1. This is an appeal filed by St. Joseph's Upper Primary School, Kurnool, objecting to the order of the AAC upholding partly the assessment made on the assessee for the assessment year 1976-77.
2. The assessee is a society registered under the Societies Registration Act, 1860, on 9-5-1967. The objects of the society are: (a) to promote educational institutions and useful knowledge in St.
Joseph's Upper Primary School and other school or schools that may be started by the Managing Body ; (b) to organise and develop the St. Joseph's Upper Primary School and other school or schools on approved lines.
The managing body consists of 7 persons. Though the name of the society is Upper Primary School, it is ordinarily meant to cover classes upto VII ; there had been an expansion in 1967 and there are X classes run in English medium. The school is located in two buildings. One belongs to Smt. S.C. Rojamma who is the headmistress and who is also incidentally the daughter-in-law of the Founder-Secretary, Sri Swamykannu Pillai. The other building is owned by the society. It was the assessee's case that its surplus income was exempt from tax under Section 10(22) of the Income-tax Act, 1961 ('the Act'). This claim was negatived by the ITO on the ground that the assessee is a society which runs the school, while according to him, it is only the school which is entitled to be recognised as an institution within the meaning of Section 10(22). He was also of the view that the assessee could not be treated as an institution exempt under Section 11 of the Act, notwithstanding registration under Section 12A of the Act because he was of the view, that the assessee was doing it as a business and that the school was run by an AOP consisting of the family members of ShrijSwamykannu Pillai and that the induction of other the members was merely 'to give a colour of a public body'. So, he brought to tax an amount of Rs. 54,503 which was the surplus during the year. He brought a further amount of Rs. 22,000 as income from other sources on the ground that the further construction of the building in the name of Smt. Rojamma was not properly explained. The total income as computed by the ITO was Rs. 76,500. The assessee in its appeal before the first appellate authority resisted every conclusion, both legal and factual, on the part of the ITO. The first appellate authority agreed with the findings of the ITO except for the fact that he found material for the deletion of Rs. 22,000 under the head 'Other sources' because, according to him, if the construction was unexplained, it should be considered in the hands of the lady and not the society as the building belonged to her. He assumed that the property in the name of Smt.
Rojamma was purchased and improved entirely out of the funds of the society. Since the school building did not belong to the society and that it would revert to Smt. Rojamma in the event of dissolution, he concluded that it was an educational institution for profit. He, therefore, did not agree that the assessee was eligible for exemption either under Section 10(22) or even under Section 11.
3. The learned counsel for the -assessee claimed that there had been number of mistakes made by the authorities below on facts. The school is run in two buildings. One of them undoubtedly belongs to the society. The other belongs to Smt, Rojamma. It was purchased by her and the ground floor was constructed by her out of her own personal funds.
Her husband is a planter having considerable resources. All the same, she had allowed the use of the property since the family was of charitable disposition and was interested in running the English Medium School which was in demand in that area. The ground floor was acquired by her in 1970. It was only for the construction of first and second floors that the lady borrowed funds from the society. The construction was for the benefit of the school and she did not charge any rent either for the ground floor or for the newly constructed first and second floors. It was for this reason that the society had not charged any interest on the advance made for construction of part of the building. He also cited number of authorities for his claim that even societies or trusts running a school will be eligible for being treated as an institution. He also pointed out the Circular reproduced in one of the Tribunal's decisions in the case of Thiagarajar Educational Trust v. ITO  8 Taxman 77 (Mad.-Trib.). The learned departmental representative relied on the orders of the authorities below. He pointed out that Section 10(22) does not automatically exempt every educational institution but those 'existing solely for educational purposes and not for purposes of profit'. According to him, an institution which was lending money to family members of the founder to purchase property in their name could not be treated as such an institution. He also claimed that the fact there was a surplus show that the institution exists for making profit. He also relied upon the other argument that a society running an institution is not the same as the institution itself. Only the latter will be eligible for exemption.
He also relied on the other arguments found in the orders of the authorities below.
4. We have carefully considered the records as well as the arguments.
The objects of the society are reproduced in para 2 (supra). Both the objects are merely to run the institution already running in the name of St. Joseph's Upper Primary School or any other school that may be started by the managing body. In other words, the society has educational purpose as its sole object. As for the first objection that a society running institution cannot come under Section 10(22), we find that this question had come up before various High Courts and these High Courts have unanimously overruled the narrow view that is sought to be adopted by the authorities in this case. The Orissa High Court in Secondary Board of Education v. ITO  86 ITR 408, found that a statutory authority could be treated as 'other educational institution' within the meaning of Section 10(22). The Allahabad High Court in Katra Education Society v. ITO  111 ITR 420, held that a similar society running an intermediate college has to be treated as an educational institution. It observed that the word 'institution' has not been defined in the Act and that there is no reason why a society running an educational institution cannot be regarded as one. It characterised the narrow interpretation sought to be adopted by the authorities as 'manifestly erroneous'. The Madras High Court in Addl.
