1989 PLP (Trib (PTD)

By these nine appeals the department challenges the exemption granted by the learned C I T (Appeals) to the respondent under Section 14 (1) read with Clauses 86 and 94 of the Second Schedule to the Income Tax Ordinance, 1979. The respondent was registered' as a Society under the Societies Registration Act, 1860 in November, 1960 with the object of setting up and running a School according to American, Standards. However, the assessment proceedings against it were fir4t commenced in March 1985 when the Income Tax Officer issued notices under Section 65 of the Income Tax Ordinance, 1979 for the assessment years 1975-76 to 1977-78. The respondent submitted the returns but claimed that its income was exempt from Income Tax. The I T O turned down the claim to exemption for Assessment, years 1975-76 to 1979-78. by a combined order dated 30-6-1986 holding that the respondent had been charging fabulous fees from its students and' paid extra ordinary salaries, emoluments and allowed benefits, privileges etc. to its foreign staff which indicated that the School was established to earn profits for the benefit of its foreign staff and as such the respondent shall be subjected to tax. He further disallowed one-third of the total salaries paid to foreign staff and added it to the Income of the respondent Society. Assessments for 1979-80 to 1984-85 were later completed by the I T O by his order dated 30-6-1986. On appeal; the learned C- I T (Appeals) examined the claim. to exemption in the light of certain reported cases from India and came to the conclusion that the working of the Society had, in most of the years, resulted into losses: He also observed that liberal voluntary grants were received by the Society ,from various international agencies for the purposes of the educational Institution which he also held as exempt from tax under clause 94 of the Second Schedule to the Income Tax Ordinance, 1979. He further disapproved the disallowance of salaries paid to foreign staff and declared the income of the assessee totally exempt from income tax Hence this appeal by the I T O. Before us Chaudhry Mohammad Ishaq the learned counsel for, the appellant started his submissions with a brief analysis of the provisions of clause 86 of the Second Schedule, and maintained that the exemption from tax is available only if the assessee satisfies the two pre-conditions, namely

(a) that it is University or other Educational Institution; and (b) that it is not for purpose of profit; He frankly conceded that the respondent Society satisfied the first condition but claimed that the second condition was not satisfied. He asserted that the respondent was a commercial organisation, which had been charging fabulous tuition fees and was earning profits. He claimed that it was not possible for the poor and the common citizens to think of joining the institution which was exclusively meant for the rich alone: He maintained that if the Institution had cut down the fees and gave stipends to the poor, it could possibly justify its claim as a `non-profit' Institution under clause 86 of the Second Schedule. It was urged that the respondent was not a charitable institution for the reason that it does not cater to the needs of the poor and offered no relief to the poor students. He avered that the C I T has wrongly applied the ratio of the case reported as Bila Vidhya Vihar Trust v. C I T 136 I T R 445, and went to the extent of adopting the Judgment and placing reliance on it. The learned Counsel next relied on the maxim generalibus specialia derogant (Special things derogate from general things) to contend that it was not open to the, respondent to claim relief under clauses 86 and 94 simultaneously. According to him, the respondents case fall within the purview of clause 86 and as it' was not entitled to exemption under that clause, it could not claim exemption under clause 94 and relied upon the Judgment of the Supreme Court in C I T v. The Engineers Ltd. (P L D 1967 SC 527) in support of the proposition. He lastly relied upon Section 22 of Oanun-e-Shahadat, 1984, to contend that where a particular fact is in the special knowledge of a party, the onus of proving that fact lies on him. The learned counsel for the respondent, in' turn, explained that the Institution had been set up to provide educational facility on American Standards and the expenses were bound to be heavy if teaching staff was to be drawn from the United States. He supplied copies of the Balance Sheet and Income & Expenditure Account for all the years and also supplied tabulated information about the income/losses to demonstrate- that barring the years 1980-81 and 1981-82, the Society incurred heavy losses, before the grants from International Institutions are taken into account. He added that even the voluntary donations from International Institutions have been wholly absorbed in the Educational Institution run by the Society. He asserted that no part of the earnings of the Society has been utilised for any other activity and submitted that it was not the Department's case that the respondent engaged itself in any other activity or applied any part of its receipts for any