IT: Merely because there is an exemption order under section 10(23C), assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted
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[2013] 36 taxmann.com 81 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax, Mangalore
v.
Manipal Academy of Higher Education (MAHE)*
N. KUMAR AND B. MANOHAR, JJ.
IT APPEAL NO. 1344 OF 2006†
APRIL 1, 2013
Section 10(23C), read with section 11, of the Income-tax Act, 1961 - Charitable or religious trust - Educational institutions [Conditions precedent] - Whether merely because there is an exemption order under section 10(23C), assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted - Held, yes - Assessee, a deemed university, claimed that its income was exempt under section 10(23C) and, consequently, claimed exemption under section 11 - But it failed to produce notification exempting tax under section 10(23C) - Assessing Officer proceeded to compute its income on premise that assessee did not have any exemption -He noticed that assessee had advanced a sum for purchase of property but during year no purchase was made and it remained as advance and held that said sum could not be treated as utilized for educational purpose and thus, assessee had violated section 11(5) - Meanwhile, CBDT extended exemption to assessee - Appellate Authority held that assessee was entitled to exemption under section 10(23C) but as regards infringement of section 11, he agreed with Assessing Officer - However, Tribunal held that exclusive jurisdiction to decide infringement of section 11 was with Board - Order granting exemption revealed that it was an conditional approval dependent upon assessee applying its income towards charitable objects - Moreover, two fact-finding authorities had recorded that assessee had violated section 11 - Whether since Tribunal committed serious error by ignoring said findings, approach of Tribunal could not be sustained and matter was to be set aside to Assessing Officer for re-adjudication - Held, yes [Para 13] [In favour of revenue]
FACTS
| ■ | The assessee, a deemed university, claimed that its income was exempt under section 10(23C)(vi), consequently, it claimed exemption under section 11 but it failed to produce Notification granting exemption under section 10(23C). | |
| ■ | The Assessing Officer proceeded with assessment on ground that assessee did not have exemption under section 10(23C)(vi). | |
| ■ | Further, the Assessing Officer noticed that assessee had advanced a sum to a party for purchase of property but during year no purchase against advance had been made and said sum remained as advance and was not utilized towards any educational purpose and he rejected assessee's claim for exemption under section 11 and raising demand against assessee. | |
| ■ | Meanwhile, CBDT granted exemption under section 10(23C) to assessee. | |
| ■ | The Commissioner (Appeals) noticed that the Assessing Officer had not brought anything adverse to his notice regarding the fulfilment of the conditions as laid down in the order of exemption. Therefore, he proceeded to hold that the Assessee qualified for exemption under section 10(23C)(vi). But he agreed with the Assessing Officer in respect of infringement of provisions of section 11. | |
| ■ | However, the Tribunal held that only the prescribed authority had the power to withdraw approval in case there was violation of the condition in approval provided by them. It did not give any finding regarding infringement of section 11(5) and held the assessee was entitled to the exemption under section 10(23C)(vi) and not liable to pay tax. | |
| ■ | On further appeal: |
HELD
| ■ | In computing the total income of a previous year of any person, any income falling under section 10(23C)(vi) shall not be included. Before the assessee could claim the benefit of the said provision, the assessee should obtain an approval by the prescribed authority. In the instant case, the approval has been accorded by the prescribed authority. [Para 10] | |
| ■ | As is clear from the said order, it is not an unconditional approval. It is subject to the conditions mentioned therein. The proviso to the said provision makes it clear that after obtaining the approval from the prescribed authority, if the assessee has not applied its income in accordance with the provisions contained in the third proviso then, the approval granted to such assessee is liable to be rescinded. However, before the prescribed authority rescinds such an approval, the assessee is entitled to a reasonable opportunity of showing cause against the proposed acts. | |
| ■ | The third proviso to section 10(23) makes it very clear that if the assessee does not invest or deposit its funds, other than in the manner set out therein 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, then the assessee is not entitled to the benefit of the said exemption. | |
