The Judgment of the Court was delivered by

N. Kumar, J.:— As the assessee is common in all these appeals, though the appeals pertain to various assessment years wherein different questions of law arise for consideration, they are taken up for consideration together and disposed of by this common order.

2. The assessee, M/s. Children's Education Society, is a society registered under the Karnataka Societies Registration Act, 1960. The society was formed on September 29, 1974, with the object of promoting, establishing and maintaining all types of educational institutions. The assessee-society over the years has promoted several educational institutions from time to time. It was running as many as 23 educational institutions up to the assessment years 1999-2000 and 2000-2001. Thereafter, as many as 25 and 28 educational institutions are being run during the previous years relevant to the assessment years 2001-2002 and 2002-2003, respectively. The details of the institutions run by the assessee are as under:

SI. No. Name of the institution Year in which started Authority form whom the educational institution is approved (1) (2) (3) (4) 1. The Oxford Nursery School 1974-75 DDPI, Govt. of Karnataka 2. The Oxford Kannada Higher Primary School 1975-76 DDPI, Govt. of Karnataka

(1) (2) (3) (4) 3. The Oxford English Nursery/Primary School 1975-76 DPI Govt. of Karnataka 4. The Oxford English High School 1982-83 DPI Govt. of Karnataka 5. The Oxford Kannada High School 1982-83 DDPI Govt. of Karnataka 6. The Oxford Teachers Training Institute 1985-86 Govt. of Karnataka, Commissioner of Public Instructions 7. The Oxford Nursery Teacher Training-Institute 1985-86 Govt. of Karnataka, Commissioner of Public Instructions 8. The Oxford Polytechnic 1986-87 Govt. of Karnataka, Department of Technical Education 9. The Oxford Senior Secondary School 1990-91 CBSE, Delhi 10. The Oxford Evening Polytechnic 1991-92 Govt. of Karnataka, Department of Technical Education 11. The Oxford Institute of Pharmacy 1992-93 Govt. of Karnataka, Pharmacy, Council of India 12. The Oxford School of Pharmacy 1992-93 Bangalore University, Govt, of Karnataka 13. The Oxford School of Nursing 1992-93 Kar. Nur. Council, Govt. of Karnataka 14. The Oxford College of Nursing 1992-93 Bangalore University, Govt. of Karnataka, R.G.U.H.S 15. The Oxford Dental College 1992-93 Bangalore University, Govt. of Karnataka, D.C.I 16. The Oxford College of Science 1994-95 Bangalore University, Govt. of Karnataka 17. The Oxford College of Business Management 1994-95 Bangalore University, Govt. of Karnataka 18. The Oxford College of Hotel Management 1994-95 Bangalore University, Govt. of Karnataka 19. The Oxford College of Business Management, MBA 1995-96 Bangalore University, Govt. of Karnataka

(1) (2) (3) (4) 20. The Oxford College of Science, MCA 1995-96 Bangalore University, Govt. of Karnataka 21. The Oxford College of Physio-therapy 1995-96 Bangalore University, now R.G.U.H.S 22. The Oxford College of Science, MSC 1998-99 Bangalore University, Govt. of Karnataka 23. The Oxford English School (ICSE) 1998-99 ICSE, New Delhi 24. The Oxford College of Engineering 2000-01 Govt. of Karnataka V.T.U Belgaum 25. The Oxford College of Science, BCA 2000-01 Bangalore University, Govt. of Karnataka 26. The Oxford College of Engineering MBA progm. 2001-02 Govt. of Karnataka V.T.U Bangalore 27. The Oxford College of Engineering MCA Progm. 2001-02 Govt. of Karnataka V.T.U Belgaum 28. The Oxford Pre-University College. 2001-02 Govt. of Karnataka

