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Additional Commissioner Of Income-Tax, Madras-I v. Aditanar Educational Institution.
Structured Summary of the Opinion (Sethuraman, J.)
Factual and Procedural Background
This matter was presented as a reference under section 256(1) of the Income-tax Act, 1961. The specific question posed was whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the income of the assessee was entitled to exemption under section 10(22) of the Income-tax Act, 1961.
The assessee is a society registered under the Societies Registration Act, 1960, with objects to establish, run, manage or assist colleges, schools and other educational organisations existing solely for educational purposes. In the relevant previous years the society received donations from “Thanthi Trust” of Rs. 15,71,370 (for assessment year 1965-66), Rs. 5,62,432.25 (for assessment year 1966-67) and Rs. 4,78,899.67 (for assessment year 1967-68). The assessee filed returns for those years claiming nil taxable income because it stated it was an educational institution existing solely for educational purposes; the returns showed losses.
The Assessing Officer (ITO) closed the assessments on the ground that there was no taxable income and therefore did not consider the question of exemption under section 10(22). The Commissioner invoked section 263, holding that the assessments were erroneous and prejudicial to the revenue because the ITO had not considered whether the assessee was entitled to exemption in respect of the voluntary contributions; the Commissioner also expressed the view that the assessee was not entitled to exemption in view of sections 11 and 12(2). The Commissioner cancelled the assessments for the three years (orders dated 30 March 1972 for one year and 2 March 1973 for the other two) and directed the ITO to make fresh assessments taking into consideration the voluntary contributions.
The assessee appealed to the Income-tax Appellate Tribunal. By a common order dated 22 April 1974 the Tribunal held that the assessee was an institution existing for educational purposes and that the assessee itself could be termed an educational institution so as to fall within the ambit of section 10(22). The reference before the court arises from that Tribunal order.
Relevant factual background further includes the society’s memorandum of association (setting out objects to establish/run/assist colleges and schools, to raise funds, and to do incidental acts), a governing body and regulations, a dissolution clause providing that surplus would go to a society with similar objects, registration of the society in February 1963, and the establishment by the society of “Aditanar College of Arts and Science” at Tiruchendur in 1965. The college received approval from the Director of Public Instruction (Madras) on 18 February 1965, applied for affiliation for the P.U.C. course and stated to the University that funds in excess of Rs. 22,00,000 were earmarked for the college and would not be diverted without prior sanction. The Syndicate inspected and placed conditions which were complied with; affiliation was granted and later the college was affiliated to Madurai University after that University was established.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the assessee’s income was entitled to exemption under section 10(22) of the Income-tax Act, 1961.
- Whether the phrase “other educational institution” in section 10(22) includes a society that runs an educational institution (i.e., whether such a society can itself be treated as an educational institution within the meaning of section 10(22)).
- Whether the ejusdem generis rule should limit the scope of “other educational institution” by reference to the word “University.”
- Whether an entity that merely finances or assists educational institutions (rather than directly imparting education) can qualify for exemption under section 10(22), or whether the institution claiming exemption must itself be the educational institution imparting education.
- Whether the institution must exist solely for educational purposes and not for purposes of profit in the relevant year, and whether exemption under section 10(22) extends only to income that is directly related or incidental to the running of the educational institution.
Arguments of the Parties
Revenue's Arguments
- The Commissioner (and revenue counsel) took the view that the Assessing Officer’s closure was erroneous and that the assessee was not entitled to exemption under sections 11 and 12(2), and that the receipts (voluntary contributions) should be considered in fresh assessments.
- It was argued for the revenue that the term “other educational institution” in section 10(22) should be construed by applying the rule of ejusdem generis with “University” as the leading genus; accordingly, the phrase should be confined to institutions of the same kind as a University (the submissions urged that the exemption would apply only to a college, academy or school as such and not to entities that merely financed or assisted educational institutions).
Assessee's Arguments
- The assessee (as reflected in the Tribunal’s findings and the submissions recorded) contended that it existed solely for educational purposes, had established and was running a college (Aditanar College of Arts and Science), and therefore could be regarded as an “educational institution” within the meaning of section 10(22).
