Madras H.C : The petitioner is eligible for exemption in respect of income as per s. 10(23C) of the IT Act and application has been made to the first respondent through the CIT for exemption under the said provision. It is stated that the petitioner society has been granted exemption upto 2008-09.

High Court Of Madras

Valliammai Society vs. Director General Of Income Tax (Investigation) & Anr.

Section 10(23C)(vi)

Asst. Year 2007-08 to 2009-10

P. Jyothimani, J.

Writ Petn. Nos. 24214 to 24216 of 2009

19th March, 2010

Counsel Appeared :

M. Ramachandran for Dr. Anitha Sumanth, for the Petitioner : K. Subramaniam, for the Respondents

ORDER

P. Jyothimani, J. :

These writ petitions are directed against the orders of the first respondent withdrawing the approval under s. 10(23C)(vi) of the IT Act, for the asst. yr. 2009-10 and issuing show-cause notices in respect of asst. yrs. 2007-08 and 2008-09 relating to the petitioner society.

2. The petitioner society which is registered under the Tamil Nadu Societies Registration Act, 1975 with the object of setting up and establishing and administering educational institutions, both engineering and medical colleges and hostels, is stated to have been started not with profit motive. The petitioner society had started SRM Engineering College and thereafter, many institutions under its control and the petitioner institutions are recognized as minority institutions, as declared by the High Court and the petitioner society has been regularly filing audit reports in the prescribed manner, after complying with various statutory requirements of the IT Act.

2(a). The petitioner is eligible for exemption in respect of income as per s. 10(23C) of the IT Act and application has been made to the first respondent through the CIT for exemption under the said provision. It is stated that the petitioner society has been granted exemption upto 2008-09.

2(b). It is stated that for the year 2007-08, the first respondent by order dt. 4th March, 2008 accorded approval under the abovesaid provision r/w r. 2CA of the IT Rules, 1962 and the approval was subject to certain conditions which included that the accumulated income has to be spent for the object of the society and the society should not invest or deposit its funds otherwise than the modes specified under s. 11(5) of the IT Act and the said approval is not applicable to any income received by way of profit or gain of business and the society should regularly file return and the approval would be void if it is subsequently found that the same has been obtained by fraud or misrepresentation, apart from various other conditions.

2(c). For the year 2008-09, the petitioner applied for the continuance of the approval and the first respondent granted approval in the order dt. 30th Oct., 2008 subject to the conditions as set out for the year 2007-08. It is the case of the petitioner that the petitioner complied with the said conditions. The petitioner filed an application on 30th Oct., 2008 before the Chief CIT/Director General of IT seeking approval of exemption for the asst. yr. 2009- 10 with all details.

2(d). By the impugned order dt. 22nd Oct., 2009, the first respondent found that the petitioner society which was constituted with the object of education is not fit for approval and accordingly, rejected the application for approval for the asst. yr. 2009-10. It is stated that there was a search conducted in SRM Group on 12th Aug., 2004 and certain CDs and loose sheets in respect of accounts of various years were found and seized and in respect of certain difference in the figures between the CDs and the returns relating to the asst. yrs. 1999-2000 to 2003-04, explanation was submitted by the petitioner, which was not accepted by the respondents and on the basis of legal presumption, order came to be passed.

2(e). It is also stated that a reference was made to the CIT under s. 263 of the Act in respect of SRM Systems & Software (P) Ltd. for the asst. yr. 2004-05, wherein it was held that the petitioner is not qualified for approval under s. 10(23C)(vi) r/w third proviso. It was also held that the petitioner does not exist solely for educational purposes. It is also stated that the respondents found that between 31st March, 2005 to 31st March, 2007, the petitioner received deposits from various persons and also paid interest and that is construed to be a profit-oriented activity and therefore, the presumption has been drawn against the petitioner.

2(f). Though there was a detailed enquiry conducted by the respondents, it is the case of the petitioner that no discrepancy was found in respect of asst. yr. 2009-10, for which an application for approval was made and the averments made were relating to the year upto 2003-04 and not in respect of later years. It is based on the said rejection of the application for the year 2009-10, the respondents proposed to withdraw the approval granted by the Director General in respect of asst. yrs. 2007-08 and 2008-09 for the reason that for the asst. yr. 2009-10, the approval has been withdrawn.

