Loan receipts and personal guarantees can satisfy exemption conditions; educational income incidental to purpose remained exempt.

Amounts placed with companies by way of loan receipts or fixed deposit receipts in form only were treated on their substance as loans, not investments, so the prohibition in section 13(2)(h) did not apply. Personal guarantees of the directors were held to be security within the wide meaning of section 13(2)(a), and their net worth was sufficient to make the security adequate, so the exemption was not lost on that ground. The institution was also described as existing solely for educational purposes, with the interest income incidental to and supporting that activity, so exemption under section 10(22) was available as well.

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Issues: (i) Whether amounts placed with companies in the form of deposits or loan receipts constituted an investment attracting the prohibition in section 13(2)(h); (ii) Whether personal guarantees of the directors amounted to adequate security within section 13(2)(a) so as to preserve exemption on the interest income; (iii) Whether the assessee was entitled to exemption of its entire income under section 10(22) as an educational institution existing solely for educational purposes.

Issue (i): Whether amounts placed with companies in the form of deposits or loan receipts constituted an investment attracting the prohibition in section 13(2)(h).

Analysis: The payments were made at the instance of the companies for their use and were supported by loan receipts in one case and fixed deposit receipts in form only in the other. The substance of the transactions was lending, not investment. A loan does not involve conversion of money into a different asset, whereas an investment does.

Conclusion: The amounts were loans and not investments, so section 13(2)(h) did not apply.

Issue (ii): Whether personal guarantees of the directors amounted to adequate security within section 13(2)(a) so as to preserve exemption on the interest income.

Analysis: The expression "security" is of wide import and includes a personal guarantee. Adequacy depends on the creditworthiness of the guarantor, and the record showed that the guarantors' net worth exceeded the loan amounts. The loans were therefore not advanced without adequate security.

Conclusion: The personal guarantees constituted adequate security and the assessee was not hit by section 13(2)(a).

Issue (iii): Whether the assessee was entitled to exemption of its entire income under section 10(22) as an educational institution existing solely for educational purposes.

Analysis: The trust's sole object was education and the institution existed throughout the relevant years only for educational purposes. The interest income supported the educational activity and was incidental to it. On that footing, the income also fell within the exemption for educational institutions.

Conclusion: The assessee was entitled to exemption under section 10(22) as well.

Final Conclusion: The revenue's appeals failed, and the exemption claimed by the assessee was sustained on both the security issue and the educational-purpose exemption.

Ratio Decidendi: A loan supported by a credible personal guarantee may satisfy the requirement of adequate security under section 13(2)(a), and such loans are not to be treated as investments for section 13(2)(h); an institution existing solely for educational purposes retains exemption for income incidental to that purpose.

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