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2015 (10) TMI 600 - HC - Income TaxIncome from All India Personality Enhancement and Cultural Centre for Scholars AIPECCS Society - whether exigible to tax under the Act? - whether Assessee was not functioning solely for the purposes of education and, therefore, was not eligible for exemption under Section 10(22) of the Act? - Assessee submitted that since Revenue had not challenged the order dated 4th August, 2006 passed by the Tribunal under Section 254(2) it was not open for the Revenue to impugn the same in the present appeal and as by virtue of Section 10(22) of the Act, the income of the Assessee was not chargeable to tax and, therefore, the Assessee was also not liable to file its return of income under Section 139 - assessment under Section 158BC Held that - The expression undisclosed income would have to be given a schematic interpretation. The provisions regarding search and seizure and assessing undisclosed income are draconian provisions; the assessment and penalties that follow the discovery of undisclosed income are also harsh. Thus, the expression undisclosed income would have to be viewed from the stand point of an Assessee and unless it is manifest from the conduct of the Assessee that he consciously intended to conceal his income, which he otherwise believed to be taxable; the same would not to be liable to be treated as undisclosed income of an Assessee. As indicated earlier, there is no material to conclude that the Assessee acted in a manner to conceal its income or activities from the Authorities. Thus, in the facts of the present case, even if it is found that the Assessee was not entitled to benefit of Section 10(22)/10(23C) of the Act, its income as recorded in its regular books of accounts, nonetheless could not be treated as undisclosed income . In view of the aforesaid, the assessment order made by the AO under Section 158BC of the Act is not sustainable as in the absence of any undisclosed income, the question of framing a block assessment does not arise. We find no infirmity with the decision of the Tribunal in setting aside the block assessment order dated 31st January, 2001. We accept the contention advanced on behalf of the Assessee that the question whether the income of the Assessee was liable to be excluded from its total income by virtue of Section 10(22) of the Act was an issue which could not be made the subject matter of block assessment under Section 158BC, as the same is concerned only with the assessment of undisclosed income . In the facts of the present case, it is seen that the objects of the Assessee society are solely for the purposes of education and not for purpose of profit. Distribution of surpluses is prohibited. Further, in the event of dissolution of the Assessee society, its assets would have to be transferred to another institution carrying on similar activities and the same cannot be distributed to its members. The Assessee has been running three schools that are affiliated to CBSE; admittedly, this which would not be permissible in case the Assessee did not exist solely for educational purposes and/or if the Assessee was found to be pursuing the profit motive. The surpluses generated by the Assessee are necessarily to be applied towards its charitable objects.In view of the aforesaid, the exemption under Section 10(22) of the Act cannot be denied to the Assessee only for the reason that it had been generating surpluses Whether the investments made by the Assessee would disentitle the Assessee to the exemption under Section 10(22)? - Held that - The exemption available under Section 10(22) and 10(23C) could not be denied to the Assessee on the ground that it had invested its funds contrary to Section 11(5) of the Act, as the said condition was introduced by the fifth proviso to Section 10(23C) only w.e.f. 1st April, 1999. More importantly, the Assessees who had made their investments which did not conform to Section 11(5) of the Act, were by virtue of the proviso to Section 10(23C) afforded time till 30th March, 2001 a period of three years to transfer their investments to permissible securities as specified under Section 11(5) of the Act. It is not disputed that the investments made by the Assessee in Consortium Finance Pvt. Ltd. were released and the funds of the Assessee were invested in a manner as specified under the provisos to Section 10(23C) read with section 11(5) of the Act. It is not disputed that bulk of the investment in BVR Plantations Ltd. amounting to ₹ 3,64,520/- was made in the financial year 1995-96. The petitioner had paid only two installments of ₹ 34,550/- each in the year 1999-2000. The Assessee had claimed that the payments made in the year 1999-2000 were only further installments of the investment already made and could not be considered as fresh investments. It is also not disputed that the funds invested by the Assessee in BVR Plantations Ltd. were unrecoverable. Thus, in our view, it cannot be disputed that the Assessee had realigned all its investments in the manner as specified under provisos to Section 10(23C) read with Section 11(5) of the Act prior to 30th March, 2001 and had complied with the provisos of Section 10(23C) of the Act. The activities of the Assessee must be viewed in the overall perspective of its nature and its principal object. It is not disputed that the surpluses generated by the Assessee could not be distributed to its members and there is also no allegation that the funds of the Assessee had been so distributed. The fact that certain advances had been made to Col. Satsangi and some of its family members who were also involved in running the school cannot be construed as diluting the predominant object of the Assessee. Seen from the overall perspective, it could hardly be disputed that the predominant activity of the Assessee was managing schools and the substratal purpose of its activities was education. Thus, in our view, the conclusion that the Assessee did not exist solely for educational purposes, but for the purposes of profit on the basis that it had advanced the aforesaid sums to Col. Satsangi and/or his family members who were involved in the affairs of the Assessee, is unwarranted.Thus, in our view, the Assessee would qualify for exemption under Section 10(22)/10(23C) of the Act. Non furnishing of audit report may be necessary for seeking approval under section 10(23C) of the Act; however, failure to file the same along with application would not be fatal to the application. And, in the event an Assessee furnishes the report/certificate, the approval as sought by the Assessee cannot be denied. Thus, in our view, DGIT(E) was not justified in denying the Assessee approval under Section 10(23C)(vi) on the ground that the audit report had not been furnished along with the application but had been furnished by the Assessee subsequently, prior to the rejection of the application. Insofar as other reasons for rejection of the Assessee s application are concerned, in our considered view, the same are not sustainable for the reasons as discussed hereinbefore. - Decided in favour of assessee.