| ■ | If an assessee invests its funds in immovable property and satisfies one of the requirements of law, then he is entitled to the exemption as per the notification issued. Whether the assessee has complied with the conditions stipulated in the exemption order, before it could claim exemption is a matter, which has to be investigated by the assessing authority. It is only on the assessee satisfying the conditions stipulated in the exemption order, that it would be entitled to exemption. In the event there is a violation of the terms and conditions of the exemption order, the assessing authority would be justified in not extending the benefit of exemption but at the same time the assessing authority cannot ignore the order of exemption. Therefore, on enquiry if he is satisfied that the assessee is not entitled to exemption as he has violated the terms and conditions of exemption order, he has to bring the said fact to the notice of the prescribed authority. Thereafter, the prescribed authority is under an obligation to issue a show cause notice to the assessee to show cause, why the order of exemption should not be rescinded. After hearing the assessee, if the prescribed authority decides to rescind the exemption granted, they are at liberty to pass such an order and a copy of the said order is to be communicated both to the assessee as well as the assessing authority. It is on receipt of such an order rescinding the exemption order, that the assessing authority could proceed to assess the assessee and raise a demand for payment of tax. This is the procedure prescribed under the scheme of the Act. Therefore, merely because there is an exemption order, the assessee is not entitled to exemption unless he satisfies conditions subject to which said exemption is granted; question whether such conditions are fulfilled or not is a matter to be investigated by assessing authority. [Para 11] | |
| ■ | In the instant case, on the day the assessment order was passed, this order of exemption was not there. Therefore, the Assessing Authority did not have the opportunity to bring the violations as recorded by them under section 11(5) of the Act. On that day, the assessing authority was justified in proceeding with the assessment. However, during the pendency of the appeal, the order of exemption was passed. The jurisdiction of the First Appellate Authority being continuation of the jurisdiction of the assessing authority, though the First Appellate Authority concurred with the finding recorded by the Assessing Authority with the continuation of jurisdiction under section 11(5), it committed a serious error in extending the benefit of exemption on the ground that it has not yet been rescinded. The First Appellate Authority had a duty to bring the said fact to the notice of the Prescribed Authority and await decision of the prescribed authority before passing an order on appeal. That was not done. On the contrary, ignoring the said violation, without waiting for the prescribed authority to look into the matter, it granted the exemption. In appeal, the Tribunal could have gone into the correctness of the finding recorded by both the authorities under section 11(5), but the Tribunal was of the view that it has no jurisdiction to go into the same. The reason given is, as long as the order of exemption stands and not rescinded, is the assessee is entitled to the said benefit. This approach is also erroneous. An assessee is entitled to exemption subject to the conditions stipulated in the said order. When two fact finding authorities recorded a categorical finding that there is violation of section 11(5), the Tribunal committed a serious error by ignoring the same holding that the assessee is entitled to the benefit. If the Tribunal was not inclined to go into the merits of the case, the proper course would have been to set-aside the order of the authorities, remit the matter back to the Assessing Authority to take note of the exemption and then to see whether the violation of section 11(5) is recorded by it earlier, still holds good and then pass appropriate orders in the light of the aforesaid provisions of law. Therefore, the approach of the Tribunal cannot be countenanced and sustained. Therefore, the appropriate course would be to set aside the order passed by all the authorities and remit the matter back to the assessing authority. [Para 12] |
CASE REVIEW
Asstt. CIT v. Manipal Academy of Higher Education (MAHE) [2006] 9 SOT 284 (Bang) (para 12) reversed.
E.R. Indrakumar and E.I. Sanmathi for the Appellant. S. Parthasarathi and S.Gopalkrishna for the Respondent.
JUDGMENT
N. Kumar, J. - This appeal is by the Revenue against the order dated 21.04.2006 passed by the Tribunal declining to go into the question whether there is an infringement of Section 11(5) of the Income Tax Act, 1961 (for short, hereinafter referred to as 'the Act') as the Board has already approved the Assessee under Section 10(23C)(vi) of the Act.
