2013 (3) TMI 491 - HC - Income Tax

Exemption u/s 10(21) - Whether the petitioner Centre for Development of Telematics C. DoT is a scientific research association for the purposes of clause (ii) of sub-section (1) of section 35? - assessee contested against the denial of claim stating that the Board is required to refer this question to the central government to take the decision which was not followed - central government categorized the petitioner as other institution partly engaged in scientific research - Held that - On going through the file submitted by respondent no clear cut reference from the Board to the central government arises requiring the central government to decide as to whether the petitioner fell within the category of a scientific research association or in the second category of other institution partly doing scientific research as referred to in section 35(1)(ii) of the said Act. In the note prepared at paragraph 7(b) Page 10 of the file thereof, it appears that the fact that in the process of activities engaged in part by the petitioner, the petitioner also received some payments, reimbursements and royalties based, weighed heavily with the central government in deciding that the petitioner fell into the category of other institutions . However, this may not be the correct approach inasmuch as section 10(21) and in particular the third proviso thereto recognises a situation where the research association could have profit and gains from business also. In fact, the proviso goes to the extent of saying that the exemption under section 10(21) would apply even to profits and gains of business of a research association provided the business was incidental to the attainment of its object and separate books of accounts were maintained in respect of such business. Therefore, the fact that the petitioner also received certain payments towards royalty, service charges, etc. would not in itself mean that the petitioner was not a scientific research association. Thus the issue should be considered by the central government afresh in the manner indicated above and in accordance with law.

Summary

Issues:
1. Determination of whether the petitioner qualifies as a 'scientific research association' under section 35(1)(ii) of the Income Tax Act, 1961.
2. Interpretation of the criteria for categorizing institutions as 'scientific research associations' or 'other institutions' partly engaged in scientific research.
3. Examination of the central government's decision-making process in categorizing the petitioner and the need for a fresh consideration.

Analysis:

Issue 1:
The primary issue in this case revolves around whether the petitioner, a Center for Development of Telematics (C. DoT), can be classified as a 'scientific research association' under section 35(1)(ii) of the Income Tax Act, 1961. The petitioner contends that its main objective is scientific research, and any ancillary activities such as receiving royalty and service fees should not disqualify it from being categorized as a 'scientific research association.'

Issue 2:
Section 35(1)(ii) distinguishes between institutions primarily focused on scientific research and those, like universities, colleges, or other institutions, engaged in some scientific research. The petitioner argues that it should be classified as a 'scientific research association' due to its exclusive focus on research activities. The court notes that the central government's decision to categorize the petitioner as an 'other institution' was influenced by the payments received by the petitioner, which may not necessarily disqualify it as a scientific research association under the provisions of section 10(21) of the Act.

Issue 3:
The court scrutinizes the central government's decision-making process and finds that there was no clear reference seeking a determination on whether the petitioner qualifies as a 'scientific research association.' The court emphasizes the need for a fresh consideration by the central government, directing them to reevaluate the petitioner's classification within three months, taking into account the provisions of Rule 5D of the Income Tax Rules, 1962. The court sets aside the previous notification and instructs a reexamination of the petitioner's status.

In conclusion, the judgment highlights the importance of accurately categorizing institutions engaged in scientific research for tax purposes and emphasizes the need for a thorough evaluation based on the statutory provisions. The court's decision to remand the matter to the central government for a fresh determination underscores the significance of proper classification under the Income Tax Act.