2005 (6) TMI 17 - HC - Income Tax

Educational Institution's Interest Income Exempt under Income-tax Act

The court held that interest income earned on surplus funds by an educational institution qualifies for exemption under section 10(22) of the Income-tax ... 'Whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption under section 10(22) on interest earned on surplus funds of the school (run by the assessee-trust) for the assessment years 1979-80 and 1980-81?' - It is, thus, obvious that granting exemption to the income of the educational institutions is to enable such institutions to utilise the moneys available with them for the purpose of running the educational institutions. The source from which the moneys are received is of no consequence, what is relevant is the application of income. So long as the income of the institution, which solely exists for educational purpose and not for earning profit, is applied for the educational purpose, such income of the institution is exempted under section 10(22) of the Act. The question referred is, thus, answered in the affirmative, i.e., in favour of the assessee and against the Revenue Issues Involved:1. Entitlement to exemption under section 10(22) of the Income-tax Act, 1961, on interest earned on surplus funds of an educational institution.Detailed Analysis:1. Entitlement to Exemption under Section 10(22):The central issue is whether the interest earned on surplus funds by an educational institution qualifies for exemption under section 10(22) of the Income-tax Act, 1961. The trustees of an educational trust claimed exemption for the interest income earned from the investment of surplus funds for the assessment years 1979-80 and 1980-81. The Income-tax Officer (ITO) denied this exemption, stating that the income was not directly earned from educational activities. This decision was upheld by the Appellate Assistant Commissioner and the Tribunal.Statutory Provision:Section 10(22) of the Income-tax Act, 1961, which was omitted by the Finance (No. 2) Act of 1998, effective from April 1, 1999, states: 'any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.'Submissions:The applicant-assessee argued that the interest earned from surplus funds should be treated as income of the educational institution, existing solely for educational purposes and not for profit. They contended that the source of the income is irrelevant as long as the institution is not engaged in profit-making activities. The respondent-Revenue countered that only income directly received from educational activities qualifies for exemption, and the interest income in question had no direct nexus with the running of the educational institution.Consideration:The court considered various judicial precedents to determine whether interest income derived from the investment of surplus funds by educational institutions is exempt under section 10(22). The intention of the Legislature was to grant exemption to institutions existing solely for educational purposes and not for profit.Judicial Precedents:- A.M.M. Arunachalam Educational Society [2000] 243 ITR 229 (Mad): The court held that income derived by an educational society running a school qualifies for exemption under section 10(22), regardless of the source of the income.- Addl. CIT v. Aditanar Educational Institution [1979] 118 ITR 235 (Mad): The court ruled that a society running an educational institution qualifies for exemption, even if it receives donations and other income, as long as the institution exists solely for educational purposes.- CIT v. Sindhu Vidya Mandal Trust [1983] 142 ITR 633 (Guj): The court held that a trust running schools qualifies for exemption under section 10(22).- CIT v. Academy of General Education [1984] 150 ITR 135 (Karn): The court ruled that income from various sources received by an academy running educational institutions is exempt under section 10(22).- Katra Education Society v. ITO [1978] 111 ITR 420 (All): The court held that an educational society running educational institutions qualifies for exemption.- Agarwal Shiksha Samiti Trust v. CIT [1987] 168 ITR 751 (Raj): The court ruled that a trust collecting donations for educational purposes qualifies for exemption under section 10(22).- Governing Body of Rangaraya Medical College [1979] 117 ITR 284 (AP): The court held that a society managing a medical college qualifies for exemption under section 10(22).- Birla Vidhya Vihar Trust v. CIT [1982] 136 ITR 445 (Cal): The court ruled that a charitable trust running educational institutions qualifies for exemption under section 10(22).- Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 (SC): The apex court held that the exemption under section 10(22) should be evaluated annually to ensure the institution exists solely for educational purposes and not for profit.Conclusion:The court concluded that the interest income derived from the investment of surplus funds by an educational institution qualifies for exemption under section 10(22) of the Act. The income should be applied for educational purposes and not for profit. The court answered the question in the affirmative, in favor of the assessee and against the Revenue.