2(g). It is stated that the rejection for the year 2009-10 with the reason given is not relating to that year and not even relating to 2007-08 and 2008-09 and the allegations are relating to 19992000 to 2000-01 and 2003-04. The said impugned order and show-cause notices are challenged by the petitioner on various grounds that without any evidence of contravention of conditions by the petitioner, the orders have been passed; that as per s. 10(23C), thirteenth proviso, the violation must be only in respect of the relevant year; that under the third proviso, the prescribed authority must notice that there are violation of conditions set out in respect of the assessment year for which the approval has been sought for; that in respect of certain irregularities stated to have been found for the previous years, the rejection for the asst. yr. 2009-10 is not valid; that the petitioner has complied with various conditions set out in s. 10(23C)(vi) as well as various provisos for the respective assessment years and therefore, there are absolutely no grounds for withdrawing the approval for the asst. yr. 2009-10 and also for issuing show- cause notice for the years 2007-08 and 2008-09.

In the counter affidavit filed by the first respondent, it is denied that the petitioner society exists solely for educational purposes and the same has been discussed in detail in the impugned order. It is stated that the society has been suppressing its receipts and inflating its expenses and maintaining duplicate books of account. It is stated that the society has been showing the receipt of huge deposits from sundry persons and paying interest to them but, the same is not supported by confirmation of identifiable creditors and therefore, they are to be treated as illegal capitation fees charged from the students in violation of the public policy and the charging of capitation fees is another way of earning profits.

4(a). It is stated that the search and seizure carried out on 12th Aug., 2004 resulted in discovery of various documents evidencing payment to the chairman and other members of the society which is in contravention of s. 13(1)(c) r/w s. 13(3) of the Act and certain amounts are stated to have been paid to ICICI Bank towards repayment of loan taken by the chairman in his personal capacity, and advances were made in the name of sister concerns including a firm of chartered accountants and the same is in contravention of s. 10(23C)(b) r/w s. 11(5) of the Act and the said chartered accountant of the assessee, by name, Shri K.S. Subramanian admitted that besides his fees, rest of the amounts were routed through his concern, M/s K.S. & Co. for the personal benefits of the members of the society.

4(b). It is stated that these are the business ventures and the said activities are with business motive and the Supreme Court has heavily condemned any such practice in TMA Pai Foundation vs. State of Karnataka AIR 2003 SC 355. It is also stated that SRM Engineering College has been taken over by a separate trust by name, SRM Institute of Science and Technology under a trust deed dt. 30th June, 2001 and the said institute which is distinct from the assessee society, has been granted approval under s. 10(23C)(vi) in the order dt. 26th Oct., 2009.

4(c). It is stated that false accounts have been maintained and the society has not satisfied the conditions stipulated in s. 10(23C)(vi) of the Act. It is stated that the approval granted to the petitioner society on 11th Dec., 2002 for the asst. yrs. 1999-2000 to 2001-02 was given prior to the discovery of incriminating materials which were found during the search made on 12th Aug., 2004 and the proceedings for rescinding of the notification are still pending.

4(d). It is stated that after the search, no approval was granted under s. 10(23C)(vi) for any assessment year upto the asst. yr. 2006-07 and the approval was granted only for the asst. yrs. 2007-08 and 2008-09 without appreciating the seized records and therefore, a notice for withdrawal of approval for those two years was issued under the impugned proceedings dt. 22nd Oct., 2009 and such notice is authorized as per s. 10(23C), thirteenth proviso.

4(e). It is stated that the conclusion arrived at by the first respondent based on the seized accounts is in consonance with the order of the Tribunal, Chennai Bench. It is stated that the assessee has failed to produce confirmation letters from three of the depositors viz., Subapriya, S.V. Pandurangan and P. Kalaiselvi. It is stated that the approval granted under s. 10(23C) was not for a specific assessment year, but from a particular assessment year onwards for an indefinite period subject to withdrawal as provided under thirteenth proviso and therefore, the question of approval has to be decided on the basis of past records of the assessee and the withdrawal order has been passed only on the basis of tangible records and the same cannot be said to be vague.

4(f). It is also stated that the assessee was never granted approval for the years 2003-04 to 2005-06 and for the year 2006-07, it was denied ab initio because of late filing of application and the approval was granted only for 2007-08 and 2008-09 and the proceedings for rescinding and withdrawal are pending by way of show-cause notice. It is reiterated that the disposal of application must be based on the past records and not on the records relating to a particular year.

Mr. M. Ramachandran, learned senior counsel appearing for the petitioner would reiterate that the consideration of exemption under the said provision of the Act is based on the assessment of the said year and not on the past conduct and in the present case, the transaction that is stated to have taken place nine years ago, is for the purpose of refusal of renewal of concession and for withdrawal of concession for the years 2007-08 and 2008-09. It is also his contention that in view of the averment made in the counter affidavit filed by the respondents that the term, ‘capitation fees’ does not find a place in the impugned order, the intention of the respondents is to deprive the petitioner of such concession under one pretext or the other.