other purpose or activity. He submitted that the respondent was running the Educational Institution and applied the receipt to meet the expenses of the Institution and referred to us to the Balance Sheets, etc. to claim that no part of the earning or surplus was ever distributed among the founders or members and claimed that for this reason alone the respondent Society satisfied the test of a "non-profit association". He relied on Rangaraya Medical College v. I T O (117 I T R 284) in which inter alia the question arose whether a Society could be said to be running for purposes of profit merely because certain surplus arose from the Society's operations? The Court, after examining the Judgments, of the House of Lords mEreant v. Girls Public Day School Trust Ltd. (15 T.C. 529 (HL); and Mayor of Manchester v. Me Adam, (1896) 3 T.C. 491 (HL), answered the question in the negative and held that since the Society had not distributed any part of its income among its founders members, it was a non-profit organisation. It was submitted that the respondent Society performed no function except to run the Institution, which imparted education to children which was a 'charitable purpose' within the meaning of clause (14) of Section 2 of the Income Tax Ordinance, 1979. He referred us to the provisions of Section 10 (22) of the Indian Income Tax Act, 1961. The Indian and Pakistan provisions are identical with no variations whatsoever. He placed reliance on the following Indian judgments, which do throw some light on the question as to when an educational Institution would be exempt from Tax as a "Charitable Institution". Katra Education Society v. I.T.O. (1978) 11 I T R 235 Addl. C.I.T. v. Adifanar Educational Institution (1979) 118 I T R 235 Blrla Vighya Vihar Trust v. C.I.T. (1982) 136 LT .R. 445; C.I.T. v. Sindhu Vidya Mandal Trust (1983) 142 I.T.R 633 C.I.T. v. Academy of General Education (1984) 1.36 I.T.R.

135. C.I.T. v. Bimetal Bearings Ltd. (1985) 154 I.T.R.

208. Agarwal Shiksha Samiti Trust v. C.I. .T (1987) 168 I.T.R

751. It was contended that clauses 86 and 94 did not embrace the same sphere and were applicable to different sets of receipts or income. While clause 86 applied to income arising to an educational institution from its activity as such clause 94 was attracted to, voluntary grants by donors for the benefits of a 'charitable institution'. It was explained that in the case reported as C.I.T. v. The Engineers Ltd. PLD 1967 S.C. 527 the learned Judges of the Supreme Court of Pakistan clearly held the expression generalibus specialia derogant'. Things special derogate from things general) was not attracted to the interpretation of the two clauses of wholly different scope. It was submitted that in the aforesaid judgment, the Court had to consider the provisions of Clauses (xii),(xiv) and (xv) of subsection (2) of Section 10 and held that rule in the maxim was not attracted to the interpretation clause (xvi) of that sub-section. It was submitted that the respondent had duly discharged the onus of showing that it had functioned as a 'non-profit' Society and did not apply its profits to any other purpose except education and that too its own School. We have applied our mind to the facts of this case and notice that the respondent Society was founded and registered under the Societies Registration Act, 1860 as a non-profit Society in November, 1960 within the Ambassador of the United States of America as its Chairman and permanent ex officio Member of the Board of Directors. The Society was approved by the Central Board of Revenue as 'Charitable Institution' under the provisions of Section 15D of the Income Tax Act, 1922 by Notification C. No. 71 (101)- I T P/64 dated 7-11-1964. The Notification accords recognition not only to the assessed Society but also to its counter parts: the School at Karachi and the School at Dacca. The Notification remained in operative force till its repeal by the Income Tax Ordinance, 1979 which introduced a new scheme for approval of 'charitable institution'. ` The Constitution and other material on record show that the primary object of the, Society was to run a School according to American Standards and practices for the children of Members of the Society. There is little doubt that the Society did not engage itself in any other activity and at any rate no profits or losses from any other source or activity are even alleged to have arisen. The tuition paying parents or guardians of students and the regular teaching staff are the members of the Society. There is a provision for admission of Associate Members who would have no power to vote. There is, however, no provision for distribution of any profit among Members and none is even, alleged to have been ever distributed. In fact, such a situation could not have arisen because the Society normally ran into losses and survived because of generous voluntary donations by certain International Institutions. The Constitution of the Society also provides that in the event of dissolution of, the respondent Society, its assets would be donated to another non profit educational or charitable organisation to be determined by the Members on the