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Commissioner of Income-tax, Tamil Nadu-i Vs. Bimetal Bearings Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 405 to 407 and 593 to 596 of 1978
Judge
Reported in(1984)40CTR(Mad)141; [1985]152ITR85(Mad)
ActsIncome Tax Act, 1961 - Sections 10(22), 10(22A), 11, 13, 13(1), 13(2), 13(3) and 80G
AppellantCommissioner of Income-tax, Tamil Nadu-i;commissioner of Income-tax, Tamil Nadu-i;paramakalyani Educ
RespondentBimetal Bearings Ltd.;wheel and Rim Company of India Ltd.;commissioner of Income-tax, Madras;param
Appellant AdvocateJ. Jayaraman, ;Nalini Chidambaram and ;S. Jaishree, Advs.
Respondent AdvocateK.R. Ramamani, ;S.V. Subramaniam and ;P.P.S. Janarthana Raja, Advs.
Cases ReferredRex v. Special Commissioners of Income
Excerpt:
.....of memorandum of association did not provide for any commercial activity - no other clause to take assessee society out of purview of section 10 (22) - held, assessee society entitled to benefit under section 10 (22). - - 11, it could clearly claim relief on the basis of s. 11 as well as under ss. the relevant objects of the assessee-society, which was registered on june 15, 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. surat art silk cloth manufacturers association [1980]121itr1(sc) .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,..........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 june 15, 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 an continue the management of sri. paramakalyani high school, alwarkurichi, tinnevelly district; (c) to further the cause of promotion of greater educational opportunities to the growing needs of the community in the suburbs of sri paramakalyani high school by developing the nucleus of the present.....
Judgment:

Ramanujam, J.

1. Since all these tax cases are interconnected, they are dealt with together. As the decision in T.Cs. Nos. 405 to 407 of 1978 will mainly depend upon the decision we render in T. C. Nos. 595 and 596 of 1978, we propose to deal first with T.Cs. Nos. 595 and 596 of 1978.

2. The assessee in T.Cs. Nos. 595 and 596 of 1978 is one Shri Paramkalayani Education Society, Madras. For the assessment years 1971-72 and 1972-73, it claimed the benefit of exemption under s. 11 of the I.T. Act, 1961, hereinafter referred to as '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 s. 13(3) read with s. 13(2)(a) of the Act, the assessee cannot claim the benefit of exemption under 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 is was not entitled to the benefit of exemption under s. 11, it could clearly claim relief on the basis of s. 10(22) and s. 10(22A) of the Act as an educational institution existing solely for educational purpose and not for purposes of earning profit. The AAC, after referring to the claim of the assessee both under s. 11 as well as under ss. 10(22) and 10(22A), held that the assessee was not entitled to the benefit of exemption under s. 11 of the Act. However, he did not give his view on the question as to whether the assessee was entitled to the benefit of s. 10(22) and 10(22A) of the Act. Thereafter, the assessee went before the Tribunal. Though the memorandum of appeal filed did not contain any ground based on the applicability of s. 10(22) or s. 10(22A) of the Act, 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 s. 11, in view of the advances made from the trust funds to persons falling under s. 13(3) of the Act. The Tribunal, however, upheld the assessee's alternative claim for exemption based on s. 10(22) and s. 10(22A) of the Act. Before the Tribunal, the Revenue contended that the exemption under s. 10(22) of the Act 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 I.T.A. Nos. 720/ 72-73 and 383 and 384/73-74 dated April 22, 1974, and holding that the assessee would come within the expression 'other educational institution' occuring in s. 10(22). The said earlier decision of the Tribunal was the subject-matter of a reference before this court in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) . In that case this court has specifically held that the provision in s. 10(22) of the Act will apply not only to educational institutions as such but also to 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 s. 10(22) and s. 10(22A) of the Act.

