TaxTMI 
TaxTMI 
2015 (10) TMI 600
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....visions 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 prevaili....
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.....M. Public School, Riico Industrial Area, Bhiwadi, Alwar, Rajasthan. 6.3 On 15thJanuary, 1999 a search and seizure operation was conducted 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 ....
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....fy 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 reduced to Rs. 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 th....
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....e 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 4th August, 2006 passed by the Tribunal in this appeal? 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 petition....
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....on 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 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 ....
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.... of the Revenue, Mr Ajay Vohra, learned Senior Counsel appearing for the Assessee submitted that since Revenue had not challenged the order dated 4th August, 2006 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 cont....
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.... 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 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 em....
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....n 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. 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 o....
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....ainable 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 4th August, 2006 had partly amended the order dated 25th 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. 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 ....
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....e solely for the reason that the Assessee had not filed a return disclosing the same. 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 ....
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....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 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....
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....ot 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 t....
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....d 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 subsection 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 (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 subsection (3) of section 74A], he may fur....
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....ssee 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 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 chargeabl....
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....ibed 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 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 in....
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....e 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 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....
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....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 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 t....
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....he 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 1st 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 "(22) any income of a universi....
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....ly 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 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....
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....ioned 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, 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 subclause (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 t....
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....stments 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 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....
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.... 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 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 ne....
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....ome 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. 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 29th December, 2010 indicates that DGIT(E) rejected the petitioner's applicati....
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....nner 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. 80. In American Hotel & Lodging Association Institute (supra), the Supr....
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....proval 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 ....
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....ears 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 necessarily have to include the auditor's report. Reading the expression "audited accounts" as suggested by the Assessee would defeat 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 b....