recommendation of the Board of Directors. The Society was founded in 1960 and functioned all along, yet it was only in March, 1985 that the I T O issued notices under section 65 of the Income Tax Ordinance, 1979 in an attempt to impose income tax for the years 1975-76 to 1977-78. The respondent-Society did employ a large number of American Teachers who would, naturally not leave their houses in U.SA unless they are induced by payments of still higher salaries abroad. We have little doubt that the cost of administration of the institution was bound to be colossal. If the Society had perforce to provide education on American Standards, it could, not have possibly reduced the salaries of the Foreign Staff. The tuition fee was bound to be high, yet the overall income was normally less than the expenses on administration. The facts do not support the allegation of profitmaking motive. On the contrary certain international institutions helped the Society to continue to function. We have no doubt in our mind that but for the voluntary donations the school would have long closed down. The situation, to our mind, does not call for any adverse inference to warrant the conclusion that. the society had any profitmaking motive.. , The charge of tuition fee undoubtedly depends to a very large extent upon the, standard of education and the salary and other emoluments of its teaching staff and the overall cost of administration of the school. In I T A Nos. 1636 to 1640 of 1979-80 reported at 1986 P T D (Trio) 441, the Tribunal had to deal with the case of a Flying Club which charged high fees for imparting training/instructions: The Department resisted the claim to exemption under the corresponding provision of section 4 (3) of the Income Tax Act, 1922 on the ground that the general public could not be benefited because of the high fees. At page 444 the following interesting observation was made-- "We de not agree with these contentions. Every educational institution, whether public or private, cannot, particularly in this age of competition, admit every applicant. Therefore, certain conditions and qualifications have to be present for the purpose of admission. Similarly the Lahore Flying Club must have laid down certain conditions and qualifications for the persons desiring to become its members. These conditions of course, would include the payment of certain fees. These fees are bound to be heavy keeping in view of the exorbitant prices of aircrafts and other training and aeronautical equipments. Hence despite such fees and strict discipline, which is exercised for admission to become a member of the Club or a trainee thereof, the respondent's Club does not lose its usefulness of being an institution of general public utility. There can be no denial that at present, only the flying clubs are such institutions, which provide, or have the facility of providing, aeronautical training for commercial flying. No other institution, in the country, other than the Pakistan Air Force, has either the sources or the facilities to provide such training. Hence for all intents and purposes, the objections of Lahore Flying Club are of general public utility." The working of the institution resulted in losses except in the years'1980 81 and 1981-82 which fact is well illustrated by the following figures taken from the Society's Balance Sheets:- Asstt year Declared surplus Voluntary grants. (deficit) including voluntary grants. Net surplus (deficit) Assessed excluding voluntary grants. 1975-76 91,322 3,11;100 4,02,422 1,14,507 1976-77 1,70,882 3,46,500 1,75,618 4,30,024 1977-78 2,13;743 3,65,842 1,52,099 5,52,054 1978-79 1,89,434 2,37,600 4,27,034 Proceedings filed 1979-80 47,358 59,400 1,06,758 4,44,463 1980-81 3,43,559 2,67,300 76,259 7,36,363 1981-82 7,15,358 2,27,700 4,87,658 11,43,126 1982-83 58,566 1,98,000 1,39,434 6,13,517 1983-84 1,30,917 2,81,740 1,50,823 7,96,110 1984-85 2,07,350 3,05,291 5,12,641 6,93,166 The deficit was met through voluntary grants by International Institutions, We are, also satisfied that these grants were eventually absorbed in the working of Institution. It is not the appellant's case that any part of the income of Society was ever distributed among the Members or applied to any purpose other than the object of running the Society School on American i standards. We have carefully examined the judgment in Birla Vidhya Vihar Trust v. C I T (1982) 136 I T R

445. In that case, the assessee Birla Vidhya Vihar Trust was running two Schools. It claimed exemption on the plea that it was an educational institution within the meaning of Section 10 (22) of the Income Tax Act (Indian) 1961, upon a thorough review of the case-.law, the Calcutta High Court-observed at page 460 , "Now, here, unless there is an income, that is to say, a surplus of receipt over the expenditure; ho question of not including that income under section 10 arises. Therefore, merely because there is a surplus, that is to say, a surplus of receipt over expenditure, it cannot be said that the educational institution exists for profit, if that surplus is intended or is maintained for the purpose of education and not for the purpose of I personal gain of the recipient