- Mr. A.K. Sen (counsel for the assessee) candidly acknowledged that the word “existing” in section 10(22) requires an investigation year by year and that exemption is available for income that exists for educational purposes in the relevant year and where profit is incidental to education; he conceded that not all income of a society (if unrelated to educational activity) would automatically be exempt and that the exemption covers income directly related or incidental to the running of the institution.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| S. Azeez Basha v. Union of India, AIR 1968 SC 662 | Shows that historically private individuals/bodies could establish universities in India; distinguishes the characteristic of a University (granting degrees) from other educational institutions. | The court relied on this authority to conclude that the word “University” cannot be treated as the genus limiting “other educational institution,” because universities are distinguishable principally by their power to grant degrees. |
| Katra Education Society v. ITO, [1978] 111 ITR 420 (Allahabad High Court) | Holds that an educational society can be regarded as an educational institution if the society was running an educational institution. | The court expressly agreed with this decision and applied it to the facts to support the view that the assessee-society, running a college, falls within “other educational institution.” |
| Secondary Board of Education v. ITO, [1972] 86 ITR 408 (Orissa High Court) | Holds that a body whose profits (from publication etc.) are applied to the development and expansion of education and form part of a fund devoted to education cannot be said to exist for purposes of profit. | The court cited this authority to support the conclusion that an entity can exist solely for educational purposes despite earning income or profits, provided earnings are dedicated to educational objectives. |
Court's Reasoning and Analysis
The court proceeded in a step-by-step analysis anchored to the statutory text of section 10(22) and the facts established in the record.
- Construction of section 10(22): The court reproduced the operative text of section 10(22), which exempts “any income of a University or other educational institution, existing solely for educational purposes and not for purposes of profit.”
- Application of ejusdem generis: The revenue urged that “other educational institution” should be confined by the ejusdem generis rule in light of the preceding word “University.” The court reviewed the ejusdem generis principle (citing Craies on Statute Law) and noted that the rule is a presumption to be applied cautiously and only when a distinct genus exists. The court concluded that “University” does not operate as a genus that confines the subsequent words because the categories are different: a University is chiefly distinguished by its power to grant degrees, a feature not shared by ordinary educational institutions.
- Distinction between Universities and other educational institutions: Relying on S. Azeez Basha, the court observed there is a substantial commonality between universities and non-university educational institutions (both teach students and employ teachers) but the capacity to grant degrees differentiates a university. Therefore the court found no reason to apply ejusdem generis so as to restrict “other educational institution” to institutions of the same kind as a university.
- Whether the society itself is an educational institution: The court examined the assessee’s memorandum (objects clauses a–d), the actual conduct (incorporation in 1963, creation and running of Aditanar College in 1965, approval and affiliation process, representation that funds were earmarked for the college) and found that the assessee had established and operated a college as the means of effectuating its objects. The court observed there was no material showing the college was separately incorporated as a distinct registered body. On this evidence, the court rejected the submission that the society was merely a financing body and held that the assessee itself imparted education through the medium of the college and thus came within “other educational institution.”
- Solely for educational purposes and not for profit: The court examined the memorandum clauses and concluded that clauses (a) and (b) demonstrated that the society’s sole purpose was education at school and college levels. The court relied on Secondary Board of Education to show that an entity earning profits (for example, from publications) may nonetheless be held to exist solely for educational purposes so long as revenues are applied to educational development and not for private profit.
- Scope of exempt income under section 10(22): The court accepted the assessee’s candid concession (through counsel Mr. A.K. Sen) that “existing” in section 10(22) requires a year-by-year inquiry and that exemption is confined to income which, in the relevant year, is shown to be for educational purposes or incidental to the running of the educational institution. The court emphasized that a society could not use section 10(22) to exempt unrelated income; there must be a factual connection or that the profit be incidental to the institution’s educational activities. Examples given in the opinion (e.g., investment income from deposits made as condition of affiliation) illustrate incomes that could be treated as directly related and therefore exempt, but the court declined to define precise and exhaustive rules, stating determination must be fact-specific.
- Conclusion of analysis: On the combined basis of the society’s objects, its establishment and running of a college, the legal principles cited, and the factual matrix, the court concluded that the assessee qualified as an “other educational institution” within section 10(22) in the relevant years, and that exemption would apply to income that was directly related or incidental to the educational activities.
Holding and Implications
Holding: The court answered the reference question in the affirmative: the Tribunal was correct. The question is “answered in the affirmative and in favour of the assessee.”