Issues Involved:
1. Whether the income of the Assessee is exigible to tax. 2. Whether the surpluses reflected by the Assessee in its Books of Accounts could be taxed as undisclosed income. 3. The validity of the search operations under Section 132 of the Income Tax Act. 4. Whether the Assessee is entitled to exemption under Section 10(22)/10(23C) of the Income Tax Act. 5. The legality of the penalty imposed on the Assessee under Section 158BFA(2) of the Act. 6. The correctness of the order passed by the DGIT(E) rejecting the Assessee's application for approval under Section 10(23C)(vi) of the Act. Detailed Analysis: 1. Whether the income of the Assessee is exigible to tax: The primary controversy revolves around whether the income of the All India Personality Enhancement and Cultural Centre for Scholars (AIPECCS Society) is taxable. The Assessee claimed that its income was exempt under Section 10(22)/10(23C) of the Income Tax Act, asserting that it existed solely for educational purposes. 2. Whether the surpluses reflected by the Assessee in its Books of Accounts could be taxed as undisclosed income: The Tribunal found that surpluses recorded in the Assessee's books maintained in the regular course could not be considered as 'undisclosed income' under Chapter XIV-B of the Act. The High Court upheld this view, emphasizing that the surpluses recorded by the Assessee in its regular books of accounts, which the Assessee believed were not chargeable to tax, could not be assumed to be 'undisclosed income' solely because a return of income surrendering the said surpluses to tax had not been filed. 3. The validity of the search operations under Section 132 of the Income Tax Act: The Assessee challenged the validity of the search operations, arguing that the warrant of authorization did not specify a person but only the premises to be searched, which was contrary to the provisions of Section 132. However, the Tribunal did not decide on the validity of the search, as it had already allowed the appeal on the ground that the surpluses could not be considered as 'undisclosed income'. 4. Whether the Assessee is entitled to exemption under Section 10(22)/10(23C) of the Income Tax Act: The High Court held that the Assessee was entitled to the benefit of exemption under Section 10(22)/10(23C) of the Act. The Court noted that the Assessee was managing and running schools solely for educational purposes and not for profit, and that the surpluses generated were to be applied towards its charitable objects. The Court also observed that the investments made by the Assessee did not disentitle it from the exemption, as the conditions regarding investments were introduced only w.e.f. 1st April, 1999. 5. The legality of the penalty imposed on the Assessee under Section 158BFA(2) of the Act: The Tribunal had set aside the penalty imposed on the Assessee under Section 158BFA(2) of the Act, and the High Court upheld this decision. Since the surpluses recorded in the Assessee's books could not be considered as 'undisclosed income', the penalty imposed was not sustainable. 6. The correctness of the order passed by the DGIT(E) rejecting the Assessee's application for approval under Section 10(23C)(vi) of the Act: The High Court set aside the order passed by DGIT(E) rejecting the Assessee's application for approval under Section 10(23C)(vi) of the Act. The Court held that the scope of examination for granting approval under Section 10(23C)(vi) was limited to considering whether the objects and the nature of the Assessee fell within the scope of Section 10(23C)(vi) and whether the institution existed solely for educational purposes. The Court directed DGIT(E) to consider the Assessee's application afresh in light of its observations. Conclusion: The High Court dismissed the Revenue's appeals, upheld the Tribunal's decisions, and directed DGIT(E) to reconsider the Assessee's application for approval under Section 10(23C)(vi) of the Act. The Assessee was found to be entitled to the exemption under Section 10(22)/10(23C), and the surpluses recorded in its books could not be treated as 'undisclosed income'. The penalties imposed were also set aside.
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