High Court Of Andhra Pradesh
Priyadarshini Educational Academy Vs. Director General Of Income-Tax (Investigation)
Assessment Year : 2008-09
Section : 10(23C)(vi)
V.V.S. Rao And Ramesh Ranganathan, JJ.
Writ Petition No. 25069 Of 2009
December 22, 2010
JUDGMENT
Ramesh Ranganathan, J. – The relief sought for in this writ petition is to declare the order of the first respondent dated 31-3-2009, rejecting the petitioner’s application for grant of approval under section 10(23C)(vi) of the Income-tax Act, 1961 (hereinafter called the Act), arbitrary and illegal, and consequently to direct the first respondent to consider the petitioner’s application for exemption under section 10(23C)(vi) of the Act.
2. The petitioner is a society registered under the Societies Registration Act vide Registration No. 1041 of 1990. They claim to be running a high school, and intermediate and degree colleges. They submitted an application to the first respondent on 26-3-2008, claiming exemption under section 10(23C)(vi) of the Act for the assessment year 2008-09. The petitioner was afforded a personal hearing on 26-3-2009, whereat they were informed that, against column No. 10 of Form 56D, the income of the society only for the preceding two years was shown, and not the income for the previous year for which exemption was sought ; and similarly in column Nos. 11 and 12 also the information furnished was merely for the preceding two years. They were also informed that the application was not made within time. The petitioner submitted their detailed explanation on 30-3-2009, stating that, since they had submitted an application on 26-3-2008, seeking exemption for the assessment year 2008-09, their application was within time ; by the time the institution was required to file its application, under the proviso to section 10(23C)(vi), its accounts for the financial year would not be closed, and its income would not be ascertained ; a practical difficulty had arisen in reporting the income of the current year ; hence the particulars of the preceding two years were given; and, along with their application submitted on 30-3-2009, they had enclosed copies of the audited accounts for the assessment year 2008-09.
3. In her order dated 31-3-2009, the first respondent held that nowhere in the application, or in the covering letter, was it mentioned that the application related to the assessment year 2008-09 ; in column Nos. 10 and 11 of Form 56D the periods were mentioned as assessment years 2006-07 and 2007-08 ; the financial statements enclosed with the application form also related to the said two years ; in case the petitioner had any difficulty in submitting the application within time, they ought to have mentioned in column Nos. 10 and 11 of the application ; there was no mention in the application regarding the assessment year being 2008-09 ; and, from the report of the Commissioner of Income-tax (Central), Hyderabad dated 6-3-2009, it was evident that, for the assessment year 2007-08, the petitioner society had contributed to a chit fund thereby violating the provisions of section 11(5) of the Act which was in violation of the provisos to section 10(23C) of the Act.
4. Before this court Sri. A.V. Krishna Koundinya, learned counsel for the petitioner, would contend that by the time the institution was required to file its application in Form 56D, its accounts for the financial year relevant to the assessment year 2008-09 were not finalized, and its income could not be ascertained ; a practical difficulty had arisen in reporting the income of the current year against columns 10, 11 and 12 in the form ; hence particulars of the preceding two years were given ; on 30-3-2009 the petitioner had informed the first respondent that, since the financial year 2007-08 had ended, their accounts were finalized ; and they had enclosed copies of the audited accounts for perusal of the authorities which would clearly show that they had fulfilled the conditions stipulated in the other monitoring provisos under section 10(23C), and they were eligible for exemption ; the petitioner was maintaining regular books of account, and was also getting its accounts duly audited by a chartered accountant ; their existence was solely for educational purposes ; the surplus income, if any, and all their funds stood invested in acquisition of assets, and in the modes and forms specified in section 11(5), for the assessment year 2008-09, i.e., the year for which approval was sought ; the legal infirmity, on the basis of which exemption was denied to the society in the past assessment years, was because of its contribution to a chit fund scheme which was considered by the Assessing Officer as a contravention of section 13(1)(d) of the Act ; the said infirmity did not exist in the assessment year 2008-09 inasmuch as the instalment had been fully paid in the earlier year itself; in the financial year, relevant to the assessment year 2008-09, all the petitioner’s funds stood invested in the forms approved under section 11(5) of the Act ; each assessment year should be examined independently for the purpose of approval under section 10(23C)(vi) of the Act, and the claim has to be considered on the facts for each year without reference to omissions and commissions in the past years which have no bearing on the present year ; and the first respondent, without considering the explanation of the petitioner, had rejected their claim by her order dated 30-3-2009 on wholly unreasonable and untenable grounds.
