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All India Personality Enhancement & Cultural Centr Vs. Director General Of Income Tax (Exemptions)
December, 15th 2015
           THE HIGH COURT OF DELHI AT NEW DELHI
%                                                   Judgment delivered on: 07.10.2015

+       ITA 705/2008
DIRECTOR OF INCOME TAX (EXEMPTION)                                  .....Appellant

                                              versus
ALL INDIA PERSONALITY ENHANCEMENT
& CULTURAL CENTRE FOR SCHOLARS
AIPECCS SOCIETY                                                     ..... Respondent

Advocates who appeared in this case:
For the Appellant    :Mr Kamal Sawhney, Senior Standing Counsel,
                     Mr Raghvendra Singh, Junior Standing Counsel
                     with Mr Shikhar Garg.
For the Respondent   :Mr Ajay Vohra, Senior Advocate with
                     Ms Kavita Jha and Mr Vaibhav Kulkarni.

                                              AND

+       ITA 924/2009
DIRECTOR OF INCOME TAX (EXEMPTION)                                  .....Appellant

                                              versus
ALL INDIA PERSONALITY ENHANCEMENT
& CULTURAL CENTRE FOR SCHOLARS                                      ..... Respondent

Advocates who appeared in this case:
For the Appellant    :Mr Kamal Sawhney, Senior Standing Counsel,
                     Mr Raghvendra Singh, Junior Standing Counsel
                     with Mr Shikhar Garg.
For the Respondent   :Mr Ajay Vohra, Senior Advocate with
                     Ms Kavita Jha and Mr Vaibhav Kulkarni.

                                             WITH
+       W.P.(C) 3797/2011



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                                Page 1 of 71
ALL INDIA PERSONALITY ENHANCEMENT
& CULTURAL CENTRE FOR SCHOLARS
AIPECCS SOCIETY                                            ..... Petitioner
                                             versus

DIRECTOR GENERAL OF INCOME TAX
(EXEMPTIONS)                                               .....Respondent

Advocates who appeared in this case:
For the Petitioner   :Mr Ajay Vohra, Senior Advocate with
                     Ms Kavita Jha and Mr Vaibhav Kulkarni.
For the Respondent   :Mr Kamal Sawhney, Senior Standing Counsel,
                     Mr Raghvendra Singh, Junior Standing Counsel
                     with Mr Shikhar Garg.

CORAM:
DR. JUSTICE S.MURALIDHAR
MR. JUSTICE VIBHU BAKHRU
                                             JUDGMENT
VIBHU BAKHRU, J

1.      The substratal controversy involved in the above captioned appeals

and the writ petition, relates to the question whether the income of All India

Personality Enhancement and Cultural Centre for Scholars AIPECCS

Society (hereafter the `Assessee') is exigible to tax under the Act.


2.      The principal issue involved in the above mentioned appeals filed by

the Revenue under Section 260A of the Income Tax Act, 1961 (hereafter

the `Act'), is whether the surplus reflected by the Assessee in its Books of

Accounts maintained in the normal course could be taxed under the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 2 of 71
provisions of Chapter XIV-B of the Act; inasmuch as, it is contended that

the same could not be considered as undisclosed income earned during the

block period. Since the issues involved in the above captioned appeals and

the writ petition are common and/or interlinked, the said matters were heard

together.


3.      ITA 705/2008 is an appeal preferred by the Revenue under Section

260A of the Act against an order dated 28th September, 2007 passed by the

Income        Tax      Appellate         Tribunal   (hereafter   the   `Tribunal')        in

IT(SS)A.No.300/Del/2001 whereby the Assessee's appeal directed against

the order dated 29th November, 2001 passed by the Commissioner of

Income Tax (Appeals) [hereafter `CIT(A)'] in Appeal No. 60/2001-II, was

allowed.


4.      ITA 924/2009 is an appeal preferred by the Revenue under Section

260A of the Act impugning an order dated 6th June, 2008 passed by the

Tribunal in IT(SS)A.No.36/Del/2008, allowing the appeal of the Assessee

against an order dated 10th January, 2008 passed by CIT(A) upholding the

levy of penalty imposed by the Assessing Officer (hereafter the `AO')

under Section 158BFA(2) of the Act. The said order was passed by the

Tribunal as a consequence of the Assessee prevailing in its Appeal -



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                                 Page 3 of 71
IT(SS)A.No.300/Del/2001, before the Tribunal.


5.      W.P.(C) 3797/2011 is a petition filed by the Assessee under Article

226/227 of the Constitution of India, inter alia, impugning an order dated

29th December, 2010 passed by the Director General of Income Tax

(Exemption) [hereafter `DGIT(E)'] declining the petitioner's application

for approval under Section 10(23C)(vi) of the Act. The Assessee further

prays that an appropriate writ order or direction be issued to DGIT(E) for

the grant of approval under Section 10(23C)(vi) of the Act for the

Assessment Years 1999-2000 and onwards.


6.      Briefly stated, the relevant facts necessary to address the issues

involved in the above captioned matters are as under:


6.1     The Assessee is a Society and was registered under the Societies

Registration Act, 1860 on 26th December, 1980. The aims and objects of the

Assessee as specified in its memorandum of association read as under:-


        "a)     To establish schools in India and provide good quality
                education to all without distinction of race or creed or
                caste or social status with a view to help the Government
                which is unable to cope with providing education to all.
       b)       To organize special education for Gifted Children which
                does not exist in specific form anywhere in the country




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 4 of 71
                and because of which, there is crisis of leadership in
                most walks of life.
       c)       To arrange and provide for scholarship for education to
                meritorious children of limited means.
       d)       To organize and conduct other activities, which further
                the cause of education, particularly at school level, and
                specifically for Gifted Children.
       e)       To promote progress, prosperity and welfare of the
                Gifted Children.
       f)       For the above purpose, the Society may raise funds by
                various means, acquire premises, buildings and other
                property on rent/lease, by way of gift/donation, by
                purchase, anywhere in India or abroad and all other
                things which it may consider in its opinion required for
                the furtherance of the above aims, objects and purposes.
       g)       To do all other acts, as are incidental and conducive to
                the attainment of the above aims and objects."


6.2     The Assessee is managing and running the following schools for

imparting education to children:


       S.No.              Name of the School
       1.                 C.S.K.M. Public School, Satbari Mehrauli, Delhi

       2.                 C.S.K.M. Public School, Navrangpur, Gurgaon,
                          Haryana.

       3.                 C.S.K.M. Public School, Riico Industrial Area,
                          Bhiwadi, Alwar, Rajasthan.

6.3     On 15thJanuary, 1999 a search and seizure operation was conducted




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                           Page 5 of 71
under Section 132 of the Act on the premises of the school run by the

Assessee at Mehrauli. The warrant of authorization for the search was not

issued in the name of the Assessee but in the name of "Col. Satsangi Kiran

Memorial, AIPECCS Education Complex". The residence of Col. Satsangi

(the Chairman of the Assessee), the Manager and the Principal of the

School were also searched.


6.4     A survey under Section 132A of the Act was also carried out at the

Accounts Department within the premises of the school. During the course

of the survey, the Books of Accounts which were regularly maintained by

the Assessee were inventorised, however, the same were not seized. Certain

cash was also found at the residence of the Chairman of the Assessee.


6.5     Thereafter, a notice under Section 158BC of the Act was issued on

22nd December, 1999. In response to the aforesaid notice, the Assessee

filed a return for the block period 1st April, 1988 to 15th January, 1999

showing Nil income. In the note given below the computation of income,

the Assessee claimed that its income was exempt under Section

10(22)/10(23C) of the Act. The Assessee claimed that it existed solely for

the purpose of education and its receipts and payments were relatable to the

said purpose only.



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 6 of 71
6.6     The AO examined the Books of Accounts of the Assessee and found

that the account of receipts of payments maintained by the Assessee

reflected a surplus in several years falling within the block period 1 st April,

1988 to 15th January, 1999.                  The Assessing Officer concluded that

substantial surpluses in all years except Previous Years relating to the

Assessment Years 1991-92 and 1992-93 indicated that the Assessee was

functioning with the motive to earn profit. The AO held that the Assessee

was indulging in non-educational activities and making speculative

investments. The AO also noticed that the Assessee had made advances to

its office bearers, which included the chairman and his family and, thus,

concluded that the Assessee was not entitled to exemption under Section

10(22) of the Act.


6.7     The AO proceeded to pass the assessment order dated 31st January,

2001 assessing a sum of `12,80,66,147/-, being the surpluses as recorded

in the books of the Assessee, as `undisclosed income' during the block

period. Separate penalty proceedings under Section 158BFA(2) of the Act

and under Section 271(B) of the Act were also initiated.


6.8     In the meantime, on 30th March, 1999, the Assessee filed an

application in the prescribed form with DGIT(E) seeking approval under



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                            Page 7 of 71
Section 10(23C)(vi) & (via) for the year 1998-99.


6.9     Aggrieved by the assessment order dated 31 st January, 2001, the

Assessee preferred an appeal before CIT(A) urging several grounds. The

Assessee claimed that the proceedings under Section 158BC of the Act

were not maintainable. The Assessee contended that the surpluses reflected

in the Books of Accounts could not be termed as undisclosed income under

Chapter XIV-B and, therefore, the assessment order framed was

unsustainable. The Assessee also challenged the validity of the search

operations under Section 132 of the Act. According to the Assessee, a

search under Section 132 of the Act could be authorized in respect of a

person where the concerned Income Tax Authority had reason to believe

that either of the conditions as specified under Section 132(1) of the Act

were satisfied. It was urged that a warrant of authorization, which did not

specify a person but only the premises to be searched was contrary to the

provisions of Section 132 of the Act and, therefore, was illegal. The

Assessee also argued that no search had been conducted on the Assessee

and, therefore, an assessment under Section 158BC could not be framed.


6.10 The CIT(A) passed an order dated 29th November, 2001 upholding

the assessment order. However, the quantum of undisclosed income was



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                     Page 8 of 71
reduced to `10,08,24,264/- as a consequence of allowance on account of

depreciation.


7.      Aggrieved by the order dated 29th November, 2001 passed by the

CIT(A), the Assessee preferred an appeal before the Tribunal, which too

was dismissed by an order dated 25th June, 2004. The Tribunal upheld the

AO's finding that the Assessee was not functioning solely for the purposes

of education and, therefore, was not eligible for exemption under Section

10(22) of the Act.


8.      Thereafter, the Assessee filed a miscellaneous application under

Section 254(2) of the Act being MA No. 143/2005 dated 8th October, 2004

which was registered with the Tribunal on 22nd November, 2004.

