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Judgment
Tarun Agarwala, J.—The petitioner is a society duly registered under the Societies Registration Act since 1982 and is running an educational institution known as Simpkins School at Agra. The petitioner has been enjoying exemption under s. 10(22) of the IT Act, 1961 (hereinafter referred to as the Act) upto the asst. yr. 1998-99. By Finance Act No. 2 of 1998, w.e.f. 1st April, 1999 s. (22) of the Act was omitted and an analogous provision s. 10(23C)(vi) was brought into existence with effect from the same date. Under r. 2BC of the IT Rules if the gross receipts are below Rs. 1 crore, approval is not required but if the gross receipts exceeds Rs. 1 crore, approval is required to be taken under s. 10(23C)(vi). The petitioner contends that even after coming into existence the provision of s. 10(23C)(vi) of the Act, the gross receipts for the asst. yr. 1998-99 till asst. yr. 2002-03, being less than Rs. 1 crore, the petitioner did not apply for approval. Since its gross receipts exceeded Rs. 1 crore in the asst. yr. 2003-04, the petitioner applied for approval of exemption before the CIT, Agra by moving an application in the prescribed Form 56D under r. 2CA on 22nd March, 2003 praying for exemption under s. 10(23C)(vi) of the Act for the asst. yrs. 2003-04 and 2004-05. Another application was filed on 31st May, 2006 before the Director General of IT (Inv.), Lucknow for the asst. yrs. 2004-05, 2005-06, 2006-07. This application was filed before the Director General of IT (Inv.), Lucknow on the ground that the jurisdiction of the petitioner was centralized in the year 2004 in the wake of search and seizure action under s. 132(1) of the Act. Another application before the same authority was filed on 27th March, 2007 for the asst. yr. 2007-08. Another application was filed on 31st March, 2009 before the Chief CIT for the asst. yrs. 2007-08, 2008-09 and 2009-10, which was moved through the CIT, Central, Kanpur. All the aforesaid applications for approval of exemption for the asst. yrs. 2003-04 upto 2009-10 remained pending.
For the asst. yr. 2010-11, the petitioner filed an application dt. 24th March, 2010 before the Director General of IT (Inv.), Lucknow for exemption under s. 10(23C)(vi) of the Act. This application was rejected by the impugned order dt. 31st March, 2011.
The Director General of IT in its order held that the application for exemption for the asst. yr. 2003-04 upto 2008-09 was not before him and, therefore, no orders on such application could be passed. On merits, the authority held after perusal of the records found that there was a trend of rising expenditure from the asst. yrs. 2003-04 to 2010-11 and that income was being derived from earning from plying of buses and, therefore, the society was not existing solely for educational purpose. The authority further found that the society was also earning for the purpose of profit for which certain commercial activities were being conducted. These findings were based upon perusal of the assessment orders passed by the AO for previous assessment years. The authority further held that the appellate orders of the CIT(A) granting exemption for the asst. yrs. 1999-2000 to 2002-03 were not applicable to the facts and circumstances of the case.
The petitioner, being aggrieved, has filed the present writ petition praying not only for the quashing of the order passed by the Director General of IT (Inv.), Lucknow but has also prayed for a writ of mandamus commanding the Direction General of IT (Inv.) to grant approval to the petitioner under s. 10(23C)(vi) of the Act and further prayed that a writ of mandamus should be issued holding that the applications dt. 22nd March, 2003, 31st May, 2006, 27th March, 2007, 31st March, 2009 under s. 10(23C)(vi) of the Act for the asst. yrs. 2003-04 to 2009-10 are deemed to have been sanctioned/approved under the 9th proviso to s. 10(23C)(vi) of the Act, which has been inserted by the Tax Laws (Amendment) Act, 2006 w.e.f. 1st April, 2006.
The respondents in the counter-affidavit have contended that the application was rightly rejected and other applications for the asst. yrs. 2003-04 to 2009-10 was filed before the authorities other than the prescribed authority and, consequently, no orders were passed on these applications.