On the other hand, it is the contention of the learned senior Central Government standing counsel for income-tax, Mr. K. Subramaniam, that the case of the petitioner is one relating to capitation fees which is a social evil to be curtailed and the Supreme Court has heavily come down on the same in TMA Pai Foundation case (supra). It is his contention that when the Department has found tangible, incriminatory materials against the petitioner society, the petitioner is not entitled to continuation of such concession at all. It is his submission that the withdrawal or refusal of grant of such concession can only be based on the past conduct and he would rely upon various judgments in Dhansiram Agarwalla vs. CIT (1993) 111 CTR (Gau) 39 : (1993) 201 ITR 192 (Gau) and Coimbatore Spinning & Weaving Co. Ltd. vs. CIT (1974) 95 ITR 375 (Mad) to substantiate his contention that the past conduct can be taken into consideration. According to him, if the conditions of exemption are violated, certainly the petitioner is not entitled for the grant of exemption for subsequent years and even if a mistake has been committed earlier, such mistake cannot be permitted to continue.

I have heard the learned senior counsel for the petitioner and the learned senior Central Government standing counsel for the respondent Department and perused the records and given my anxious thoughts to the issue involved in this case.

It is an admitted case as it is seen in the counter affidavit filed by the respondents that the petitioner society was granted approval under s. 10(23C)(vi) of the IT Act for the assessment years from 1999-2000 to 2001-02 and a search operation was effected by the Department on 12th Aug., 2004 and thereafter, approval was granted for the years 2007-08 and 2008-09. It is based on certain incriminating materials, it was concluded that the petitioner society violated the conditions of approval, and the application for approval for the year 2009-10 was rejected by the first respondent and simultaneously show-cause notice was issued by the first respondent for the purpose of cancellation of approval granted for the years 2007-08 and 2008-09 and the show-cause notice as well as the order of rejection for the said assessment years are challenged in these writ petitions.

The main grievance of the petitioner is that the approval has to be granted for every assessment year based on the existing facts and in respect of earlier year, if any material has been found so as to create a doubt in the mind of the authority that the petitioner is not entitled for the approval which in effect is a privilege, the approval granted for that year can be cancelled and there cannot be a presumption that such mistake will continue in future years also. It is stated that it is not even the case of the respondent Department that any material, which is incriminating in nature, was found against the petitioner society in respect of the asst. yrs. 2007-08, 2008-09 and 2009-10 and it is on the basis of incriminating materials found in the search made in the year 2004, which showed the adverse conduct of the petitioner, a presumption was drawn against the petitioner and on the basis of such presumption, the impugned order came to be passed apart from the issuance of show-cause notice. Therefore, the issue to be decided is, as to whether the approval granted under the said provision relating to every assessment year is to be passed on the basis of conduct of the parties in that particular year or an inference can be drawn against the assessee based on the previous conduct of the assessee.

10. Sec. 10 of the IT Act, in computing the total income of the previous year of any person, excludes certain incomes like, (i) agricultural income; (ii) income of a member of an HUF where such sum has been paid out of the income of the family; (iii) share income of a partner in the total income of the firm which is separately assessed; (iv) any income by way of interest on securities or bonds or savings certificates of a non-resident; (v) the value of any travel concession or assistance received by or due to an individual from his employer; (vi) the remuneration received by an individual who is not a citizen of India as an official of an embassy, etc.; (vii) the remuneration received by an individual who is not a citizen of India as an employee of a foreign enterprise for services rendered by him during his stay in India; (viii) income chargeable under the head, ‘Salaries’ received by or due to any individual being a non-resident as remuneration for services rendered in connection with his employment on a foreign ship; (ix) remuneration received as an employee of the Government of a foreign State during his stay in India; (x) allowances or perquisites paid or allowed outside India by the Government to a citizen of India; (xi) any remuneration or fee received by a consultant out of the funds made available to an international organization, etc.

11. In sub-s. (23) of s. 10, any income of an association or institution established in India, notified by the Central Government, having regard to the fact that the association or institution has as its object the control, supervision, regulation or encouragement in India of the games of cricket, hockey, etc., does not form part of total income computed for the purpose of income-tax. The said sub-section was subsequently omitted by the Finance Act, 2002 w.e.f. 1st April, 2003. Further, under sub-s. (23A) of s. 10, exemption is granted to the income from house property or any income received for rendering any specific services of an association or institution established in India having as its object the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering or architecture or such other profession as the Central Government may specify in this behalf by notification.

