35.ducational institution : Exemption u/s. 10(23C)(vi) : Capital assets acquired/constructed by educational institutions cannot be treated as income in a blanket manner without recording a finding whether capital assets have been applied and utilised to a

35. Educational institution
: Exemption u/s. 10(23C)(vi) of Income-tax Act, 1961 : A.Ys. 2007-08 to
2010-2011 : Capital assets acquired/constructed by educational institutions
cannot be treated as income in a blanket manner without recording a finding
whether capital assets have been applied and utilised to advance purpose of
education : Advancement of loans to employees cannot be regarded as
misapplication of funds : Remuneration paid to directors or teachers of school,
in their capacity as employees would be considered to be paid for educational
purposes.

[Kashatriya Sabha
Maharana Partap Bhavan v. UOI, 194 Taxman 442 (P&H)]

The assessees were
educational societies claiming to exist solely for educational purposes. Their
applications for grant/renewal of approval for exemption u/s.10(23C)(vi) of the
Income-tax Act, 1961 for the relevant assessment years were rejected by the
Chief Commissioner on the grounds that they were generating substantial surplus
year after year and their incomes were not being utilised exclusively for
educational purposes. In some of the cases, the Chief Commissioner denied
exemption on the ground that the society had advanced a loan to the principal of
the school and members of the society; and that the society was paying salaries
to its members.

The Punjab and Haryana High
Court allowed the writ petitions filed by the assessees and relying on its
judgment in the case of Pinegrove International Charitable Trust v. UOI, 188
Taxman 402 (P&H) held as under :

“(i) When the facts of the
instant cases were examined in the light of the above discussion, the first
thing which became evident is that in the instant cases capital assets
acquired/constructed by the educational institutions had been treated as
incomes in a blanket manner without recording any finding whether the capital
assets had been applied and utilised to advance the purpose of education. It
is obligatory on the part of the prescribed authority, while considering the
application for grant of exemption, to decide whether expenditure incurred as
capital investment is on the object of education or not.

(ii) In all the instant
cases, the impugned orders passed by the Chief Commissioners were similar in
substance and appeared to have been inspired by the view taken by the
Uttarakhand High Court in the case of Queens Educational Society (supra),
which had not been accepted in the judgment rendered in the case of Pinegrove
International Charitable Trust’s case (supra).

(iii) The competent
authority was also required to consider the question of advancement of loans
to the employees of the college, which were given to the principal of the
institution, in its proper perspective. The advancement of loans to the
employees of the institution cannot be regarded as mis-application of funds
because good service conditions for its employees would always attract
talented persons to an educational institution. If facilities like housing
loan, car loan, etc., which are prevalent in the public sector and the
Government institutions, are given, then necessarily it would be regarded as
an expenditure spent on the objects of the education and not for any other
purpose.

(iv) Likewise, it would be
a relevant factor if any institution had enjoyed exemption for the last 2½
decades. The competent authority should have recorded findings of fact insofar
as remuneration paid to director of the school and to his wife, who was
teacher in the school, was concerned. If the remuneration had been paid in
their capacity as employees rendering the service to the school as director or
teacher, then it would be proper to interpret the same to be for education
purpose. But if the remuneration had been paid farcically, then the payments
made to such persons must be reckoned to have been spent on a purpose other
than for education.

(v) In order to avoid any
reference to all individual cases, it would suffice to mention that the
competent authorities should not have read the judgment of the Uttarakhand
High Court in the case of Queens Educational Society (supra) like a statute.

(vi) As a sequel to the
aforesaid discussion, the petitions were to be allowed and the impugned orders
passed by the Chief Commissioners refusing to grant exemption u/s. 10(23C)(vi)
or to renew the same were to be quashed.”