Having heard Sri V.B. Upadhya, the learned senior counsel assisted by Sri R.P. Shukla and Sri Dinesh Tiwari, the learned counsel for the petitioner and Sri Sambhoo Chopra, the learned counsel for the Department, we find that the impugned order has been passed on irrelevant consideration without considering the case law on the subject.
In order to appreciate the submission of the learned counsel for the parties and the findings given in the impugned order, it would be relevant to peruse the relevant provision of s. 10(23C)(vi) of the Act, which is extracted hereunder:
"Sec. 10. In computing the total income of a previous year of any person, any income falling within any of the following causes shall not be included--
..............
(23C): Any income received any person on behalf of--
(i) to (v)...........
(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-cl. (iiiab) or sub-cl. (iiiad) and which may be approved by the prescribed authority.
The first, second, third, thirteenth and fourteenth proviso to s. 10(23C) reads as under:
"First proviso: 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-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (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-cl. (iv) or sub-cl. (v) or sub-cl. (via):
Second proviso: Provided further that the prescribed authority, before approving any fund or trust or institution or any hospital or other medial institution, under sub-cl. (iv) or sub-cl. (vi) or sub-cl. (via), may call for such documents (including audited annual accounts) or information from the fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the hospital or other medical institution, as the case may be, and the prescribed authority may also make such inquiries as it deems necessary in this behalf:
Third proviso: Provided also 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-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (via).
Thirteenth proviso: Provided also that where the fund or institution referred to in sub-cl. (iv) or trust or institution referred to in sub-cl. (v) is notified by the Central Government or is approved by the prescribed authority, as the case may be or any university or other educational institution referred to in sub-cl. (vi) or any hospital or other medical institution referred to in sub-cl. (via), is approved by the prescribed authority and subsequently that Government or the prescribed authority is satisfied that--
(i) such fund or institution or trust or any university or other educational institution or any hospital or other medical institution has not--
(A) applied its income in accordance with the provisions contained in cl. (a) of the third proviso; or
(B) invested or deposited its funds in accordance with the provisions contained in cl. (b) of the third proviso; or
(ii) the activities of such fund or institution or trust or any university or other educational institution or any hospital or other medical institution--
(A) are not genuine; or
(B) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved,
it may at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned fund or institution or trust or any university or other educational institution or any hospital or other medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such fund or institution or trust or any university or other educational institution or any hospital or other medical institution and to the AO:
Fourteenth proviso: Provided also that in case the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in the first proviso makes an application on or after the 1st June, 2006 for the purposes of grant of exemption or continuance thereof, such application shall be (made on or before the 30th September of the relevant assessment year from which the exemption is sought."
The Supreme Court in American Hotel and Lodging Association Educational Institute Vs. Central Board of Direct Taxes and Others, analysed the aforesaid provisions and, while setting aside the order and remitting the matter back for afresh consideration clarified that if the petitioner fulfils the threshold conditions of the actual existence of an educational institution under s. 10(23C)(vi) of the Act, the authority could not reject the application.