Subsequently MA No. 143/05 dated 27th December, 2005 was moved by the

Assessee in substitution/addition to the earlier application. This application

was allowed. The Tribunal accepted that it had not considered certain

grounds urged by the Assessee and by an order dated 4th August, 2006,

recalled its earlier order dated 25th June, 2004.


9.      The Tribunal, thereafter, passed an order dated 28th September, 2007,

which is impugned in ITA 705/2008, allowing the Assessee's appeal




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 9 of 71
principally on the ground that surpluses disclosed by the Assessee in the

Books of Accounts maintained in the regular course could not be

considered as `undisclosed income' of the Assessee under Chapter XIV-B

of the Act. The Tribunal further accepted the contention of the Assessee

that it was not required to file its return as its income was exempt under

Section 10(22) of the Act. The Tribunal, having allowed the appeal as

aforesaid, did not decide the issue with respect to the validity of the search

under Section 132 of the Act and the consequent initiation of proceedings

under Chapter XIV-B of the Act.


10.     In the meantime, the AO also passed an order dated 13 th January,

2005 imposing penalty under Section 158BFA(2) of the Act. The

Assessee's appeal against the said order was dismissed by the CIT(A) on

10th January, 2008. The Assessee preferred a second appeal before the

Tribunal, which was allowed by an order dated 6th June, 2008. The said

order is the subject matter of appeal in ITA 924/2009. In the meantime, by

an order dated 27th March, 2002, the AO framed an assessment under

Section 143(3) of the Act for the Assessment Year 1999-2000. The

Assessee's claim for exemption under Section 10(23C) of the Act was

rejected by the AO following an earlier decision in relation to the block




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 10 of 71
period.


11.        The Assessee preferred an appeal against the assessment order dated

27th March, 2002 passed in respect of Assessment Year 1999-2000, which

was partly allowed by CIT(A) on 10th July, 2003. The Assessee preferred a

further appeal against the order dated 10th July, 2003 to the Tribunal which

was disposed of by an order dated 15th May, 2009. The Tribunal restored

the assessment to the file of the AO for fresh adjudication after ascertaining

the outcome of the petitioner's application for approval under Section

10(23C) of the Act, which was at the material time pending before the

prescribed authority.


12.        On 29th December, 2010, the petitioner's application for grant of

approval under Section 10(23C) of the Act was rejected. The Assessee has

filed an application for rectification of the said order, which is stated to be

pending.


13.        The appeals (705/2008 and 924/2009) were, accordingly, heard on

the following questions of law:


      A.     Whether the Revenue is entitled to challenge the order dated 4 th

             August, 2006 passed by the Tribunal in this appeal?



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 11 of 71
      B.     If the answer to question (A) is in favour of the Revenue, whether

             on the facts of the present case, the Tribunal was correct in law in

             recalling its order dated 25th June, 2004?


      C.     Whether, in the given facts and circumstances, an assessment

             under section 158BC could be made in respect of the income of

             Assessee as recorded in its books maintained in the regular course

             treating the same as `undisclosed income'?


      D.     Whether the Tribunal was correct in law in holding that the

             Assessee was entitled to the benefit of exemption under Section

             10(22) of the Act?


      E.     Whether the Tribunal was correct in deleting the penalty imposed

             on the Assessee?


14.        In addition, the parties were also heard on the question whether the

order dated 29th December, 2010 passed by DGIT(E) - which is impugned

in W.P.(C) 3797/2007 - rejecting the petitioner's application for approval

under section 10(23C) of the Act, was erroneous and unjustified?




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                           Page 12 of 71
Submissions on behalf of the Revenue


15.     At the outset, Mr Kamal Sawhney, learned Senior Standing counsel

for the Revenue contended that the decision of the Tribunal to recall its

earlier order dated 25th June, 2004 was patently erroneous. He pointed out

that the only reason on account of which the Tribunal had recalled its

earlier order dated 25th June, 2004 was non-consideration of certain

grounds urged by the Assessee. He submitted that the said reason was

patently erroneous as the grounds of appeal in question (i.e., Ground No. 6,

14.1, 14.2, 9, 10 & 17) had been specifically considered by the Tribunal in

its order dated 25th June, 2004. He contended that the Tribunal had

completely reheard the matter and had decided the appeal contrary to the

earlier decision made on 25th June, 2004.


16.     He referred to the decision of the Madras High Court in Vyline Glass

Works Ltd. v. Assistant Commissioner of Wealth Tax: (2015) 371 ITR

355 (Mad.) in support of his contention that where a Tribunal renders a

judgment without dealing with the specific factual situation, the same

would be an irregularity of procedure and would not warrant a recall of the

order. He submitted that, therefore, the Tribunal's order dated 4 th August,

2006 was erroneous and was liable to be set aside.



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 13 of 71
17.     Mr Sawhney further submitted that the Tribunal's order dated 4 th

August, 2006 recalling its earlier order dated 25 th June, 2004 had not been

challenged at the material time as an appeal against the said order was not

maintainable under Section 260A of the Act. He, however, submitted that

notwithstanding the fact that the Tribunal's decision dated 4 th August, 2006

had not been challenged at the material time, the Revenue could,

nonetheless, challenge the same along with the final order. He referred to

the Full Bench decision of this Court in Lachman Dass Bhatia v. Assistant

Commissioner of Income Tax: ITA 724/2010, decided on 6th August,

2010 and drew the attention of this Court to paragraphs 21 to 24 of the said

decision in support of his contention that where an order under Section

254(2) of the Act is passed recalling the earlier order and the main order

under Section 254(1) is passed thereafter, both the said orders could be

challenged in an appeal preferred against the later order under Section

254(1) of the Act.


18.     It was next contended by Mr Sawhney that the Tribunal had erred in

accepting the Assessee's contention that the surpluses recorded in its books

of accounts maintained in the normal course could not be considered as

`undisclosed income'. He contended that since the Assessee had not filed




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 14 of 71
its return of income, it was not open for the Assessee to urge that the

surplus recorded in its books was disclosed. He contended that it was

incumbent upon an Assessee claiming exemption under Section 10(22) of

the Act to file its return of income if the same exceeded the maximum

amount not chargeable to tax ignoring the provisions of Section 11 and 12

of the Act.


19.     He submitted that it was not open for the Assessee to consider its

income as not chargeable to tax under Section 10(22) of the Act and avoid

filing a return of income. He argued, empathetically, that the question

whether the Assessee's income was not taxable by virtue of Section 10(22)

of the Act would arise only when the Assessee disclosed the same by filing

a return. He referred to the decision of the Bombay High Court in Director

of Income Tax v. Malad Jain Yuvak Mandal Medical Relief Centre:

(2001) 250 ITR 488 (Bom.) in support of his contention that the Assessee

was obliged to file its return even though it claimed its income was not

chargeable to tax by virtue of Section 10(22) of the Act.


20.     In addition to the non disclosure of surpluses recorded in the books,

Mr Sawhney submitted that the unaccounted cash of `44 Lacs was found in




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 15 of 71
the residence of Col. Satsangi and the same would warrant making an

assessment under Chapter XIV-B of the Act.


21.     Mr Sawhney also contested the Assessee's claim that it was entitled

to exemption under Section 10(22)/10(23C) of the Act. He argued that the

Assessee had consistently generated surpluses after meeting its revenue and

capital expenditure and this indicated that the pre-dominant object of the

Assessee was not to impart education but to generate profits and the activity

of running and managing educational institutions was carried on, pre-

dominantly, with the object of generating profits. In addition, he referred to

the findings recorded by the Tribunal in its order dated 25 th June, 2004

where it was held that non-educational activities were being conducted by

the Assessee which included sale and purchase of immovable properties;

investment of `4,33,620/- made with BVR Plantations and `2 lacs

investment made with Consortium Finance; uncontrolled utilisation of

funds by the Chairman of the Assessee; purchase of farm by the daughter of

the Chairman of the Assessee; and advances made to the wife of the

Chairman of the Assessee. He submitted that the instances noted by the

Tribunal clearly indicated that the Assessee was not carrying on its

activities solely for the purposes of education but was also indulging in




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 16 of 71
other commercial activities in addition to benefiting the Chairman of the

Assessee and his family members.


22.     Mr Sawhney referred to the following decisions in support of his

contention that the Assessee was not eligible for claiming the benefit of

Section 10(22) /10(23C) of the Act:


(1)     Aditanar Educational Institution v. ACIT: (1997) 224 ITR 310

        (SC)

(2)     ACIT v. Surat Art Silk Cloth Manufactures Association: (1978) 121

        ITR 1 (SC).

(3)     American Hotel & Lodging Association, Educational Institute v.

        CBDT: (2008) 301 ITR 86 (SC).


(4)     Vishvesvaraya Technological University v. ACIT: (2014) 362 ITR

        279 (Karnataka).


Submissions on behalf of the Assessee

23.     Countering the arguments advanced on behalf of the Revenue, Mr

Ajay Vohra, learned Senior Counsel appearing for the Assessee submitted

that since Revenue had not challenged the order dated 4 th August, 2006




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                   Page 17 of 71
passed by the Tribunal under Section 254(2) of the Act, it was not open for

the Revenue to impugn the same in the present appeal.


24.     Mr Vohra next contended that by virtue of Section 10(22) of the Act,

the income of the Assessee was not chargeable to tax and, therefore, the

Assessee was also not liable to file its return of income under Section 139

of the Act.


25.     Mr Vohra pointed out that during the period in question, the

Assessee was not claiming any benefit under Section 11 or 12 of the Act,

which related to exempting income derived from property held wholly for

charitable or religious purposes; but was claiming benefit of section 10(22)

of the Act, which provided a specific exemption to certain educational

institutions. Therefore, the provisions of Section 139(4A) of the Act, which

required an Assessee claiming benefit under sections 11 and 12 of the Act

to file a return if its income exceeded the maximum amount not chargeable

to tax, was inapplicable. He also referred to Section 158BB(1)(c)(B) of the

Act and contended that the entries recorded in the books of accounts and

other documents maintained in the normal course on or before the date of

search would not be assessed as undisclosed income if the income did not

exceed the maximum amount not chargeable to tax. Mr Vohra relied upon



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 18 of 71
the decision of this Court in L.R. Gupta v. Union of India: (1992) 194 ITR

32 (Delhi) in support of his contention that the surpluses as disclosed in the

regular books of accounts could not be considered as undisclosed income

only for the reason that the Assessee, claiming the same to be not

chargeable to tax under the provisions of the Act, had not disclosed the

same in its return.


26.     Mr Vohra also pointed out that notice under Section 148 of the Act

had been issued to the Assessee but the same had not been proceeded with.

