2014 (11) TMI 411 - HC - Income Tax

Rejection of renewal of recognition u/s 10(23C)(vi) Held that - It has been held in Sri Ranganatha Enterprises v. CIT 1998 (1) TMI 52 - KARNATAKA High Court that in respect of any exemption claimed under any of the provisions in Chapter-III, the burden of proof that the income falls under the Sections in the said chapter is on the assessee - the prescribed competent authority, while considering the application for approval and examining the eligibility criteria, ought to take into consideration the real purpose of the Trust - assessee submitted its application for renewal in the proper format, namely, Form 56D, and stated that the main objects of the Trust are relief to poor, education, medical relief and advancement of any other objects of public utility. The Trust is running Polytechnic and Industrial Training Institute - under Chapter-III, more particularly, Sections 10 to 13A of the Act, the Act brings certain categories of exemption and incomes falling within those categories are completely exempt from the purview of the Act, as they are not at all to be included in the total income of the assessee - such type of exemption/s has/have to be distinguished from certain types of income, which are included in the total income of the assessee, but in respect of which statute provides relief by way of deduction in computing the total income, by granting rebate of tax and by granting certain other reliefs from the tax-payers - the opportunity afforded to the petitioner was inadequate, inasmuch as the order appears to be solely on the basis of the report of the DIT (E), without any opportunity to the assessee to place materials to rebut the findings contained in the report and that the tests required to be applied while examining the issue, having not been rightly applied - the order is set-aside and the matter is remanded back for fresh consideration Decided in favour of assessee.

Issues Involved:
1. Rejection of renewal of recognition under Section 10 (23C) (vi) of the Income Tax Act, 1961.
2. Violation of principles of natural justice.
3. Distinction between approvals under Sections 12A, 80G, and 10 (23C) (vi) of the Income Tax Act.
4. Adequacy of the opportunity for personal hearing.
5. Consideration of the real purpose of the Trust.

Issue-wise Detailed Analysis:

1. Rejection of Renewal of Recognition under Section 10 (23C) (vi) of the Income Tax Act, 1961:
The petitioner, a Trust registered under the Indian Trusts Act, 1882, sought renewal of recognition under Section 10 (23C) (vi) of the Income Tax Act, 1961, for the assessment year 2009-10. The first respondent rejected the application on 05.08.2010, stating that the Trust did not exist solely for educational purposes. The petitioner challenged this order, arguing that it had been recognized as a Public Charitable Trust under Section 12A of the Act since 1977 and had received previous approvals under Section 10 (23C) (vi) for earlier assessment years.

2. Violation of Principles of Natural Justice:
The petitioner contended that the impugned order violated principles of natural justice because the Trust was not given an opportunity to rebut the presumption drawn by the first respondent. The petitioner argued that if given a chance, it could have provided materials to justify its claim. The court noted that the petitioner was not made aware of the adverse report from the Director of Income-Tax (Exemptions) (DIT (E)), which formed the basis of the rejection. The court emphasized that an opportunity of personal hearing should be meaningful and effective, allowing the petitioner to present all relevant materials before a decision is made.

3. Distinction between Approvals under Sections 12A, 80G, and 10 (23C) (vi) of the Income Tax Act:
The respondents argued that approval under Section 12A or eligibility under Section 80G does not automatically grant exemption under Section 10 (23C) (vi). Each provision has independent criteria, and merely being an approved charitable trust under Section 2 (15) does not entitle the Trust to exemption under Section 10 (23C) (vi). The court acknowledged this distinction, noting that the conditions prescribed under Section 10 (23C) (vi) must be strictly fulfilled by the assessee claiming exemption.

4. Adequacy of the Opportunity for Personal Hearing:
The court found that the petitioner was afforded an opportunity of personal hearing, but it was inadequate. The adverse report from the DIT (E) was not disclosed to the petitioner, depriving it of the chance to rebut the findings. The court emphasized that the opportunity should be effective and adequate, enabling the petitioner to place all materials before the authority.

5. Consideration of the Real Purpose of the Trust:
The court opined that while considering the claim for exemption, the substance of the claim is more relevant than the form. The authority should not be solely guided by the objects set out in the Trust Deed but should consider the activities of the Trust and how the funds are employed. The court noted that the exemption under Chapter-III of the Act deals with incomes that do not form part of the total income, and the prescribed authority should consider the real purpose of the Trust while examining the eligibility criteria.

Conclusion:
The court allowed the writ petition, set aside the impugned order, and remanded the matter back to the first respondent for fresh consideration. The petitioner was to be furnished with a copy of the report from the DIT (E) and given an opportunity to submit its objections. The first respondent was directed to afford a personal hearing and pass a reasoned order on merits and in accordance with law. No costs were awarded, and the connected miscellaneous petition was closed.

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