The Supreme Court found that the second proviso lays down the powers and duties of the prescribed authority for vetting an application for approval and that the prescribed authority was empowered to call for the documents including annual accounts or information to check the genuineness of the activities of the institution. Under the third proviso, the prescribed authority, while judging the genuineness of the activities of the applicant was required to ascertain whether the applicant applies its income wholly and exclusively for the objects for which it was constituted or established. The Supreme Court held that there was a difference between stipulation of the conditions and compliance therewith. The threshold conditions are the actual existence of an educational institution and approval of the prescribed authority. It is only if the preconditions of the actual existence of an educational institution is fulfilled that the question of compliance with the stipulations set out in the provisos would arise. The Supreme Court held:
"We shall now consider the effect of insertion of provisos to s. 10(23C)(vi) vide Finance Act, 1998. Sec. 10(23C)(vi) is analogous to s. 10(22). To that extent, the judgments of this Court as applicable to s. 10(22) would equally apply to s. 10(23C)(vi). The problem arises with the insertion of the provisos to s. 10(23C)(vi). With the insertion of the provisos to s. 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 s. 10(22)] but it has now to obtain initial approval from the prescribed authority, in terms of s. 10(23C)(vi) by making an application in the standardized form as mentioned in the first proviso to that section. That condition of obtaining approval from the prescribed authority came to be inserted because s. 10(22) was abused by some educational institutions/universities. This proviso was inserted along with other provisos because there was no monitoring mechanism to check abuse of exemption provision. With the insertion of the first proviso, the prescribed authority is required to vet the application. This vetting process is stipulated by the second proviso. It is important to note that the second proviso also indicates the powers and duties of the prescribed authority. While considering the approval application in the second proviso, the prescribed authority 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 prescribed authority. Under the third proviso, the prescribed authority 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 prescribed authority 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 s. 12AA or to any fund or trust or institution or university or other educational institution and to that extent the proviso states that such payment shall not be 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 to provide guidance to the prescribed authority as to the meaning of the words ''application of income to the objects for which the institution is established''. Therefore, the twelfth proviso 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 prescribed authority is empowered to withdraw the approval earlier granted. Under that proviso, if the prescribed authority 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 third proviso 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 prescribed authority is empowered to withdraw the approval earlier granted after complying with the procedure mentioned therein."
In the instant case, it is not disputed that the petitioner-society is running an educational institution. Merely because there are other objects of the society does not mean that the educational institution is not existing solely for educational purpose. The emphasis of the word "solely" is in relation to the educational institution, which is running not for the purpose of making profit and is not in relation to the objects of the society.
In American Hotel & Lodging Association (supra), (sic-it was held) the authority is required to consider the nature and genuineness of the activities. The third proviso only sets out the conditions, which must be adhered to by the institution and compliance therewith is not to be tested at the stage of approval since they require considerations of facts and findings, which takes place in future. The requirement mentioned in the third proviso can only be tested after the end of the previous year when income is ascertained and thereafter applied. Further, the Supreme Court held that the authority is only required to examine that the petitioner''s institution comes within the phrase "exists solely for the educational purpose and not for profit". Other conditions like application of income is not to be examined at this stage. The authority is only required to examine the nature, activities and genuineness of the institution. The mere existence that there is some profit does not disqualify the petitioner if the sole purpose of existence was not profit-making but educational activities. The authority has to find out the predominant object of the activity and see whether the institution exists solely for education and not to earn profit. Merely because some profit arises from its activity will not mean that the predominant object of the activity is to earn profit and that it is not an educational activity. In order to ascertain whether the institute is carried on with the object of making profit or not it is the duty of the prescribed authority to ascertain whether balance of income has been applied wholly and exclusively to the object for which the institution is not established and in deciding the character of the recipient it was not necessary to look at the profits of each year but to consider the nature and the activities undertaken.
The Supreme Court held that the threshold conditions are actual existence of an educational institution and approval of the prescribed authority for which every applicant has to move an application in the standardised form in terms of the first proviso. If the prerequisite condition of actual existence of the educational institution is fulfilled then the question of compliance with the requirements as spelt out in the other provisos would arise. At this stage, such considerations are not required.
We find from the impugned order that the Director General of IT (Inv.) had misdirected itself in not considering the stipulated conditions mentioned under s. 10(23C)(vi) of the Act and had digressed from the main issue in considering irrelevant consideration. We find that the prescribed authority has considered the expenditures depicted by the petitioner in the previous assessment years. We find that the prescribed authority has considered the findings of the AO, which findings have been set aside in appeal by the appellate authority. Consequently, on this short ground the impugned order cannot be sustained.
The contention of the learned senior counsel appearing for the petitioner that previous applications for exemption for the asst. yrs. 2003-04 to 2009-10 are deemed to be approved and, consequently, a writ of mandamus should be issued cannot be accepted.