or the owner of the income." In Birla Vidhya Vihar Trust (supra) the Court relied upon the Judgment in Additional C.I.T V: Surat Art Silk & Cloth Manufacturers Association (1980) 1211 T R 1, and did deal with the peculiar features of the case viz. diversion of the profits to a purpose which was charitable though not educational and at page 463 further observed:- "Though the facts of the relevant year would be a very material factor, whether an institution exists or is existing solely for any particular purpose or not cannot be judged only by the facts of one year. All cumulative factors will have to be taken into consideration, namely the clause of the power enabling the institution to function its activities in general, etc. Neither the fortuitous factor of having large surplus in any particular year, nor the solitary factor of diverting some income of the l source concerned to objects charitable but not educational by itself would be decisive of the matter and in that content the facts relevant to the relevant year would be very' material though not conclusive. But in this case except that there was one solitary instance in one of the prior years when there was the application of some income to non-educational purposes, there was no other fact. That by itself, in our opinion would not be very material. If, however, an educational institution as a source a, of income general or usually used as a means of earning income to he utilized for non-educational purposes, then other considerations would apply. In that view of the matter, we are of the opinion that the Tribunal was in error in not allowing the assessee the benefit of Section 10 (22) of the Act. The trust which owned the educational purposes but if taking all the relevant factors the educational institution _generating the income was existing for only educational purposes the assessee was entitled to exemption under section 10 (22) of the Act'. We have no doubt that the Judgment in Vidhya Vihar Trust on which both the parties place reliance supports the standpoint of the respondent. In fact, we find nothing in this Judgment which supports the appellant. The ratio of the case was rightly applied by the learned C.I.T. (Appeals). In C I T West Pakistan Management Association 1985 P T D 287 the Karachi High Court repelled the objection taken by the 'Department that approval under section 15-D of the Income Tax Act, 1922 was not relevant for exemption from Tax under the correct proceedings provisions of section 4 (3) (i) of the Act and at page 9 made the following observation:

It is, therefore, obvious that charitable purposes are common in Section. 15-D (4) of the Income Tax Act and Section 4 (3) (1) of the Income Tax Act. Hence an association, which is found to be having a charitable purpose under section 15-D by the Central Board of Revenue, should be ordinarily be held to- be having one same charitable purpose for the purpose of Section 4 (3) (i) (Explanation) of the Income Tax Act provided it satisfies the other condition of section 4 (3) (i) & (ii). Therefore, according to our view declaration of an Association by the Central Board of Revenue as an association being run for a charitable purpose under section 15-D of the Income Tax though not conclusive should be very relevant for the purposes of assessment of its income and it should ordinarily be treated as an association for a charitable purpose by the I T O under Section 4 (3) (Explanation) of I.T.O Act as well unless there are positive findings that other requirement of Section 4 (3) (i) & (ii) are lacking:' The learned counsel for the appellant has failed to advance any argument to justify the present assessment proceedings against the respondent society, which was earlier recognised by the CBR under section 15-D. The learned counsel has failed to point out any amendment of the Constitution or regulations of the Society, which have possibly altered the charitable character of the Society. There seems little justification for the appellant: to subject to tax the respondent society, which was earlier registered as a charitable education society under section 15-D. We shall presently examine the question whether the objects and function-of the Society in running the School fall within the domain of charity according to the law of Income Tax. In England, Lord Macnaghten in Commissioner for Special Purposes of Inc m Tax v. Pemsel (3 Tax Cases 53(HL) observed That charity in its legal sense, comprises four' principal divisions; trust for the' relief of poverty; trust for the advancement of education; trust for the advancement of religion; and trust for the purposes beneficial to the community not falling under any of the preceding heads. The words 'charity' and 'charitable' must be construed in their legal or technical sense, which is different from their popular meaning. Charity is a word of art, of precise and technical meaning and an exhaustive definition of charity into the legal sense has never been at attempted. In the Addl. Commissioner of Income Tax v. Surat Art Silk Manufactures Association (1980) 122 I T R 1 (SC), the Bench of five Judges of the Supreme Court of India reviewed the earlier cases, and