3. The assessee filed returns of income claiming status of “artificial juridical person”. However, the assessee was assessed in the status of “association of persons”. The Assessing Officer framed assessment order. However, he denied exemption under section 10(23C)(iiiad) for the years from 2000-2001 to 2005-2006. He also disallowed subsidy for the assessment year 2001-2002. He disallowed building fund for the years 2001-2002 to 2006-2007. He also disallowed interest for the period from 2002-2003 to 2005-2006. Even expenditure on account of lease was disallowed for the assessment year 2003-2004. The donation was disallowed for the year 2003-2004 to 2005-2006. Aggrieved by the said disallowance, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In fact, the Commissioner of Income-tax (Appeals) had granted relief to the assessee for the assessment year 1999-2000 first year in which section 10(23C)(iiiad) came into force. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal which is I.T.A No. 1105 of 2002. That appeal along with appeal filed by the assessee against the aforesaid impugned order were clubbed together. The Tribunal dismissed the appeal filed by the Revenue and allowed all the appeals filed by the assessee in toto granting the relief to the assessee. Aggrieved by the said order of the Tribunal, the Revenue is in appeal. After going through the substantial questions of law raised and framed at the time of admission, we are of the view, it requires to be recasted. The learned counsel appearing for the parties are also of the same view. Accordingly, the following substantial questions of law are framed:

“1. Whether the Tribunal is correct in law in holding that the respondent-assessee is to be assessed in the status of artificial juridical person instead of status of an association of persons adopted by the Assessing Officer and confirmed by the Appellate Commissioner?

2. Whether, on the facts of the case, the Tribunal is correct in holding that the exemption in terms of provisions of section 10(23C)(iiiad) of Income-tax Act, 1961, is available to the respondent-assessee as annual receipts of each of the institutions of the respondent-society is less than the prescribed limit under the said provision?

3. Whether the Tribunal is correct in holding that the exemption in terms of section 10(23C)(iiiad) of Income-tax Act, 1961, is allowable?

4. Whether, on the facts of the case, the Tribunal is correct in deleting the addition made in respect of grant of subsidy and advancement of unsecured loans to persons connected with the chairman of the society under various agreements?

5. Whether, on the facts, the Tribunal is correct in deleting the interest amount in respect of interest-free advances made to the relatives, i.e, son and daughter of the chairman and the amounts in turn, are transferred to a firm?

6. Whether, on the facts, the Tribunal is correct in holding that the funds collected towards construction of building as donation is allowable and cannot be treated as income of assessee under the provisions of the Income-tax Act, 1961?

7. Whether the Tribunal was correct in holding that the expenditure of Rs. 2.63 crores on account of write off of lease hold properties is an allowable deduction in the assessee's case under the provisions of the Income-tax Act?

8. Whether, on the facts of the case, the donations made by the respondent-society qualify for deduction?

9. Whether the Tribunal is correct in not appreciating that the assessee was independently claiming section 10(23C)(iiiad) exemption in respect of the entire trust as well as in respect of independent institutions when the management and the control of the same vested with its chairman, who was running the same as a business concern, i.e, for profit?

10. Whether the Tribunal was correct in holding that building fund of Rs. 28,04,505, infrastructure development fund Rs. 16,39,73,678 should be treated as the corpus fund of the assessee even though the donors had not been identified and was contrary to section 11(1)(d) of the Income-tax Act?”

First substantial question of law

4. The word “person” is defined under section 2(31) of the Act. It reads as under:

“2. (31) ‘person’ includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation.— For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.”

5. A reading of the aforesaid definition makes it clear that a “person” includes an association of persons or body of individuals whether incorporated or not and also every artificial juridical person, not falling within any of the preceding sub-clause. Once a body/society is incorporated under a statute, it becomes juridical person.

6. Under the terms of the Societies Registration Act, 1860, any seven or more persons associated for any literary, scientific or charitable purpose, may by subscribing their names, to a memorandum of association and filing the same with the Registrar of Societies may form themselves into a Society under the Act.

