Sunbeam Academy Educational Society vs Chief Commissioner of Income Tax

Tarun Agarwala, J.—Heard Sri Ashish Bansal, the learned counsel for the petitioner and Sri Shambhu Chopra, the learned counsel appearing for the Chief Commissioner of income tax. The petitioner is a society registered under the Societies Registration Act, 1860, and is providing education by setting up centres for educational excellence and schools under the name and style of "The Sunbeam Academy Educational Society". Initially, the society was imparting education up to the 8th standard and the same was increased to 12th standard from the academic year 2003-04. Considering the aims and objects of the society, the petitioner applied and was duly granted a registration u/s 12A of the income tax Act, 1961 (hereinafter referred to as "the Act").

The Chief Commissioner of income tax, by an order dated December 20, 2007, granted approval u/s 10(23C)(vi) of the Act after being satisfied that the educational institution was existing solely for educational purpose and not for the purpose of profit. This approval by the order dated December 20, 2007, was granted for the assessment years 2005-06 to 2007-08, i.e., for a period of three years.

Under the provisions of the income tax Act, the approval is granted for three assessment years and the assessee is required to apply for extension of the approval. Accordingly, the petitioner applied for extension of the approval on March 25, 2008, for the assessment years 2008-09, 2009-10 and 2010-11. This application was rejected by the Chief Commissioner of income tax by the impugned order dated March 17, 2009. The petitioner, being aggrieved by the rejection of his application, has filed the present writ petition on various grounds.

The learned counsel for the petitioner made a submission that in view of Circular No. 7, dated October 27, 2010 (see [2010] 328 ITR (St.) 43), the Central Board of Direct Taxes (hereinafter referred to as "the CBDT") has clarified that it was not necessary to seek further approval or extension of the earlier approval granted u/s 10(23C)(vi) where approval was granted after July 13, 2006. This specific ground has not been raised by the petitioner in his writ petition but since this issue goes to the root of the matter, we have allowed the learned counsel for the petitioner to add a ground in the writ petition.

The Central Board of Direct Taxes issued Circular No. 7, dated October 27, 2010, upon receiving various references from the public about the period of validity of approval granted by the Chief Commissioner of income tax under sub-clauses (iv), (v), (vi) and (via) of section 10(23C) of the Act and approval granted by the Commissioner of income tax or the Director of income tax u/s 80G(5) of the income tax Act, 1961. The Central Board of Direct Taxes noticed that various field authorities were interpreting the provision relating to the period of above approval in a different manner and, consequently, for removal of doubt, the Central Board of Direct Taxes issued various instructions.

In so far as clause (vi) of section 10(23C) of the Act is concerned, the Central Board of Direct Taxes issued the following directions ([2010] 328 ITR (St.) 43, 44):

"4. Approvals under sub-clauses (vi) and (via) of section 10(23C) are governed by the procedure contained in rule 2CA. Rule 2CA was amended with effect from December 1, 2006, inter alia, by substitution of the existing sub-rule (3) by a new provision which is reproduced below:

''(3) The approval of the Central Board of Direct Taxes or the Chief Commissioner or Director General, as the case may be, granted before the 1st day of December, 2006, shall at any one time have effect for a period not exceeding three assessment years.''

Read in isolation, without any further guidance as was given by way of explanatory notes to the Finance Act, 2006, in respect of the amendment of sub-clauses (iv) and (v) of section 10(23C), the above amendment leaves some scope for doubt about the period of validity of the approval u/s 10(23C)(vi) and (via) on or after December 1, 2006. For the removal of doubts if any in this regard, it is clarified that as in the case of approvals under sub-clauses (iv) and (v) of section 10(23C), any approval issued on or after December 1, 2006, under sub-clause (vi) or (via) of that sub-section would also be a onetime approval which would be valid till it is withdrawn."

The Central Board of Direct Taxes clarified that in view of the amendment of rule 2CA with effect from December 1, 2006, the explanatory note with regard to the amendment in sub-clauses (iv) and (v) of section 10(23C) would also have to be read for the provision of clause (vi) and (via) and that any approval granted by the Chief Commissioner of income tax u/s 10(23C) after December 1, 2006, would be a one-time approval, which would remain valid till it was withdrawn under the proviso. For facility, the relevant proviso to section 10(23C) is extracted hereunder:

"Provided also that where the fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (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-clause (vi) or any hospital or other medical institution referred to in sub-clause (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 clause (a) of the third proviso; or

(B) invested or deposited its funds in accordance with the provisions contained in clause (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 Assessing Officer."

The aforesaid proviso was in relation to clauses (iv) and (v) of section 10(23C) of the Act. The Central Board of Direct Taxes by its Circular No. 7 of 2010 has clearly held that, it would also be applicable for approval granted under clauses (vi) and (via) of the Act, namely, that the approval can be withdrawn by the competent authority on certain conditions being satisfied and after giving a reasonable Opportunity of show cause to the assessee.

In the light of the aforesaid, the application dated March 25, 2008, filed by the petitioner for extension of the approval u/s 10(23C)(vi) of the Act for the assessment years 2008-09, 2009-10 and 2010-11 was a redundant application, inasmuch as, there was no requirement to apply for extension of the approval inasmuch as the approval in the case of the petitioner was granted after December 1, 2006, on December 20, 2007. The approval so granted by the Chief Commissioner of income tax, by an order dated December 20, 2007, was a one-time affair, which was to continue till it was withdrawn under the proviso as extracted above. Consequently, the impugned order dated March 17, 2009, was otiose having no effect in law. The impugned order only rejects the application for extension of the approval for the assessment years 2008-09, 2009-10 and 2010-11. The original order of approval dated December 20, 2007, still continues to remain in force in spite of the rejection of the petitioner''s application by the impugned order dated March 17, 2009.

In the light of the circular dated October 27, 2010, issued by the Central Board of Direct Taxes, the approval granted by the Chief Commissioner of income tax dated December 20, 2007, being a one-time affair continues to remain in force till it is withdrawn under the proviso as extracted aforesaid. Similar view was held by a Division Bench of the Lucknow Bench of this High Court in State Innovations in Family Planning Services Project Agency v. Union of India Writ Petition No. 6715(M/B) of 2013, decided on September 4, 2013 (since reported in [2014] 365 ITR 359 (All).

In the light of the aforesaid, the impugned order passed by the Chief Commissioner of income tax is quashed. The writ petition is allowed. It is hereby clarified, that it would be open to the authorities to proceed, if they are so advised against the petitioner under the proviso as extracted aforesaid.