TMI Blog2006 (11) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Petitioner enjoys tax exemption in America as an educational institution under Section 501(c)(3) of the Internal Revenue Code of 1954. Sometime in 1993, it entered into a Memorandum of Understanding (MoU) with the National Council for Hotel Management and Catering Technology under the Ministry of Tourism of the Government of India for offering its courses and expertise with a view to improve the quality of hospitality education and training in India. 3. For the purposes of discharging its obligation under the MoU, the head office opened a liaison office at Bombay on or about 6th July, 1994 when it obtained approval from the Reserve Bank of India to do so. Thereafter, as its activities increased, it was permitted by the Reserve Bank of India by a letter dated 10th February, 1995 to convert its liaison office into a branch office for the purpose of undertaking the following activities : (i) Research, reproduction, marketing etc. in relation to educational services and resources. (ii) Provide educational services and resources to the target groups consisting of hospitality industry, training institutions and individuals. 4. With a view to clarifying its tax status in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the total income of a previous year of any person, any income falling within any of the following clauses shall not be included ____ . . . (23C) any income received by any person on behalf of _____ . . . (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) or sub-clause (iiiad) and which may be approved by the prescribed authority, or . . ." 8. There are certain provisos to this, which we propose to consider a little later. 9. In view of the change in law, the Petitioner made an application on 7th April, 1999 to the Commissioner of Income Tax in Bombay in the prescribed Form 56D and requested for approval for the purposes of Section 10(23C)(vi) of the Act. 10. For the assessment year 1999-2000, the Petitioner had filed its return of income on 7th April, 1999 declaring its income as Nil. The total receipts received by the Petitioner were Rs.1,54,01,487/-. On this, a deduction of Rs.23,71,199/- was claimed on account of expenses incurred and the remaining income over the said expenditure coming to about Rs.1,30,30,288/- was claimed as exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head office and is remitted after making some deductions for office expenses in India. According to the Petitioner, the surplus is only the sum of funds available with the branch office which it owes to the head office and in that sense it is not a genuine surplus in the nature of income. The Petitioner clarified that the terms of Section 10(23C)(vi) of the Act as well as the third proviso thereof do not require the income to be applied in India or accumulated for the application towards the objects of the institution in India. While this may be a requirement under the provisions of Section 11(1) and (2) of the Act, Section 10(23C)(vi) thereof is independent and reading an application or accumulation for application of the income towards the objects of the institution in India would be against the legislative intent. As an alternative, it was stated that the surplus amounts are maintained by the Petitioner with Dena Bank, Overseas Branch and are invested in short term deposits. To that extent, the requirement of the third proviso to Section 10(23C)(vi) of the Act is met. The Petitioner also placed reliance upon the decision of the Authority Advance Ruling in support of its case ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I 48823, USA' for initial approval of exemption under section 10(23C) (vi) of the IT Act, 1961, for the assessment year1999-2000 is rejected as the institution does not fulfil the conditions as prescribed under section 10(23C) (vi) of the Income Tax Act, 1961." 17. We heard learned counsel for the parties on 1st, 4th and 5th September, 2006 when orders were reserved. We find no error in the view taken by the Respondents. 18. At the outset, we may notice a dichotomy in the stand taken by the Petitioner. On the one hand it is contended (where convenient) that the head office and the branch office are one and the same entity. If so, any amounts received by the branch office in India are actually amounts received by the head office. Therefore, there is no question of any expatriation of the amounts to the head office the head office is earning in India and taking its earnings (less domestic expenses) to USA. On the other hand, it is contended (where convenient) that the head office and the branch office are two different entities. If so, then the branch office has to stand on its own legs. In that event, the branch office is earning in India and taking its earnings to USA, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, the receipts arise from the following sources : (1) Course fees - which includes individual courses, group courses and institutional networking. (2) Training resources e.g. Books, videos, CD-ROMs supplied. (3) Training Programs i.e. Seminars and workshops conducted. 21. It appears, as contended by learned counsel for the Petitioner, that the cost incurred by the head office in respect of intellectual inputs and efforts are not passed on to the Petitioner but are accounted for by the head office only. If this cost is passed on to the Petitioner, perhaps it may not have any surplus as contended by its learned counsel and, therefore, it would have no income that is taxable in India. In other words, the Petitioner merely acts as a post office for all intents and purposes vis-a-vis its relationship with the head office located in USA. Learned counsel for the Petitioner is in error, we feel, in equating surplus with income. That cannot be so. We are of the opinion that the amount generated by the Petitioner in India is its income. Any income generated by the Petitioner may be income generated for and on behalf of the head office ___ nevertheless it is the income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an interpretation cannot be accepted. Take for instance a situation where the amount is applied in country X, say in South America. Obviously, the Revenue does not have any machinery to ensure that the amount is applied for educational purposes in that country. Is it, therefore, reasonable to expect the Revenue to nevertheless ensure that the amount is being applied in that country for educational purposes ? The answer must clearly be in the negative. Consequently, it must be held that application of the income is required to be in India for the purposes of Section 10(23C)(vi) of the Act read with the third proviso thereto. 24. Learned counsel suggested that importing the words "in India" in the third proviso is impermissible. That may be so, but similarly importing the words "anywhere in the world" is equally impermissible. But that is not really the issue. The words "in India" have necessarily to be read into the third proviso to make it workable and to keep it conformity with the application of the Act. The Respondents have rightly noted in the impugned order that the Act applies to the whole of India __ it is not extraterritorial in operation. If we agree with learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of tax, a construction which would defeat and obliterate it from the statute book should be eschewed. If two constructions are possible then the one that would preserve its workability and efficacy is to be preferred to one which will render it otiose. [See State of Tamil Nadu v. M.K. Kandaswami, [1975] 36 STC 191 (SC) AIR 1975 SC 1871]. The courts will have to reject that construction which will defeat the plain intention of the Legislature even though there may be some inexactitude in the language used. [See Salmon v. Duncombe [1886] 11 App Cas 627(PC), referred to in CIT v. S. Teja Singh [1959] 35 ITR 408 (SC). When the scope of the words used is sought to be curtailed by construction, as it was pointed out in CIT v. Shahzada Nand and Sons [1966] 60 ITR 392 (SC) and we quote (page 400) : "the approach suggested by Lord Coke in Heydon's case[(1584) 3 Rep. 7b] yields better results : To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act;? to consider according to Lord Coke : 1. What was the law before the Act was passed; 2. What was the mischief or defect for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odes specified in section 11(5). These institutions are given time up to March 30, 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 October 12, 1998 (see [1998] 234 ITR (St) 11). By this notification the Central Board of Direct Taxes has been designated as the prescribed authority for the purpose of approval under sub-clauses (vi) and (via) of section 10(23C). 8.5 These amendments will take effect from April 1, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years. 29. Circular No.779 also issued by the CBDT on 14th September, 1999, in clause (vi) states as follows (page 42) : "(vi) The provisions of clause (23C) of section 10 are rationalised so that the Central Government before notifying a fund, trust or institution may call for any information and may hold any enquiry so as to determine the genuineness of such fund, trust or institution. The second proviso to this clause has been substituted so as to empower the prescribed authority to call for information or to hold such enquiry as it deems fit before the Univ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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