He submitted that the pre-condition for issuance of notice under Section

148 of the Act is a belief that the income of an Assessee had escaped

assessment and as the AO had decided not pursue the matter under Section

147 and 148 of the Act, it was not open for the AO to claim that the

surpluses generated by the Assessee were `undisclosed income'. Mr Vohra

further emphasized that the question whether the Assessee was entitled to

the benefit under Section 10(22) of the Act could not be a subject matter of

determination in assessment for the block period under Section 158BC of

the Act.


27.     It was next urged by Mr Vohra that the Assessee had existed solely

for educational purposes and not for the purpose of profit. He submitted






ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 19 of 71
that merely because the Assessee had generated surpluses in certain years,

the same would not indicate that the Assessee was not existing solely for

educational purposes. He referred to the decisions of the Supreme Court in

Queens Educational Society v. CIT: (2015)] 372 (ITR) 699 (SC); Indian

Chamber of Commerce v. CIT: (1975) 101 ITR 796 (SC); Aditanar

Educational Institution v. CIT: (1997) 224 ITR 310 (SC) and Oxford

University Press v. CIT: (2001) 247 ITR 658 (SC) in support of his

contention that the pre-dominant purpose test must be used to determine

whether the Assessee was existing only for educational purposes. He

submitted that if the aforesaid test is applied, it would be apparent that the

Assessee was existing solely for educational purposes and not for the

purposes of profit. He further submitted that the institutions managed and

run by the Assessee were affiliated to the Central Board of Secondary

Education (CBSE) and as per the prevalent rules, affiliation could be

granted only to non-profit institutions/societies. Mr Vohra also referred to

the objects of the Assessee Society and also drew the attention of this Court

to clause 21 and 22 of the Rules and Regulations of the Society, which

provided that on dissolution of the society, its properties both movable and

immovable would not be distributed amongst the members but would be




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 20 of 71
given to another society having similar aims and objects. He urged that the

objects of the society and the Rules and Regulations prohibited distribution

of any surplus and, therefore, it could not be disputed that the Assessee

existed only for the purposes of education and not for profit.


28.     Insofar as the instances relating to the funds of the Assessee being

made available to the Chairman and his family members were concerned,

Mr Vohra submitted that the same were in the nature of advances to

employees. He contended that the Chairman and his wife as well as other

persons mentioned by the AO were also employees of the School/Assessee

and were also given advances similar to other employees. Regarding the

investments made by the Assessee in FDRs, BVR Plantation, Consortium

Finance and other assets were concerned, Mr Vohra submitted that at the

material time there was no restriction as to the investments that could be

made by an educational institution claiming benefit under Section 10(22)

and 10(23C) of the Act. He submitted that the restrictions to make

investments other than in the form as specified under Section 11(5) of the

Act were not applicable to institutions claiming exemption under Section

10(22) of the Act. Similar restrictions were imposed by proviso to Section

10(23C)(vi) of the Act by virtue of the Finance Act, 1998 w.e.f. 1st April,




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 21 of 71
1999; however, by virtue of the fifth Proviso to Section 10(23C)(vi) of the

Act, exemption would not be denied to an Assessee if the investments were

made prior to 1st June, 1998 and that the funds did not continue to remain

so invested after 30th March, 2001. The effect of the aforesaid proviso was

to grant the Assessees time till 30th March, 2001 to ensure that non-

conforming investments were disinvested and funds were invested in

conformity with Section 11(5) of the Act.


29.     Mr       Vohra         submitted     that   all   investments   had       been

returned/liquidated by the Assessee prior to the specified date, except the

investment in BVR Plantation Ltd., which was not recoverable as the said

company was under liquidation.                  He contended that in the given

circumstances the exemption under Section 10(22)/10(23C) of the Act

could not be denied for the reason that the Assessee had invested its funds

in real estate and other investments.


30.     Mr Vohra also advanced contentions to assail the order dated 29th

December, 2010 passed by the DGIT(E) rejecting the Assessee's

application for approval under section 10(23C) of the Act. He canvassed

that the scope of examination for the purposes of granting (or refusing)

approval under Section 10(23C)(vi) was limited to considering whether the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                              Page 22 of 71
objects and the nature of an Assessee fell within the scope of Section

10(23C)(vi) of the Act and whether the university or institution actually

existed. Mr Vohra submitted that the approval contemplated under Section

10(23C)(vi) is to be granted at the beginning of the assessment year and,

therefore, compliance of provisos to Section 10(23C), which also included

the manner of utilization of funds by the Assessee, was outside the

jurisdiction of DGIT(E). He referred to the decision of American Hotel &

Lodging Association, Educational Institute vs. CBDT: (2008) 301 ITR 86

(SC) in support of its contention.


31.     In addition, it was submitted that the Assessee's application for

approval could not be rejected on account of failure on the part of the

Assessee to furnish the audit report along with the application. Mr Vohra

contended that prescribed form for making an application for approval

under Section 10(23C)(vi), Form-56D, only required that the same be

accompanied by audited accounts and it was not mandatory to enclose the

audit report of the Chartered Accountant. Further, the Assessee had

furnished the audit report when called upon to do so and, therefore, its

application for approval under Section 10(23C)(vi) of the Act could not be

rejected for the reason that it was not accompanied with an audit report.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 23 of 71
Reasoning and Conclusions


        Whether the Revenue can impugn the Tribunal's order dated
        4th August, 2006

32.     The first and foremost issue that needs to be addressed is whether the

Revenue can, in this appeal (i.e. ITA 705/2008), assail the order dated 4th

August, 2006 passed by the Tribunal recalling its earlier order dated 25 th

June, 2004.


33.     At the outset, it is relevant to note that the Assessee had, by way of

an appeal (being ITA No.275/2005) filed in this court, impugned the order

dated 25th May, 2004 passed by the Tribunal. The Assessee had also filed

an application before the Tribunal under Section 254(2) of the Act for recall

of the said order, in which the Assessee succeeded resulting in the order

dated 4th August 2006; the same was also informed to this Court. On 6th

November, 2013, in proceedings relating to the appeal filed by the Assessee

i.e. ITA No. 275/2005, the counsel for the Revenue informed this court that

the Revenue was likely to file an appeal against the Tribunal's order of 4th

August, 2006 and the hearing was adjourned.          However, the Revenue

neither filed any appeal against the order dated 4th August, 2006 nor filed

any other proceedings to challenge the said order. In the circumstances, the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 24 of 71
Assessee's appeal (ITA No. 275/2005) against an order dated 25th June,

2004 was disposed of by this Court on 13th February, 2014, as being

infructuous. The only inescapable conclusion that can be drawn is that the

Revenue had accepted the order dated 4th August, 2006 passed by the

Tribunal and, thus, it would not be open for the Revenue to challenge the

same in the present proceedings. The contention advanced by the Revenue

that the Tribunal's decision of 4th August 2006 could be challenged in this

appeal (ITA 705/2008) filed against the Tribunal's order of 28th September,

2007, is without merit. The reliance placed by the learned counsel for the

Revenue on the decision of a Full Bench of this Court in Lachman Dass

Bhatia (supra) is also entirely misplaced; the ratio of that decision is quite

to the contrary. In that case, the Full bench of this Court had summarised its

conclusion in the following words:-


        "23. In view of our foregoing analysis, we proceed to record
        our conclusions in seriatim:
                 (i)      An order passed under Section 254(2) recalling an
                          order in entirety would not be amenable to appeal
                          under Section 260A of the Act.
                 (ii)     An order rejecting the application under Section
                          254(2) is not appealable.
                 (iii)    If an order is passed under Section 254(2)
                          amending the order passed in appeal, the same can




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 25 of 71
                          be assailed in further appeal on substantial question
                          of law."


34.     The Court had further clarified that in cases where an appeal was not

maintainable against an order under section 254(2) of the Act, the same

could be challenged by way of a writ petition under Article 226 and 227 of

the Constitution of India.


35.     In the given circumstances, it was always open for the Revenue to

challenge the Tribunal's order dated 4th August, 2006 by filing an appeal on

a substantial question of law, if it considered that the order dated 4 th

August, 2006 had partly amended the order dated 25 th June, 2004. It was

also open for the Revenue to challenge the said order by filing a writ

petition as observed by the Full Bench of this Court in the aforementioned

decision. However, the Revenue did neither. In the circumstances, it would

not be open for the Revenue to assail the order dated 4th August, 2006 in the

present appeals in the manner as is sought to be argued on behalf of the

Revenue.


36.     Accordingly, the first question ­ question A, is answered in the

negative; that is, against the Revenue and in favour of the Assessee.

Consequently, there is no need to consider the second question.



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                              Page 26 of 71
        Whether block assessment under section 158BC could be made in

respect of surpluses disclosed in the books maintained in the normal

course.


37.     The next question that needs to be addressed is whether, in the given

facts, an assessment could be made by the AO under Section 158BC of the

Act. It is not disputed that the AO would have jurisdiction to make an

assessment under Section 158BC only if the search and seizure operations

carried out by the income tax authorities revealed any `undisclosed

income'. Admittedly, other than the surpluses as disclosed by the Assessee

in the books maintained by it in the normal course of its activities, the AO

has not made any addition or bought to tax any income in the hands of the

Assessee. Thus, the point in issue is whether the surpluses as disclosed in

the books of accounts could be considered as `undisclosed income' of the

Assessee.


38.     Section 158B(b) defines undisclosed income as under:-


          "(b) "undisclosed income" includes any money, bullion,
          jewellery or other valuable article or thing or any income
          based on any entry in the books of account or other documents
          or transactions, where such money, bullion, jewellery, valuable
          article, thing, entry in the books of account or other document
          or transaction represents wholly or partly income or property



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 27 of 71
          which has not been or would not have been disclosed for the
          purposes of this Act [or any expense, deduction or allowance
          claimed under this Act which is found to be false."


39.     A plain reading of the definition of `undisclosed income' as quoted

above indicates that undisclosed income would include income based on

the entries in the books of accounts, which has not been or would not have

been disclosed for the purposes of the Act. The Assessee has been

maintaining records in its normal course and there is no allegation that the

said books had ever been asked for and not produced by the Assessee or

that the Assessee was maintaining separate/parallel books of accounts with

a view to conceal its receipts and payments. The Assessee has been

operating its bank accounts in the normal course and there is no material,

which would give rise to any apprehension that the Assessee would not

have produced his books of accounts or disclosed the same if called upon to

do so. Thus, a conclusion that the Assessee would not have disclosed the

surpluses as recorded in its books cannot be drawn. The only aspect that

remains to be considered is whether the surpluses recorded in the books

could be considered as undisclosed income of the Assessee solely for the

reason that the Assessee had not filed a return disclosing the same.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 28 of 71
40.     The expression `undisclosed income' would connote assets or

income, which the Assessee believes to be taxable and seeks to conceal the

same from the Income Tax Authorities. The surpluses, which are recorded

by the Assessee in its books maintained in the normal course and which

according to the Assessee are not chargeable to tax cannot be assumed to be

`undisclosed income' only for the reason that a return of income

surrendering the said surpluses to tax has not been filed; particularly, where

the Assessee, for bona fide reason, subscribes to the view that he is not

required to file his return of income.