12. It was in that category relating to the exemption to the assessment, sub-s. (23C) was introduced exempting the income received by a person on behalf of the Prime Minister’s National Relief Fund, the Prime Minister’s Fund (Promotion of Folk Art), the Prime Minister’s Aid to Students Fund, or the National Foundation for Communal Harmony, etc. and in sub-s. (23C), cl. (vi) was introduced w.e.f. 1st April, 1999 which is as follows : “Sec. 10(23C)(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.”

13. The authority, who is prescribed for such approval is the Chief CIT or Director General. Rule 2CA which relates to the guidelines for approval in respect of cl. (vi) of sub-s. (23C) of s. 10 which applies to the present facts of the case, is as follows :”Rule 2CA. (1) The prescribed authority under sub-cls. (vi) and (via) of cl. (23C) of s. 10 shall be the Chief CIT or Director General, to whom the application shall be made as provided in sub-r. (2).

(1A) The prescribed authority under sub-cls. (vi) and (via) of cl. (23C) of s. 10 shall be the CBDT constituted under the Central Board of Revenue Act, 1963 (54 of 1963) for applications received prior to 3rd day of April, 2001 : Provided that in case of applications received prior to 3rd day of April, 2001 where no order has been passed granting approval or rejecting the application as on 31st day of May, 2007, the prescribed authority under sub-cls. (vi) and (via) of cl. (23C) of s. 10 shall be the Chief CIT or Director General. (2) An application for approval shall be made in Form No. 56D by any university or other educational institution or any hospital or other medical institution referred to in sub-cl. (vi) or sub-cl. (via) of cl. (23C) of s. 10. (3) The approval of the CBDT or Chief CIT 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. Explanation—For the purposes of this rule, ‘Chief CIT or Director General’ means the Chief CIT or Director General whom the CBDT may, authorise to act as prescribed authority, for the purpose of sub-cl. (vi) or sub-cl. (via) of cl. (23C) of s. 10, in relation to any university or other educational institution or any hospital or other medical institution.”

14. The proviso to the said rule which enables an application for approval to be made in Form No. 56D, in column 7 mandates that the assessee should enclose the audited accounts and the balance sheet for the last three years and the said clause is as follows : “7. Enclose copies of audited 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 objects of the university or other educational institution or hospital or other medical institution referred to in serial No. 1.”

15. The said rule especially sub-r. (3) makes it clear that the approval granted before the 1st Dec., 2006 at one time shall be effected for the period of not exceeding three assessment years. Therefore, it is clear that the exemption granted once is not final or continuing one and it can always be revoked.

