ORDER

D.C. Agrawal, Accountant Member. - These are two appeals filed by the revenue against the order of the learned CIT(A) for assessment years 2003-04 and 2004-05 raising similar grounds as under :—

"(i) The learned CIT(A), Bareilly has not appreciated the acts for assessment year 2003-04 that as per case of Asstt. CIT v. Bal Bharti Nursery School [2002] 76 TTJ 602 (All.) : [2002] 82 ITD 71 (All.), the use of fees charged against expenses is commensurate with the quality of education rather surplus/profit is diverted as expenses claimed excessively in shape of construction of building for the benefit of the person engaged with the society.
(ii) The DVO has rightly disallowed the claim of the assessee when confronted accordingly for excessive value of construction.
(iii) Mere vouching of expenses without concrete evidences of expenses or suppressing of expenses in shape of routed investment of undisclosed income is not considered by the learned CIT(A), Bareilly.
(iv) Order of the CIT(A) is erroneous of law as well as facts of the case, hence, may cancelled and order of the Assessing Officer may be restored."

2. The assessee is held to be a charitable trust as per assessment order. However, the Assessing Officer invoked the provisions of under section 13(2) of the Act and denied, the exemption otherwise available to the society under section 11 of the Act. It had filed return of income declaring nil income in the status of 'society'. The case was picked up for scrutiny. During the course of assessment-proceedings, the Assessing Officer noted that assessee has constructed a single storey school building at Karanpur Chaudhary Nainital Road, Bareilly. Believing that investment in the construction is more than what is declared, the Assessing Officer referred the matter to the DVO, who estimated the cost of construction as under against the declared investment by the assessee :—

3. The Assessing Officer further noted that assessee has not kept any vouchers or any account for purchase of raw material, day-to-day employment of labour, etc. Thus, the cost of construction is not open to verification. The Assessing Officer proposed to make the addition of the difference arising on account of estimation of cost of construction by the DVO, in response to which the assessee submitted that the construction is not complete and therefore, proposed addition should not be made. Report of approved valuer was also filed which was not accepted by the Assessing Officer. Since the Assessing Officer did not find explanation satisfactory, he proposed to make the addition of the differential amount.

4. The Assessing Officer further found that expenditures claimed in the P&L a/c are exaggerated and are siphoned off for personal use of the founder member. As all the expenses are incurred in cash, they are not open to verification, their genuineness cannot be established, therefore, expenses to some extent could not be allowed as supportive evidences were not produced by the assessee. Out of expenditure incurred on cultural programmes, the Assessing Officer considered that a sum of Rs. 69,450 is not allowable as there is no evidence and that cultural programmes are part of educational activities. Out of expenditure of Rs. 26,665 on staff welfare, the Assessing Officer disallowed a sum of Rs. 16,665 as assessee could not explain authenticity of expenses. Out of expenditure on food and nutrition amounting to Rs. 68,615, the Assessing Officer disallowed a sum of Rs. 47,350 on the ground that the claim is excessive and there is no supportive evidence. Out of claim of Rs. 2,51,735 incurred on repair/alteration of school building, the Assessing Officer disallowed a sum of Rs. 2,13,500 on the ground that details of repairs/alterations were not provided, supportive evidences Were not. furnished, requirement of repairs/alterations was not explained, local inspection also did not confirm that repair/alteration on such a large scale was carried out.

5. Further, out of claim of Rs. 75,215 in bus expenses, the Assessing Officer disallowed a sum of Rs. 29,970 on the ground that supportive evidences for salary payment, diesel expenses and bus maintenance expenses were not provided. Out of claim of Rs. 48,035 on printing and stationery, the Assessing Officer disallowed a sum of Rs. 15.700 on the ground that no supportive evidences were furnished to prove the genuineness of the expenses. Thereafter, the Assessing Officer, referring to the decision of Hon'ble Supreme Court in the case of DIT v. Bharat Diamond Bourse [2003] 259 ITR 280 (SC) , held that benefit of exemption under section 11 could not be given as income of the trust has been utilized for the benefit of the founder of the trust within the meaning under section 13(2) of the Act read with section 13(2)(c). According to the Assessing Officer, incomes/funds of the trust, have been misutilized in the form of excessive claim of various expenses debited in the income and expenditure account for the purposes of use by a person having interest in the institution. The Assessing Officer also referred to the decision in Asstt. CIT v. Bal Bharti Nursery School [2002] 82 ITD 71 (All.) for the proposition that where surplus/profit is used for personal benefit of any person or relative having interest in the institution then benefit under section 11 could not be given. The Assessing Officer also highlighted that in Government's school normal fees for Class KG to Class VII is Rs. 10 to 20 whereas assessee is charging Rs. 250 to Rs. 450 and meager salary is paid to the teachers. He referred to the decision of Tribunal in the case of Asstt. CIT v. Bal Bharti Nursery School (supra) wherein it was observed that if the quantum of fees charged is not commensurate with the quality of education and the expenditure incurred is not for running the institution then it could not be said that institution is existing for the purposes of education.

