1. This is an appeal by the department against the findings of the Commissioner (Appeals) that the assessee-institution is exempt under Section 10(22) of the Income-tax Act, 1961 ('the Act').
2. The deed of trust was executed by the Academy of General Education, Manipal, a registered body for the purpose of spread of education, by which, the Society had decided to start a college at Karkala in South Kanara District. The college was called Sri Bhuvanendra College. The trust deed is dated 18-8-1960. As per clause 2 of the trust deed, the settlor, i.e., the Academy of General Education ('Academy' for short) transferred to the trustees library books of value of Rs. 2,000 to be held by the trustees for the benefit and use of the trust. Clause 3 stated that the trust would be irrevocable so long as the object for which the college was founded exists. The trust deed does not give the names of the trustees but clause 4 of the deed states that the trust will be managed by the Board of Trustees and the names of the first 17 persons who would be in the Board of Trustees are given in that clause.
There is no separate object clause for which the trust is created except the preamble which makes it clear that the object was to establish Arts, Science and Commerce College at Karkala. The rest of the clauses in the trust deed deal with the powers of the trustees in the administration of the college.
3. In the return filed by the trust for the assessment year 1977-78, the trust claimed exemption under Section 11 of the Act. It also claimed that the donations of Rs. 1,85,209 received by the trust would not form part of the income for the purpose of Section 11. The ITO did not accept the assessee's claim. He made out a draft assessment order in which he had held that the assessee was fully taxable.
4. When the draft assessment order was forwarded to the IAC, the assessee made out a new claim before him that the income of the trust would the exempt under Section 10(22). The IAC, however, did not accept this claim. According to him, the exemption under Section 10(22) is available only for the educational institutions and since the assessee was a trust which was running an educational institution it cannot claim exemption.
5. The assessee appealed. The Commissioner (Appeals) accepted that the assessee was exempt under Section 10(22). He pointed out that the objects of the trust was for establishing and managing a college. They do not have any other activity except running an educational institution. He then referred to the decision of the Tribunal in the case of Academy of General Education which is the settlor in this case wherein the Tribunal had rejected the requirement set out by the department that the educational institution and the assessee must be one and the same in order to be eligible for the exemption.
6. Against this finding, the department has now come on appeal. Shri Raju for the department took up a preliminary point that the assessee cannot make out a new claim, as they had done, in the draft assessment stage before the IAC under Section 144B of the Act. He submitted that the jurisdiction of the IAC under Section 144B is limited to the points made out by the ITO which was being objected to and the assessee's objections thereon. It is not open for the assessee to travel outside the draft assessment order and make out a new claim which was never taken up before the ITO. He then submitted that in view of this, the Commissioner (Appeals) was in error in accepting the assessee's contention.
7. We are unable to accept this objection. The real issue arising in this objection is whether the proceedings before the IAC under Section 144B is continuation of the assessment proceedings or whether it is a separate proceeding. In other words, we have to find out whether with the issue of the draft assessment order the assessment proceedings and the powers of the ITO to make assessment came to an end. In deciding this issue, we will make reference to certain authorities. The first decision in respect of the nature of Section 144B proceedings will be found in the order of the Delhi High Court in the case of Sudhir Sareen v. ITO  128 ITR 445. If is not necessary for us to consider the facts of the case except to note the High Courts views regarding the nature of the proceedings. It is observed: ...The object of the provisions cannot be to reduce the number of regular appeals before the AAC but to increase the volume of proceedings before the IAC. The real object appears to be to provide competent scrutiny at the Assistant Commissioner's level and to reduce relative finality and free play at the ITO's level. The language of the section also does not permit any interpretation favouring more than one draft order. If an assessee accepts the variation the matter ends there. In other words, there is no prejudicial order against the petitioner. But where he raises objections, he gets an opportunity of persuading the revenue at a higher level to his own point of view ... (p. 448) It will be seen from the above quotation that where the assessee has certain objections with regard to the additions proposed by the ITO, he gets an opportunity of persuading the revenue at a higher level to accept the assessee's own point of view. In making the revenue accept the assessee's point of view it is open for an assessee to take up new arguments which were hitherto not put before the ITO.8. The second authority is the decision of the Madhya Pradesh High Court in the case of Banarsidas Bhanot & Sons v. CIT  129 ITR The issuance of a draft order as required by Section 144B is not necessary to clothe the ITO with jurisdiction to make the assessment. The ITO has jurisdiction to make the assessment under Section 143. Section 144B provides special procedure to be followed in cases where the variation in the income or the loss returned which is prejudicial to the assessee exceeds the amount fixed by the Board, i.e., Rs. 1 lakh. In such a case, a draft order is required to be served on the assessee and if the assessee takes objection within seven days, the ITO has to seek the directions of the IAC by forwarding the draft order and the objections to him. A direction issued by the IAC for the guidance of the ITO is binding on him and he has to complete the assessment in the light of such a direction.