7. Once the society is formed, it would become a juridical person as opposed to natural persons. Business of the society is carried on in the name of the society and not in the name of the persons who form the said society. The properties of the society would vest in the name of the society managed by the governing body. The society so registered, may sue or be sued in the name of the president, chairman or principal secretary or the trustees as shall be determined by the rules and regulations of the society and in default of such determination, in the name of such persons as shall be appointed by the governing body for the occasion. Therefore, the society would be an artificial juridical person other than the association of persons or body of individuals. Therefore, the society while filing return is described the status as artificial juridical person. The assessing authority could not accept the said status and treated the assessee as an association of persons and has passed the order. Now, the Tribunal has held that the assessee is to be treated as artificial juridical person. When the return is filed as artificial juridical person, the question of treating the assessee as an association of persons would not arise. Therefore, the substantial question of law No. 1 is answered in favour of the assessee and against the Revenue.

Second and third substantial questions of law

8. Shri Indrakumar, the learned senior counsel appearing for the Revenue, contended that clauses (iiiab), (iiiad) and clause (vi) were introduced by the Finance (No. 2) Act, 1998, with effect from April 1, 1999, as a substitute for section 10(22) which was omitted by the said Act with effect from April 1, 1999. The reason being the blanket exemption in respect of the educational and medical institutions which is being misused, was proposed to be withdrawn, compelling such institutions to come under a discipline. However, safeguards are being provided to ensure that the institutions genuinely serving the social cause, in either field do not lose existing benefit and thus amended provisions have to be construed strictly. So construed. Though even after the said amendment, an assessee is entitled to the benefit of section 10, its application is now restricted to income received by the assessee on behalf of other educational institution existing solely for educational purposes and not for the purposes of profit. If aggregate annual receipts of such educational institutions do not exceed the amount of annual receipts as may be prescribed. The words “aggregate annual receipts” means annual receipts of such educational institutions run by the assessee. In the event of an assessee running more than one educational institution and if the annual receipts exceed more than a crore, then he has to seek approval under clause (vi) which is made applicable to educational institutions those not falling under sub-clause (iiiab) or sub-clause (iiiad) and, therefore, he submits, the order passed by the Tribunal holding aggregate annual receipts means aggregate of each educational institution, is contrary to the expressed provision contained in the statute. As such the said binding requires to be interfered with.

9. Per contra, Shri Shankar, the learned counsel appearing for the assessee, submitted, as clause (22) of section 10 stood before deletion, any income of a university or other educational institution existing solely for education purposes and not for purposes of profit, was excluded from the total income of the assessee. However, that provision is now deleted and in its place sub-clauses (iiiab), (iiiad) and even clause (vi) are introduced. Now, the wording used in clause (23C), namely, any income received by any person on behalf of other educational institutions means the income from each of such educational institution run by the assessee and if aggregate annual receipts of such educational institution do not exceed the amount of annual receipts prescribed, namely, Rs. 1 crore, the assessee is entitled to the benefit of section 10. The aggregate annual receipts does not mean that the annual receipts of all educational institutions have to be clubbed. It only means it is an aggregate of annual receipts issued by each educational institution and, therefore, he submits that the interpretation placed by the Tribunal is consistent with the aforesaid statutory provisions and, therefore, no case for interference is made out.

10. In order to appreciate the aforesaid contentions, it is necessary to have a look at the statutory provisions. Chapter III deals with incomes which do not form part of total income. Section 10 deals with income not included in total income, which reads as under:

“10. 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.”

11. Clause (22) before deletion read as under:

“any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.”

12. By deleting the aforesaid provision, the provisions which are now substituted are clause (23C) of section 10. Clause (23C) reads as under:

“Any income received by any person on behalf of

(iiia) the National Foundation for Communal Harmony; or

(iiiab) any university or other educational institution existing solely for educational purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or

(iiiac) any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, and which is wholly or substantially financed by the Government; or

(iiiad) any university or other educational institution existing solely for educational purposes and not for purposes of profit if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed; or…

(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority;”

13. Section 10 groups in one place various incomes which are exempted from tax, which includes certain types of income from the ambit of total income, as defined under the Act. The incomes enumerated in the section are not only excluded from the taxable income of the assessee, but also from his total income. They are not to be taken into consideration for the purpose of determining either the taxable income or rate of tax. If any income falling within any of these clauses of the section is in reality not the income of the assessee, but is deemed to be his income under any provision of this Act, the exemption would still be available. A receipt may not be income, at all, within the proper concept of the term and yet may come within the expressed exemption in this section due to the over anxiety of the taxman to make the non-taxable clear from possibility of doubt. In other words from the fact that such a receipt is exempted under the section which must not be assumed that, but for the exemption, it would necessarily be taxable. The onus of showing that a particular item of income falls within any clause of the section, is on the assessee. The object with which clause (22) of section 10 was deleted is found in the Budget Speech of the Minister of Finance for 1998-99, where it is stated as under (see [1998] 231 ITR (St.) 45, 68):