6. The Assessing Officer, accordingly, denied the benefit of exemption under section 11 as well as under section 10(22) and computed the income of the assessee trust at Rs. 5,63,970.

7. The learned CIT(A), on the other hand, considered that reference to Valuation Cell is irrelevant if proper books of account are kept. He referred to the decisions of Hon'ble Rajasthan High Court in the cases of CIT v. Hotel Joshi [2000] 242 ITR 478 (Raj.) and ITO v. Smt. Santosh Khanna [1985] 20 Taxman 15 (Jp) (Mag.) . He also considered following submissions of the assessee :—

"(a) The founder of the society is a widow who is running the school in loving memory of her husband to make him immortal is the sacred purpose of the lady.
(b) The promoters have denoted their precious land for the purpose of society.
(c) The purpose of the Assessing Officer could not be ascertained on the contradictory facts of the cases.
(d) That additions as unexplained investment under section 69 of the Income-tax Act in building account on the excessive, ground and to tax the society as AOP. The purpose is ambiguous.
(e) The society is running their work exactly the same as per their objects so the concluding remarks of Assessing Officer that undisclosed sources cannot be categorized as proved head of receipt in contemplation of basic object of society. That the surplus cannot be used for the personal benefit of any person or his relatives are ambiguous and have no sense in the given situations."

8. On the above basis, the learned CIT(A) held that gross receipts of the assessee are less than Rs. 1 crore, therefore, as per section 10(23C)(iiiad) its income is not liable to be taxed. He, accordingly, annulled the assessment by observing as under :—

"I have carefully considered the issue and perused the assessment order as well as written submissions of the Authorised Representative for the appellant. It is noticed that the appellant is duly registered under section 12A and its gross receipts are below Rs. one crore and as per section 10(23C)(iiiad) its income is not liable to be taxed. Further the submissions of the Authorised Representative in respect of estimating of cost of contract support the view that the estimate of cost of construction if any, is to be done on the basis of rates of UP PWD rates. However, in the case of Madhya Pradesh Madhyam v. CIT [2002] 256 ITR 277 (MP)/[2002] 125 Taxman 382 (MP) . Hon'ble Madhya Pradesh High Court on the issue of registration (held that registration) once granted cannot be reviewed in assessment proceedings. Scope of the proceedings of registration and its cancellation are different from the assessment proceedings. The Income-tax authorities are bound by the registration. Once they have registered an institution as charitable one. they cannot go behind registration in assessment proceedings. They are prima facie bound by such a registration. However, the right to conduct the proceedings of cancellation in accordance with law cannot be denied to the Department. Thus, keeping in view the entirety of the circumstances, in my considered view the appellant is a trust duly registered under section 12A, and its gross receipts are below Rs. one crore and as per section 10(23C)(iiiad) its income is exempt, therefore the Assessing Officer was not justified to change the status of the appellant, hence the assessment orders for the years under appeal, as framed by the Assessing Officer are annulled. Since the income of the appellant is exempt, it is not considered necessary to deal with other disallowance as made by the Assessing Officer."

9. Before us, the learned Departmental Representative submitted that the assessee has claimed expenses in the income and expenditure account which he is not able to explain and certainly there is diversion of funds and the founder being in control of entire affairs of the society, such inflated expenses are going to the benefit of the founder. This will hit the provisions under section 13(2) of the Act as benefit is given to founder of the society who is in control of all the expenses. He also submitted that if benefit goes to the founder of the society or to his personal interest then it could not be said that institution is existing solely for the purposes of education as it is existing for the purposes of benefit of the founder. In view of this, the assessee also loses the benefit under section 10(23C)(iiiad) [old section 10(22)].