In this regard, we find that prior to 2006, there was no time-limit fixed for passing an order granting or refusing to grant approval for exemption. The ninth proviso was inserted by Taxation Laws (Amendment) Act, 2006, which provided that the application filed under the first proviso shall be approved or an order rejecting the application shall be passed within the period of 12 months from the end of the month in which such application was received.
It was contended by the learned senior counsel that since the application was not rejected within a period of 12 months from the end of the month in which such application was received, it would be deemed to have been granted. In support of his submission, the learned senior counsel has placed reliance upon a decision of this Court in Society for the Promotion of Education Adventure Sport and Conservation of Environment Vs. Commissioner of Income Tax, Central and Others, , wherein the Division Bench held that the application for registration under s. 12AA(2) of the Act not being considered within the stipulated period would mean that there was deemed grant of registration.
On the other hand, the learned counsel for the Department submitted that another Division Bench of this Court in CIT v. Muzaffar Nagar Development Authority in IT Appeal No. 348 of 2008 has disagreed with the decision in Society for Promotion of Education Adventure Sport (supra) and has referred the matter to a Larger Bench.
We also find that there is a bone of contention between the parties with regard to the applications filed by the petitioner for exemption for the asst. yrs. 2003-04 to 2009-10. According to the petitioner, the application has been filed before the appropriate authority to be sent through the proper channel as provided under the Act and the Rules.
On the other hand, the prescribed authority in its impugned order has held that since the applications were not before him, no orders were passed on the said applications. We find from the affidavits that a specific assertion was made by the petitioner that the applications were filed before the Chief CIT, Agra and CIT, Central, Kanpur, who was authorized to receive the applications during the relevant year. We also find that the said authorities had processed the applications inviting certain queries from the petitioner but for reasons best known, it was not forwarded by these authorities to the prescribed authority, namely, Director General of IT (Inv.).
It may he pointed out that the application for approval under s. 10(23C)(vi) of the Act has to be filed as per the procedure prescribed under r. 2CA of the IT Rules in the prescribed format, namely, Form 56D.
The instructions given under the heading "Notes" in Form 56D provides as under:
"Notes:
The application form should be sent to the Chief CIT or Director General whom the CBDT may authorise to act as prescribed authority for the purposes of sub-cl. (vi) or sub-cl. (via) of cl. (23C) of s. 10 through the CIT or Director of IT (Exemptions) having jurisdiction over the university or other educational institution or hospital or other medical institution referred to in serial No. 1 of this Form. Four copies of the application form along with the enclosures should be sent."
A perusal of the aforesaid indicates that the application form has to be sent through the CIT or Director of IT (Exemptions) having jurisdiction over the educational institution.
In the light of the aforesaid, we find that the application forms were addressed to the prescribed authority and were sent through proper channel, which were duly processed but for some reasons best known to the Department was not forwarded to the prescribed authority.
We are of the opinion that necessary orders on these applications are required to be passed by the prescribed authority. Consequently, the impugned order passed by the Director General of IT (Inv.), Lucknow is quashed. The writ petition is allowed. The matter is remitted to the prescribed authority to pass a fresh order on the application of the petitioner dt. 24th March, 2010 for the asst. yr. 2010-11 in accordance with law and in the light of the observation made above within four months from the date of production of a certified copy of this order after hearing all the parties concerned. The prescribed authority will also summon the applications of the petitioner dt. 22nd March, 2003, 31st May, 2006, 27th March, 2007, 31st March, 2009 for exemption under s. 10(23C)(vi) of the Act for the asst. yrs. 2003-04 to 2009-10 and will pass appropriate orders within the same period after giving opportunity of hearing to the petitioner. It would be open to the petitioner to contend before the prescribed authority that since no orders were passed, the said applications would be deemed to have been granted. If such a ground is taken, the authority will consider and pass appropriate orders.
In the circumstances of the case, parties shall bear their own cost.