred to in clause (d), the existence

of clause (d) itself in the memorandum of association will take the assessee-society out of the purview of section 10(22). The entire argument of the

learned counsel for the revenue proceeds on the basis that clause (d) enables the assessee to carry on a commercial activity for profit and that,

therefore, 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. However, we are not inclined to agree with the learned counsel for the revenue that clause (d) contains an

object for carrying on an activity for purposes of earning profit. According to the learned counsel for the revenue, clause (d) should be construed

as an independent clause and if it is so construed without reference to the other objects set out in the memorandum of association, it will indicate

that the assessee-society was established not only to carry out the other objects, but also the objects referred to in clause (d) which are for

purposes of earning profit by carrying on a commercial activity. But we are not in a position to construe clause (d) as an independent clause. A

mere reading of clause (d) itself will indicate that it cannot be read independently and divorced from other clauses or objects set out in the

memorandum of association. That clause enables the assessee-society to establish other allied or auxiliary institution including any agency such as

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. If it was intended to be an independent clause, the use of the expression, ''allied or auxiliary institution'' would be quite unnecessary.

The expression, ''allied or auxiliary institution'' occurring in clause (d) would indicate that the institutions referred to therein should be of the nature

as the other institutions referred to in the earlier clauses, such as high school, college or polytechnic. That shows that the automobile workshop,

driving school and printing press, the establishment of which is contemplated by clause (d) should be of the nature of a high school, college or

polytechnic, that is, institutions where coaching is given to students so as to make them as automobile mechanics or drivers or compositors, as the

case may be. The expression, ''allied or auxiliary institution'' shows that the institutions to be established under clause (d) should run on the same

lines as educational institutions such as school, college or polytechnic. It is no doubt true that clause (d) directs the assessee-society to run an

automobile workshop, driving school and printing press, if need be, on a commercial basis. But this is subject to the limitation placed, by the

expression, ''in order to make them self-supporting''. The expression ''in order to make them self-supporting'' clearly indicates an intention to not to

earn profit. The direction to run the institutions on a commercial basis is only to see that the institutions become self-supporting. Thus, the intention

to run the institutions on a commercial basis is only to make them self-supporting, that is, to run them on ''no profit, no loss'' basis. This excludes

the idea of any intention to earn profit by establishing and running institutions such as automobile workshop, driving school, printing press, etc. It is

pointed out by the learned counsel for the assessee that clause (d) has not been given effect to ever since the registration of the society on 15-6-

1960 that there was in fact no carrying on of any activity referred to in clause (d) in the assessment years in question and that, therefore, the mere

existence of clause (d) in the memorandum of association cannot be taken to deprive the assessee from getting the benefit of section 10(22). In

support of the said submission, the learned counsel for the assessee relied on a decision of the Supreme Court in Dharmaposhanam Company,

Kerala Vs. The Commissioner of Income Tax, Kerala, . In that case, the Supreme Court referred to Rex v. Special CIT [1922] 8 TC 286 (CA)

wherein it was pointed out that where the settlor reserved to himself the power of appointment under which he might appoint to non-charitable

purpose, the trust cannot claim exemption u/s 11 even though the power of appointment is in fact exercised in favour of a charitable object, that it

would be a different case where one or more of the objects mentioned in the memorandum of association, although included therein, were never

intended to be undertaken and that if there was evidence pointing to that conclusion, clearly the Court would ignore the object and proceed to

consider the case as if it did not exist in the memorandum. However, there is no material before us to indicate that the assessee never intended to

undertake the object referred to in clause (d). It may not, therefore, be possible to ignore the object and proceed to consider the case as if the

memorandum of association did not contain this object. But it is unnecessary to elaborate this point further, as we are inclined to hold that clause

(d) does not provide for any commercial activity for purposes of earning profit. Having regard to the language used in clause (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. If clause (d) is taken as not

providing for a commercial object, then there is no other clause in the memorandum which could take the assessee-society out of the purview of

section 10(22). We have, therefore, to agree with the view taken by the Tribunal that the assessee in this case is entitled to the benefit of exemption

u/s 10(22).

In this case though the assessee is not an educational institution as such, but a society running an educational institution, it is entitled to the benefit

of section 10(22) as per the decision of this Court in the case of Aditanar Educational Institution (supra). The learned counsel for the revenue,

however, points out that even though as per the above decision of his Court, the assessee which is a society running an educational institution is

entitled to claim exemption u/s 10(22), the question of exemption has to be considered in each year of assessment and, therefore, the question as

to whether the assessee-society exists solely for educational purposes has to be considered with reference to the facts of the year for which

exemption is claimed and there cannot be a general exemption u/s 10(22) in relation to an educational institution. In support of this submission, the

learned counsel refers to a passage in the case of Aditanar Educational Institution (supra), at page 241 wherein the Court has expressed the view

that for deciding the question as to whether an assessee could merely by running an institution for educational purposes, get exemption for all its

income whether it related to the educational purpose or not, 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 was incidental to the purpose of education, its income

would be exempt. However, it is unnecessary for us to express any opinion on that question, for the question referred to us relates only to two

assessment years and we are called upon to answer the question whether the assessee is entitled to claim exemption u/s 10(22) only in relation to

those two years. If and when exemption is claimed in the subsequent years, it is open to the revenue to contend that there is no general exemption

for all years to come and the question of exemption has to be examined with reference to the facts of each year.

We, therefore, answer the question referred to us in TC Nos. 595 and 596 of 1978 in the affirmative and against the revenue.

In view of the said answer, the questions referred to us in TC Nos. 593 and 594 of 1978 become unnecessary and are, therefore, returned

unanswered.

Coming to TC Nos. 405 to 407 of 1978, the assessees in those cases are institutions which made donations to Sri Paramakalyani Education

Society, which is the assessee in TC Nos. 593 to 596 of 1978. As regards the donations made by the assessees in these tax cases, exemption is

claimed u/s 80G(2)(a)(i) of the Act. In view of the fact that the donee institution has been held to be an educational institution, any donation to that

institution should be taken to fall within section 80G. We have, therefore, to uphold the order of the Tribunal holding that the assessee who are

donors are entitled to claim exemption u/s 80G. Accordingly, the common questions referred to us in TC Nos. 405 to 407 of 1978 are answered

in the affirmative and against the revenue.

There will be no order as to costs in any of these tax cases. The learned counsel for the revenue makes an oral application for leave to appeal

to the Supreme Court against our answer in TC Nos. 595 and 596 of 1978. It is seen that leave to appeal to the Supreme Court has been granted

against the decision in the case of Aditanar Educational Institution (supra) which we have followed here in SCP No. 214 of 1979 by order dated

19-4-1979 and in SCP No. 315 of 1979 by order dated 27-4-1979. As we have followed the decision referred to above in TC Nos. 595 and

596 of 1978 and as leave has been granted against the said judgment, we have to grant leave in these cases also. We, therefore, grant leave to

appeal to the Supreme Court against the judgment rendered by us in TC Nos. 595 and 596 of 1978.