2010 (1) TMI 40 - HC - Income Tax

Exemption u/s 35E - scientific research - association - Certain very prominent persons in the field of science, which included the then Director General of Council of Scientific and Industrial Research (CSIR) came together to form INSA Notification dated 01.03.2001 was effective only upto 31.03.2003 and did not cover the year under consideration, though at that time application for this purpose was pending with the CBDT. The AO accordingly framed the assessment at an income of Rs.1,38,44,790/-. Against this order, the NISA filed an appeal before the CIT (Appeals). By that time Notification dated 28.03.2007 had been issued granting approval to the NISA under Section 35 (1) (ii) of the Act in view thereof CIT (A) allowed the appeal vide orders dated 30.08.2007 granting exemption under Section 20(21) of the Act to the NISA held that - Since, the basic issue is as to whether exemption under Section 10(21) is applicable only to Scientific Research Institution and not to other institutions and this aspect has not been dealt with at all by the Tribunal. We have no option but to set aside the order of the Tribunal and remit the case back to the Tribunal for afresh consideration - , the NISA had been allowed approval under Section 35(1)(ii) of the Act for the last twenty five years, i.e., till 31.03.2003 as of Scientific Research Association . Reason why the approval is now granted as other institution , is not discernible

Summary

Issues:
1. Approval granted to the scientific association under Section 35(1)(ii) of the Income Tax Act.
2. Eligibility for tax exemption under Section 10(21) of the Act.
3. Classification of the institute under "other institutions" instead of "Scientific Research Association."

Issue 1:
The judgment discusses the approval granted to the Institute under Section 35(1)(ii) of the Income Tax Act, allowing deductions for expenditure on scientific research. The Institute, formed by prominent scientists, had been granted approval as a Scientific Association and a Scientific and Industrial Research Organization (SIRO) by the Government for over twenty-five years. The approval was periodically renewed, and the Institute was recognized for its scientific work and contributions to national welfare.

Issue 2:
Regarding tax exemption under Section 10(21) of the Act, the judgment highlights the importance of approval as a scientific research association for eligibility. The Institute's approval under the category of "other institutions" raised a dispute on its entitlement to tax exemption. The Tribunal upheld the exemption based on a later notification, but the Revenue contested that the Institute did not qualify as a "Scientific Research Association," thus challenging the exemption under Section 10(21).

Issue 3:
The classification of the Institute as an "other institution" instead of a "Scientific Research Association" impacted its tax exemption status. The Tribunal's decision to dismiss the Revenue's appeal was based on the approval granted by the CBDT, considering the Institute as a Scientific Research Association. However, the Tribunal did not address the crucial distinction between the two classifications, prompting the High Court to set aside the order for further consideration.

The judgment emphasizes the significance of the Institute's classification and approval status under the Income Tax Act for tax benefits. It underscores the need for clarity in categorizing institutions for tax exemptions and the importance of proper approvals for scientific research associations. The case highlights the complexities involved in determining eligibility for tax benefits based on the Institute's classification and approval history.