41.     At this stage, it is also necessary to mention that the AO had issued a

notice under Section 148 of the Act to tax the income of the Assessee on

the ground that it had escaped assessment. These proceedings were

abandoned and not pursued by the AO. Clearly, the only inference that can

be drawn is that either the AO was satisfied that the income of the Assessee

had not escaped assessment and/or that the proceedings under Section

147/148 of the Act were not maintainable. It is also apparent that the AO

was in knowledge of the activities carried on by the Assessee.


42.     This Court in the case of L.R. Gupta (supra) had considered the

expression `undisclosed income or property' in the context of Section 132



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 29 of 71
of the Act. In that case, the Assessee had received compensation against

acquisition of land in and around Delhi. The said amount had not been

disclosed by the Assessee in its return because, according to the Assessee,

the said amount was not taxable as an appeal had been filed against the

quantum of compensation by the Union of India, which was pending

consideration in the Court and another appeal had also been filed by the

Gram Sabha and the owners of the property challenging the right of the

Assessee to receive such compensation. However, the said compensation

had been dealt with through normal banking channels and the Income Tax

Authorities were aware of the same. Nonetheless, warrant of authorisation

for search under section 132 of the Act in respect of the Assessee was

issued and the fact that the compensation received by the Assessee had not

been disclosed by the Assessee in its Income Tax Return or in his Wealth

Tax Return was recorded as one of the reasons for issuing such

authorization to conduct search and seizure operation in respect of the

Assessee. This Court repelled the arguments that non-disclosure of receipt

of compensation in the return filed by the Assessee could be considered as

undisclosed income. The Court explained that non-disclosure of assets and

funds, which the Assessee believed to be not chargeable to tax, in his




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                     Page 30 of 71
returns would not render the same to be treated as undisclosed income;

even if the Assessee's opinion may be incorrect in law , but if the income

tax department is aware of such income, the same could not be considered

as undisclosed. The Court observed that the department would be justified

in issuing notice under Section 148 of the Act but search and seizure

operation on the basis that the Assessee was in possession of undisclosed

income would not be warranted. The relevant extract of the said decision is

quoted as under:-


          "32. Sub-clause (b) of Section 132(1) refers to cases where
          there is reason to believe that if any summons or notice, as
          specified in the said sub clause (a) has been issued or will be
          issued then that person will not produce or cause to be
          produced the books of accounts etc. In other words, the said
          provision refers to the belief which may be formed by the
          Appropriate Authority to the effect that the person concerned
          is not likely to voluntarily or even after notice produce
          documents before the Income Tax authorities. Where, for
          example, there is information that a person is hiding or likely
          to hide or destroy documents or books of accounts which are
          required or are relevant for the purposes of the Act then in
          such a case it can be said that unless and until search is
          conducted the said books of account or documents will not be
          recovered. The belief of the authority must be that the only
          way in which the Income Tax Department will be in a position
          to obtain books of accounts and documents from a person is
          by the conduct of a search and consequent seizure of the
          documents thereof. In our opinion some facts or circumstances
          must exit on the basis of which such a belief can be formed.
          For example, if the Department has information that a person



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 31 of 71
          has duplicate sets of account books or documents where
          havala transactions are recorded then the Department can
          legitimately come to the conclusion that if a notice is sent then
          that person is not likely to produce the said documents etc.
          Duplicate books of accounts and such like documents are
          maintained primarily for the reason that they are not to be
          produced before the Income Tax authorities. To put it
          differently, the nature of the documents may be such which
          are not, in the normal course, likely to be produced before the
          Income Tax authorities either voluntarily or on requisition
          being sent. It may also happen that the documents may exist
          and be in the custody of a person which would show the
          existence of immoveable property which he may have
          acquired from money or income which has been hidden from
          the Income Tax Department. The past record of the assessed,
          his status or position in life are also relevant circumstances in
          this regard. Where, however, documents exist which are not
          secretly maintained by an assessed, for example pass books,
          sale deeds which are registered and about the existence of
          which the Department is aware, then in such a case it will be
          difficult to believe that an assessed will not produce those
          documents.

          33. Sub-clause (c) refers to money, bullion or jewellery or
          other valuable articles which either wholly or partly should
          have been income of an assessed which has not been disclosed
          for the purpose of the Act. The said sub-clause pertains only to
          moveable and not immoveable assets. Secondly it pertains to
          those assets which wholly or partly represent what should
          have been income. The expression "which has not been or
          would not be, disclosed for the purposes of Income Tax Act"
          would mean that income which is liable to tax, but which the
          assessed his not returned in his Income Tax return or made
          known to the Income-Tax Department. The sub Clause itself
          refers to this as "undisclosed income or property". In our
          opinion the words "undisclosed", in that context, must mean
          income which is hidden from the Department. Clause (c)
          would refer to cases where the assessed knows that the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 32 of 71
          moveable asset is or represents income which is taxable but
          which asset is not disclosed to the Department for the purpose
          of taxation. Those assets must be or represent hidden or
          secreted funds or assets. Where, however, existence of the
          money or asset is known to the Income Tax Department and
          where the case of the assessed is that the said money or the
          valuable asset is not liable to be taxed, then, in our opinion,
          the provisions of sub-Clause (c) of Section 132(1) would not
          be attracted. An assessed is under no obligation to disclose in
          his return of income all the moneys which are received by him
          which do not partake of the character of income or income
          liable to tax. If an assessed receives, admittedly, a gift from a
          relation or earns agricultural income which is not subject to
          tax, then he would not be liable to show the receipt of that
          money in his Income Tax return. Non-disclosure of the same
          would not attract the provisions of Section 132(c). It may be
          that the opinion of the assessed that the receipt of such amount
          is not taxable, may be incorrect and, in law, the same may be
          taxable but where, the Department is aware of the existence of
          such an asset or the receipt of such an Income by the assessed
          then the Department may be fully Justified in issuing a notice
          under Section 148 of the Act, but no action can be taken
          under Section 132(1)(C). Authorisation under Section
          132(1) can be issued if there is a reasonable belief that the
          assessed does not want the Income Tax Department to know
          about the existence of such Income or asset in an effort to
          escape, assessment. Section 132(1)(c) has been incorporated
          in order to enable the Department to take physical possession
          of those moveable properties or articles which are or represent
          undisclosed income or property. The words "undisclosed
          income" must mean income which is liable to be taxed under
          the provisions of the Income Tax Act but which has not been
          disclosed by an assessed in an effort to escape assessment. Not
          disclosed must mean the intention of the assessed to hide the
          existence of the income or the asset from the Income Tax
          Department while being aware that the same is rightly
          taxable."




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 33 of 71
43.     Although, the aforesaid judgment was rendered in the context of

Section 132 of the Act the same would be equally applicable to the issue

involved in this case - whether the surpluses recorded by the Assessee in its

books of accounts could be considered as undisclosed income. This is so,

because the search and seizure operations under Section 132 of the Act and

the assessment that follows constitute an integral part of the scheme to tax

undisclosed income. Further, by virtue of clause (c) of Section 132(1) of the

Act, the expression `undisclosed income' for the purposes of Section 132 of

the Act also includes "income of property, which has not been, or would

not be disclosed for the purposes of the Indian Income Tax Act, 1922 (11 of

1922) or this Act" and this condition is similar to that as specified in Clause

158B(b) of the Act.


44.     Mr Sawhney's contention that the fact that the Assessee had not filed

its return would render the entire surpluses as disclosed in its books as

undisclosed income is not sustainable.       According to the Assessee its

income was entirely exempt under Section 10(22) of the Act and hence it

was not required to file a return. Section 139(1) of the Act enjoins every

person to file a return of income if the income for which the person is

assessable under the Act exceeds the maximum amount, which is not




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 34 of 71
chargeable to income tax. The relevant portions of Section 139 of the Act

as applicable for Assessment Year 1989-90 reads as under:-


        "139. (1) Every person, if his total income or the total income
        of any other person in respect of which he is assessable under
        this Act during the previous year exceeded the maximum
        amount which is not chargeable to income-tax, shall, on or
        before the due date, furnish a return of his income or the
        income of such other person during the previous year in the
        prescribed form and verified in the prescribed manner and
        setting forth such other particulars as may be prescribed

        Explanation: In this sub-section, "due date" means--

        (a) where the assessee is a company, the 31st day of December
        of the assessment year;

        (b) where the assessee is a person, other than a company,--

        (i) in a case where the accounts of the assessee are required
        under this Act or any other law to be audited or in the case of a
        co-operative society, the 31st day of October of the assessment
        year;

        (ii) in a case where the total income referred to in this sub-
        section includes any income from business or profession, not
        being a case falling under sub-clause (i), the 31st day of
        August of the assessment year;

        (iii) in any other case, the 30th day of June of the assessment
        year. ]

        xxxxx                      xxxxx       xxxxx            xxxxx




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 35 of 71
         (3) If any person who has sustained a loss in any previous
        year under the head "Profits and gains of business or
        profession" or under the head "Capital gains" and claims that
        the loss or any part thereof should be carried forward under
        sub-section (1) of section 72, or sub-section (2) of section 73,
        or sub-section (1) [or sub-section (3)] of section 74, [or sub-
        section (3) of section 74A], he may furnish, within the time
        allowed under sub-section (1), a return or loss in the prescribed
        form and verified in the prescribed manner and containing
        such other particulars as may be prescribed, and all the
        provisions of this Act shall apply as if it were a return under
        sub-section (1).

        xxxxx                      xxxxx        xxxxx           xxxxx

         [(4A) Every person in receipt of income derived from
        property held under trust or other legal obligation wholly for
        charitable or religious purposes or in part only for such
        purposes, or of income being voluntary contributions referred
        to in sub-clause (iia) of clause (24)of section 2, shall if the
        total income in respect of which he is assessable as a
        representative assessee (the total income for this purpose,
        being computed under this Act without giving effect to the
        provisions of sections 11 and 12)exceeds the maximum
        amount which is not chargeable to income-tax, furnish a return
        of such income of the previous year in the prescribed form and
        verified in the prescribed manner and setting forth such other
        particulars as may be prescribed and all the provisions of this
        Act shall, so far as may be, apply as if it were a return required
        to be furnished under sub-section (1).]]"

