COMMISSIONER OF INCOME TAX Vs. BIMETAL BEARINGS LIMITED

JUDGEMENT

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

(2.) THE assessee in T.Cs. Nos. 595 and 596 of 1978 is one Shri Paramkalayani Education Society, Madras. For the assessment years 1971-72 and 1972-73, it claimed the benefit of exemption under s. 11 of the I.T. Act, 1961, hereinafter referred to as "the Act," in respect of its income on the ground that it is a charitable institution which is not carrying on any activity for profit. THE ITO rejected the assessee's claim on the ground that in view of s. 13(3) read with s. 13(2)(a) of the Act, the assessee cannot claim the benefit of exemption under s. 11. In the further appeal filed by the assessee to the AAC, an alternative claim was also put forward by the assessee. THE contention of the assessee was that even if is was not entitled to the benefit of exemption under s. 11, it could clearly claim relief on the basis of s. 10(22) and s. 10(22A) of the Act as an educational institution existing solely for educational purpose and not for purposes of earning profit. THE AAC, after referring to the claim of the assessee both under s. 11 as well as under ss. 10(22) and 10(22A), held that the assessee was not entitled to the benefit of exemption under s. 11 of the Act. However, he did not give his view on the question as to whether the assessee was entitled to the benefit of s. 10(22) and 10(22A) of the Act. THEreafter, the assessee went before the Tribunal. Though the memorandum of appeal filed did not contain any ground based on the applicability of s. 10(22) or s. 10(22A) of the Act, the Tribunal considered that question, having regard to the fact that the assessee had raised that alternative ground both before the ITO and before the AAC. THE Tribunal took the view that the assessee might not be entitled to the benefit of s. 11, in view of the advances made from the trust funds to persons falling under s. 13(3) of the Act. THE Tribunal, however, upheld the assessee's alternative claim for exemption based on s. 10(22) and s. 10(22A) of the Act. Before the Tribunal, the Revenue contended that the exemption under s. 10(22) of the Act can be claimed only by the educational institution itself and it cannot be claimed by other agencies which run universities or colleges. THE Tribunal rejected the said contention of the Revenue, relying on its earlier decision relating to a similar institution in I.T.A. Nos. 720/ 72-73 and 383 and 384/73-74 dated April 22, 1974, and holding that the assessee would come within the expression "other educational institution" occuring in s. 10(22). THE said earlier decision of the Tribunal was the subject-matter of a reference before this court in Addl. CIT v. Aditanar Educational Institution [1979] 118 ITR 235. In that case this court has specifically held that the provision in s. 10(22) of the Act will apply not only to educational institutions as such but also to other agencies running educational institutions. As already pointed out, after considering a similar contention advanced by the Revenue in this case, the Tribunal upheld the assessee's claim for exemption based on s. 10(22) and s. 10(22A) of the Act.