The entire scheme of Sections 143 and 144B will go to show that the jurisdiction to assess continues in all cases with the ITO ; but in cases where the variation in the income or loss returned is to exceed Rs. 1 lakh, a special procedure has to be followed and if the assessee files an objection within the time fixed, the guidance of the IAC has to be obtained. The object behind the issuance of a draft order is to give a comprehensive opportunity to the assessee to object to the proposed variations in the income or loss returned by the assessee... (pp. 491-92) The Madhya Pradesh High Court has also found that the object behind the issuance of a draft order is to give a comprehensive opportunity to the assessee to object to the proposed variations in the income or loss.
The High Court has further pointed out that although a reference has been made to the IAC, the jurisdiction to assess continue with the ITO.9. The Gujarat High Court in the case of Mrs. Meeraben P. Desaiv. Union of India  130 ITR 922 had the following observations: It is clear that what is contemplated is that before passing the final order of assessment when the variation exceeds rupees one lakh an opportunity has to be given to the assessee so as to enable him to put forward his objections to the proposed order of assessment, and this provision has been introduced with a view to avoid appeals to the AAC against an order of assessment where the objections to the proposed order of assessment are not considered by the competent authority. In the instant case, an officer of the level of the IAC goes through the objections to the proposed order of assessment and he gives directions to the ITO and in the light of those directions the ITO has to pass the order of assessment. Therefore, what is material is the furnishing of the draft of the proposed order of assessment to the assessee concerned when'the variations between the income or loss returned and the amount at which the ITO proposes to assess the assessee in that case exceeds rupees one lakh. The whole purpose of the exercise which is enacted in Section 144B is to give an opportunity to the assessee concerned at the earliest stage to be heard against the line of action which the ITO proposes to take...
(pp. 925-26) The last line in the quotation above makes the point abundantly clear.
In the opportunity of being heard given by the IAC under Section 144 the assessee could show what line of action he proposed to take.
10. We may also mention two Tribunal decisions wherein a similar point has come up. The Nagpur Bench was considering a case, where the assessee making a new claim for deduction before the IAC after the draft assessment orders have been issued. The judgment is reported in the Income-tax Tribunal Decisions, Vol. 1, page 77. The following observations have been made: ...Thus, to our mind, the provisions of Section 144B have a very limited operation. Section 144B is merely in the nature of an additional safeguard to the assessee against frivolous and fantastic assessments. It did not take away the right of an assessee to raise issues before the ITO in respect of any other item of claim or deduction which it would be entitled to, which it had omitted to claim in the first instance before the ITO through ignorance of law or otherwise. The assessee had always got such a right before Section 144B was placed on the statute book. Under Section 143(3), the ITO was under an obligation to take into consideration all relevant material on the subject of the assessee's income or loss and then to frame an assessment. The assessee's entitlement to any statutory relief is a material very relevant for the assessment.