45.     Although, Section 139 of the Act was further amended during the

period 1st April, 1989 to 31st March, 1999, however, the said amendments



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 36 of 71
were not material to the issue concerned as none of those amendments

required an Assessee, whose income was below the maximum amount not

chargeable to tax, to file his return of Income.


46.     Indisputably, the income of an Assessee falling within the scope of

Section 10(22) of the Act is not to be included in the total income of the

Assessee. Thus, if such exemption was available, the Assessee was not

obliged to file its return of income as its income would fall below the

maximum amount which was not chargeable to income-tax. It is relevant

to note that Section 10 of the Act provides for exclusions from the total

income of an Assessee at the threshold. Such exclusions are qualitatively

different from the exemptions, allowances or deductions from the total

income of an Assessee which may otherwise be available under other

provisions of the Act such as Chapter VI-A. This is so because incomes

exempt under Section 10 of the Act are not considered a part of total

income of an Assessee. It was urged on behalf of the Revenue that whether

an Assessee is entitled to exemption under Section 10(22) of the Act could

only be assessed once the Assessee files a return and, therefore, it was

necessary for the Assessee to do so in the present case. We are unable to

accept this contention. The language of Section 139(1) of the Act is




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                     Page 37 of 71
unambiguous and a person is required to file a return only if his income

exceeds the maximum amount not chargeable to tax under the Act. We,

respectfully, are unable to concur with the views of the Bombay High Court

in Malad Jain Yuvak Mandal Medical Relief Centre (supra); if the

reasoning as canvassed on behalf of the Revenue is accepted, all Assessees

whose incomes are below the taxable limit would also necessarily have to

file a return for verification of their respective incomes. In our view, this

view is not supported by the plain language of Section 139 of the Act.


47.     It is relevant to note that Section 139(4A) of the Act was amended by

virtue of the Direct Tax Laws (Amendment) Act, 1989 to make it

mandatory for persons holding property under Trust or other legal

obligation for charitable and religious purpose to file the return of income if

their income exceeded the maximum amount not chargeable to tax without

giving effect to the provisions of Section 11 & 12 of the Act. As pointed

out by the Assessee, it was not claiming exemption under Section 11 & 12

of the Act but under Section 10(22) of the Act. Section 10(22) of the Act

was omitted by virtue of the Finance (No. 2) Act, 1998 and the exemption

available to a university or an educational institution existing solely for

educational purposes was included under Section 10(23C) of the Act w.e.f.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 38 of 71
1st April, 1999. At the material time, even institutions claiming exemption

under Section 10(23C) of the Act were not liable to furnish a return of

income if by virtue of the aforesaid provision their income was below the

maximum amount not chargeable to tax. This position changed w.e.f. 1st

April, 2003 consequent to the insertion of Sub-section (4C) of Section 139

of the Act by virtue of Finance Act, 2002. Sub-section (4C) to Section 139

is quoted below:-


        "(4C) Every--
               (a) research association referred to in clause (21)
                   of section 10;
               (b) news agency referred to in clause (22B) of section 10;
               (c) association or institution referred to in clause (23A)
                   of section 10;
               (d) institution referred to in clause (23B) of section 10;
               (e) fund or institution referred to in sub-clause (iv) or
                   trust or institution referred to in sub-clause (v) or any
                   university or other educational institution referred to
                   in sub-clause (iiiad) or sub-clause (vi) or any hospital
                   or other medical institution referred to in sub-clause
                   (iiiae) or sub-clause (via) of clause (23C) of section
                   10;
                (f) trade union referred to in sub-clause (a) or association
                    referred to in sub-clause (b) of clause (24) of section
                    10;




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                           Page 39 of 71
               (g) body or authority or Board or Trust or Commission
                   (by whatever name called) referred to in clause (46)
                   of section 10;
               (h)    infrastructure debt fund referred to in clause (47)
                      of section 10,]
               shall, if the total income in respect of which such research
               association, news agency, association or institution, fund
               or trust or university or other educational institution or any
               hospital or other medical institution or trade union or body
               or authority or Board or Trust or Commission or
               infrastructure debt fund is assessable, without giving effect
               to the provisions of section 10, exceeds the maximum
               amount which is not chargeable to income-tax, furnish a
               return of such income of the previous year in the
               prescribed form and verified in the prescribed manner and
               setting forth such other particulars as may be prescribed
               and all the provisions of this Act shall, so far as may be,
               apply as if it were a return required to be furnished under
               sub-section (1)."


48.     It is relevant to note that even after the insertion of Sub-section 4C of

Section 139 of the Act, university and educational institutions, which were

covered under clause (iiiab) and (iiiad) of Section 10(23C) of the Act were

excluded from the obligation to furnish their returns. The Memorandum

explaining the provisions of Finance Bill, 2002 also expressly indicated that

Sub-section 4C was proposed to be inserted in Section 139 because certain

institutions claiming exemption under Section 10 were not obliged to file

their returns and such amendment was, therefore, necessary to ascertain




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                            Page 40 of 71
whether such institutions were complying with the conditions of the

exemption claimed by them. The relevant extract from the Memorandum

explaining the provisions in the Finance Bill is quoted below:-


                "Under the existing provisions, scientific research
          association referred to in clause (21), news agency referred to
          in clause (22B), association or institution referred to in clause
          (23A), institution referred to in clause (23B), fund or
          institution referred to in sub-clause (iv) or trust or institution
          referred to in sub-clause (v) or any university or other
          educational institution referred to in sub-clause (vi) or any
          hospital or other institution referred to in sub-clause (via) of
          clause (23C), trade union referred to in sub-clause (a) or
          association of trade unions referred to in sub-clause (b) of
          clause (24) of section 10 are not obliged to file return of
          income in respect of which they are assessable. It is,
          therefore, not possible to ascertain as to whether these bodies
          are complying with the conditions specified in those clauses.
                It is proposed to insert a new sub-section (4C) in
          section 139 to provide that every such person mentioned
          above, shall, if the total income in respect of which person, is
          assessable without giving effect to the provisions of section
          10, exceeds the maximum amount which is not chargeable to
          income-tax, furnish a return of such income of the previous
          year."


49.     Even if the Assessee's view that it was exempt under Section 10(22)

of the Act is found to be erroneous in law, nonetheless, the same cannot

lead to the conclusion that the surpluses recorded by the Assessee in its

books were undisclosed income. The expression `undisclosed income'




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                             Page 41 of 71
would have to be given a schematic interpretation. The provisions

regarding search and seizure and assessing undisclosed income are

draconian provisions; the assessment and penalties that follow the

discovery of undisclosed income are also harsh. Thus, the expression

`undisclosed income' would have to be viewed from the stand point of an

Assessee and unless it is manifest from the conduct of the Assessee that he

consciously intended to conceal his income, which he otherwise believed to

be taxable; the same would not to be liable to be treated as undisclosed

income of an Assessee. As indicated earlier, there is no material to

conclude that the Assessee acted in a manner to conceal its income or

activities from the Authorities. Thus, in the facts of the present case, even if

it is found that the Assessee was not entitled to benefit of Section

10(22)/10(23C) of the Act, its income as recorded in its regular books of

accounts, nonetheless could not be treated as `undisclosed income'.


50.     In view of the aforesaid, the assessment order made by the AO under

Section 158BC of the Act is not sustainable as in the absence of any

undisclosed income, the question of framing a block assessment does not

arise. We find no infirmity with the decision of the Tribunal in setting

aside the block assessment order dated 31st January, 2001. We accept the




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 42 of 71
contention advanced on behalf of the Assessee that the question whether

the income of the Assessee was liable to be excluded from its total income

by virtue of Section 10(22) of the Act was an issue which could not be

made the subject matter of block assessment under Section 158BC, as the

same is concerned only with the assessment of `undisclosed income'.


51.     The third question, question C, is answered in the negative; that is,

against the Revenue and in favour of the Assessee.


        Whether the Assessee is entitled to benefit under section
        10(22)/10(23C) of the Act.

52.     The next issue to be considered is whether the Assessee was entitled

to exemption under Section 10(22)/10(23C) of the Act. The AO had made a

block assessment for the period from 1st April, 1988 to 15th January, 1999.

As we have upheld the decision of the Tribunal to set aside the block

assessment order for that period, therefore, it is not necessary to decide this

issue insofar as the block period ­ that is, period from 1st April, 1988 to 15th

January, 1999 ­ is concerned. We were also informed during the course of

the hearing that the Assessee has been granted registration under Section

12A of the Act for the assessment year 2000-01 onwards. However, rival

contentions have been heard. Further, the Assessee has been denied the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 43 of 71
approval under Section 10(23C) of the Act by DGIT(E) for the AY 1999-

2000 and this denial has been impugned by the Assessee in its writ petition

- W.P.(C) 3797/2011. In the circumstances, we consider it appropriate to

consider the question


53.     It was, inter alia, contended before us that the Assessee was not

entitled to exemption under Section 10(22)/10(23C) of the Act as it was not

"existing solely for educational purposes and not for purposes of profit".

According to the Revenue, this was evident from the fact that the Assessee

has earned surpluses during most of the years falling within the block

period. In addition, it was urged that the Assessee had advanced sums to the

Chairman of the Assessee; the Chairman's wife; the Chairman's daughter;

Chairman's son-in law; and the Manager of the Assessee. According to the

Revenue, the Assessee had also indulged in dealing in real estate and

making investments, which were not in conformity with Section 11(5) of

the Act and, therefore, the Assessee was disentitled to the exemption under

Section 10(23C)(vi) by virtue of the provisos to Section 10(23)(vi) of the

Act.


54.     Insofar as the question whether the university or educational

institution existing solely for educational purposes could be denied the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 44 of 71
benefit of Section 10(22)/10(23C)(vi) on the ground that its receipts

exceeded its expenditure is concerned, the same is no longer res integra. It

is now well established that an educational institution existing solely for

educational purposes would not cease to be so only for the reason that some

of its activities have yielded surpluses. In Sole Trustee, Loka Shikshana

Trust v. CIT: (1975) 101 ITR 234 (SC); (1976) 1 SCC 254, the Supreme

Court had observed that:


        "If the profits must necessarily feed a charitable purpose under
        the terms of the trust, the mere fact that the activities of the trust
        yield profit will not alter the charitable character of the trust.
        The test now is, more clearly than in the past, the genuineness
        of the purpose tested by the obligation created to spend the
        money exclusively or essentially on "charity"".


The learned Judge also added that the restrictive condition "that the

purpose should not involve the carrying on of any activity for profit would

be satisfied if profit making is not the real object".