Implications:
- Direct effect on the parties: The assessee is held to be an “educational institution” within the meaning of section 10(22) for the relevant years on the facts found, and exemption is available for income that exists for educational purposes in the relevant year or is incidental to the running of the institution.
- The court awarded costs to the assessee: Counsel’s fee of Rs. 500.
- Scope of exemption: The decision clarifies that exemption under section 10(22) must be determined year by year and is limited to income directly related or incidental to the educational activities of the institution; unrelated income cannot be automatically exempted. The court declined to lay down a precise catalogue of exemptible items, indicating that determinations are fact-specific.
- Precedential effect: The court expressly agreed with and applied existing authorities cited in the opinion (as reflected above). The opinion does not purport to lay down a detailed new test beyond the application of those principles to the facts before it.
Costs awarded: The assessee will be entitled to its costs. Counsel's fee Rs. 500.
Sethuraman, J.:— In this reference under s. 256(1) of the I.T Act, 1961, the following question has been referred;
“Whether, on the facts and in the circumstances of the base, the Tribunal was right in holding that the income of the assessee is entitled for exemption under section 10(22) of the Income-tax Act, 1961?”
2. The assessee is a society registered-under the Societies Registration Act, 1960. Its objects are to establish, run, manage or assist colleges, schools and other educational organisations existing solely for educational purposes. It received as donation from a trust called “Thanthi Trust” a sum of Rs. 15,71,370 during the previous year relevant to ‘the assessment year 1965-66, a sum of Rs. 5,62,432.25 during the previous year relevant to the assessment year 1966-67 and a sum of Rs. 4,78,899’67 during the previous year relevant to the assessment year 1967-68. The assessee filed returns for all these three assessment years stating that “its taxable income was nil as it was an educational institution existing solely for educational purposes”. The actual figure-shown was “loss” for all the three years. The ITO closed the assessments stating that since there was no taxable income, the question of granting the exemption under s. 10(22) did not arise. The CIT took-proceedings under s. 263 of the Act as, in his view, the assessment made by the ITO was erroneous and prejudicial to the revenue. According to him, the ITO had not considered the question whether the assessee was entitled to exemption, in respect of the receipts of voluntary contributions. In his view, the assessee was not entitled to any “exemption in view offthe provisions of ss. 11 and 12(2) of the Act. After giving the necessary notice to show cause why the assessments for these-years should not be cancelled, the Commissioner passed an order on 30th March, 1972, cancelling the assessments for these three years and-directing the ITO to make fresh assessments taking intorconsideration the voluntary contributions received from “Thanthi Trust”. It may be mentioned herein that for the (assessment year 1965-66’ the order of the Addl. CIT is dated 30th March, 1972, and-for the other two assessment years the order/was-passed on March 2, 1973. In the second order, which is little more elaborate than the first/the Additional Gonrmissioner took the view that, the principle??? would apply in the construction of s. 10(22) and that the section would apply only to exempt the income for a college, academy or school. In other words, the pointsought to bemade was that the exemption under s. 10(22) wouldtapply to the ledudational institutions, as such, and not to anyoneelse, who might be financing for running such an institution.
3. The assessee appealed to the Tribunal for all the three years and the appeals came to be disposed of by a common order-dated April 22, 1974. The Tribunal held that the tassesseevwas an institution existing for educational purposesiand not for purposes of earning any profit/and that the assessee itself could be termed as an educational-institution so as to come within the ambit of s. 10(22) of the Act. It is this order of the Tribunal that has given rise tot the question set out above.
4. Before we proceed to consider the question, we may refer to its objects and as to what was done by it in pursuance of its objects. The objects for which it came into existence are set out in its memorandum of association and they are as follows:
(a) To establish, run, manage or assist colleges for teaching of arts, sciences or professions.
(b) To establish, run, manage or assist schools and other educational organisations existing solely for educational purposes.
(c) For the objects aforesaid (a) and (b), to raise or collect funds by subscriptions, donations, gifts, grants or endowments.
(d) To do all such acts, deeds and things as may be incidental or conducive to the furtherance of the above objects.