“Moderate rates and large concessions do not go hand in hand. I have, therefore, carried out a review of the various concessions and exemptions under the Income-tax Act. I find that many of them are no longer necessary and some of them are also being used for tax avoidance. I, therefore, propose to withdraw many of these provisions. These include exemption to the Export Import Bank of India and exemption in respect of certain perquisites on foreigners employed in India. The blanket exemption in respect of educational and medical institutions which is being misused, is proposed to be withdrawn, compelling such institutions to come under a discipline. However, safeguards are being provided to ensure that the institutions genuinely serving the social cause in either field do not lose the existing benefits.”

14. The apex court had an occasion to consider the clause (22) of section 10 in the case of Aditanar Educational Institution v. Additional Commissioner Of Income Tax, [1997] 224 ITR 310 (SC) has held as under (page 316):

“Counsel for the Revenue mainly stressed the plea that the exemption under section 10(22) of the Act would apply only to educational institutions as such. According to him, in this case, the assessee might be financing for running an educational institution, but it is not itself an educational institution. As noted earlier, the Tribunal held that the assessee was an institution existing for educational purposes and not for the purposes of earning any profit and the assessee itself could be termed as an ‘educational institution’ coming within section 10(22) of the Act. The High Court has concurred with this view. The High Court has further held that the medium through which the assessee could effectuate its objects is the college and by employing this medium, the assessee imparts education and it cannot be stated that the assessee is only a financing body and does not, on the facts, come within the scope of ‘other educational institution’ occurring in section 10(22) of the Act. Reliance was placed on the decision of the Allahabad High Court in Katra Education Society v. ITO, [1978] 111 ITR 420 (All), to hold that an educational society could be regarded as an educational institution if the society was running an educational institution. We are of the view that an educational society or a trust or other similar body running an educational institution solely for educational purposes and not for the purpose of profit could be regarded as ‘other educational institution’ coming within section 10(22) of the Act (See Commissioner Of Income-Tax, West Bengal-Vii, Calcutta v. Doon Foundation, [1985] 154 ITR 208 (Cal) and Aggarwal Shiksha Samiti Trust v. CIT, [1987] 168 ITR 751 (Raj)). It will be rather unreal and hypertechnical to hold that the assessee-society is only a financing body and will not come within the scope of ‘other educational institution’ as specified in section 10(22) of the Act. The object of the society is to establish, run, manage or assist colleges or schools or other educational institutions solely for educational purposes and in that regard to raise or collect funds, donations, gifts, etc. Colleges and schools are the media through which the assessee imparts education and effectuates its objects. In substance and reality, the sole purpose for which the assessee has come into existence is to impart education at the levels of colleges and schools and so, such an educational society should be regarded as an ‘educational institution’ coming within section 10(22) of the Act. We hold accordingly. In our view, the judgment of the High Court does not merit interference. The plea of the Revenue to the contrary is untenable and we repel the same. All the appeals filed by the Revenue shall stand dismissed, but there shall be no order as to costs.”