55.     The aforesaid view was reiterated by the Supreme Court in a later

decision in Addl. Commissioner of Income Tax v. Surat Art Silk Cloth

Manufacturers Association: (1980) 121 ITR 1 (SC), wherein the Supreme

Court applied the predominant object test for determining whether the




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                            Page 45 of 71
Assessee existed solely for charitable purposes or for making profit. The

Supreme Court observed as under:-


        "The test which has, therefore, now to be applied is whether the
        predominant object of the activity involved in carrying out the
        object of general public utility is to subserve the charitable
        purpose or to earn profit. Where profit-making is the
        predominant object of the activity, the purpose, though an
        object of general public utility, would cease to be a charitable
        purpose. But where the predominant object of the activity is to
        carry out the charitable purpose and not to earn profit, it would
        not lose its character of a charitable purpose merely because
        some profit arises from the activity."

56.     In Aditanar Educational Institution v. ACIT: (1997) 224 ITR 310

(SC), the Supreme Court reiterated that the predominant object test needs to

be applied to determine whether the institution exists solely for educational

purposes, in the following words:-


           "....After meeting the expenditure, if any surplus results
           incidentally from the activity lawfully carried on by the
           educational institution, it will not cease to be one existing
           solely for educational purposes since the object is not one
           to make profit. The decisive or acid test is whether on an
           overall view of the matter, the object is to make profit. In
           evaluating or appraising the above, one should also bear in
           mind the distinction/difference between the corpus, the
           objects and the powers of the concerned entity."




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 46 of 71
57.     In a recent decision, the Supreme Court in Queen's Educational

Society v. CIT: (2015) 372 ITR 699 (SC) summarized the law on the issue

as under:-


           "11.      Thus, the law common to Section 10(23C)(iiiad) and
                     (vi) may be summed up as follows:
                  (1)     Where an educational institution carries on the
                          activity of education primarily for educating
                          persons, the fact that it makes a surplus does not
                          lead to the conclusion that it ceases to exist solely
                          for educational purposes and becomes an
                          institution for the purpose of making profit.
                  (2)     The predominant object test must be applied ­ the
                          purpose of education should not be submerged by
                          a profit making motive.
                  (3)     A distinction must be drawn between the making
                          of a surplus and an institution being carried on
                          "for profit". No inference arises that merely
                          because imparting education results in making a
                          profit, it becomes an activity for profit.
                  (4)     If after meeting expenditure, a surplus arises
                          incidentally from the activity carried on by the
                          educational institution, it will not be cease to be
                          one existing solely for educational purposes.
                  (5)     The ultimate test is whether on an overall view of
                          the matter in the concerned assessment year the
                          object is to make profit as opposed to educating
                          persons."


58.     In the facts of the present case, it is seen that the objects of the

Assessee society are solely for the purposes of education and not for

purpose of profit. Distribution of surpluses is prohibited. Further, in the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                               Page 47 of 71
event of dissolution of the Assessee society, its assets would have to be

transferred to another institution carrying on similar activities and the same

cannot be distributed to its members. The Assessee has been running three

schools that are affiliated to CBSE; admittedly, this which would not be

permissible in case the Assessee did not exist solely for educational

purposes and/or if the Assessee was found to be pursuing the profit motive.

The surpluses generated by the Assessee are necessarily to be applied

towards its charitable objects.


59.     In view of the aforesaid, the exemption under Section 10(22) of the

Act cannot be denied to the Assessee only for the reason that it had been

generating surpluses.


60.     The next aspect to be considered is whether the investments made by

the Assessee would disentitle the Assessee to the exemption under Section

10(22). Section 10(22) of the Act as it existed prior to 1 st April, 1999 reads

as under:-


        "10. Incomes not included in total income.- In computing the
        total income of a previous year of any person, any income
        falling within any of the following clauses shall not be
        included--
        xxxxx                      xxxxx      xxxxx




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 48 of 71
         "(22) any income of a university or other educational
        institution, existing solely for educational purposes and not for
        purposes of profit;"


61.     Plainly, the exemption under Section 10(22) of the Act was not

conditional on the funds of the institutions being invested in the form and

manner as required under Section 11(5) of the Act. Thus, the university and

the educational institution was free to apply and invest its funds in the

manner as it deemed fit. This Court in the case of Director of Income Tax

(Exemption) v. Prakash Education Society: (2006) 286 ITR 288 (Del.)

considered a case where an Assessee had deployed its funds to purchase

rights and bonus shares of companies and upheld the Tribunal's decision

that investments made by the Assessee therein did not disentitle the

Assessee to exemption under Section 10(22) of the Act. The relevant

extract of the said decision reads as under:-


            "We also are of the view that the surplus funds available
            with the assessee could be suitably invested whether by
            way of fixed deposit in a bank or financial institution or in
            stock market to earn profit which would in turn be available
            to the society for being utilised to pursue its educational
            purposes. Inasmuch as the assessee had in the instant case
            invested a part of its surplus funds for purchase of rights
            and bonus shares in companies wherein it had acquired
            some shares in the earlier years, it could not be said to have
            disagreed from its basic purpose of running the educational
            institution. It is noteworthy that the Tribunal has on a


ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                           Page 49 of 71
            question of fact found that the assessee had applied funds to
            the extent of Rs.1,47,04,829 towards the running of the
            educational institution. It was not, therefore, a case where
            the society had received funds which it had entirely
            directed for investment purposes by neglecting its basic
            object of running the institution."


62.     It is also relevant to note that Section 10(22) of the Act was omitted

by virtue of Finance (No.2) Act, 1998 w.e.f. 1st April, 1999, and the

provisions to exempt income of universities and educational institutions

existing solely for educational purposes were introduced in Section

10(23C) of the Act by introduction of clauses (iiiab), (iiiad) and (vi) in that

section. Clause (iiiab) excludes from the net of income tax, any income

received by any university or educational institution existing solely for

educational purposes which is wholly and substantially financed by the

Government. Clause (iiiad) exempts educational institutions whose annual

receipts do not exceed the prescribed limit.          Clause (vi) extends the

exemption to universities and educational institutions, existing solely for

educational purposes and not for purposes of profit, which are approved by

the prescribed authority. The relevant clauses of Section 10(23C) of the Act

are quoted below:


        "10. Incomes not included in total income. In computing the
        total income of a previous year of any person, any income



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 50 of 71
        falling within any of the following clauses shall not be
        included-
        ...
        (23C) any income received by any person on behalf of-
        (iiiab) any university or other educational institution existing
                solely for educational purposes and not for purposes of
                profit, and which is wholly or substantially financed by
                the Government; or
        ...
        (iiiad) any university or other educational institution existing
                solely for educational purposes and not for purposes of
                profit if the aggregate annual receipts of such university
                or educational institution do not exceed the amount of
                annual receipts as may be prescribed; or
        ...
        (vi)       any university or other educational institution existing
                   solely for educational purposes and not for purposes of
                   profit, other than those mentioned in sub-clause (iiiab)
                   of sub-clause (iiiad) and which may be approved by the
                   prescribed authority;
        ...
        Provided that the fund or trust or institution or any university or
        other educational institution or any hospital or other medical
        institution referred to in sub-clause (iv) or sub-clause (v) or sub-
        clause (vi) or sub-clause (via)] shall make an application in the
        prescribed form and manner- to the prescribed authority for the
        purpose of grant of the exemption, or continuance thereof,
        under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-
        clabse (via):
        ...
        Provided also that the fund or trust or institution or any
        university or other educational institution or any hospital or


ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                           Page 51 of 71
        other medical institution referred to in sub-clause (iv) or sub-
        clause (v) or sub-clause (vi) or sub-clause (via)--
        (a) applies its income, or accumulates it for application, wholly
        and exclusively to the objects for which it is established and in a
        case where more than fifteen per cent of its income is
        accumulated on or after the 1st day of April, 2002, the period of
        the accumulation of the amount exceeding fifteen per cent of its
        income shall in no case exceed five years; and
        (b) does not invest or deposit its funds, other than--
        (i) any assets held by the fund, trust or institution or any
        university or other educational institution or any hospital or
        other medical institution where such assets form part of the
        corpus of the fund, trust or institution or any university or other
        educational institution or any hospital or other medical
        institution as on the 1st day of June, 1973;
        (ia) any asset, being equity shares of a public company, held by
        any university or other educational institution or any hospital or
        other medical institution where such assets form part of the
        corpus of any university or other educational institution or any
        hospital or other medical institution as on the 1st day of June,
        1998;
         (ii) any assets (being debentures issued by, or on behalf of, any
        company or corporation), acquired by the fund, trust or
        institution or any university or other educational institution or
        any hospital or other medical institution before the 1st day of
        March, 1983;
        (iii) any accretion to the shares, forming part of the corpus
        mentioned in sub-clause (i) and sub-clause (ia), by way of
        bonus shares allotted to the fund, trust or institution or any
        university or other educational institution or any hospital or
        other medical institution ;
        (iv) voluntary contributions received and maintained in the form
        of jewellery, furniture or any other article as the Board may, by
        notification in the Official Gazette, specify,



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 52 of 71
        for any period during the previous year otherwise than in any
        one or more of the forms or modes specified in sub-section (5)
        of section 11:
        Provided also that the exemption under sub-clause (w) or sub-
        clause (via) shall not be denied in relation to any funds invested
        or deposited before the 1st day of June, 1998, otherwise than in
        any one or more of the forms or modes specified in sub-section
        (5) of section 11 if such funds do not continue to remain so
        invested or deposited after the 30th day of March, 2001:
        ..."


63.     The provisos to Section 10(23C) provided for several restrictions and

conditions including the extent of income that could be accumulated and

the form and manner in which its funds have to be invested, to avail the

exemption under Section 10(23C) of the Act. It is relevant to note that the

aforesaid conditions do not apply to universities and educational

institutions, which are covered under clause (iiiab) and (iiiad) of Section

10(23C) of the Act but only to those institutions, which seek exemption

under clause (vi) of Section 10(23C) of the Act.