discussed the scope of the definition of `Charitable purposes' in the Act. The Court further held that the definition of Charitable purpose' goes further than the definition of `charity' to be derived from the England cases. It includes medical relief and objects of general public utility and is not tied down to purposes within the spirit and intendment of certain statutes in England. The Supreme Court of India further held that "where tine purpose of the trust for institution was relief of the poor, education or medical relief, the requirement of the definition of charitable purpose would be fully satisfied even if an activity for profit was carried on in the course of actual carrying out of the primary purpose of the trust or institution." The definition of `charitable purpose' given by clause (14) of section 2 reads as under:- "Charitable purpose" includes relief of the poor, education and advancement of any other object (if general public utility." The definition spells out education' as amongst the objects recognised by law as constituting `charitable purpose" and the expression when appearing in clause 94 would be construed to include that purpose. The voluntary grants were applied for running the School, which perhaps is the primary objective of the Society and the only activity in which the assessee is engaged. In C I T v. Aditanar Educational Institution (1979) 118 I T R 235 at Page 242, the Madras High Court succinctly summed up the law on the subject as under; "A society by merely running a college cannot utilise this provision as an instrument for exemption in respect of all its sources of income which had no connection with its educational authority. There must be some correlation between the income earned and the educational institution. For instance, it is well known in this part of the country, that educational institutions before they are granted affiliation are required to deposit a substantial sum, and that such deposits are to be invested in Government securities or trustee securities, which yield income. Though such income would otherwise be taxable, still in view of the fact it has a direct relation to the running of the institution, which imparts education, the exemption would have to be granted. It would not be possible or proper to lay down in any precise terms as to what would be the income of the educational institution which would qualify for exemption under section 10 (22) and what would be outside the exemption. The answer would depend upon the facts in each case. What can possibly be stated is that any income, which has as direct relation or is incidental to the running of the institution, as such, would qualify for exemption." The judgment has been followed in C I T v. Doon Foundation (1985) 154 I T R 208 and C I T v. Bimetal Bearings Ltd. (1985) 152 I T R 85 which support the respondent's case. We cannot help observing that even the concept of "public purpose" and" public use" has undergone a change throughout the world. This fact was noticed by the Supreme Court of Pakistan, in the famous case of Fauji Foundation v. Shamimur Rehman P L D 1983 S.C. 457 where after a very thorough review of the concept of "public purpose" as obtaining in various countries of the world, at page 673-74 the Court made the following observations:- "Here as against Justice Holmes's "concise comment", I -would refer to his subsequent observations in Rindge Co. v. Los Angeles 262 US 707 reproduced in the case of people of Pureto Rico v. Eastern Sugar Association 325 US- 772: Mr. Justice Holmes speaking for a unanimous Court said: "The inadequacy of use by the general public as a universal test is established". Then later in 1923 in Rindge Co. v. Los Angeles,....the Supreme Court Said: "It is not essential that the entire community, nor even any considerable portion, should directly enjoy or participate in any improvement in order to constitute a public use." Accordingly, the inadequacy test is no longer now in vogue to constitute public use. Here "public purpose" includes any purpose in which even a fraction of a community may be interested or by which it may be benefited." Similarly, here too, the expression "public purpose" has not precise and rigid meaning except that it should have the criterion of benefit or advantage to the public as distinguished front the private interest of an individual. In this connection, I would refer to D.D. Basu's "Commentaries on the Constitution of India, Vol.II Page 217: "The definition of the expression is elastic and takes its colour from the statute in which it' occurs the concept varying with the time and state of society and its needs. The point to be determined in each case is whether the acquisition is in the general interest of the community as distinguished from the private interest of an individual. No hard and fast definition of 'public purpose' can, therefore, be laid from down. Whatever features the general interests of the community as opposed to the particular interests of the individual must be regarded as a public purpose and the expression .has to be construed according to the spirit of the times-in, which the particular legislation is enacted. Thus:" With the onward