15. The aforesaid provision as it stood then and the interpretation placed on it by the various High Courts as well as the apex court gave total exemption in respect of the income derived from running such educational institutions. As the said provision was abused by some persons, the said provision was deleted and thus new provisions have been inserted. However, it is made clear, the intention of such amendments was not to deny the benefit to the institutions genuinely serving the social cause and to deny the existing benefits. Therefore, the real test is whether the assessee who claiming these exemptions is running educational institutions solely for education purposes and not for purpose of profit. If the said fact is established, he is entitled to exclude the income from such institution under section 10. However, as intention of the deletion of section 10(22) and introduction of these provisions was to compel such institutions to come under a discipline, the stress now is on the aggregate of the annual receipts received by such institutions. By the amended provisions what is intended to be done is, any university or other educational institution existing solely for educational purpose and not for purposes of profit, if it is wholly or substantially financed by the Government, then the income of such educational institutions in the hands of the assessee, is not included in the total income of the assessee. The reason appears to be that if the Government is financing, they would take all precautions before parting with funds and make sure that such educational institution is existing for the educational purpose and not for the purpose of profit. Therefore, the income derived from such institutions is excluded from the total income of the assessee. The next exemption is contained in sub-clause (iiiad). If any university or other educational institution existing solely for educational purpose and not for the purposes of profit, if the aggregate annual receipts of such university or educational institution do not exceed the amount of annual receipts as may be prescribed.

16. Rule 2BC of the Income-tax Rules prescribes the amount of annual receipts for the purposes of sub-clauses (iiiad) and (iiiae) of clause (23C) of section 10, which reads as under:

“2BC. (1) For the purposes of sub-clause (iiiad) of clause (23C) of section 10, the amount of annual receipts on or after the 1st day of April, 1998, of any university or other educational institution, existing solely for educational purposes and not for purposes of profit, shall be one crore rupees.

(2) For the purposes of sub-clause (iiiae) of clause (23C) of section 10, the amount of annual receipts on or after the 1st day of April, 1998, of any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, shall be one crore rupees.”

17. Therefore, one crore of rupees is the aggregate annual receipts which is prescribed under the Rules. In other words, if the aggregate annual receipts of an educational institution is less than one crore, the income from such educational institution in the hands of the assessee, is not taken into consideration in computing the total income of the assessee.

18. Sub-clause (vi) provides that any university or other educational institution existing for educational purpose and not for the purpose of profit other than those mentioned in sub-clause (iiiab) and sub-clause (iiiad) and which may be approved by the prescribed authority, they are also entitled to the said benefit. In other words, sub-clause (iiiab), sub-clause (iiiad) and sub-clause (vi) applies to three categories of institutions.

19. Now, we are concerned with the meaning to be attached to the word “aggregate annual receipt”. The argument is, other educational institution referred to in the said sub-clause refers to all educational institutions run by the assessee and aggregate annual receipts of such other educational institutions means the aggregate of annual receipts of all such educational institutions put together. Otherwise, the use of the word “aggregate” loses its meaning. We find it difficult to accept the said argument.

20. Firstly, if the word “aggregate annual receipts” of other educational institution is to be understood as clubbing of annual receipts of all educational institutions run by an assessee-society, then it will also include the annual receipts of an educational institution which is wholly or substantially financed by the Government. If that was intention of the Legislature, they would not have introduced separate sub-clauses as (iiiab) and (iiiad). If such interpretation is placed, sub-clause (iiiab) becomes otiose. Therefore, it is not possible to place such an interpretation. If an assessee society is running several educational institutions, if some of them are wholly or substantially financed by the Government in terms of sub-clause (iiiab), the income on behalf of such educational institution received by the assessee is exempted from being computed the total income of the assessee. If the assessee is running other educational institutions which are not wholly or substantially financed by the Government, then the benefit of that exemption is also extended to the income derived from such educational institutions and received by the assessee under sub-clause (iiiad) reading with sub-clause (iiiad) along with rule 2BC. It was contended, the Legislature used the word “aggregate annual receipt” and “amount of annual receipts” and, therefore, the provisions are not one and the same. The word “aggregate” has been defined in Chambers 21st Century Dictionary as under:

“Aggregate − noun = a collection of separate units brought together, a total taken altogether, bring together.”

In Wharton's Law Lexicon, it is defined as thus: “a collocation of individuals, units or things in order to form a whole.”