5. Under section 10(23C)( vi) of the Act in computing the total income of a previous year of a person any income received by the person on behalf of an educational institution, (existing solely for educational purposes and not for profit and which may be approved by the prescribed authority), shall not be included. The first proviso to section 10(23C) requires the educational institution, referred to in sub-clause (vi), to make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of exemption or continuance thereof.
6. The prescribed form and manner in which an application is to be made by the educational institution to the prescribed authority for the purpose of grant of exemption is as stipulated in rule 2CA of the Income-tax Rules, 1962 which are the guidelines for approval under section 10(23C)(vi) of the Act. Rule 2CA(1) stipulates that the prescribed authority, under section 10(23C)(vi), shall be the Chief Commissioner or Director General to whom the application should be made as provided in sub-rule (2). Rule 2CA(2) stipulates that an application for approval shall be made in Form 56D by an educational institution referred to in section 10(23C)(vi) of the Act. Form 56D, which is the application form for grant of exemption or continuance thereof, is required to be made for a particular year. Column 7 thereof requires the applicant to enclose copies of the audited annual accounts and balance sheets for the last three years, 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 the objects of the educational institution. Column 13(i) requires the applicant to furnish details of the modes in which the funds of the educational institution are invested or deposited showing the nature, value and income from the investment. Column 13(ii) requires the applicant to furnish details of funds not invested in the modes specified in section 11(5) of the Act. Among the specified enclosures, to the application in Form 56D, are the true copies of the assessment orders passed for the last three years, if any. It is evident from Form 56D that the audited annual accounts, balance-sheets, and annual reports for the previous three years are to be enclosed to the application, along with copies of the assessment orders for the said three years. The applicant is also required to submit a note on the examination of accounts, on the activities as reflected in the accounts, and in the reports, with special reference to the appropriation of income towards the objects of the educational institution. Form 56D is a statutory form prescribed by rule 2CA(2) of the Income-tax Rules, 1962, and forms a part of the said rule. The statutory requirement in Form 56D, of furnishing copies of the audited accounts, balance-sheets, and annual reports for the past three years, is not without significance.
7. The second proviso to section 10(23C) of the Act enables the prescribed authority, before approving any educational institution under sub-clause (vi), to call for such documents (including audited annual accounts), or information from the educational institution, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such an educational institution. The second proviso also enables the prescribed authority to make such enquiries as it deems necessary in this behalf. The activities of the institution, its objects, its source of income and its utilization, must be analysed by the prescribed authority to ascertain whether it exists solely for education, and not for profit, and it is his duty to ascertain whether the income is applied wholly and exclusively for the educational objects for which purpose the applicant is established. [Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1/[1979] 2 Taxman 501 (SC) and American Hotel & Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86/ 170 Taxman 306 (SC)].
8. The third proviso to section 10(23C) of the Act requires the educational institution, referred to in sub-clause (vi), not to invest or deposit its funds, for any period during the previous year, otherwise than in any one or more of the forms or modes specified in section 11(5) of the Act. Section 11(5) prescribes the forms and modes of investing or depositing money as those specified in clauses (i) to (xii) thereunder. Investment/deposit in a chit fund is not one of the modes of investment or deposit of money referred to in clauses (i) to ( xii) of section 11(5) of the Act. As section 10(23C)( vi) of the Act requires the income received by any person, on behalf of the educational institution existing solely for educational purposes and not for profit, to be excluded while computing the total income of the previous year of such a person, the third proviso thereto stipulates that the investment or deposit of funds of the educational institution, otherwise than in any one of the forms or modes specified in section 11(5), for any period during the previous year, would result in denial of the benefit of exclusion of such income from the total income of the previous year of the said person. Even in cases where approval was granted earlier under section 10(23C)(vi) of the Act, failure of the society (educational agency) to invest in the modes and forms specified in section 11(5) of the Act would disentitle them from claiming the benefit of exclusion of the income, received on behalf of an educational institution, from their total income for the previous year. In cases where initial approval, or extension of the approval granted earlier, is sought, the prescribed authority would be entitled to examine the annual accounts of the applicant-society for the previous three years to ascertain whether investment/deposits made in any of the previous three years are in the forms and modes other than those specified in section 11(5) of the Act. It is only if the prescribed authority is satisfied that the applicant has applied its income exclusively for the purpose of education, and has adhered to the modes specified in section 11(5) of the Act, that he would grant approval, or renew the approval granted earlier, under section 10(23C)(vi) of the Act.