16. The various clauses of income referred to in s. 10(23C)(vi) which are eligible for exemption are explained in various provisos indicating the manner of making application, etc. For the better appreciation of the facts in issue it is desirable to extract the provisos which are relevant for the purpose of this case, as follows : “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. (vi) or sub-cl. (via) : Provided further that the prescribed authority, before approving any fund or trust or institution or any university or other educational institution or any hospital or other medical institution, under sub-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (via), may call for such documents (including audited annual accounts) 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 prescribed authority may also make such inquiries as it deems necessary in this behalf : 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)— (a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and (b) does not invest or deposit its funds, other than— (i) any assets held by the fund, trust or institution (or any university or other educational institution or any hospital or other medical institution) where such assets form part of the corpus of the fund, trust or institution (or any university or other educational institution or any hospital or other medical institution) as on the 1st day of June, 1973; (ia) any asset, being equity shares of a public company held by any university or other educational institution or any hospital or other medical institution where such assets form part of the corpus of any university or other educational institution or any hospital or other medical institution as on the 1st day of June,1998; (ii) any assets (being debentures issued by, or on behalf of any company or corporation), acquired by the fund, trust or institution (or any university or other educational institution or any hospital or other medical institution) before the 1st day of March 1983; (iii) any accretion to the shares, forming part of the corpus mentioned in sub-cl. (i) [and sub-cl. (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-s. (5) of s. 11 : Provided also that the exemption under sub-cl. (iv) or sub-cl. (v) shall not be denied in relation to any funds invested or deposited before the 1st day of April, 1989, otherwise than in any one or more of the forms or modes specified in sub-s. (5) of s. 11 if such funds do not continue to remain so invested or deposited after the 30th day of March, 1993 : Provided also that the exemption under sub-cl. (vi) or sub-cl. (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-s. (5) of s. 11 if such funds do not continue to remain so invested or deposited after the 30th day of March, 2001 : Provided also that the exemption under sub-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (via) shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution of the nature referred to in cl. (b) of the third proviso to this sub-clause, subject to the condition that such voluntary contribution is not held by the trust or institution (or any university or other educational institution or any hospital or other medical institution), otherwise than in any one or more of the forms or modes specified in sub-s. (5) of s. 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1992, whichever is later : Provided also that nothing contained in sub-cl. (iv) or sub-cl. (v) or sub-cl. (vi) or sub-cl. (via) shall apply in relation to any income of the fund or trust or institution (or any university or other educational institution or any hospital or other medical institution), being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business : Provided also that any [notification issued by the Central Government under sub-cl. (iv) or sub-cl. (v), before the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, shall, at any one time, have effect for such assessment year or years, not exceeding three assessment years] (including an assessment year or years commencing before the date on which such notification issued) as may be specified in the notification : Provided also that where an application under the first proviso is made on or after the date on which the Taxation Laws (Amendment) Bill, 2006 receives the assent of the President, every notification under sub-cl. (iv) or sub-cl. (v) shall be issued or approval under [sub-cl. (iv) or sub-cl. (v) or] sub-cl. (vi) or sub-cl. (via) shall be granted or an order rejecting the application shall be passed within the period of twelve months from the end of the month in which such application was received. Provided also that where the total income, of 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), without giving effect to the provisions of the said sub-clauses, exceeds the maximum amount which is not chargeable to tax in any previous year, such trust, hospital or other medical institution shall get its accounts audited in respect of that year by an accountant as defined in the Explanation below sub-s. (2) of s. 288 and furnish along with the return of income for the relevant assessment year, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed : Provided also that any amount of donation received by the fund or institution in terms of cl. (d) of sub-s. (2) of s. 80G [in respect of which accounts of income and expenditure have not been rendered to the authority prescribed under cl. (v) or sub- s. (5C) of that section, in the manner specified in that clause, or] which has been utilised for purposes other than providing relief to the victims of earthquake in Gujarat or which remains unutilised in terms of sub-s. (5C) of s.
80G and not transferred to the Prime Minister’s National Relief Fund on or before the 31st day of March, 2004 shall be deemed to be the income of the previous year and shall accordingly be charged to tax. Provided also that where 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) does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under s. 12AA or to any 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 not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established : 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 not 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 : 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 day of June, 2006 for the purposes of grant of exemption or continuance thereof, such application shall be made on or before the 30th day of September of the relevant assessment year from which the exemption is sought : Provided also that any anonymous donation referred to in s. 115BBC on which tax is payable in accordance with the provisions of the said section shall be included in the total income : Provided also that all pending applications, on which no notification has been issued under sub-cl. (iv) or sub-cl. (v) before the 1st day of June, 2007, shall stand transferred on that day to the prescribed authority and the prescribed authority may proceed with such applications under those sub-clauses from the stage at which they were on that day.”

The first proviso prescribes that application should be made in the prescribed form for grant of exemption or for continuance of exemption, which means that such application should be made for every assessment year.

Under the third proviso, when an institution covered under s. 10(23C)(vi) applies its income or accumulates it for application, wholly to the objects for which it is established and in a case where 15 per cent of its income is accumulated on or after 1st April, 2002, the amount exceeding 15 per cent shall not be accumulated beyond five years. Further, the said proviso makes it clear that such institution shall not deposit or invest its funds other than 5 circumstances mentioned therein, during the previous year otherwise than in any one or more of the forms or modes specified in s. 11(5) of the IT Act which prescribes the modes of investing or depositing the moneys including the investment in saving certificates as defined in the Government Saving Certificates Act, 1959, the deposit in any account with the Post Office Savings Bank, any scheduled bank or co-operative society engaged in carrying on business of banking, investment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963, investment in any security for money created and issued by the Central or State Government, investment in debentures issued by or on behalf of any company or corporation guaranteed by the Central Government or State Government, investment or deposit in any public undertaking, deposit or investment in any bonds issued by a financial corporation which is engaged in providing long-term finance for industrial development in India, deposit or investment in any bonds issued by a public company with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, deposit or investment in bonds issued by a public company with the main object of carrying on the business of providing long-term finance for urban infrastructure in India, investment in immovable properties, deposit with Industrial Development Bank of India established under Industrial Development Bank of India Act, 1964 or any other modes of investment as prescribed. Rule 17C prescribes various modes of investment in that regard.

The eighth proviso relied on by the learned senior counsel for the petitioner to substantiate his contention that the conduct only in respect of only three assessment years should be taken into consideration for granting exemption is not applicable to the facts of the present case for the reason that the said proviso relates to the exemption to be granted to the charitable purposes or trust or institution wholly for public religious purposes whereas in the present case, the issue involved relates to university or other educational institutions. However, it is true that in respect of trust or charities, the notification issued by the Government therefor before the date of Taxation Laws (Amendment) Bill, 2006 received the assent on 13th July, 2006 would have the effect for such assessment year or years, not exceeding three assessment years.