10. In any case, the learned CIT(A) should not have annulled the assessment because in case the assessment has to be framed the income has to be either computed under sections 11 to 13 or under sections 28 to 43C of the Act i.e., under the head 'Income from business or profession'.

11. Against this, learned Authorised Representative submitted that there is no material or evidence before the Assessing Officer to come to the conclusion that the inflated expenditure, if any, has been transferred to the interested members. Firstly, there is no inflation in expenditure. Even if there is any, it could not be said that it has benefited only the founder of the society as alleged by the Assessing Officer. There is no evidence or material in Support of the allegation made by the Assessing Officer. According to learned Authorised Representative, the Assessing Officer has simply disallowed certain expenses by estimate without pointing out any specific expenditure which has not been incurred towards the object of the society in spite of the fact that all the expenses are properly vouched. He submitted that allegation of the Assessing Officer that expenses have also been diverted to other activities is not supported by any material or evidence. The Assessing Officer has not pointed out as to how the alleged inflated expenditure was not relatable to the activity of education or how it has resulted in the benefit to the interested members or the founder member. He submitted that reliance of the Assessing Officer on the decision of Hon'ble Supreme Court in the case of Bharat Diamond Bourse (supra) is misplaced because in that case the nexus of money lent to the interested members was established and hence, section 13 was invoked. In the present case, the Assessing Officer has not been able to establish the nexus between the disallowance made and the alleged benefit transferred to the interested persons. He submitted that reliance of the Assessing Officer on the decision in Bal Bharti Nursery School's case (supra) is also misplaced because there was a finding of fact in that case that surplus/fund generated was utilized on repairs of the building owned by secretary and his mother. Huge amounts taken by the secretary and his mother were not repaid. Further, personal expenses of secretary's mother had been met by the institution. Thus, in the light of above facts, it was held in that case that the surplus generated was transferred to the interested persons and his family. On the other hand, present institution has been registered under section 12A. It has been carrying on the activities of imparting education to the students of Class KG to VIII; they do not have any receipt other than from education, its receipt is less than Rs. 1 crore in both the years. No other activity other than education has been carried out by the assessee. Under the facts and circumstances, the provisions of under section 13(2) are not applicable. For same reasons, the two judgments referred to by the Assessing Officer are also not applicable, to the facts of the present case.

12. On the other hand, he submitted that the Hon'ble Supreme Court has held in the case of Aditanar Educational Institution v. Additional Commissioner Of Income Tax [1997] 224 ITR 310 (SC) , that after meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution then it will not lose to be one existing solely for educational purposes as object is not one to make profit. He then referred to the decision of Hon'ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute v. CBDT [2008] 301 ITR 86 , for the proposition that once the facts of the case on record cover the case within the provisions of under section 10(23C)(iiiad) then no other condition regarding application of income was required to be complied with.

13. The learned Authorised Representative finally referred to the decision of Hon'ble Supreme Court in the case of P.R. P.R Prabhakar v. Commissioner Of Income Tax, Coimbatore [2006] 284 ITR 548 , for the proposition that exemption provision should be construed strictly but when they are found applicable then they are required to be interpreted liberally. He also submitted that once assessee's case is found covered under section 10(22)/10(23C)(iiiad) then Assessing Officer need not deny benefit on the pretext that such exemption is not available under section 13 of the Act.

14. The learned Authorised Representative made a final reference to the estimation of cost of construction and stated that even if an addition is proposed to be made on the basis of DVO's report then the same would be considered as application of funds and therefore, would not be taxable separately.

15. We have considered the rival submissions and perused the material on record. In our considered view, the judgment of learned CIT(A) in annulling the assessment is basically incorrect. An assessment order is annulled only when Assessing Officer passes the order without jurisdiction. Once Assessing Officer has acquired a valid jurisdiction on the basis of return filed by the assessee then assessment cannot be annulled. It can only be modified. Thus, the order of the learned CIT(A) is set aside and the assessment order is not treated as annulled.