2. The Assessee M/s. Manipal Academy of Higher Education (MAHE) filed a return of income on 31.10.2001. The assessee claimed a sum of Rs. 212,74,25,714/- as exempt from income tax under Section 10(23C)(vi) of the Act. The Government Notification exempting the assessee's income under Section 10(23C)(vi) of the Act was not produced before the Assessing Officer. Therefore, he proceeded with the assessment on the premise that the Assessee is not having any exemption. He assessed the total income at Rs. 47,03,58,078/- and raised a demand for Rs. 24,32,30,437/- including interest and surcharge. In the said Assessment Order, he recorded a finding that. the assessee had advanced a sum of Rs. 37 crores to Sri. Dayananda Pai for purchase of property. During the year no purchase of property had been made and it remained as advance. Therefore, the said advance amount paid cannot be treated as utilized for educational purpose. Aggrieved by the said order, the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals). Though the Appellate Authority agreed with the said finding of fact, in view of the notification under Section 10(23C)(vi) of the Act, he held the assessee is entitled to exemption and therefore, allowed the appeal. Aggrieved by the said order, the Revenue preferred an appeal before the Tribunal. The assessee also preferred a Cross-objection.
3. The Tribunal held that as the Board has already approved the Institution under Section 10(23C)(vi) of the Act, its income is exempted under that Section. Since the Income Tax Authorities directed the prescribed authority to withdraw the approval in case there is violation of the condition by them while granting, approval, it is not necessary for them to record a finding that there has been any violation of the conditions mentioned while giving approval. Therefore, the Tribunal refrained from giving any finding regarding infringement of Section 11(5) of the Act as the exclusive jurisdiction to decide such infringement is with the Board. Accordingly, the Tribunal held that the Institution is exempted under Section 10(23C)(vi) as approved by the Board and not liable to tax. In view of the said finding, the Cross-objection was also dismissed. Aggrieved by the said order of the Tribunal, the Revenue is in appeal.
4. Sri. E.R. Indrakumar, learned Senior Counsel appearing for the Revenue assailing the order of the Tribunal contended that the approval is given by the Board subject to the terms and conditions mentioned in the said order of approval. There is a violation of those terms and conditions. Section 11(5) of the Act has been contravened. There is a concurrent finding recorded by the Assessing Authority as well as the First Appellate Authority regarding the contravention. Under those circumstances, the Tribunal was not justified in ignoring the said concurrent finding and granting exemption solely on the ground of notification issued by the Board, which has not been withdrawn. Therefore, he submits that a case for interference is made out.
5. Per contra, Sri. Parthasarathi, learned counsel appearing for the Assessee supported the impugned order.
6. At the time of admission, this Court had framed three substantial questions of law. After hearing the learned counsel appearing for the parties, with their consent, the substantial question of law is refrained as under:
"Whether the Tribunal was justified in declining to go into the correctness of the finding regarding infringement under Section 11(5) of the Act on the ground that the notification issued granting exemption under Section 10(23C)(vi) of the Act is not withdrawn?"
7. The Assessee is a deemed University and it runs several Educational Institutions. The Assessee claims that its income is exempted under Section 10(23C)(vi) of the Act. They did not produce the Notification exempting tax under Section 10(23C)(vi) of the Act. Therefore, the Assessing Authority proceeded with the Assessment on the ground that the Assessee does not have exemption under Section 10(23C)(vi) of the Act. The Assessee also claimed computation of income under Sections 11 and 12 of the Act. The Assessing Authority noticed that the Assessee has made an advance of Rs. 37 crores to one P. Dayananda Pai for purchase of property. During the year, no purchase as against the advance has been made. The Assessee claimed that the advance for purchase of property is an admissible investment under Section 11(5) of the Act. During the year, neither the property was registered nor possession of the property was taken over by the Assessee. In the circumstances, he held the Assessee cannot claim ownership rights with respect to this property and that the amount continues to be an advance only as on 31.03.2001. Therefore, the claim of the Assessee for computation of income under Sections 11 and 12 of the Act was also rejected. Therefore, he proceeded to pass an order under Section 143(3) of the Act and raised a demand for Rs. 24,32,30,437/-. Aggrieved by the said order, the Assessee preferred an appeal to the Commissioner of Income Tax (Appeals).
