ANAND EDUCATION SOCIETY V. DIRECTOR GENERAL OF INCOME TAX (EXEMPTIONS),DELHI

W.P.(C)/5467/2010

AI Insights

The case involves the Anand Education Society, which filed a writ petition against the Director General of Income Tax (Exemptions) challenging the rejection of their application for registration under Section 10(23C)(vi) of the Income Tax Act, 1961. The rejection was based on alleged discrepancies in the society's financial records, which the respondent claimed indicated non-educational use of funds. The petitioner argued that the respondent did not properly consider the Supreme Court's guidelines on the matter. The High Court found that the respondent had not adequately followed these guidelines and thus quashed the initial rejection, ordering a fresh decision on the application.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 752188 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 02-02-2012
• Assessment Year: misc
• Other Referred Cases: American Hotel and Lodging Association Education Institute Vs. Central Board of Direct Taxes and Ors. (2008) 301 ITR 86 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Department Lawyers: ABHISHEK MARATHA; ANSHUL SHARMA
• Assessee Lawyers: KANAN KAPUR
• Keywords: Educational purposes; Registration under section 10(23C)(vi); Rejection of application; Bogus and exaggerated expenses; Withdrawal of exemption under section 12A
• Section: 143(3); 12A; 10(23C)(vi)

Judgement Text

"* IN THE HIGH COURT OF DELHI AT NEW DELHI + W.P.(C) 5467/2010 % Date of Decision : 2\"^ February, 2012. 7 y ANAND EDUCATION SOCIETY Petitioner Through: Mr.Kanan Kapur, Advocate versus,, V DIRECTOR GENERAL OF INCOME TAX (EXEMPTIONS),DELHI Respondent Through: Mr.Abhishek Maratha Sr.Standing Counsel with Mr.Anshul Sharma, Advocate. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V.EASWAR SANJIV KHANNAJ: (ORAL) 1. Anand Education Society has; filed the present writ petition impugning the order dated 29.04.2010 passed by the Director General of Income Tax (Exemption) respondent No.l rejecting the application filed by the petitioner in FormNo.56D for grantof registration u/s 10(23C) (vi) ofthe Income Tax Act, 1961 (Act for short) for the assessment year 2008- 09 onwards. 2. The petitioner society was set up vide certificate of registration dated 4.11.1982. It has been managing and running a school in Delhi WP(C) No.5467/2010 Page1 of 11 Digitally Signed By:AMULYA Signature Not Verified D since 1988. The petitioner was registered u/s 12A of the Act on 04.04.2005. 3. The impugned order dated 29.04.2010 refers to the balance sheet/profit & loss account of the petitioner society for the assessment year 2006-07 to 2009-10. The respondent No.l in the impugned order has pointed out discrepancies with regard to sale of buses, vehicles maintenance, maintenance of furniture and sale of fumiture/fixed assets. It appears that these discrepancies have been culled out on the basis ofthe records/accounts which were produced by the petitioner during the course of proceedings u/s 10(23C) (vi) of the Act. The final analysis and reasoning ofthe respondent No.l in the impugned order reads \"I have carefully considered the submissions and other clarifications offered by the applicant. The discrepancies, bothprocedural andfactual, as discussed above go to show that the applicant has debited bogus and exaggerated expenses. Accounts have not been maintained in a proper and transparent manner which is becoming ofa pubic charitable institution. The huge diversion of funds on the ground of repairs and maintenance and the curious case of buying back the same old vehicles sold at an earlier date lead to situation where funds are being applied for non-educational purposes. The materials on record clearly lead to a reasonable conclusion that the funds collected from the students and others have not been applied solely for educations purpose. Under the circumstances, its application u/s 10(23C) (vi) for A.Y. 2009-10 onwards is rejected. \" WP(C) No.5467/2010 Page 2 of11 4. Learned counsel for the petitioner has drawn our attention to the jurisdiction, scope and ambit ofthe power exercised by respondent No.l, while adjudicating an application u/s 10(23C) (vi) of the Act. The Supreme Court of India in American Hotel and Lodging Association Education Institute Vs. Central Board ofDirect Taxes and Ors. (2008) 301 ITR 86 (SC) had examined the provisos to the aforesaid section and the scope and ambit of the jurisdiction and power exercised by the prescribed authority to whom an application for registration is made. After referring to provisions and the reasons for inserting Section 10(23C)(vi) it was held:- \"32. We shall now consider the effect of insertion ofprovisos toSection 10(23C)(vi) vide Finance Act, 1998. Section 10(23C)(vi) is analogous to Section 10(22). To that extent, the judgments ofthis Court as applicable to Section 10(22) would equally apply to