21. Similarly, relying on the judgment of the apex court in the case of Aditanar Educational Institution v. Additional Commissioner Of Income Tax, it was contended the words “other educational institution” refers to the assessee society and not to the individual educational institution. If the intention of the Legislature was to club the annual receipts of all educational institutions run by the assessee society, they could have said so in clear terms. On contrary what is stated in the said section is the aggregate annual receipts of such university or such educational institution referring to other educational institution. Other educational institution is to be understood with the context of the first word, i.e, the university. Both in the university and any educational institutions, education is imparted. The university is a statutory body. But there are a number of educational institutions which are not run by a statutory authority which are imparting education, the word “other educational institution” has to be understood in the context of other than any university. If so understood, all that it means is every educational institution existing solely for educational purpose and not for the purpose of profit, if the aggregate annual receipts of such educational institution exceeds Rs. 1 crore, then the income from such educational institution received by the assessee is excluded from his total income. In an educational institution the amount are calculated periodically. It may be calculated under different heads. All such amounts received constituted receipts and those receipts may be received throughout the year. Therefore, the word “annual” has been inserted. But to be eligible for exemption, aggregate of annual receipts should not exceed Rs. 1 crore, i.e, the total annual receipts of a year if it does not exceed Rs. 1 crore, then the income derived from such educational institution in the hands of the assessee cannot be taken into consideration to compute the income of the assessee.

22. No doubt, education has become a business, a very profitable business also. But it requires huge investment. It is the duty of the Government to provide education to all its citizens, as the Government is not able to shoulder the responsibility completely. Therefore, the field of education is now thrown open to private organizations. But for throwing open the field to the private operators, probably, the country would not have achieved in the field of education what it has achieved. Therefore, lot of funds are invested in running these educational institutions, either by creating a society or a trust. In course of time, they have expanded their activity providing course in various subjects at various levels and for that purpose they have established more than one educational institution. Each educational institution is a separate entity controlled under various statutes for various purposes. May be the management of these educational institutions would be in the hands of the societies or the trust, but for all other purposes they are different, independent entities. That is the reason why section 10(23C) is worded as under:

“any income received by any person on behalf of.

23. Here “any person” refers to the assessee and “on behalf of” refers to such institutions. It may be an university, it may be an educational institution, it may be a hospital or other institutions of similar nature. As all such institutions are independent entities and they generate income and when that income is received by the assessee, it becomes the income in the hands of the assessee and it is such income which is sought to be excluded while computing the total income of the assessee under section 10. The test prescribed under the aforesaid provision is not the income of the educational institution. It is the aggregate annual receipts of such educational institution that is prescribed at Rs. 1 crore. Therefore, irrespective of the expenditure incurred by those institutions, the exemption is based on the total receipts. Even if the word “aggregate” has to be understood as suggested by the Revenue as the annual receipts of such educational institutions put together, probably, the said provision regarding exemption would be of no use at all. Especially, if the society is running a medial college or any engineering college or other professional courses, then the annual receipt of each institution would run to a few crores and, therefore, the very object of granting exemption to such genuine institution would be lost. Therefore, the words “aggregate annual receipt” has to be understood with the context in which it is used and the purpose for which the said provision was inserted, keeping in mind, the scheme of the Act. Therefore, if an assessee is running several educational institutions, if any of them is wholly or substantially financed by the Government, then the income from such educational institution received by the assessee is not included while computing his total income. Similarly, income from each educational institution if they are not receiving any aid from the Government wholly or substantially in respect of which the aggregate annual receipt do not exceed Rs. 1 crore received by the assessee, is also not included while computing annual total income of the assessee.

24. Clause (vi) makes it clear that if educational institution do not fall under either of those two categories and still such educational institutions are also entitled to the exemption, provided such institutions are approved by the prescribed authority. Therefore, all these three provisions apply under three differed spheres. Otherwise, there was no necessity for the Legislature to introduce these three provisions. In that view of the matter, the finding recorded by the Tribunal that aggregate annual receipt of other educational institution means, total annual receipt of each educational institution, is correct and it does not call for any interference. Therefore, the substantial questions of law Nos. 2 and 3 is answered in favour of the assessee and against the Revenue.

