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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