5. There is a governing body for the institution and there are rules and regulations governing its conduct. Any surplus remaining at the time of the dissolution of the society has to be made over to a society having similar objects. The society was registered in February, 1963. In pursuance of its objects the assessee-society started a college called “Aditanar College of Arts and Science” at Tiruchendur in 1965. The Director of Public Instruction, Madras, by his proceedings dated 18th February, 1965, approved the opening of a college at Tiruchendur, under the rnanagement of the assessee subject to certain conditions. On 31st May, 1965, the assessee applied to the Registrar of the Madras University for affiliation for the P.U.C course and also for opening of the college at Tiruchendur. In the application sent to the University, the assessee stated that the entire fund of more than Rs. 22,00,000 standing in its name was earmarked for the college and that the amount would not be diverted to any other purpose without obtaining the prior sanction of the University. The Syndicate considered the application and after obtaining a report of inspection requested the assessee to comply with certain conditions before affiliation was granted. As the assessee complied with those conditions the college was granted affiliation. After the Madurai University was established, the college was affiliated to that University.
6. Section 10(22), to the extent relevant, runs as follows:
“In computing the total income of a previous year of any person, any income falling within any of the following clausbs 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. In the present case the institution is not a University. The question is whether it comes under the category “or other educational institution”. On this aspect, the learned counsel for the revenue reiterated what is stated in the orders of the Commissioner under s. 263, viz., that the term “other educational institution” should be construed by an application of the rule of ejusdem generis. How this rule is to be applied has been set out by Craies on Statute Law, seventh edition, at page 181, as follows:
“The ejusdem generis rule is one to be applied with caution and not pushed too far, as in the case of many decisions, which treat it as automatically applicable, and not as being, what it is, a mere presumption, in the absence of other indications of the intention of the legislature. The modern tendency of the law, it was said, is to attenuate the application of the rule of ejusdem generis. To invoke the application of the ejusdem generis rule there must be a distinct genus or category. The specific words must apply not to different objects of a widely differing character but to something which can be called a class or kind of objects. Where this is lacking, the rule cannot apply, but the mention of a single species does not constitute a genus. ‘Unless you can find a category’, said Farwell L.J, ‘there is no room for the application of the ejusdem generis doctrine’, and where the words are clearly wide in their meaning they ought not to be qualified on the ground of their association with other words. For instance, where a local Act required that ‘theatres and other places of public entertainment’ should be licensed, the question arose whether a ‘fun-fair’ for which no fee was charged for admission was within the Act. It was held to be so, and that the ejusdem generis rule did not apply to confine the words ‘other places’ to places of the same kind as theatres.”
8. The word “University” does not represent the genus in the present case, so that the subsequent words will have to be considered as taking their colour from this genus. As pointed out by the Supreme Court in S. Azeez Basha v. Union of India, AIR 1968 SC 662, 671, there was no law in India which prohibited any private individual or body from establishing a University and it was, therefore, open to a private individual or body to establish a University. There is a good deal in common between educational institutions which are not universities and those which are universities. Both teach students and both have teachers for the purpose. But what distinguishes a University from any other educational institution is that a University grants degrees of its own while other educational institutions cannot. It is this granting of degrees by a University which distinguishes it from the ordinary run of educational institutions. Thus, in law, in India there was no prohibition against establishment of Universities by private individuals or bodies and in fact the famous Viswabharathi University was started by Rabindranath Tagore as a private individual. It was only in 1956 by sub-s. (1) of s. 22 of the University Grants Commission Act (III of 1956) it was laid down that the right of conferring or granting degrees should be exercised only by a University established or incorporated by or under a Central Act) or a State legislature.’. The other “educational institution” cannot come within^the category “University”. The term “University” stands for a higher degree, of education, than scholastic level.” Any educational institution “would fall within the scope of sr 10(22).even though it may have or may notjhave anything to do with the-University. The categories are so different that the University cannot be the genus and the other educational institution the species thereof. Thus, the college, here could come, under the other educational institution:”.