3. As against the decision of the Tribunal holding that the assessee is not entitled to the exemption under s. 11 of the Act, the assessee has sought for and obtained a reference on the following five common questions in T.Cs. Nos. 593 and 594 of 1978 :

'(1) Whether, on the facts and in the circumstances of the case, the applicant's case fell within the scope of the provisions of section 13 of the Income-tax Act, 1961

(2) Whether the Tribunal was justified in its conclusion that the security offered for the advance was not adequate

(3) 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)

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

(5) Whether the income of the trustee is not exempt from taxation ?'

4. Aggrieved by the decision of the Tribunal holding that the assessee is entitled to the benefit of exemption under s. 10(22) and s. 10(22A) of the Act, the Revenue has sought for and obtained a reference to this court in T.Cs. 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 under s. 10(22) of the Income-tax Act, 1961, and therefore, its income is totally exempt from tax ?'

5. If the assessee is held to be entitled to the benefit of exemption under s. 10(22) or s. 10(22A) of the Act, it will be unnecessary to go into the question as to whether the assessee will be entitled to exemption under s. 11 or not, as the exemption under s. 10(22) is of much wider scope than the one under s. 11 of the Act. Therefore, the main question that has to be gone into now is whether the assessee could claim exemption under 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 June 15, 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 an continue the management of Sri. Paramakalyani High School, Alwarkurichi, Tinnevelly District;

(c) to further the cause of promotion of greater educational 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 fullfledged 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.'

6. 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 purposes of profit as contemplated by s. 10(22)

Section 10(22) of the Act is extracted below :

'10. 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;'

7. 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 s. 10(22) of the Act, 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 education 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, 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 s. 10(22) of the Act. 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 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 under s. 10(22) of the Act, he has referred to the decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association : [1980]121ITR1(SC) . 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 exemptions under s. 11 of the Act. 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 founded 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 s. 11 of the Act, 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 s. 10(22) of the Act. 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 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 institutions including any agency such as automobile workshop, driving school, printing press, etc., and to run them, 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 were coaching is given to students so as to make them 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 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 June 15, 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 s. 10(22) of the Act. In support of the said submission, the learned counsel for the assessee relied on a decision of the Supreme Court in Dharmaposhanam Co. v. CIT : [1978]114ITR463(SC) . In that case, the Supreme Court referred to Rex v. Special Commissioners of Income-tax [1922] 8 TC 286 , 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 under 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 of a commercial object, then there is no other clause in the memorandum which could take the assessee-society out of the purview of s. 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 under s. 10(22) of the Act.

8. 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 s. 10(22) of the Act as per the decision of this court in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) . The learned counsel for the Revenue, however, points out that even though as per the above decision of this court, the assessee which is a society running an educational institution is entitled to claim exemption under s. 10(22) of the Act, 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 under s. 10(22) in relation to an educational institution. In support of this submission, the learned counsel refers to a passage in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) , 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 the assessment years and we are called upon to answer the question whether the assessee is entitled to claim exemption under s. 10(22) of the Act 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.

9. We, therefore, answer the question referred to us in T.Cs Nos. 595 and 596 of 1978 in the affirmative and against the Revenue.

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

11. Coming to T.Cs. Nos. 405 to 407 of 1978, the assessee in hose cases are institutions which made donations to Sri Paramakalyani Education Society, which is the assessee in T.Cs. Nos. 593 to 596 of 1978. As regards the donations made by the assessees in these tax cases, exemption is claimed under 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 should fall within s. 80G of the Act. We have, therefore, to uphold the order of the Tribunal holding that the assessees who are donors are entitled to claim exemption under s. 80G of the Act. Accordingly, the common questions referred to us in T.Cs. Nos. 405 to 407 of 1978 are answered in the affirmative and against the Revenue.

12. There will be no order as to costs in any of these tax cases.

13. The learned counsel for the Revenue makes an oral application for leave to appeal to the Supreme Court against our answer in T.Cs. Nos. 595 and 596 of 1978. It is seen that leave to appeal the Supreme Court has been granted against the decision in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) , which we followed here, in S.C.P. No. 214 of 1979 by order dated April 19, 1979 and in S.C.P. No. 315 of 1979 by order dated April 27, 1979. As we have followed the decision referred to above T.Cs. 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 T.Cs. Nos. 595 and 596 of 1978.


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