The ninth proviso makes it clear that after coming into effect of the Taxation Laws (Amendment) Bill, 2006 on 13th July, 2006, any application made in respect of grant of exemption shall be either granted or rejected within the period of 12 months from the end of the month from which such application was made. That relates to the grant of exemption.

The eleventh proviso says that in cases where the institution does not apply its income during the year of receipt and accumulates it, any payment or credit out of such accumulation to any trust or institution registered under s. 12AA or to any fund or trust or institution or university or other educational institution or any hospital or other medical institution, etc., that shall not be treated as an application of income to the object for which the institution was established. Therefore, the said proviso makes it clear that in cases where the funds of the institution or trust or any university or other educational institution or any hospital or other medical institution are utilised otherwise than for the purpose for which the institution was established, it is open to the authority to reject such application. That depends upon the conduct of the society for the purpose of rejection of claim of exemption in that year.

The more important proviso is the twelfth proviso which enables the prescribed authority, viz., the first respondent herein to take action to withdraw the approval after giving reasonable opportunity of showing the cause of the proposed action to the concerned institution when such institution has not applied its income for the purpose for which it was established or invested the amount against the conditions or the institution is not genuine or that the conducts are not carried out in accordance with the objects for which the institution was created.

It is on the basis of the powers conferred under the twelfth proviso, the impugned order has been passed by the first respondent for the year 2009-10 and show-cause notice issued for the years 2007-08 and 2008-09. Apart from the contents of the proviso, it is relevant to point out that the provisos are subject to the main provision of s. 10(23C)(vi) which says, ‘any educational institution existing solely for educational purposes and not for purposes of profit’. The term, ‘solely’ has to be construed exclusively and not with any proportion. Whenever the authority contemplated under the Act comes to a conclusion, of course, after following the principles of natural justice which are inherent, viz., by giving opportunity to the assessees, especially those assessees who were already granted exemption in the previous years, that the income amounts of the institution have been diverted for the purposes other than the institutional purpose, viz., the object for which the institution was created, certainly it is not open to the assessee to contend that only negligible portion of the amounts has been diverted. Such construction would defeat the very object of the provision which by using the word, ‘solely’ makes it very clear that the sole purpose of the institution shall be for the purpose of perpetrating the object of the institution. In as much as the exemptions granted under s. 10 are privileges for the objects which are deemed to be laudable by the law-makers and so long as the objects fully followed by the conduct of the society, the society will be entitled for either continuance of exemption or for the grant of exemption every year. Again, the word ‘existing’ is to be construed in the sense that the existence of institution insofar as it relates to s. 10(23C)(vi) is only for educational purpose and not commercial or profit making purpose. Certainly when an amount has been drawn as income by the institution, it is the duty on the part of the institution to prove that such receipt is only in furtherance of educational purpose for which the institution exists and not for any other purpose, of course, except those purposes which are given in various provisos including the purposes explained under s. 11(5) of the IT Act enumerated above.

The Government has in effect issued various circulars including the Circular No. 580, dt. 14th Sept., 1990 [(1990) 87 CTR (St) 54], within the meaning of s. 2(24) of the Act by granting exemption under s. 10(23C). In the above backdrop of the legal position, we have to consider the impugned order passed by the first respondent especially for the year 2009-10 in respect of which year a positive order of rejection has been passed. A reading of the impugned order shows that by application of s. 132(4A) which is as follows :

“Sec. 132(4A) : Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed—

(i) that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing belong or belongs to such person;

(ii) that the contents of such books of accounts and other documents are true; and (iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.” Read with s. 292C which is as follows : “Sec. 292C. (1) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search under s. 132 (or survey under s. 133A), it may, in any proceedings under this Act, be presumed— (i) that such books of account, other documents, money, bullion, jewellery, or other valuable article or thing belong or belongs to such person; (ii) that the contents of such books of accounts and other documents are true; and (iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person’s handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested. (2) Where any books of account, other documents or assets have been delivered to the requisitioning officer in accordance with the provision of s. 132A, then the provisions of sub-s. (1) shall apply as if such books of account, other documents or assets which had been taken into custody from the person referred to in cl. (a) or cl. (b) or cl. (c), as the case may be, of sub-s. (1) of s. 132A, had been found in the possession or control of that person in the course of a search under s. 132.”

The authority has drawn a presumption about the contents of the CDs and seized documents and even after opportunity was given to the assessee viz., the petitioner herein, as per s. 10(23C)(vi), twelfth proviso, the petitioner has not rebutted the legal presumption.