8. During the pendency of this appeal, the Central Board of Direct Taxes vide their order dated 02.07.2004 approved the assessee - Trust for the purpose of Section 10(23C)(vi) of the Act for assessment years 1999-2000 to 2001-2002. A copy of the order of the Board was placed before the Appellate Authority. He noticed that the Assessing Officer has not brought anything adverse to his notice regarding the fulfilment of the conditions as laid down in the order of exemption. Therefore, he proceeded to hold that the Assessee-Academy qualifies for exemption under Section 10(23C)(vi) of the Act. Insofar as the payment of advance of Rs. 37 crores to Sri. P. Dayananda Pai, for the purchase of immovable property as an investment under Section 11(5) of the Act is concerned, he was of the view that the amount of Rs.37 crores has actually remained as an advance only during the year under consideration, as the same could not be utilized and invested for purchase of the land for the purposes of the Academy. Therefore, he recorded a finding that he is in complete agreement with the Assessing Officer that the Assessee's claim in the above matter cannot be accepted as there has been a clear infringement of the provisions contained under Section 11(5) of the Act. In view of the notification issued by the Board under Section 10(23C)(vi) of the Act and the fulfilment of the conditions laid down therein, the entire income of the assessee was held to qualify for exemption under the said provision. Accordingly, the appeal was partly allowed. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal.
9. The Tribunal after narrating the aforesaid facts was of the view that since the Board has already approved the Institution under Section 10(23C)(vi) of the Act, its income is exempted under the Section since only the prescribed authority has the power to withdraw approval in case there is violation of the condition provided by them. It is not necessary for the Tribunal to record a finding that there has been violation of the conditions while giving approval. Therefore, on merits, the Tribunal refrained from, giving any finding regarding infringement of Section 11(5) of the Act as such jurisdiction is with the Board. Therefore, it also held that the Assessee is entitled to the exemption and not liable to pay tax.
Section 10(23C)(vi) of the Act reads as under:
"10. 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-
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(23C) any income received by any person on behalf of-
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| (vi) | any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority; or" |
10. In computing the total income of a previous year of any person any income falling under Section 10(23C)(vi) shall not be included. Before the assessee could claim the benefit of the said provision, the assessee should obtain an approval by the prescribed authority. In the instant case, the approval has been accorded by the prescribed authority which reads as under:
"ORDER
In exercise of powers conferred by the sub-clause (vi) of clause (23C) of Section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby approves "Manipal Academy of Higher Education, Manipal" for assessment year 1999-2000 to 2001-2002 for the purpose of the said sub-clause subject to the following conditions namely:-
| (i) | the assessee will apply its income, or accumulate for application, wholly and exclusively to the objects for which it is established; | |
| (ii) | the assessee will not invest or deposit its fund (other than voluntary contributions received and maintained in the form of jewellery, furniture etc.) for any period during the previous years relevant to the assessment years mentioned above other wise than in any one or more of the forms or modes specified in sub-section (5) of Section 11; | |
| (iii) | this order will not apply in relation to any Income being profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of account are maintained in respect of such business; | |
| (iv) | the assessee will regularly file its return of Income before the Income-tax authority in accordance with the provisions of the Income-tax Act, 1961; | |
| (v) | that in the event of dissolution, its surplus and the assets will be given to a charitable organisation with similar objectives." |
As is clear from the said order, it is not an unconditional approval. It is subject to the conditions mentioned therein. The proviso to the said provision makes it clear that after obtaining the approval from the prescribed authority, if the assessee has not applied its income in accordance with the provisions contained in the third proviso then, the approval granted to such assessee is liable to be rescinded. However, before the prescribed authority rescinds such an approval, the assessee is entitled to a reasonable opportunity of showing cause against the proposed acts. The third proviso reads as under:
"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-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (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-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." |
The third proviso makes it very clear that if the assessee does not invest or deposit its funds, other than in the manner set out therein 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, then the assessee is not entitled to the benefit of the said exemption. Section 11(5) of the Act reads as under:
"11(5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely :-
| ** | ** | ** |
(x) investment in immovable property.