march of civilization our nation as to the scope of the general, interest of the community are fast changing and widening with the result that our old, and narrower notions as to the sanctity of the private interest of the individual can no longer stem the forward flowing i tide of time and must necessarily give way to the broader notions of the general interest of community." It will be seen that conceptually the expression "public purpose" has also the same connotation and we do not see why it should not be taken to be included within the concept of public welfare which according to Schwartz, is a broader expression and includes within its ambit both "public use" and "public purpose". This wider interpretation is given because of the changing times, state of society and its needs. However, the basic requirement nonetheless remains, that is, the general interest of the community as distinguished from the private interest of an individual." We, therefore, find no force in the present appeals and are of the opinion that the order of the learned C.I.T. (Appeals) is unexceptionable and calls for no interference. These appeals are accordingly dismissed. Penalty under sec. 91 (1975-76: 1976-77: 1979-80) These appeals have been filed against the penalties imposed, Consequent upon the order passed by us, (I T A Nos. 3602 to 3604/1-13 of 1986-87, No. 176 to 181/LB of 1988-89 dated 29-3-1989), these penalties stand cancelled. I had the advantage of perusing the decision proposed by my learned brother the Judicial Member (Mr. Qadeer Ahmad Siddiqui) and concurred by other Judicial Member (Mr. Abrar Hussain Naqvi). The copious case-law and the accompanying discussion are no doubt illuminating but with profound respect to my two learned brothers, I have a slightly different view m the matter. The consensus between the two Judicial Members has rendered a different conclusion purely a matter of academic interest, still I feel compelled to concisely record m5 views as under: The exemption granted by the legislature at Clause 86 of the Second Schedule to the Ordinance reads as under:- "Any income of any University or other educational institution shall be solely for educational purposes and not purposes of profit," Obviously, three conditions are to be satisfied; (first) the income should be, earned by the university or other educational institutions; (second) which is established solely for educational purposes; and (third) not for purposes of profit. These three conditions are to be satisfied accumulatively to make the income fall under this clause and to become exempt. A parusal of the constitution of the Lahore American Society at Article II lists its "Purpose" as . "Article II. Purpose

1. To provide educational facilities and operate, a school according to American standards and practices for the children of members of the Society;

3. To provide such other related facilities and activities as the Society may elect Even a cursory reading shows that though the Respondent was established for educational purposes it intended "to provide educational facilities of American standard and practices for the children of the Members of the Society" In fact the predominant activity appears to be "to promote a spirit of good fellowship and international understanding" hence these exceed the parameters prescribed m the exemption at Clause 86 which require an institution to be "solely" for educational purposes. Moreover, the entry to the school is restricted to the children of the Members of the Society who have been categorised as 'voting members' and `associate members'. Therefore, it is a closed and restricted institution and, therefore, in my opinion, does not come up to the expectation of` general public utility', an expression to which a reference has been made by my learned brothers in the context of the 'religious or charitable' purposes of the institution. It is true that this Tribunal in its decision reported as 1986 P T D (Trio.) 441 held the purpose of the LFC as of general public utility but that decision is distinguishable inasmuch as the institution there (it was emphatically observed in the above decision) was the only institution providing facility of aeronautical training for commercial flying and no other institution had the sources or the facilities to provide such training. In the field where the Respondent is carrying on its activity, there are innumerable institutions carrying on educational purposes with the result that the benefit of scarcity which come to the aid of LFC is not available to the present Respondent. I am, therefore, of the firm view that. the Respondent did not qualify for exemption either under Clause 86 (or Clause 94) and, therefore, the learned Commissioner erred in ordering the exemption. I consequently would hold that his order should be undone with the result that the assessment as framed should stand good and the penalties also he treated validly imposed. However, as I have already observed above my views would have no impact on the decision which has already been concurred by two learned members in favour of the respondent. All the appeals thus fail by majority view. M.BA./630/T Order accordingly.