16. Now, it is an undisputed fact that various expenses claimed by the society are not verifiable and therefore, could be inflated. But the Assessing Officer has not pointed out any instance out of various expenses as to whether it was not at all incurred or it was incurred excessively or the funds or money relating to such expenses was diverted to other persons and in particular, to the founder member of the society. Thus, rest of the inferences other than the expenditure being not verifiable/proved are hypothetical and therefore, not acceptable. There is no material evidence collected by the Assessing Officer to prove that expenditure, if inflated, has resulted in the benefit to the founder member of the society. The inflation of expenses though it is not proved, may only create suspicion that somebody might be benefited but to say that it is only the founder member who is benefited is only far-fetched. In fact, an organization is run with the help of several employees though there may be only one or two controllers/supervisors/managers. It is not a case of Assessing Officer that all the expenses are personally incurred by the founder member, and that he is at liberty to pocket a portion of the expenses debited in P&L a/c. In an organization which employs several persons who for duty incur expenses, it cannot be alleged that it is only founder member who is responsible for expenses and hence pilferage. Though it is not proved that expenses are actually inflated in the present case, but even if it is so then inference that alleged extra expenditure has benefited the founder member is not substantiated and proved. Therefore, provisions of section 13(2) could not be invoked. There has to be direct nexus of outflow of money with the. interested members as it was in the case of Bal Bharti Nursery School (supra) or in Bharat Diamond Bourse's case (supra).

17. In this regard, we refer to section 13 as under :—

"13. (1) Nothing contained in under section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—..........

(c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof—

(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or
(ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the-previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) :—

(2) Without prejudice to the generality of the provisions of cl. (c ) and cl. (d) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),—...........

(c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services;...........

(g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3) :..........

(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :—

(a) the author of the trust or the founder of the institution;
(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution upto the end of the relevant previous year exceeds fifty thousand rupees;
(c) where such author, founder 6r person is an HUF, a member of the family;
(cc) any trustee of the trust or manager (by whatever name called) of the institution;
(d) any relative of any such author, founder, person, (member, trustee or manager) as aforesaid;
(e) any concern in which any of the persons referred to in clause ( a), ( b), ( c ), ( cc) and ( d) has a substantial interest."

18. Let us examine whether case of the revenue falls under clause (2) under section 13(1)(c) or under section 13(2). It is not disputed that the person referred to in sub-section (3) is the founder member of the trust. The condition mentioned under section 13(1)(c)( ii) is that income of the trust should be used or applied directly or indirectly for the benefit of any person falling in the prohibited category. Benefit here would mean some ex gratia expenditure without any contribution by such person to the society. The term 'benefit' exclude from its ambit a two way process. If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case does not fall in clause (ii) under section 13(1)(c). The expenditure incurred on those interested persons would be a compensation for such services. A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or discharging personal obligation, but where persons of prohibited category render services to the society and in turn, get some remuneration, salary and allowances etc. as a member then provisions of sub-section (2) would be applicable and not of sub-section (1) and for applying the provisions of sub-section (2) under section 13, it has to be shown by the revenue that amount paid to the persons of prohibited category was in excess of what may be reasonably paid for such services. In other words, the Assessing Officer has to collect material to show that payment to the persons of prohibited category was unreasonable as compared to the market rates for the services rendered. In the present case, there is no material on record firstly to show that alleged inflated expenditure has gone to the persons of prohibited category, therefore, the case of the revenue made out on the basis under section 13(1) cannot be upheld; The question of invoking section 13(2) in the present case also does not arise because section 13(2) could be invoked only when there is a claim of expenses in the form of salary/allowances or perquisites to the persons of prohibited category for some services rendered. The Assessing Officer has not made out a case on these premises. Thus, neither section 13(1) under section 13(2) is applicable on the facts of the present case.

19. Now coming to the question as to whether difference in cost of construction arising on account of valuation done by the DVO could be added as income we are of the considered view that firstly, there is no case made out for referring the under construction of the school building to the DVO by rejecting the books and pointing out defects therein. Even otherwise, if an addition is proposed to be made under section 69 as unexplained investment in school building then same would be treated as application of funds for charitable purposes. This investment would, therefore, come within the ambit of 85 per cent of total income applied for charitable purposes within the meaning of section 11(1), if the case of assessee is to be considered for exemption under that section.