9. The further contention was that the institution in order to qualify for the exemption under s; 10(22) should-itself be the educational institution and that it was-not enough if it??? educational institution. It was pointed out that the assessee could assist colleges and that case it merely rendered;assistance, it would be in the nature of a financial body, which did not itself impart education. It is difficultto accept the argument that, in the present case the assessee is not the educational-institution. The assessee has come inter existence for the purpose of establishing, running managing or assisting colleges, schools and other educational organisations. In pursuance of its objects as seen earlier, the assessee has established as college. It is stated that the? management of the college had to be vested in a registered body. It is not clear whether two registered bodies were contemplated; one being the assessee and the other the managing body. In para. 8 of its order, the Tribunal has observed as follows:
“Ultimately, affiliation for the P.U.C course was granted to the college by the Madras-University on condition-that the management of the college should be by a-registered body.”
10. It was stated that the college itself was incorporated as a separate registered body. There is no material on record to show that the college was separately incorporated as a registered body. It is not possible on the facts to pursue this point further. It is enough at this stage to mention that the assessee, in order to effectuate its objects, has necessarily to impart education only through the medium of a college consisting of professors and students. Unless a college itself is brought into existence by the professors, a college would ordinarily come into existence only by third parties, who appoint the principal and the professors. With the help of professors, students would have to be recruited and education imparted. Thus, the medium through, which the assessee could effectuate its objects is the college and by employing this medium,.the assessee imparts education. It is not possible to accept the contention that the assessee is only a financing body and does not on the facts come within the scope of other educational institution occurring in s. 10(22).
11. The provision requires that the institution should exist solely for educational purposes and not for purposes of profit. We have already reproduced the clauses in the memorandum describing the objects of the society. In effect, there are only two clauses, viz., els. (a) and (b), which are material for this purpose. Clause (a) provided for establishment, running or management of colleges or assistance to colleges. Clause (b) contemplates the same being done for schools and other educational organisations. Thus, the sole purpose for which the assessee has come into existence is education at the levels of college and school.
12. This point as to whether a society could by running an institution claim exemption under s. 10(22) has been considered by the Allahabad High Court in Katra Education Society v. ITO, [1978] 111 ITR 420. It has been held therein that an educational society could be regarded as an educational institution if the society was running an educational institution. It is true there is no further discussion, But the point appears to need no further discussion. We agree with this decision.
13. The further question is whether this institution exists for the purpose of profit. In this connection our attention was drawn to a decision of the Orissa High Court in Secondary Board of Education v. ITO, [1972] 86 ITR 408. Under the Orissa Secondary Education Act, 1953, the Secondary Board of Education had a fund. One of the sources of income of the Board was profits from compilation, publication, printing and sale of text books. The profits so earned formed part of the board's fund. The income and expenditure of the board was controlled and the entire expenditure was directed towards development and expansion of educational purposes. Any surplus remaining after the expenditure was also to form part of the sinking fund to be devoted to the cause of education as and when necessary. It was held that the Board of Secondary Education could not be said to exist for the purpose of profit and that its existence was solely for the purpose of education.
14. Mr. A.K Sen, the learned counsel for the assessee, gave a categorical answer to a question as to whether an assessee like the present one could merely by running an institution for educational purposes, get exemption for all its income whether it related to the educational purpose or not. Quite fairly, and in our opinion, rightly, he stated that the expression “existing” used in s. 10(22) clearly showed that 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 is incidental to the purpose of education, the income would be exempt, and not any income however remotely connected with the educational institutions. A society by merely running a college cannot utilise this provision as an instrument for exemption in respect of all its sources of income which had no connection with its educational authority. There must be some correlation between the income earned and the educational institution. For instance, it is well known in this part of the country, that educational institutions before they are granted affiliation are required to deposit a substantial sum, and that such deposits are to be invested in ^ Government securities or trustee securities which yield [income. Though such income would otherwise be taxable, still in view of the fact that it has a direct relation to the running of the institution which imparts education, the exemption would have to be granted. It would not be possible or proper to lay down in any precise terms as to what would be the income of the educational institution which would qualify for Exemption under s. 10(22) and what would be outside the exemption. The answer would depend upon the facts in each case. What can possibly be stated is that any income, which has a direct relation or is incidental ito the running of the institution, as such, would qualify for exemption.
15. Before parting with the case, we may point out that a paper book was filed on behalf of the assessee and it was stated by Mr. Jayaraman, the standing counsel for the Commissioner, that the said book contains certain other materials, which have not been made annexures to the statement of the case. We did not look into those materials. The question is accordingly answered in the affirmative and in favour of the assessee.
16. The assessee will be entitled to its costs. Counsel's fee Rs. 500.
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