9. Accepting the submission of the learned counsel for the petitioner that, since the petitioner’s investment in a chit fund, (which is not one of the modes and forms specified in section 11(5) of the Act), was in the assessment year 2007-08, prior to the assessment year 2008-09 for which approval was sought, such investment or deposit cannot result in denial of grant of exemption, would render the requirement of furnishing the audited annual accounts for the previous three years, as stipulated in Form 56D, wholly unnecessary. A logical corollary of the aforesaid submission would be that only the income of the previous financial year, relevant to the assessment year in question, would be required to be examined by the prescribed authority, and not the two previous years prior thereto.
10. The very purpose of requiring the applicant to furnish the audited annual accounts, balance-sheets and annual reports for the previous three years is to ascertain whether the objects of the applicant-society, and the application of its income, is solely for the purpose of education and not for profit, for it is only if the income of an educational institution is utilized for the purpose of education, and not for any other, that they can be held to exist solely for the purpose of education. The prescribed authority would, therefore, be justified in rejecting the application, seeking approval under section 10(23C)(vi) of the Act, on the ground that in any of the previous three years, relevant to the assessment year for which approval is sought, the investment/deposit is not in any one of the modes and forms prescribed in section 11(5) of the Act necessitating the conclusion that the existence of the applicant society, and the application of its income, is not solely for the purpose of education. If the mode or form of investment/deposit, as prescribed in section 11(5) of the Act, is required to be adhered to only in the previous year relevant to the assessment year for which approval is sought then the statutory requirement of furnishing audited annual accounts, balance-sheets, annual reports and assessment orders for the three previous years would merely be an empty ritual, and a needless formality, rendering such a requirement redundant and wholly unnecessary. A construction that reduces one of the provisions to a “dead letter” must be avoided. ( Anwar Hasan Khan v. Mohd. Shafi [2001] 8 SCC 540). Such a construction would also defeat the very object of ensuring that the existence of the educational agency, and the application of its income, is solely for the purpose of education and no other. The first respondent is, therefore, justified in rejecting the petitioner’s application for grant of exemption on the ground that they had deposited/invested money in a chit fund in the assessment year 2007-08, though it is not one of the modes or forms specified in section 11(5) of the Act.
11. The submission of the learned counsel that, as the application was made by the petitioner on 26-3-2008, seeking exemption under section 10(23C)(vi) of the Act for the assessment year 2008-09, they could not have filed the annual accounts and balance-sheet for the financial year 2007-08 since the financial year had not even ended by then, merits acceptance. Prior to its amendment by the Finance Act, 2009, the fourteenth proviso to section 10(23C) required an application, seeking exemption under section 10(23C)(vi ) of the Act for any assessment year, to be made at any time during the financial year immediately preceding the said assessment year. As such, for the assessment year 2008-09, the petitioner was required to submit their application on or before 31-3-2008 and, since the petitioner submitted their application on 26-3-2008 within time, the annual accounts for the financial year 2007-08 (which would come to an end only on 31-3-2008) could not have been finalized by then. Insistence on the petitioner performing an impossibility would render the impugned order illegal, more so as the first respondent did not even examine the annual accounts for the financial year 2007-08 though it was enclosed along with the objections submitted by the petitioner on 30-3-2009.
12. As the order of the first respondent is required to be upheld on the ground that the petitioner had invested and contributed to a chit fund, during the assessment year 2007-08, which is not amongst the forms and modes specified in section 11(5) of the Act and they had, thereby, violated the proviso to section 10(23C) of the Act, the mere fact that the other limb of the order, requiring the petitioner to submit the annual accounts for the financial year 2007-08, is erroneous would not necessitate exercise of discretion under article 226 of the Constitution of India to interfere with the order impugned in this writ petition.
13. The writ petition fails and is, accordingly, dismissed. However, in the circumstances, without costs.
[Citation : 333 ITR 347]
