2010 (3) TMI 701 - HC - Income Tax

Exemption Educational Institution Approval for purposes of exemption - Government issued circulars including Circular No. 580, within the meaning of section 2(24) of the Act by exemption under section 10(23C) Condition for Exemption Institution for Educational purposes and not for profit Search operation in office of assessee, showing discrepancy in Accounts, Receipt of deposits and payment of interest presumption raised under section 132 not rebutted by assessee Withdrawal of approval for assessment year 2009-10 and show cause notices for assessment year 2007-08 and 2008-09 Justified

Issues Involved:
1. Withdrawal of approval under section 10(23C)(vi) of the Income-tax Act for the assessment year 2009-10.
2. Issuance of show-cause notices for the assessment years 2007-08 and 2008-09.
3. Compliance with conditions for exemptions under section 10(23C)(vi) of the Income-tax Act.
4. Validity of the rejection of the application based on past conduct and incriminating evidence.
5. Rebuttal of legal presumptions drawn from seized documents.

Detailed Analysis:

1. Withdrawal of Approval under Section 10(23C)(vi) for AY 2009-10:
The petitioner-society, established for educational purposes, had its application for exemption under section 10(23C)(vi) rejected for AY 2009-10. The rejection was based on a search conducted in 2004, which uncovered discrepancies in accounts for earlier years. The first respondent concluded that the society was not fit for approval due to these discrepancies and activities perceived as profit-oriented.

2. Issuance of Show-Cause Notices for AYs 2007-08 and 2008-09:
Following the rejection for AY 2009-10, show-cause notices were issued for the withdrawal of approval for AYs 2007-08 and 2008-09. The respondents based their decision on the past conduct of the petitioner, particularly the findings from the 2004 search, which indicated violations of the conditions for approval.

3. Compliance with Conditions for Exemptions:
The petitioner argued that it had complied with all conditions set out in section 10(23C)(vi) and the relevant provisos for the respective assessment years. However, the respondents contended that the society had been suppressing receipts, inflating expenses, and maintaining duplicate books of account. Payments to the chairman and other members were also found, which contravened section 13(1)(c) read with section 13(3) of the Act.

4. Validity of Rejection Based on Past Conduct:
The petitioner challenged the rejection on the grounds that the violations cited were from earlier years (1999-2000 to 2003-04) and not relevant to AY 2009-10. The court had to determine whether past conduct could be used to infer ineligibility for future years. The court concluded that the approval for each assessment year could be influenced by past conduct, especially if it indicated a pattern of violating conditions.

5. Rebuttal of Legal Presumptions from Seized Documents:
The court noted that the petitioner had not effectively rebutted the legal presumptions drawn from the seized documents during the 2004 search. The discrepancies found in the CDs and loose sheets were significant and supported the respondents' decision to reject the application for AY 2009-10 and issue show-cause notices for the earlier years.

Conclusion:
The court dismissed the writ petitions, upholding the respondents' actions. However, it allowed the petitioner to submit a proper written rebuttal to the show-cause notices for AYs 2007-08 and 2008-09 within two weeks. The respondents were directed to reconsider the petitioner's submissions and conduct a proper enquiry, providing sufficient opportunity to the petitioner as per the twelfth proviso to section 10(23C)(vi) of the Income-tax Act. No costs were awarded, and connected miscellaneous petitions were closed.

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