64.     The Central Board of Direct Taxes, by a Circular No. 772, dated 23rd

December, 1998 explained the object of the amendments to Section 10(22)

and 10(23C) of the Act the relevant extracts of which are reproduced

below:-




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 53 of 71
      "8 Provisions relating to exempting the income of educational
      institutions, Universities, Hospitals and other medical institu-
      tions.
      8.1 Under the provisions of clauses (22) and ( 22A) of section 10 of
      the Income-tax Act, before amendment, educational and medical
      institutions enjoyed a blanket exemption from income-tax if they
      existed solely for educational purposes and not for the purposes of
      profit. In the absence of any monitoring mechanism for checking
      the genuineness of their activities, these provisions have been
      misused.
      8.2 The Act omits the aforesaid clause (22) and ( 22A) from the
      statute. The exemption would, however, continue in respect of any
      university or other educational institution, hospital or other
      medical institution which is wholly or substantially financed by
      Government, under the new sub-clause (iiiab) and (iiiac) inserted
      in section 10(23C) of the Income-tax Act by the Finance (No. 2)
      Act, 1998.
      8.3 Further, under sub-clauses (iiiad) and (iiiae ) in section
      10(23C), the income of other educational and medical institutions
      would also be exempt if their annual receipts are below a limit to
      be prescribed. The limit has since been prescribed at Rs. one
      crore vide Notification No. SO 897(E) dated 12th October, 1998.
      8.4 The income of the remaining educational and medical institu-
      tions would be exempt if they are approved by the prescribed
      authority on application made by them under sub-clauses (vi ) and
      (via) of section 10(23C). This approval would be subject to their
      adherence of conditions similar to those specified for sub-clauses
      (iv) and (v) of section 10(23C) regarding maintenance of accounts,
      expenditure and accumulation of funds and investments of funds in
      specified assets. The accumulated income is required to be
      invested in the modes specified in section 11(5). These institutions
      are given time up to 30-03-2001 to transfer their investments to
      specified securities. The Rules and Forms in this regard have since
      been notified vide Notification No. S.O. 897(E) dated 12th
      October, 1998. By this notification the Central Board of Direct
      Taxes have been designated as the prescribed authority for the



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 54 of 71
       purpose of approval under sub-clauses (vi ) and (via) of section
       10(23C).
       8.5 These amendments will take effect from 1st April, 1999 and
       will, accordingly, apply in relation to assessment year 1999-2000
       and subsequent years."


65.     It is clear from the above that the restriction in accumulating

surpluses generated by a university or an educational institution and

investing the funds in a manner provided under Section 11(5) of the Act

were introduced for the first time w.e.f. 1st April, 1999 and such conditions

were not applicable for claiming exemption under Section 10(22) of the

Act.


66.     In view of the above, the exemption available under Section 10(22)

and 10(23C) could not be denied to the Assessee on the ground that it had

invested its funds contrary to Section 11(5) of the Act, as the said condition

was introduced by the fifth proviso to Section 10(23C) only w.e.f. 1st April,

1999. More importantly, the Assessees who had made their investments

which did not conform to Section 11(5) of the Act, were by virtue of the

proviso to Section 10(23C) afforded time till 30th March, 2001 ­ a period of

three years ­ to transfer their investments to permissible securities as

specified under Section 11(5) of the Act.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 55 of 71
67.     It is not disputed that the investments made by the Assessee in

Consortium Finance Pvt. Ltd. were released and the funds of the Assessee

were invested in a manner as specified under the provisos to Section

10(23C) read with section 11(5) of the Act. It is not disputed that bulk of

the investment in BVR Plantations Ltd. amounting to `3,64,520/- was made

in the financial year 1995-96.               The petitioner had paid only two

installments of `34,550/- each in the year 1999-2000. The Assessee had

claimed that the payments made in the year 1999-2000 were only further

installments of the investment already made and could not be considered as

fresh investments. It is also not disputed that the funds invested by the

Assessee in BVR Plantations Ltd. were unrecoverable. Thus, in our view, it

cannot be disputed that the Assessee had realigned all its investments in the

manner as specified under provisos to Section 10(23C) read with Section

11(5) of the Act prior to 30th March, 2001 and had complied with the

provisos of Section 10(23C) of the Act.


68.     In our view, the contention of the Assessee that the investment in

BVR Plantations Ltd. related to the financial year 1995-96, is merited. In

any view of the matter, the two installments paid in the financial year 1998-

99 cannot - in the overall perspective - be considered as significant for




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 56 of 71
determining the issue whether the Assessee is entitled to be considered as

an institution existing solely for educational purposes and not for profit.


69.     The AO noted that the Assessee had purchased and sold certain

immovable properties and further had advanced funds to Col. Satsangi, the

Chairman of the Assessee and his family members. He also observed that

the Assessee had made certain investments for the purposes of earning

profits. In view of the aforesaid, he concluded that the Assessee did not

exist solely for the educational purposes, but was existing for the purposes

of making profit.

70.     Insofar as the sale and purchase of immovable properties is

concerned, the Assessee had explained that the immovable properties were

purchased for utilizing the same for educational purposes. A DDA Flat at

Sheikh Sarai, New Delhi was purchased for commencing an admission

centre, but was subsequently sold as it did not serve the purpose. Similarly,

the property at Kalu Sarai, Sarvpriya Vihar was purchased as the Assessee

intended to start an admission and information centre for convenience of

the parents of students as the schools managed by the Assessee were

situated at a considerable distance from the city. However, subsequently,

the said venue was not found suitable and the property was sold. It was



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                         Page 57 of 71
further explained that farm land at Malbaro, Gurgaon and at Nainwal were

purchased for starting schools. The Assessee also pointed out that an

application for grant of an NOC for starting an educational institute at

Malbaro, Gurgaon was filed and a school building was also constructed.

The property at Lado Sarai, Mehrauli was stated to be purchased for an

admission centre once it was decided that the admission centre at the DDA

Flat at Sheikh Sarai was not convenient.          In view of the aforesaid

explanations, it cannot be concluded that the aforesaid transactions were

not for furthering the objects of the Assessee.


71.     The next aspect that needs to be considered is whether the Assessee

could be denied the exemption under Section 10(22)/10(23C)(vi) of the Act

for the reason that the Assessee had advanced certain sums to Col. Satsangi

and some of his family members who were also involved in managing the

affairs of the Assessee and/or the schools run and managed by the

Assessee. The Assessee had explained that a sum of `3,50,000/- had been

paid to Ms Shakuntala Jaiman (the daughter of Col. Satsangi), who was the

Principal of CSKM Public School, Delhi. It was stated that she was highly

qualified - she was an M.ed and a Ph.D. (from IIT, Delhi) - and had been

advanced the aforesaid sum in the normal course as an employee. It is also




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                     Page 58 of 71
asserted that the said amount was received back along with interest of

`83,527/-. Further, a sum of `9,34,899/- was advanced to one Mr Y. Sinha,

who was the manager of CSKM School. This advance was reduced to

`4,11,674/- in the financial year 1998-99 and was fully squared off before

30th March, 2000. Similarly, Dr. Rohit Jaiman (the son-in-law of Col.

Satsangi) was the President of the Assessee society and was advanced a

sum of `3,09,000/- which was also repaid before the end of the financial

year 1998-99 along with interest of `28,227/-. It was contended that Dr.

Jaiman was also highly qualified; was working for the Assessee; and was

advanced the aforesaid sum in the normal course as was granted to other

employees.


72.     With regard to the advances made to Col. Satsangi, it was explained

that it was for the purposes of acquiring land at Malbaro, Gurgaon for the

purposes of the Assessee. It was further asserted that the land so purchased

had been registered and mutated in the name of the society.


73.     In the aforesaid facts, we find it difficult to accept that granting

advances to persons involved in managing the schools and/or the affairs of

the Assessee would disentitle the Assessee from the benefit of Section

10(22)/10(23C)(vi) of the Act.



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 59 of 71
74.     As indicated hereinbefore, the activities of the Assessee must be

viewed in the overall perspective of its nature and its principal object. It is

not disputed that the surpluses generated by the Assessee could not be

distributed to its members and there is also no allegation that the funds of

the Assessee had been so distributed. The fact that certain advances had

been made to Col. Satsangi and some of its family members who were also

involved in running the school cannot be construed as diluting the

predominant object of the Assessee. Seen from the overall perspective, it

could hardly be disputed that the predominant activity of the Assessee was

managing schools and the substratal purpose of its activities was education.

Thus, in our view, the conclusion that the Assessee did not exist solely for

educational purposes, but for the purposes of profit on the basis that it had

advanced the aforesaid sums to Col. Satsangi and/or his family members

who were involved in the affairs of the Assessee, is unwarranted.


75.     Thus, in our view, the Assessee would qualify for exemption under

Section 10(22)/10(23C) of the Act. Accordingly, the fourth question -

question D, is answered in the affirmative, against the Revenue and in

favour of the Assessee.







ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 60 of 71
76.     The next controversy that needs to be addressed relates to the

Assessee's challenge to the order dated 29th December, 2010 passed by

DGIT(E) rejecting the petitioner's application for approval under Section

10(23C) of the Act. A perusal of the order dated 29 th December, 2010

indicates that DGIT(E) rejected the petitioner's application principally for

the reasons that the Assessee had not filed an audit report in Form No.10BB

along with its application; the Assessee had allegedly made investments

which were in violation of Section 11(5) of the Act and in schemes, which

were speculative in nature; and that the Assessee had advanced funds to its

office bearers.


77.     According to the Assessee, none of the aforesaid reasons would

warrant denial of benefit under Section 10(23C)(vi) of the Act. In addition,

it was also urged that the scope of examination for the purposes of granting

or refusing approval under Section 10(23C)(vi) was limited to considering

whether the objects and the nature of an Assessee fell within the scope of

Section 10(23C)(vi) of the Act and whether the university or institution

actually existed. It was pointed out that the approval contemplated under

Section 10(23C)(vi) is to be granted at the beginning of the assessment year

and, therefore, compliance of provisos to Section 10(23C), which also




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 61 of 71
included the manner of utilization of funds by the Assessee was outside the

jurisdiction of DGIT(E). Although mis-utilization or misapplication of

funds would disentitle the Assessee for benefit of Section 10(23C)(vi), but

the same would have to be considered by the AO on a year to year basis.


78.     The Assessee further contended that prescribed form for making an

application for approval under Section 10(23C)(vi) (Form-56D) only

required that the same be accompanied by audited accounts and it was not

mandatory to enclose the audit report with the application; nonetheless, the

Assessee had furnished the audit report when called upon to do so and,

therefore, its application for approval under Section 10(23C)(vi) of the Act

could not be rejected only on the ground that it was not accompanied with

an audit report.