As far as the documents and CDs stated to have been seized on search made in accordance with the IT Act are concerned, the authorities on fact found that for the asst. yr. 1999-2000 there was gross difference between the contents of CDs and the returns filed by the petitioner. It was also found on fact that in respect of the asst. yr. 2003- 04 there was a difference as seen from the documents seized. It was in those circumstances, the assessee’s appeal came to be dismissed by the Tribunal in its order dt. 31st March, 2009 and that dismissal order itself was based on the legal presumption drawn which was not rebutted by the assessee. Further, it is seen from the order of rejection that the Tribunal has found on the basis of statement of auditor that payments were partly routed through the auditor for the personal benefits of the members of the society. After the rejection of the appeal filed by the assessee on this account, it is not in dispute that no exemption was granted to the petitioner society in the year 2005-06. However, on fact, in the years 2006-07, 2007-08 and 2008-09, such exemption came to be granted in respect of which impugned show-cause notice was issued and for the year 2009-10, taking note of the previous conduct of the petitioner, the first respondent rejected the claim for renewal of exemption. Simply because the proviso to s. 10(23C)(vi) makes certain limitations regarding assessment years or the period within which the orders are to be passed, it does not mean that the authority should close its eyes to verify as to whether the assessee continues to remain as an educational institution solely for educational purposes. In fact, at least in respect of three cases, as it is seen in the impugned order, the receipts by the assessee were not properly explained thereby creating a presumption which is, of course, rebuttable, that the conduct of the petitioner institution is not worth enough for the purpose of continuation of the exemption benefit. It is not a case where proper opportunity was not given to the petitioner assessee, but, it is a case where even after sufficient opportunity was given to the petitioner, the petitioner did not chose to explain by way of rebuttal of presumption drawn on the basis of concrete materials which presumption was confirmed by the Tribunal. As long as the petitioner fails to explain to the satisfaction of the authority that the presumption drawn by the authority for deciding against the petitioner is wrong or on the basis of surmises, it is not possible to accept the contention of the learned senior counsel for the petitioner that the petitioner society should be presumed to be an institution existing solely for educational purposes for the purpose of conferring benefits under s. 10(23C)(vi) of the IT Act. Even now, it is open to the petitioner to provide the rebuttal of presumption to the first respondent who has issued the impugned show-cause notice in respect of the years 2007-08 and 2008-09 instead of challenging the same on technical grounds.

A reference to the letter of Mr. K. Subramanian, chartered accountant of the petitioner dt. 29th Dec., 2009 addressed to the Asstt. CIT on which reliance has been placed by the authority while passing the impugned order shows the clinching evidence against the petitioner institution. The said letter is as follows : “With reference to the enquiry with me for the transactions with M/s Valliammai Society, I wish to state that I have been engaged as their chartered accountants for the period upto March, 2005. I was paid audit fee of Rs. 90,000 (approximately) and monthly fee for handling banking loan transactions which will be around Rs. 50,000 per month. All the other transactions routed through my concern M/s K. S. & Co. are for the personal benefits of the members of the society and not for any developmental activities of the society. M/s Valliammai Society used current account with Tamil Nadu Mercantile Bank and Oriental Bank of Commerce for discounting the cheques to raise temporary funds and later on they used to deposit the amount back in the current account. As stated above the funds were utilised mainly for the personal benefits of the promoters.”

31. While dismissing the appeal of the assessee viz., SRM Systems & Software (P) Ltd. for the asst. yr. 2004-05 in ITA No. 1221/Mad/2008, dt. 31st March, 2009, the Tribunal considered the issue relating to the CDs which were seized, in the light of the judgment of the Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) and came to the conclusion as follows : “8. The case laws referred by the learned counsel of the assessee were in the context of matters where two views were possible. The AO had adopted one of the possible views. Hence, ratio from these cases are not at all applicable here. Rather apex Court exposition in Malabar Hills case is actually supportive of Revenue’s plea. The Hon’ble apex Court has held as under : ‘Held, dismissing the appeal, (i) that in the instant case, the CIT noted that the ITO passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by his erroneous. The resolution before the AO (sic). Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts, the conclusion that the order of the ITO was erroneous was irresistable. The High Court had rightly held that the exercise of jurisdictional by the CIT under s. 263(1) was justified.’

