2009 (5) TMI 31 - HC - Income Tax

Denial of exemption under section 10(23C)(vi) and no renewal of exemption on the ground that the petitioner had not applied its income wholly and exclusively to objects for which it was set up - Petitioner claims that it had withdrawn amounts credited to its principal and thereafter paid sums to these two schools in cash but there was no documentary proof - The Director General ordered to produce the books of account of the two schools - The petitioner failed to produce the books of accounts of those two schools and instead requested for issuance of summons under Section 131 - This request was turned down by the Director General. Held that this would indeed be a very dangerous precedent fraught with possibilities of harassment at the behest of the assessee if without any foundation the Department insists on a third party to produce its books of accounts Petition dismissed

Summary

Issues:
Challenge to order of Director General Income Tax rejecting exemption application under Section 10(23C)(vi) for assessment year 2008-09 onwards.

Analysis:
1. The writ petition challenged the order of the Director General Income Tax rejecting the petitioner's application for renewal of exemption under Section 10(23C)(vi) of the Income Tax Act, 1961 for the assessment year 2008-09 onwards. The petitioner, a Society running a school, faced closure leading to students being transferred to other schools. The petitioner claimed to have incurred teaching expenses for students transferred to different schools due to closure.

2. The Director General found the petitioner's payment method dubious and lacking documentary proof for expenses claimed. The petitioner failed to produce books of accounts of the schools where students were transferred, instead requesting summons under Section 131 of the Income Tax Act, which was denied. The Director General concluded that the petitioner failed to prove the payment of teaching expenses, leading to rejection of the exemption renewal application under Section 10(23C) due to non-application of income wholly and exclusively to the objects for which it was set up.

3. The petitioner argued that the Director General should have issued a process under Section 131 of the Act since the need for producing books of accounts was established. The Department contended lack of evidence for the payments to the schools. The petitioner highlighted a potential violation of CBSE Affiliation Bye Laws by the other schools, not justifying denial of exemption to the petitioner under Section 10(23C)(vi).

4. The Court disagreed with the petitioner's contentions, emphasizing the petitioner's responsibility to maintain proper accounts. The Court noted that the petitioner did not submit confirmations or books of accounts of the schools in question. Refusing to set a precedent where a third party's accounts are summoned without foundation, the Court declined to exercise extraordinary powers under Article 226 of the Constitution. The Court clarified that the issue of Affiliation Bye-laws violation was separate from the case at hand.

5. Ultimately, the Court dismissed the writ petition challenging the Director General's order rejecting the exemption renewal application under Section 10(23C)(vi) for assessment year 2008-09 onwards.