79.     Before considering other issues, it would be appropriate to consider

the Assessee's contention that the scope of inquiry for the purposes of

granting approval under section 10(23C) of the Act is limited. We find

considerable merit in the Assessee's contention that for purposes of

granting approval under Section 10(23C)(vi) of the Act, the prescribed

authority, i.e. DGIT(E), would not be concerned with the compliance of the

provisos to Section 10(23C)(vi) of the Act, which prescribe the manner and



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 62 of 71
form in which the funds of the Assessee can be invested as well as the

manner and extent to which application of income is necessary for availing

the benefit of section 10(23C)(vi) of the Act. DGIT(E)'s primary function

would be to satisfy himself that the threshold conditions for grant of

exemption under section 10(23C) exist; that is, the educational institution

exists solely for the purposes of education and not for profit. In this regard,

the DGIT(E) has to examine the Charter of the Society/Trust including its

objects as also the bye-laws, rules and regulations for conduct of affairs of

the Society/Trust. The DGIT(E) also has to satisfy himself that an

educational institution does, in fact, exist. The provisos to Section 10(23C)

contain further requirements that need to be complied with - such as

applying minimum of 75% of income in the relevant year and investing

accumulated funds only in permissible securities - for availing the benefit

under section 10(23C)(vi). However, the same can be examined by the AO

only at the end of the relevant period and cannot be the subject matter of

enquiry at the threshold while considering an Assessee's application for the

requisite approval.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 63 of 71
80.     In American Hotel & Lodging Association Institute (supra), the

Supreme Court had accepted the aforesaid view. The relevant extracts from

the said judgment are quoted below:-


        "....In this connection, learned counsel placed reliance on the
        second proviso and submits that the said proviso clarifies that
        at the stage of approval what is required to be seen by CBDT
        is the nature and genuineness of the activities of the petitioner-
        Institution under consideration. According to learned counsel,
        the provisos to the said section sets out conditions which must
        be adhered, to by the Institution, and compliance therewith
        can never be tested at the stage of approval, since they require
        consideration of acts and events which will take place in the
        future. In this connection, learned counsel urged that
        application of income is the requirement mentioned in the third
        proviso to Section 10(23C)(vi) and that requirement can only
        be tested after the end of the previous year when "income is
        ascertained and thereafter applied. Similarly, according to
        learned counsel, the requirement of accumulation, if any, in
        that proviso can also only be examined at the end of any
        previous year after "income", if any, is determined and
        thereafter accumulated. One more example is given by the
        learned counsel. The requirement of investment/deposit of
        funds, referred to in the third proviso, can only be tested at the
        stage of investment which can only take place after profit/
        surplus is established. Under the 13th proviso CBDT is
        empowered to withdraw the approval earlier granted. That
        proviso, according to learned counsel, also proceeds on the
        basis that the withdrawal will be for failure to comply with the
        terms of application or investment of funds or genuineness of
        activities and, therefore, implicit in that proviso is an alleged
        violation of application of surplus and/or investment which
        may result in a subsequent withdrawal. In short, according to
        learned counsel, at the stage of grant of approval the provisos
        dealing with items required to be monitored, as mentioned in
        the third proviso, are not to be considered by CBDT and in



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 64 of 71
        fact it would be impossible to ascertain compliance at the stage
        of approval...
        *****                                *****          *****
        Having analysed the provisos to Section 10(23C)(vi) one finds
        that there is a difference between stipulation of conditions and
        compliance thereof. The threshold conditions are actual
        existence of an educational institution and approval of the
        prescribed authority for which every petitioner has to move an
        application in the standardized form in terms of the first
        proviso. It is only if the pre-requisite condition of actual
        existence of the educational institution is fulfilled that the
        question of compliance of requirements in the provisos would
        arise. We find merit in the contention advanced on behalf of
        the petitioner that the third proviso contains monitoring
        conditions/requirements like application, accumulation,
        deployment of income in specified assets whose compliance
        depends on events that have not taken place on the date of the
        application for initial approval.
        To make the section with the proviso workable we are of the
        view that the monitoring conditions in the third proviso like
        application/utilization of income, pattern of investments to be
        made etc. could be stipulated as conditions by the PA, subject
        to which approval could be granted. For example, in marginal
        cases like the present case, where petitioner-Institute was
        given exemption up to financial year ending 31.3.1998
        (assessment year 1998-99) and where an application is made
        on 7.4.1999, within seven days of the. new dispensation
        coming into force, the PA can grant approval subject to such
        terms and conditions as it deems" fit provided they are not in
        conflict with the provisions of the 1961 Act (including the
        abovementioned monitoring conditions). While imposing
        stipulations subject to which approval is granted, the PA may
        insist on certain percentage of accounting Income to be
        utilized/ applied for imparting education in India. While
        making such stipulations, the PA has to examine the activities
        in India which the petitioner has undertaken in its Constitution,



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 65 of 71
        MoU's and Agreement with Government of India/ National
        Council. ..."


81.     Having held that the prescribed authority is not required to examine

whether the Assessee has complied with the provisos to section 10(23C) of

the Act while granting approval under section 10(23C)(vi) of the Act, we

must also add that the prescribed authority would also necessarily have to

examine the manner in which the affairs of the university or an educational

institution have been conducted in the past for the purposes of considering

whether the Assessee qualifies the threshold requirement of Section

10(23C)(vi). If it is found that the Assessee has been carrying on its

activities for the purposes of profit, contrary to its objects, the prescribed

authority would be justified in rejecting the application for approval under

Section 10(23C)(vi) of the Act. In such circumstances, it would not be open

for an Assessee to claim that the approval be granted only because the

objects prohibit pursuing any purpose other than as specified under Section

10(23C) of the Act. It would be well within the powers of the prescribed

authority to take into account the actual nature of the functions and

activities carried on by an Assessee.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                       Page 66 of 71
82.     However, in the facts of the present case, we are unable to accept that

the Assessee was not pursuing a "charitable purpose" within the meaning of

section 2(15) of the Act.


83.     The next issue to be considered is whether the approval could be

denied to the Assessee on account its failure to file the audit report along

with its application in Form-56D.


84.     Rule 2CA (2) of the Income Tax Rules, 1962 specifically mandates

that an application for approval under Section 10(23C)(vi) of the Act would

be made in Form-56D. The said form clearly requires the Assessee to

"enclose copies of audited accounts and balance sheet for last three years

along with a note on the examination of accounts and on the activities as

reflected in the accounts and in the annual reports with special reference to

the appropriation of income towards objects of the university or other

educational institution or hospital or other medical institution .....". In our

view, the Assessee's contention that an audit report is not required to

accompany the audited accounts is meritless. The auditor's report contains

the auditor's view on the accounts audited by the auditor and without such

report, the accounts would only indicate the accounts as furnished by the

Assessee to its auditor. Therefore, the expression "audited accounts" would



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                        Page 67 of 71
necessarily have to include the auditor's report. Reading the expression

"audited accounts" as suggested by the Assessee would def eat the purpose

for requiring submission of the audited accounts. Thus, in our view, it was

necessary for the Assessee to furnish a copy of the audit report along with

its application in Form-56D. However, we are unable to accept that non

furnishing of audit report along with application is an incurable defect. It

would be erroneous to ignore the report if the same was supplied, albeit

belatedly, and was available with the prescribed authority at the time of

considering the grant of approval as sought for by the Assessee.


85.     There are several provisions under the Act, including under Chapter

VI-A of the Act, that require the Assessee to file audit reports/certificates

for claiming benefit under those provisions. In that context, the Courts

have held that the exemption/allowance claimed by the Assessee could not

be denied if the audit report/certificates is not filed along with returns but is

provided subsequently. At this stage reference may be made to the decision

of the Full Bench of Punjab & Haryana High Court in Commissioner

Income Tax v. Punjab Financial Corporation: (2002) 254 ITR 6 (P&H).

In that case the Court considered the question "Whether section 32AB(5) of

the Income-tax Act, 1961, is mandatory or directory and delayed filing of




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 68 of 71
audit report would disentitle an assessee from claiming the benefit of

deduction under section 32AB(1) ?" and held as under:


        "In view of the above discussion, we hold that section
        32AB(5) is not mandatory and the Assessing Officer has the
        discretion to entertain the audit report even though the same
        has not been filed with the return and give benefit of the
        deduction to the assessee in terms of section 32AB(1)."


86.     Mention may also be made of Circular No. 689 of 1994 issued by the

Central Board of Direct Taxes in the context of section 143(1)(a) of the

Act. The said circular, inter alia, provides that an adjustment under section

143(1)(a) could be made if there was an omission to furnish any

information, which was required under a specific provision of the Act to be

furnished along with the return, to substantiate any claim. The illustration

provided in the circular is relevant and reads as under:


        "If the audit report specified under section 80HHC(4), which
        is required to be filed along with the return of income, is not so
        filed, the deduction claimed under that section can be
        disallowed as a prima facie adjustment. Some more examples
        in this regard are the non-filing of audit reports or other
        evidence along with the return of income as required under
        section 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2),
        54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4),
        80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the
        like. But if evidence is subsequently furnished, rectification
        under section 154 should be carried out to the extent permitted



ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                          Page 69 of 71
        by Board's Circular No. 669, dated 25-10-1993. No prima
        facie disallowance shall however be made if any evidence,
        required to be filed along with the return of income only in
        pursuance of the non-statutory guidance notes for filling in the
        return of income, is not so filed."


87.     It is apparent from the above that furnishing of report/certificate is

necessary, if required under any provision of the Act; however, omission to

furnish the same would not disentitle the Assessee to the benefit of the

statutory      provision,        if    the   Assessee   subsequently   furnishes      the

report/certificate.


88.     Taking a cue from the above, it is apparent that furnishing of audit

report may be necessary for seeking approval under section 10(23C) of the

Act; however, failure to file the same along with application would not be

fatal to the application. And, in the event an Assessee furnishes the

report/certificate, the approval as sought by the Assessee cannot be denied.

Thus, in our view, DGIT(E) was not justified in denying the Assessee

approval under Section 10(23C)(vi) on the ground that the audit report had

not been furnished along with the application but had been furnished by the

Assessee subsequently, prior to the rejection of the application.




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                                Page 70 of 71
89.     Insofar as other reasons for rejection of the Assessee's application

are concerned, in our considered view, the same are not sustainable for the

reasons as discussed hereinbefore. Accordingly, the writ petition (i.e.

W.P.(C) 3797/2011) preferred by the Assessee is allowed. The order dated

29th December, 2010 passed by DGIT(E) is set aside and the DGIT(E) is

directed to consider the Assessee's application afresh in the light of our

observations.


90.      The appeal preferred by the Revenue being ITA 705/2008 is

dismissed. Consequently, the Revenue's appeal being ITA 924/2009,

directed against the Tribunal's order dated 6th June, 2008 setting aside the

penalty imposed on the Assessee, is also dismissed. However, in the

circumstances, the parties are left to bear their own costs.




                                                     VIBHU BAKHRU, J



                                                     S. MURALIDHAR, J
OCTOBER 07, 2015
RK/MK




ITA 705/2008, 924/2009 & W.P.(C) 3797/2011                      Page 71 of 71

 
 
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