Section 10(23C)(vi). The problem arises with the insertion of the provisos to Section 10(23C)(vi). With the insertion of the provisos to Section 10(23C)(vi) the applicant who seeks approval has not only to show that it is an institution existing solely for educational purposes [which was also the requirement under Section 10 (22)] but it has now to obtain initial approval from the PA, in terms of Section 10(23C)(vi) by making an application in the standardizedform as mentioned in thefirst proviso to that section. WP(C) No.5467/2010 ^ That condition of obtaining approvalfrom the PA came to be inserted because Section 10(22) was abused by some educational institutions/universities. This proviso was inserted along with otherprovisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the PA is required to vet the application. This vettingprocess is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the PA. While considering the approval application in the second proviso, the PA is empowered before giving approval to call for such documents including annual accounts or information from the applicant to check the genuineness of the activities of the applicant institution. Earlier that power was not there with the PA. Under the thirdproviso, the PA has to ascertain while judging the genuineness of the activities of the applicant institution as to whether the applicant applies its income wholly and exclusively to the objects for which it is constituted/established. Under the twelfth proviso, the PA is required to examine cases where an applicant does not apply its income during the year of receipt and accumulates it but makes payment therefrom to any trust or institution registered under section 12AA or to anyfund or trust or institution or university or other educational institution and to that extent theproviso states that suchpayment shall not be P(C) No.5467/2010 Page 4 of 11 -y treated as application of income to the objects for which such trust or fund or educational institution is established. The idea underlying the twelfth proviso is toprovideguidance to the PA as to the meaning ofthe words \"application ofincome to the objectsfor which the institution is established\". Therefore, the twelfthproviso is the matter of detail. The most relevant proviso for deciding this appeal is the thirteenth proviso. Under that proviso, the circumstances are given under which the PA is empowered to withdraw the approval earlier granted. Under thatproviso, if the PA is satisfied that the trust, fund, university or other educational institution etc. has not applied its income in accordance with the third proviso or if it finds that such institution, trust or fund etc. has not invested/deposited its funds in accordance with the thirdproviso or that the activities of such fund or institution or trust etc. are not genuine or that its activities are not being carried out in accordance with the conditions subject to which approval is granted then the PA is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein. 33. 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 WP(C) No.5467/2010 Page 5 of 11 /3 / institution and approval of the prescribed authority for which every applicant has to move an application in the standardizedform in terms ofthefirst proviso. It is only ifthepre-requisite condition ofactual 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 appellant 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 theapplicationfor initial approval. 34. To make the section with the proviso workablewe are ofthe view that the Monitoring Conditions in the third proviso like application/utilization of income, pattern of investments to be made etc. could be stipulated y as conditions by the PA subject to ' which approval could be granted. For example, in ^ marginal cases like the present case, where appellant-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 WP(C) No.5467/2010 ' Page 6of 11 > -f (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 applicant has undertaken in its Constitution, MoUs. and Agreement with Government of India/National Council. In this case, broadly the activities undertaken by the appellant are - conducting classical education by providing course materials, designing courses, conducting exams, granting diplomas, supervising exams, all under the terms ofan Agreement entered into with Institutions of the Government of India. Similarly, the PA may grant approvals on such terms and conditions as it deems fit in case where the Institute applies for initial approval for the first time. The PA must give an opportunity to the applicant-institute to comply with the monitoring conditions which have been stipulatedfor thefirst time by the thirdproviso. Therefore, cases where earlier the applicant has obtained exemption(s), as in this case, need not be re-opened on the ground that the third proviso has not been complied with. However, after grant ofapproval, if it is brought to the notice of the PA that conditions on which approval was given are breached or that circumstances mentioned in the thirteenth proviso exists then the Pjj. can withdraw the WP{C) No.5467/2010 Page7of 11 approval earlier given by following the procedure mentioned in that proviso. The view wehave taken, namely, that the PA can stipulate conditions subject to which approval may be grantedfinds supportfrom sub-clause (ii)(B) in the thirteenth proviso.