Facts of the Case

The assessee, Bal Bharti, was running an educational institution engaged in imparting education. During assessment proceedings, the Assessing Officer (AO) denied exemption and treated certain receipts or surplus as taxable income, alleging that the institution was not eligible for exemption under the relevant provisions of the Income-tax Act.

The assessee contended that it existed solely for educational purposes and not for profit. The Commissioner of Income-tax (Appeals) [CIT(A)] granted relief to the assessee.

Issues Involved

  1. Whether the assessee institution qualified as an educational institution entitled to exemption.
  2. Whether surplus generated from educational activities could be treated as taxable profit.
  3. Whether the AO was justified in denying exemption.

Petitioner’s Arguments (Revenue)

  • The institution had generated surplus, indicating profit motive.
  • Certain receipts were not directly linked to educational activities.
  • The AO rightly denied exemption and assessed income to tax.

 Respondent’s Arguments (Assessee)

  • It existed solely for educational purposes.
  • Surplus, if any, was incidental and used for further development of the institution.
  • There was no distribution of profits to members or stakeholders.
  • The CIT(A) correctly granted exemption in accordance with law.

 Court Order / Findings (ITAT)

  • The dominant object of the institution was imparting education.
  • Mere generation of surplus does not convert an educational institution into a profit-making entity.
  • There was no evidence of diversion of funds for non-educational purposes.
  • The CIT(A) had correctly appreciated the facts and applicable legal provisions.

Important Clarification

  • Educational institutions can generate reasonable surplus without losing exemption.
  • The decisive test is the primary object — education, not profit.
  • Absence of profit distribution supports charitable status.
  • Revenue authorities must demonstrate actual commercial intent to deny exemption.

Link to download the order – https://itat.gov.in/public/files/upload/1574670375-BAL%20BHARTI-182.pdf

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