Substantial questions of law Nos. 4 and 5 payment of subsidy of Rs. 2,12,26,465 and notional interest thereon

25. The assessee was running a hostel for the benefit of students studying in various institutions managed by it up to December 31, 1999. It was not a separate entity. From January 1, 2000, the society discontinued the activity of providing hostel facility to the students. They entered into an agreement on January 1, 2000, between the partners of M/s. Oxford Girls Hostel and the society. The said partnership firm has to make available the hostel facility to the students studying in the various institutions. For the said purpose, the society made interest free advance to three persons namely, S.L.V Narasimharaju, Smt. Shakuntala and Smt. Triveni. Under the agreement, the society has to pay a composite rent for the building and the equipment installed therein at the rate of Rs. 30 per sq. ft. and the super built area was estimated to be 70. 000 sq. ft the monthly rent works out to Rs. 21 lakhs. However, this agreement was cancelled and another agreement dated January 1, 2000, was entered into, under which no rent became payable to the aforesaid three persons. They agreed to pay the reduced subsidy from originally agreed in the earlier agreement dated April 1, 1988. The quantum of subsidy was arrived at Rs. 2.12 crores. In terms of the said agreement, a sum of Rs. 1.12 crores was adjusted excess the amounts owed to the society by the M/s. Oxford Girls Hostel. Therefore, it was contended that the said payment of Rs. 2,12,26,465 is to be treated as expenditure towards house building subsidy. The said case of the society was not accepted by the assessing authority as well as the first appellate authority on the ground that subsidy is not a payment for the purposes of the object of the society. It is at best, payment for acquiring enduring benefits. Since there was no genuine motive for such large scale expenditure, even after having cancelled the initial agreement, it was not allowed as genuine expenditure in the books of the society. The Tribunal interfering with the said order, held that the authorities below failed to appreciate that the provision of hostel facility in close vicinity of the educational institution is an absolute necessity to ensure security of the students, especially girl students who come from far of places to study in the educational institution of the assessee-society. The subsidy given amounts only 35 per cent, of the total investment requires to be made in the construction of the hostel facility to meet the specific requirement of the students studying in various educational institution run by the assessee-society. The society secured a big advance for a small price. Considering the benefits derived by the assessee-society from the said arrangement, it cannot be denied that the payment of the subsidy for running the hostel facility has resulted in furtherance of the object of the assessee-society only. Therefore, they set aside the finding of the assessing authority and extended the benefit.

26. From the aforesaid undisputed facts, it is clear that the society has: entered into an agreement with the partnership firm for providing roughly about 70, 000 sq. ft. built up area in hostel facility to students of the society studying in various institutions. They had to pay a rent of Rs. 21 lakhs per month. It is in that context, when they found it to be unworkable, they entered into another agreement under which the partnership firm agreeing to provide accommodation to the students of the society by collecting charges directly from the students. Thereby the responsibility of providing hostel facility to the students of the society and payment of Rs. 21 lakhs per month ceased to exist. The terms of the agreement makes it clear that the partnership firm has to provide accommodation only to the students studying in educational institution run by the society. Without the hostel facility the society cannot run this educational institution as the students are coming from all over the world and there is need to provide hostel accommodation near to the educational institution and more particularly, girl students. It is in that context, whatever money had been paid earlier, was sought to be adjusted as the subsidy amount thereby the partnership firm committed to provide hostel facility. Having regard to the nature of construction, the extent of construction, the responsibilities and the advantages, the payment of Rs. 2.2 crores as subsidy cannot be sought to be a huge amount. The Tribunal rightly allowed the said amount as expenditure and deleted the additions made by the assessing authority. In that view of the matter, we do not see any error committed by the Tribunal. Consequently, the disallowance of the notional interest on the said amount would also fall to ground. Accordingly, the substantial questions of law Nos. 4 and 5 are answered in favour of the assessee and against the Revenue.