CIT v. Aditanar Educational Institution  118 ITR 235 found that a similar society registered under the Societies Registration Act, 1960 to run educational institution could be treated as an educational institution itself under Section 10(22). We also have a decision of the Andhra Pradesh High Court itself in the case of Governing Body of Rangaraya Medical College v. ITO  117 ITR 284, where a similar society registered under the Societies Registration Act to manage the college was treated as an educational institution within the meaning of Section 10(22). The High Court referred to an English decision in Ereaut v. Girls Public Day School Trust Ltd.  15 TC 529 (HL), where it was held that a limited company running a public school could be treated as a 'public school' itself within the meaning of the UK Income-tax Act. The Calcutta High Court in Birla Vidhya Vihar Trust v.CIT  136 ITR 445, held that even a trust running educational institutions, etc., for the benefit of the public would be eligible for exemption under Section 10(22) and the surplus of income over expenditure will not be liable for tax. While all these different High Courts have taken the same view that a society with educational purpose alone could be treated as an educational institution, the Board itself seems to have accepted this view by their instruction No. 111 [(F. No.194/16/1977 IT (A-I), dated 29-10-1977] in the following words: However, there may be cases where the educational institutions may be owned by trusts or societies to whom the provisions of Section 11 may be applicable. Where all the objects of these trusts are educational and the surplus, if any, from running the educational institutions is used for educational purposes only, it can be held that the institution is existing solely for educational purposes and not for purposes of profit.
Instructions were issued in the context of the question of treatment of a university or other educational institution within the meaning of Section 10(22) or a hospital or other institution under Section 10(22/A) and the instructions have been reproduced in full in another decision of this Tribunal in Thiagarajar's case (supra), a decision to which one of us was a party. Since the object of the society is only for educational purpose, and since the surplus, if any, cannot be appropriated by any individual, the claim of the assessee is in accordance with both the law as settled by the High Courts and the instructions of the Central Board of Direct Taxes.
5. It was sought to be argued that all is not well with this institution. The school is housed in two buildings. One of the buildings is owned by the society. The other belongs to Smt. Rojamma who is the daughter-in-law of the secretary of the society and is also the Headmistress in her own right. The authorities are wrong in presuming that the entire purchase consideration was met by the society. The plot and the ground floor was constructed by her out of her own resources. The first and second floors were, however, constructed by borrowing from the society. But the society had the benefit of housing its school in the premises without paying rent. It was for this reason that no interest was charged. No doubt, both interest and rent were mutually charged from 1-4-1977. The learned departmental representative tried to make out a point out of the fact that the interest charged was less than the rent of Rs. 1,500 per month fixed for the building. It is only because part of the loan had already been repaid. So long as it is not shown that the interest charged was less than the market rate or the rent paid by the society is more than the market rent, we cannot assume that Smt. Rojamma had taken any undue benefit. In other words, we are not in a position to say that there has been any misuse of authority so as to make the society's professed objects as not being real. The learned departmental representative tried to make out that the benefit makes the society a sham one and that at any rate, the assessee will be deprived of the benefit of exemption in view of Section 13 of the Act which will deprive of the exemption in cases where founder enjoys benefit. Since we have not found any benefit, we need not go into other arguments on behalf of the taxpayer which are also, in our view, not untenable even otherwise as no material have been brought on record to support the stand of the revenue both on facts and on law. We will, therefore, not discuss the issue further.
6. It has been sought to be suggested by the learned AAC that since the regulations of the society attract the provisions of the Societies Registration Act in the event of dissolution and since one of the buildings is owned by the founder's daughter-in-law, he has assumed that in the event of dissolution the handing over of the building to Smt. Rojamma would amount to private profit. The foundation on which this inference is drawn is flimsy. If the property is handed over to the real owner in the event of dissolution, it does not mean the assets of the society are being distributed to the founder or his relatives.
Under the Societies Registration Act, the funds have to be utilised for a similar purpose for running some other educational institution and hence this is a case where assets or the surplus cannot be diverted for any purpose other than the objects of the society. Stress was also laid by the learned departmental representative on the point that the assessee had made a profit and that Section 10(22) confines the benefit only to institutions which are not run for profit. Here again, we are not in a position to say that the institution is run for purposes of earning profit. There had been loss in one year and surplus in another.
Besides, profit contemplated by the law is private profit and not profit for the purpose of implementation of the basic objectives as in this case. In fact, the CBDT in the Circular already referred to in an earlier paragraph also makes it clear by pointing out that all surplus will not be taxable unless there is diversion of such profit for personal use in the following words: If the profit of educational institution can be diverted for the personal use of the proprietor thereof, then the income of the educational institution will be subject to tax.
7. Hence, in any view of the matter, we do not find any scope for disallowance of the assessee's claim for exemption under Section 10(22). The appeal is allowed and the assessment is annulled.