20. The learned Departmental Representative has argued that excess cost of construction could not be held to be covered within the limit of 85 per cent of income being applied for charitable purposes because such excess investment is not coming out of or derived from property held under the trust which is a basic condition for giving exemption under section 11(1). In our considered view, the Assessing Officer has not made out any case that excels investment in property to be added under section 69 is not coming out of property held under the trust or is not income from such property. For taxing excess investment under section 69, he has to prove that the property held under the trust is not capable of yielding income to the extent excess investment is made out. Since the case of the assessee is also covered under sections 11 to 13 as held by the Assessing Officer, by virtue of it being registered under section 12A/12AA, its income is to be computed as per income and expenditure account under sections 11 to 13 and not under sections 28 to 43D under the head 'Income from business and profession'. Section 11(1) starts with "subject to the provisions of sections 60 to 63.......". It means that sections 60 to 63 would have overriding effect if there is a conflict between sections 11 to 13 and sections 60 to 63. However, the application under section 11 is not made subject to section 68 to section 69C. In other words, provisions of sections 68 to 69C could not be applied overriding sections 11 to 13. It means that in the event of conflict between sections 11 to 13 and sections 68 to 69C, the provisions of sections 11 to 13 will prevail. Thus, where it is claimed that unexplained investment is income out of property held under trust, then onus would shift to the Assessing Officer to prove otherwise. Thus, it is for the Assessing Officer to show with material on record that property held under the trust is not capable of generating excess income which is alleged to be invested in the construction of the property and therefore, beyond the scope of sections 11 to 13 and provisions of sections 68 to 69C would be applicable in addition to the computation of income under these sections. We, therefore, reject the argument of learned Departmental Representative that addition under section 69 for excess investment has to be independently carried out notwithstanding exemption of income under sections 11 to 13.

21. Now, we come to the main argument of the learned Authorised Representative that in a case where provisions under section 10(23C)(iiiad) are applicable, the provisions of sections 11 to 13 would not be applicable.

22. In this regard, we refer to the decision of Hon'ble Supreme Court in the case of American Hotel & Lodging Association Educational Institute (supra) wherein it is held that if a trust is an educational institution then its income is excluded from the total income. In this regard, we refer to the following part of the headnotes of that decision :—

"Actual existence of the educational institution was the precondition for the application for initial approval under section 10(22) of the Income-tax Act, 1961 (which was omitted with effect from 1-4-1999). On the grant of approval, sections 11 and 13 did not apply. Once an applicant institution came within the phrase 'exists solely for educational purposes and not for profit' no other condition like application of income was required to be complied with. The prescribed authority was only required to examine the nature, activities and genuineness of the institution. The mere existence of profit/surplus did not disqualify the institution. Therefore, when exemption was given to an institution there was no assessment or demand. Section 10(22) had an automatic effect. Under section 10(22), the test was restricted to the character of the receipt of the income, viz., whether it had the character of an educational institution of India. Its character outside India was irrelevant for deciding whether its income would be exempt under section 10(22). In deciding the character of the recipient, it was not necessary to look at the profits of each year, but to consider the nature of the activities undertaken in India. If the Indian activity had no co-relation to education, exemption had to be denied."

23. From the above, it is clear that for granting exemption to an educational institution under section 10(22) it is not necessary to look at the profit of each year but to consider the activities of the trust and once approval under section 10(22) is granted, the provisions of sections 11 to 13 did not apply. It is undisputed fact that assessee is an educational institution imparting education from Class KG to Class VIII. No other activities have been alleged. The argument of learned Departmental Representative that some benefit is imparted to the founder of the trust resulting from inflated expenditure would also disable the trust from getting exemption under section 10(22) is out rightly rejected because firstly, there is no evidence that such benefit has been imparted to the founder member of the trust and secondly, even if it is so then such instances would only hit the case of the assessee within the meaning of sections 11 to 13 and cannot be imported to deny exemption under section 10(22)/10(23C)(iiiad) provided a clear finding on the basis of material on record is given that assessee trust is not existing solely for educational purposes. Here purpose is what described in the memorandum of objects of the trust. Some items of disallowances out of expenses claimed cannot be held to be a separate object for which trust is existing thereby holding that trust is not existing solely for educational purposes. We agree with the learned Authorised Representative that exemption provisions must be strictly construed but if the case of the assessee falls within the ambit of exemption then they should be applied liberally.