Substantial questions of law Nos. 6, 8 and 10 building fund/infrastructure fund

27. This addition relates to assessment years 2001 to 2003. This addition is under the head of building fund. The assessing authority treated the building fund as revenue receipt. According to the society, even if the addition is considered as income, that sum being an income of the society they can claim for exemption under section 10(23C) of the Act. Therefore, the society sought for exemption. The Tribunal held that the Building Fund are received specifically towards the corpus of the assessee-society for being applied in the construction of the building, the receipt is capital in nature and, therefore it is credited directly to the corpus fund. The grievance is, the assessing authority has considered the same as revenue receipt and has made addition. It is not in dispute that the assessee and the various educational institutions run by the assessee have received substantial donations. The amount so received from the building fund is not included in the income and expenditure account of the society. The amounts received are accounted under the building fund. Building is to be constructed only for the educational institution run by the society. The object of donation is charity in nature. Therefore, the Tribunal granted the benefit of exemption.

28. As is clear from the order passed by the Assessing Officer as well as the Commissioner, the benefit of exemption was not extended to the assessee because it failed to give particulars of the persons who gave the said donations. It is in that context the said amount were treated as income and brought to tax. The order of the appellate authority refers to the ledgers and accounts maintained showing the said advances. However, the particulars of the contents of the said books are not set out in the order of the appellate authority. Under these circumstances, if the said advances are received by the parents of the students whose children were studying in the schools and the same is properly accounted for under the heading of building fund/infrastructure fund and the said amount if it is utilized for construction of the building which in turn is used for imparting education, it would constitute charity. Therefore, the society would be entitled to the benefit of exemption. But it is purely a question of fact. Therefore, the proper thing would be to set aside the finding and remand the matter back to the assessing authority, giving an opportunity to the assessee to produce the ledger books and other accounts showing the receipt of such payment and utilization of the said amount for the purpose of construction, so that on the aforesaid material, the assessing authority can pass suitable orders on the merits. Therefore, the substantial questions of law Nos. 6, 8 and 10 is not answered, as the matter is remanded back to the assessing authority.

Substantial question of law No. 9 depreciation of Rs. 2,63,73,226

29. The assessee claimed an extent of Rs. 2,63,73,226 on account of write off 3 the lease hold properties at 6th Phase, J.P Nagar. The said building had been shown as part of the fixed asset. The case of the Revenue was any loss relating to fixed asset is only a capital loss and cannot be allowed as revenue expenditure while computing excess of income over expenditure. Therefore, they disallowed the expenditure of Rs. 2,63,73,226. The assessee's contention was that the said amount represents application of the income of the assessee-society for educational purpose. The depreciation is allowed in respect of the said building in accordance with section 32(1)(i) and Explanation 1 thereto. Therefore, it follows that the written down value is also written off as it is allowable having regard to the provisions of section 32(1)(iii) and, therefore, it cannot be a capital loss. The said contention was overruled and the appellate authority has upheld the said order. However, the Tribunal held that the loss relating to the building written off is an expenditure allowable under section 32(1)(iii) and as such it granted relief to the assessee. Aggrieved by the same the Revenue is before this court. Section 32 deals with “depreciation”. It reads as under:

“32. Depreciation.— (1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed;

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed

30. section 32(1)(iii) reads as under:

“(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof:

Provided that such deficiency is actually written off in the books of the assessee.”

31. As is clear from section 32(iii), in the case of building, machinery’, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year, the amount by which the moneys payable in respect of such building, machinery, plant or furniture together with the amount of scrap value, if any, fall short of the written down value thereof and if such deficiency is actually written off in the books of the assessee, the same shall be deducted. In the instant case, it is not in dispute that the assessee constructed a building on a leased property. It was treated as block asset and depreciation was allowed under section 32(1) of the Act. However, in the mean while, the lease period was over. The said building was discarded, i.e, the building was surrendered to the lessor on the expiry’ of the lease period. On the date of the expiry of the lease period, the written down value was mentioned in the balance-sheet. It is that amount claimed as deduction under clause (iii) of sub-section (1) of section 32. As is clear from the aforesaid provisions, the assessee is entitled to the said deduction. The lower authority by misreading the provisions of law had denied the said benefit. In that view of the matter, there is no merit in the said contention. Accordingly, the said substantial question of law No. 9 is answered in favour of the assessee and against the Revenue.

32. Accordingly, all these appeals are dismissed except in respect of the Building Fund in respect of which the order passed by the Tribunal in set aside and the matter is remanded back to the assessing authority. Ordered accordingly.