(3.) HAVING regard to the above provision, any University or other educational institution existing solely for educational purposes and not for purposes of profit is entitled to claim exemption in respect of its income. The Tribunal has held that having regard to the objects for which the assessee-society was established, the assessee should be taken to come within the expression "other educational institution" which exists solely for educational purposes. Before the Tribunal, a contention was urged by the Revenue that one of the objects of the assessee-society being to run other allied or auxiliary institutions including any agency such as automobile workshop, driving school, printing press, etc., it will take the assessee-society outside the purview of s. 10(22) of the Act, for the object of establishing commercial institutions such as automobile workshop, driving school and printing press will show that the assessee-society does not exist solely for education purposes. However, the Tribunal has rejected that contention on a short ground, namely, that it is an allied object and that object should be taken in conjunction with the other objects set out in the memorandum of association and, therefore, the assessee-society should be deemed to be an educational institution existing solely for educational purposes. Before us, Mr. Jayaraman, learned counsel for the Revenue, has advanced arguments in detail in support of his submission that clause (d) of the objects referred to above will take the society out of the purview of s. 10(22) of the Act. According to the learned counsel, if one out of the many objects for which the institution was established is to run an activity for profit, then the institution cannot be said to exist solely for educational purposes and partly for purposes of profit. In support of his submission that if an educational institution has as one of its objects a commercial activity for earning profit, then that institution cannot claim the benefit of exemption under s. 10(22) of the Act, he has referred to the decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association . That case lays down the well-established proposition of law that if a charitable institution has as one of its objects, an activity for profit, then that institution cannot claim exemptions under s. 11 of the Act. The court in that case also held that the fact that a commercial activity was not in fact carried on by that institution was immaterial so long as such charitable institution had been founded for the objects, one of which was carrying on of an activity for profit. Thus, according to the Supreme Court, the actual earning of profit or the actual carrying on of an activity for profit is not necessary and if one of the objects of the institution is to carry on an activity for profit, that will take the institution out of the purview of s. 11 of the Act, even though such an activity was not actually carried on by the educational institution, as originally intended. Relying on the said decision, the learned counsel for the Revenue submits that even if the assessee-society has not established the institutions referred to in clause (d), the existence of clause (d) itself in the memorandum of association will take the assessee-society out of the purview of s. 10(22) of the Act. The entire argument of the learned counsel for the Revenue proceeds on the basis that clause (d) enables the assessee to carry on a commercial activity for profit and that, therefore, the assessee should be taken to exist not only for educational purposes but also for purposes of carrying on the various commercial activities referred to in that clause. However, we are not inclined to agree with the learned counsel for the Revenue that clause (d) contains an object for carrying on an activity for purposes of earning profit. According to learned counsel for the Revenue, clause(d) should be construed as an independent clause and if it is so construed without reference to the other objects set out in the memorandum of association, it will indicate that the assessee-society was established not only to carry out the other objects, but also the objects referred to in clause (d) which are for purposes of earning profit by carrying on a commercial activity. But we are not in a position to construe clause (d) as an independent clause. A mere reading of clause (d) itself will indicate that it cannot be read independently and divorced from other clauses or objects set out in the memorandum of association. That clause enables the assessee-society to establish other allied or auxiliary institutions including any agency such as automobile workshop, driving school, printing press, etc., and to run them, if it was intended to be an independent clause, the use of the expression "allied or auxiliary institution" would be quite unnecessary. The expression "allied or auxiliary institution" occurring in clause (d) would indicate that the institutions referred to therein should be of the nature as the other institutions referred to in the earlier clauses, such as high school, college or polytechnic. That shows that the automobile workshop, driving school and printing press, the establishment of which is contemplated by clause (d) should be of the nature of a high school, college or polytechnic, that is, institutions were coaching is given to students so as to make them automobile mechanics or drivers or compositors, as the case may be. The expression "allied or auxiliary institution" shows that the institutions to be established under clause (d) should run on the same lines as educational institutions such as school, college or polytechnic. It is no doubt true that clause (d) directs the assessee-society to run an automobile workshop, driving school and printing press, if need be, on a commercial basis. But this is subject to the limitation placed by the expression "in order to make them self-supporting." The expression "in order to make them self supporting" clearly indicates an intention not to earn profit. The direction to run the institutions on a commercial basis is only to see that the institutions become self-supporting. Thus, the intention to run the institutions on a commercial basis is only to make them self-supporting, that is, to run them on "no-profit no loss" basis. This excludes the idea of any intention to earn profit by establishing and running institutions such as automobile workshop, driving school, printing press, etc. It is pointed out by the learned counsel for the assessee that clause (d) has not been given effect to ever since the registration of the society on June 15, 1960, that there was in fact no carrying on of any activity referred to in clause (d) in the assessment years in question and that, therefore, the mere existence of clause (d) in the memorandum of association cannot be taken to deprive the assessee from getting the benefit of s. 10(22) of the Act. In support of the said submission, the learned counsel for the assessee relied on a decision of the Supreme Court in Dharmaposhanam Co. v. CIT . In that case, the Supreme Court referred to Rex v. Special Commissioners of Income-tax [1922] 8 TC 286 (CA), wherein it was pointed out that where the settlor reserved to himself the power of appointment under which he might appoint to non-charitable purpose, the trust cannot claim exemption under s. 11 even though the power of appointment is in fact exercised in favour of a charitable object, that it would be a different case where one or more of the objects mentioned in the memorandum of association, although included therein, were never intended to be undertaken and that if there was evidence pointing to that conclusion, clearly the court would ignore the object and proceed to consider the case as if it did not exist in the memorandum. However, there is no material before us to indicate that the assessee never intended to undertake the object referred to in clause (d). It may not, therefore, be possible to ignore the object and proceed to consider the case as if the memorandum of association did not contain this object. But it is unnecessary to elaborate this point further, as we are inclined to hold that clause (d) does not provide for any commercial activity for purposes of earning profit. HAVING regard to the language used in clause (d) that the institutions referred to therein should be treated as allied or auxiliary institutions and should be run on a commercial basis, not to earn profit, but to make themselves self-supporting, the said clause cannot be taken to be a clause providing for an activity for earning profit. If clause (d) is taken as not providing of a commercial object, then there is no other clause in the memorandum which could take the assessee-society out of the purview of s. 10(22). We have, therefore, to agree with the view taken by the Tribunal that the assessee in this case is entitled to the benefit of exemption under s. 10(22) of the Act.