\" 35 36. 37. 38. 39. For thesakeofclarity^ we may reiterate that items such as application of income or accumulation of income or investment in specified assets indicated in clauses (a) and (b) in the third proviso are a part of compliance/monitoring conditions. As stated, however, there is a difference between application/utilization of'income and outward remittance of income outofIndia. As discussed above, with the insertion of the provisos in Section 10(23C)(vi) ofthe 1961Act, it is open to the PA to stipulate, while granting approval, that the approval is being given subject to utilization/application of: certain percentage of income, in the accounting sense, towards impartation ofeducation in India. Such exercise would be based on estimation. There is a difference between ^accounting income' and WP(C) No.5467/2010 Page 8 of 11 b ) ^taxable income'. At the stage ofSection 10, we are concerned with the accounting income. Therefore, it is open to the PA, if it deemsfit, to stipulate that certain percentage of accounting income would be utilized for impartation of education in India. Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes and not for profit.\" 5. We have already quoted above the operative portion of the impugned order passed by the respondent No.l. We have also referred briefly to reasons given by the respondent No.l for rejecting the application for registration under Section 10(23C)(vi) of the Act. It is clear that the respondent No.l has not taken consideration ofthe ratio and WP(C) No.5467/2010 Page 9 of 11 4 V observations of the Supreme Court in American Hotel and Lodging Association Education Institute (supra). In terms ofthe said decision, the respondent No.l astheprescribed authority is required to examine various aspects and thereafter issue directions/stipulations and impose conditions. On violation of the said conditions and stipulations, it is open to the prescribed authority to cancel the registration. The distinction between assessment proceedings and proceeding under Section 10(23C)(vi) has beeh explained and elucidated by the Supreme Court. With regard to the past conduct, and allegations, learned counsel for the petitioner has submitted that regular assessment proceedings were conducted u/s 143(3) of the Act for the assessment year 2008-09 and vide order dated 09.09.2010, return filed by the assessee declaring NIL annual income was accepted. No addition has been made. It is noticed that this order was passed five months after the impugned order of respondent No.l dated 29.04.2010. Learned counsel for the petitionerhas also submitted that the allegations are not correct and the respondent No.l has not taken several aspects and contentions into consideration. We would not like to comment on the said aspect as an order of remit is being passed to ask respondent No.l to decide the application for registration u/s 10(23C) (vi) of the Act afi-esh. The respondent No.l while deciding the application will keep in mind the decision of the Supreme Court in American Hotel andLodging Association Education Institute (supra). It is also open tothe respondent No.l or the authorities to take appropriate action in accordance with law in case they find or observe discrepancies in the WP(C) No.5467/2010 Page 10 of 11 4 1 accounts for the assessment years 20|b6-07 to 2009-10. We have not i expressed any opinion on the merit ofthe allegations oron whether or not any grantfor exemption is appropriate or required. !' 6. Accordingly, a writ of certiorarijis issued quashing the order dated 29.04.2010 with a direction to respondentNo.l to pass an order afresh on , 1 the application in Form No.56D filedjon 30.04.2009 for registration u/s 10(23C) (vi) ofthe Act for assessment year 2008-09. 1*^ In view of the aforesaid ordter, the interim order passed on 28.11.2011 staying the reassessment ijroceedings u/s 148 of the Act for i the assessment year 2009-10, is vacated and comes to an end. It will be open to the Assessing Officer to proceed in accordance with law. It will I also be open to the petitioner to challenge thereassessment proceedings if deemed appropriate in accordance witlj law. It will be also open to the tax authorities to proceed in accordance with law on the notice dated 24.04.2011 for withdrawal of exemptionu/s 12Aofthe Act. 8. The writ petition is disposeid of FEBRUARY 02, 2012 mr/Bisht WP(C) No.5467/2010 'No costs. SANJIVKHANNA, J R.V.EASWAR,J Page 11 of 11 "