Before Section 144B was placed on the statute book the assessee could always claim such a relief at any time before the ITO signed the order. We are unable to find anything in the language of Section 144B which would take away this precious right of the assessee...
(p. 81) Finally, we will also cite a decision of the Special Bench of the Tribunal in the case of ITO v. Sippy Films  1 ITD 1031 (Bom.).
The following observations have been made: ...As rightly pointed out by the learned counsel for the assessee that Section 144B is intended to be an extra measure of precaution in making a proper assessment by way of a procedure laid down and not that it created any substantive right so as to curtail jurisdiction of the appellate authorities fully. There is an extra safeguard when the assessment is tested by a superior authority. One more opportunity is provided to an assessee before the completion of the assessment. If the assessee fails to take that opportunity, the result would be that he will have to argue the matter before the first appellate authority on the basis of the evidence available subject to the appellate authority's right to admit fresh evidence, but if the assessee fails to file his objections, the IAC will give an opportunity of hearing before he issues directions prejudicial to the assessee in which case the assessee can produce further materials to satisfy the IAC. These opportunities the assessee loses if he does not file the objections. The entire provisions of Section 144B are meant to be procedural in character in regard to the making of the assessment and they have nothing to do with the right of an assessee either to file an appeal or agitate assessment in any forum as envisaged under law. That it is a matter of procedure is so clear that any argument is hardly needed. It is only a step in the process of making an assessment. It is seen that the ITO gives only 7 days' time to file objections. No doubt he can extend 'the period by not more than 15 days. The purpose here again is to expedite the completion of the assessment and nothing else... (pp. 1038-39) 11. All these authorities would go to show that the proceedings before the IAC under Section 144B is only part and parcel of the assessment proceedings. What the assessee could have done in such proceedings pending before the ITO he could continue to do in the proceedings under Section 144B before the IAC. It requires hardly any argument to show that normally in the assessment proceedings before the ITO the assessee can buttress his claim for exemption by citing certain other provisions in the Act which he had hitherto not cited. If this much is available to him in the normal proceedings before the ITO, it continues to be available to him when the said proceedings under Section 144B which is after all part of the assessment, proceedings.
12. Apart from this, on facts also we do not find that the assessee had made out a separate new claim before the IAC. In the return filed before the ITO the stand of the assessee was that no income is taxable.
This stands that no income is taxable can be supported with reference to Section 11. It can also be supported with reference to Section 10(22). It is open for the assessee to support his stand by referring to Section 10(22) in the assessment proceeding, be it before the ITO or before the IAC. We, therefore, reject the preliminary objection of the department.
13. This leaves the finding of the Commissioner (Appeals) that the asset is exempt under Section 10(22). Unlike other instances where this Tribunal had to deal with a claim under Section 10(22) there is no dichotomy between the trust which runs the institution and the educational institution. The trust owns the institution. The educational institution, i.e., the Bhuvanendra College, is not a corporate body has no separate legal existence. It is a mere property of the assessee-trust. So, the only issue we have to see is whether the conditions of Section 10(22) are satisfied. As the Calcutta High Court has pointed out in the case of Birla Vidhya Vihar Trust v. CIT  136 ITR 445, the condition precedent for claiming exemption under Section 10(22) is that the educational institution must exist solely for educational purposes and not for the purpose of profit. Tf 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 expression 'of in Section 10(22) envisages the source, i.e., the generation of a particular type of income. It is not entirety of the income of the recipient but only the income from the educational institution that comes within the purview of the exemption. Thus, from the Calcutta High Court's decision, it could be seen that the assessee may have other activities as well as the activity of running an educational institution. The income of the educational institution, however, would be exempt under Section 10(22).
We also find that the Commissioner (Appeals) had relied on a decision of this Bench in a similar issue in the case of Kasturba Medical College Trust created by the Academy of General Education, a reference to which is made by him in para 5 of his order.
14. For the reasons stated, we would uphold the Commissioner (Appeal's) findings and dismiss the departmental appeal.