24. In the case of Commissioner Of Income-Tax v. Seethakathi Trust [2007] 295 ITR 520 (Mad.) , the Assessing Officer had alleged that trust followed the provisions of section 11(5) and section 13(1)(d) and therefore, it is neither eligible for exemption under sections 11 to 13 nor under section 10(22). In this regard, the Hon'ble Madras High Court held that once an educational institution is entitled to the benefit under section 10(22) then it is not necessary to consider claim of the assessee under section 11. The Hon'ble Madras High Court referred to the CBDT Circular No. 712, dated 25-7-1995 [[1995] 127 CTR (St) 2] wherein it is also explained that if an educational institution is entitled to exemption under section 10(22) then benefit conferred under this section cannot be denied on the ground of violation under section 11(5). In this regard, we refer to following portion from that judgment as under :—

"Aggrieved by the said orders of the Assessing Officer dated 31-3-2003, the assessee preferred appeals before the CIT(A), who, by order dated 12-2-2004, held that the assessee is entitled to exemption under section 10(22) of the Act since the educational institutions are entitled to the benefit under section 10(22), 10(22A) and 10(23C) of the Act and for the said purpose, it is not necessary to consider the assessee's claim for deduction under section 11 of the Act.

Against the said order of the CIT(A), the revenue went in appeal and the Tribunal, by order dated 8-3-2006, confirmed the order of the CIT(A) taking note of its earlier order dated 5-1-2004, in the assessee's own case for the assessment year 1998-99, wherein it was held that since the ,. assessee trust had been maintaining separate statement of accounts for educational and charitable activities and were not mingled with both activities and as such, the assessee trust being carrying on the activity of educational purposes, it is entitled to exemption under section 10(22), 10(22A) and 10(23C) of the Act and in which case, it is not necessary to pass an order in respect of the alternative plea of the assessee trust in regard to the deduction under section 11 of the Act.

That apart, the CBDT themselves, issued a circular bearing No. 712, dated 25-7-1995, [see [1995] 127 CTR (St) 2 : [1995] 215 ITR (St) 3], to the effect that the educational institutions are entitled to exemption under section 10(22) of the Act and consequently, the benefit conferred under section 10(22) cannot be denied on the ground of violation under section 11(5) of the Act. The said circular reads as follows :—

'Circular No. 712, dated 25-7-1995

Subject : Investment of funds by educational institutions covered under section 10(22) of the Income-tax Act—Clarification regarding.

Under section 10(22) of the Income-tax Act, any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit, is exempt from tax.

2. The Board have received representations from various institutions which fulfil the conditions laid down under section 10(22) of the Act, but are denied exemption because their funds are not invested in accordance with the provisions of section 11(5) of the Act. It is hereby clarified that since of section 10(22) does not impose any restriction regarding mode of investment of funds, such institutions are not required to invest their funds in the modes specified under section 11(5) of the Income-tax Act. This clarification will not apply to the institutions seeking exemption under section 11 of the Act.

(Sd)

Under Secretary

to the Government of India

Since the substantial questions of law raised in these appeals are centrifuged on the point whether the assessee is entitled to the benefit under section 10(22) of the Act in view of the alleged violation under section 11(5) read with section 13(1)(d) of the Act, in view of the above circular of the CBDT dated 25-7-1995 [see [1995] 127 CTR (St) 2 : [1995] 215 ITR (St) 3], we do not see any substantial question of law that arises for our consideration."

25. The Hon'ble Delhi High Court in the case of Cit-V…Petitioner v. Lagan Kala Upvan… [2003] 259 ITR 489 (Delhi) , has held that conditions laid down in sections 11 and 13 are not relevant for the purposes of applying the provisions of section 10(22). In that ease it was found by the Assessing Officer that interest-free loan was given to interested persons. The interested person was given a portion of the house of the trust and loan was given to another society for construction. The trust was running an educational institution and was covered under section 10(22). The Assessing Officer invoked the provisions of sections 11 to 13 and denied the benefit to the assessee under section 10(22). The Hon'ble Court, referring to the decision of Apex Court in the case of Aditanar Educational Institution (supra) held that exemption under section 10(22) has to be determined with reference to the objects of the society and exemption cannot be denied merely because during the course of working of the society, there was some surplus. In this context, the conditions contained under section 11 or 13 were considered irrelevant. We refer to the relevant portion of the judgment from the above case as under :—

"We are of the view that the contentions urged on behalf of the revenue are without any substance. In fact, the main ground, viz., violation under section 13 of the Act, on which the exemption was denied by the Assessing Officer, has no bearing on the question whether the assessee exists solely for educational purposes and not for purposes of profits, so as to fall within the ambit under section 10(22) of the Act. The test to determine when an institution would qualify for exemption under section 10(22) of the Act has been laid down by the Apex Court in Aditanar Educational Institution v. Additional Commissioner Of Income Tax [1997] 139 CTR (SC) 7 : [1997] 224 ITR 310 (SC) , as follows (p. 318) :—

'We may state that the language under section 10(22) of the Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity'.