The above clearly supports the view that if on an important matter, it does not speak of an enquiry, the AO’s order would be considered erroneous. Moreover, in this case, the learned CIT has directed the AO to examine the issue in those CDs containing evidence of receipt of certain amounts. Admittedly, the assessee would have full opportunity showing to the AO that original assessment was correct. In such circumstances on the anvil of apex Court decision in Rampyari Devi Saraogi (supra) it cannot be said that the revision order of the CIT on the impugned issue is not justified. The view that when no enquiry has been conducted by the AO, revision order is justified same also gets support from Hon’ble Delhi High Court decision in Gee Vee Enterprises vs. Asstt. CIT & Ors. 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del). Thus, on the fact that as per the seized CDs, there was receipt of Rs. 6,87,77,922 from M/s Vallaimmai Society, the AO failed to make any further enquiry in this regard, the assumption of the jurisdiction by the CIT is justified.”

32. While deciding about the drawing of inference under IT law, the Division Bench of this Court in Coimbatore Spinning & Weaving Co. Ltd. (supra) held as follows : “It is true that the decisions referred to above establish the position that it is for the Revenue to show that a particular receipt is an income, that whether the explanation given by the assessee as to the source of that receipt is acceptable or not is primarily a matter for the Tribunal and that the explanation of the assessee as to the source from which the receipts had been obtained had to be considered in the light of all the facts and circumstances. The assessee, relying upon these decisions, points out that the Tribunal was not justified in drawing the inference that the excess stocks of cotton should represent the assessee’s income, merely because the assessee’s explanation that there were no excess stocks was not acceptable. But, as pointed out by the Supreme Court in CIT vs. Durga Prasad More (1969) 72 ITR 807 (SC), the principle that once it is found that a receipt by the assessee was his income, it is not necessary for the Revenue to locate its exact source, applies alike to cases in which an entry is found in the books of accounts of the assessee as to cases in which no such entry is found. In A. Govindarajulu Mudaliar vs. CIT (1958) 34 ITR 807 (SC) it has been laid down that where an assessee fails to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the ITO is entitled to draw the inference that the receipts are income. This decision has also been followed in Kale Khan Mohammad Hanif vs. CIT (1963) 50 ITR 1 (SC) and CIT vs. M. Ganapathi Mudaliar (1964) 53 ITR 623 (SC) certain amounts of cash credits were found in the assessee’s books of account and the assessee’s explanation was not accepted. The account books of the assessee also were found incomplete and unreliable. In those circumstances the cash credits were taken to represent income from undisclosed sources. The Supreme Court upheld the same, holding that the amount of cash credits could be assessed to tax as income from undisclosed sources in addition to the business income and the taxing authorities were not precluded from treating the amounts of credit entries as income from business simply because the entries appeared in the books of a business whose income and previously been computed on a percentage basis.”

It is true that a reference to the impugned order does not disclose that the amounts have been received by the petitioner by way of capitation fees while in the counter affidavit the respondents have chosen to state, by relying upon the judgment of the Supreme Court in TMA Pai Foundation case (supra), that the conduct of the petitioner shows the commercialization of education, but, that itself is not sufficient to hold that the findings given by the first respondent in the impugned order are either perverse or illegal. At the cost of repetition, it has to be reiterated that even though the conduct of the petitioner is stated to have related to the year 2004, when the search was made and seizure was effected, in spite of opportunity having been given, the petitioner has not discharged its onus of rebutting the presumption which was drawn by the authority under the IT Act, based on various clinching documents. As long as such presumption has not been rebutted by the petitioner, in my considered view, it cannot be safely concluded that the petitioner institution is in existence solely for the purpose for which it was started for the purpose of exemption under s. 10(23C)(vi) of the IT Act. In such view of the matter, all the writ petitions are dismissed, however, insofar as impugned show-cause notices issued by the first respondent for the years 2007-08 and 2008-09 are concerned, it is always open to the petitioner to explain its stand to the authority concerned even to the extent of rebutting the presumption as it has been drawn in the impugned order in respect of the asst. yr. 2009-10 and if such steps are taken by the petitioner to rebut the presumption drawn by the respondents, it is for the first respondent to reconsider the same based on such written submissions which may be made by the petitioner and the nature of proof which the petitioner may produce before the first respondent at the time of enquiry which has to be done by giving sufficing opportunity to the petitioner in accordance with the twelfth proviso to s. 10(23C) (vi) of the IT Act.

35. In such view of the matter, the writ petitions are dismissed, however, with liberty to the petitioner to submit its proper written submission to the show-cause notice in respect of asst. yrs. 2007-08 and 2008-09 and if such written submissions are made by the petitioner within a period of two weeks from the date of receipt of copy of the order, the first respondent shall, after giving sufficient opportunity to the petitioner as per the provisions of the IT Act as enumerated above and after conducting proper enquiry, pass appropriate orders on merits and in accordance with law. No costs. Connected miscellaneous petitions are closed.

[Citation : 327 ITR 337]