2010 (12) TMI 513 - HC - Income Tax

Exemption u/s 10(23C)(vi) - Rule 2CA of the Income-tax Rules, 1962 - 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 - 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 - assessment year 2008-09, the petitioner was required to submit their application on or before March 31, 2008 and, since the petitioner submitted their application on March 26, 2008 within time, the annual accounts for the financial year 2007-08 (which would come to an end only on March 31, 2008) could not have been finalized by then - 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 - The writ petition fails and is, accordingly, dismissed

Issues Involved:
1. Rejection of the petitioner's application for approval under section 10(23C)(vi) of the Income-tax Act, 1961.
2. Timeliness and completeness of the application submitted by the petitioner.
3. Compliance with the investment requirements under section 11(5) of the Income-tax Act.
4. Examination of the petitioner's financial records for the previous three years.

Detailed Analysis:

1. Rejection of the Petitioner's Application:
The petitioner sought to declare the order of the first respondent dated March 31, 2009, as arbitrary and illegal, which rejected their application for approval under section 10(23C)(vi) of the Income-tax Act, 1961. The petitioner requested the court to direct the first respondent to reconsider their application for exemption.

2. Timeliness and Completeness of the Application:
The petitioner, a registered society running educational institutions, submitted an application on March 26, 2008, for exemption under section 10(23C)(vi) for the assessment year 2008-09. They were informed during a personal hearing that the application lacked income details for the current year and was not submitted within the specified time. The petitioner explained that the accounts for the financial year were not closed by the time of application, leading to practical difficulties in reporting the income. They provided details for the preceding two years and enclosed audited accounts for the assessment year 2008-09.

The court noted that the application did not mention the assessment year 2008-09 and included financial statements for the years 2006-07 and 2007-08. The first respondent also pointed out a violation of section 11(5) of the Act due to the petitioner's contribution to a chit fund in the assessment year 2007-08.

3. Compliance with Investment Requirements:
Section 10(23C)(vi) excludes income received by an educational institution existing solely for educational purposes and not for profit from the total income. The third proviso to section 10(23C) mandates that funds must be invested in specified modes under section 11(5). The petitioner's investment in a chit fund for the assessment year 2007-08 was not among the approved modes, leading to the rejection of their application.

The court emphasized that compliance with section 11(5) is crucial for approval under section 10(23C)(vi). Failure to adhere to these investment modes in any of the previous three years can justify the rejection of the application, as it indicates that the institution does not exist solely for educational purposes.

4. Examination of Financial Records:
The court highlighted the importance of submitting audited annual accounts, balance-sheets, and annual reports for the previous three years, as required by Form 56D. This requirement ensures that the institution's income is utilized solely for educational purposes. The court rejected the argument that only the income of the previous financial year should be examined, as it would render the requirement of furnishing records for three years unnecessary.

The court accepted that the petitioner could not have finalized the accounts for the financial year 2007-08 by the application date (March 26, 2008). However, the first respondent's failure to examine the enclosed annual accounts for 2007-08 did not invalidate the rejection, given the violation of section 11(5) in the previous year.

Conclusion:
The court upheld the first respondent's decision to reject the petitioner's application for exemption under section 10(23C)(vi) due to non-compliance with the investment requirements of section 11(5) in the assessment year 2007-08. The writ petition was dismissed, and no costs were awarded.

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