Thus, the question of eligibility of exemption under the said section has to be determined with reference to the objects of the assessee (society) and the exemption cannot be denied merely because while the working of the society some surplus results. Similarly, in the context of exemption under section 10(22), the conditions as stipulated in either section 11 or 13 of the Act are irrelevant."

26. The Hon'ble Gujarat High Court in the case of Gujarat State Co-Operative Union v. Commissioner Of Income-Tax. [1992] 195 ITR 279 , held that exemption under section 11 is only in respect of income derived from the property and to the extent provided under section 11. However, no such limit is provided under section 10(22) which only lay emphasis that sole purpose of the existence of the institution should be educational. Therefore, mere existence of profit will not disqualify the institution if its sole purpose is education and not making profit. In this regard, we refer to following portion of the judgment :—

"Under section 10(22) of the Income-tax Act, 1961, it is provided that, in computing the total income of a previous year of any person, any income falling within the said clause, i.e., any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit shall not be included. Though in the context of the provisions of section 10(22), the concept of education need not be given any wide or extended meaning, it surely would encompass systematic dissemination of knowledge and training in specialised subjects. The question whether an educational institution is existing solely for educational purposes can be decided with reference to the activities actually carried on by it. Advancement of knowledge brings within its fold suitable methods of its dissemination and though the primary method of sitting in a classroom may remain ideal for most of the initial education it may become necessary to have a different outlook for further education. It is not necessary to nail down the concept of education to a particular formula. Its progress lies in acceptance of new ideas and development of appropriate means to reach them to the recipients. Section 11(a) applies to income derived from property held under trust wholly for charitable or religious purpose while section 10(22) covers any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit. The exemption incorporated under section 11(a) is only in respect of the extent to which the income derived from the property is applied for charitable purpose which includes educational charity. If the income is only accumulated or set apart for such purpose, the exemption is limited to the extent of 25 per cent of the income from the property held under such trust. The exemption under section 10(22), on the other hand, is without any such limitation. The language under section 10(22) emphasizes that the sole purpose of the existence of the institution should be educational. The very provision of exemption under section 10(22) indicates that the income of such institutions is contemplated. Therefore, mere existence of profit will not disqualify the institution if the sole purpose of its existence is not profit making but is educational activities. Incidental activities connected with the educational purposes for which the institution exists which result in income will not disqualify the institution, under section 10(22), by its very nature, contemplates income of such institutions which is to be exempted under that provision."

27. In the present case, mere disallowance of certain expenses can add to the surplus but cannot become basis for denying exemption under section 10(22)/10(23C)(iiiad). Therefore, we hold that the learned CIT(A) was justified in granting exemption to the assessee under section 10(23C)(iiiad) on the basis that gross receipt of the society is less than rupees one crore and that there is no material to suggest that assessee is not existing solely for educational purposes. To this extent the order of the learned CIT(A) is confirmed.

28. Regarding separate addition under section 68/69 on account of excess investment in the construction of property, we refer to the decision of Hon'ble Delhi High Court in the case of DIT (Exemption) v. Raunaq Education Foundation [2007] 294 ITR 76 (Delhi) , on which learned Authorised Representative has placed reliance. In this decision it is held that provisions under section 10(22) cannot be given restricted meaning and the exemption available under section 10(22) could, cover the income chargeable under section 68 also. In this regard, we refer to relevant portion of the headnotes from the above judgment as under :—

"The words 'derived from' (or some other similar words) do not occur under section 10(22) of the Income-tax Act, 1961, and, therefore, the word 'income' as occurring under section 10(22) cannot be given a restrictive meaning and must be given its natural meaning or the meaning ascribed to it under section 2(24). Hence, an assessee who is entitled to exemption under section 10(22) can claim the benefit thereof for the purpose of income deemed to be chargeable to tax under section 68."

29. As a result, appeals filed by the revenue are partly allowed and matter is restored to the file 7 of Assessing Officer to compute the income/allow exemption in the light of observation made above for both the years.