Explanation.—"Immovable property" does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth;"
11. A reading of the aforesaid provisions makes it very clear that if an assessee invests its funds in immovable property as aforesaid and satisfies one of the requirements of law, then he is entitled to the exemption as per the notification issued. Whether the assessee has complied with the conditions stipulated in the exemption order, before it could claim exemption is a matter, which has to be investigated by the Assessing Authority. It is only on the Assessee satisfying the conditions stipulated in the exemption order, it would be entitled to exemption. In the event there is a violation of the terms and conditions of the exemption order, the Assessing Authority would be justified in not extending the benefit of exemption but at the same time the Assessing Authority cannot ignore the order of exemption. Therefore, on enquiry if he is satisfied that the assessee is not entitled to exemption as he has violated the terms and conditions of exemption order, he has to bring the said fact to the notice of the prescribed authority. Thereafter, the prescribed authority is under an obligation to issue a show cause notice to the assessee to show-cause, why the order of exemption should not be rescinded. After hearing the assessee, if the prescribed authority decides to rescind the exemption granted, they are at liberty to pass such an order and a copy of the said order is to be communicated both to the assessee as well as the Assessing Authority. It is on receipt of such an order rescinding the exemption order, the Assessing Authority could proceed to assess the assessee and raise a demand for payment of tax. This is the procedure prescribed under the scheme of the Act. Therefore, merely because there is an exemption order, the assessee is not entitled to exemption unless he satisfies the conditions subject to which the said exemption is granted. The question whether such conditions are fulfilled or not is a matter to be investigated by the Assessing Authority.
12. In the instant case, on the day the assessment order was passed, this order of exemption was not there. Therefore, the Assessing Authority did not have the opportunity to bring the violations as recorded by them under Section 11(5) of the Act. On that day, the Assessing Authority was justified in proceeding with the assessment. However, during the pendency of the appeal, the order of exemption was passed. The jurisdiction of the First Appellate Authority being continuation of the jurisdiction of the Assessing Authority, though the First Appellate Authority concurred with the finding recorded by the Assessing Authority with the continuation of jurisdiction under Section 11(5) of the Act, it committed a serious error in extending the benefit of exemption on the ground that it has not yet been rescinded. The First Appellate Authority had a duty to bring the said fact to the notice of the Prescribed Authority and await decision of the prescribed authority before passing an order on appeal. That was not done. On the contrary, ignoring the said violation, without waiting for the prescribed authority to look into the matter, it granted the exemption. In appeal, the Tribunal could have gone into the correctness of the finding recorded by both the authorities under Section 11(5) of the Act, but the Tribunal was of the view that it has no jurisdiction to go into the same. The reason given is, as long as the order of exemption stands and not rescinded, the assessee is entitled to the said benefit. This approach is also erroneous. An assessee is entitled to exemption subject to the conditions stipulated in the said order. When two fact finding authorities recorded a categorical finding that there is violation of Section 11 (5) of the Act, the Tribunal committed a serious error by ignoring the same holding that the assessee is entitled to the benefit. If the Tribunal was not inclined to go into the merits of the case, the proper course would have been to set-aside the order of the authorities, remit the matter back to the Assessing Authority to take note of the exemption and then to see whether the violation of Section 11(5) of the Act is recorded by it earlier, still holds good and then pass appropriate orders in the light of the aforesaid provisions of law. Therefore, the approach of the Tribunal cannot be countenanced and sustained. Therefore, the appropriate course would be to set-aside the order passed by all the authorities, remit the matter back to the Assessing Authority.
13. The Assessing Authority shall on the facts available as on today shall go into the question whether the assessee has violated the terms and conditions subject to which, exemption was granted. If it records a finding that there is violation of Section 11(5) of the Act,. then it shall bring the said violation to the notice of the prescribed authority. On such violations being brought to the notice of the prescribed authority, the prescribed authority shall issue a show cause notice to the assessee to show cause why the order of exemption should not be rescinded and after hearing him, to pass orders on merits and in accordance with law. If the prescribed authority decides to rescind the order of exemption granted earlier, it shall do so and shall send a copy of the same to the Assessing Authority as well as to the assessee. On receipt of such order, the Assessing Authority shall proceed to frame the assessment order and proceed in accordance with law. That would meet the ends of justice. Hence, we pass the following order:
| (a) | Appeal is allowed. | |
| (b) | The substantial question of law is answered in favour of the Revenue and against the assessee. | |
| (c) | The entire matter is remitted to the Assessing authority to pass appropriate orders in accordance with law keeping in mind the observations made in the order supra. |
Parties to bear their own costs.
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