2008 (5) TMI 17 - SC - Income Tax

Appellant was a non-profit organization set up in USA. It had a branch office in India to collect data and fees which was thereafter remitted to USA. It was allowed exemption u/s 10(22) upto 31.3.1998 before omission. Appellant made an application for exemption u/s 12(23C) but CBDT refused on the ground that the income is not being used in India. SC held that CBDT may put the condition as it may deem fit but can not reject the application on the ground that income is not applied in India.

Summary

Issues Involved:
1. Scope of enquiry by the Prescribed Authority under Section 10(23C)(vi) read with the third proviso.
2. Application of income for educational purposes in India.
3. The interpretation of the words "in India" in Section 10(23C)(vi).
4. Compliance of conditions stipulated by the Prescribed Authority.

Issue-wise Detailed Analysis:

1. Scope of Enquiry by the Prescribed Authority:
The primary issue is the extent of the enquiry that the Prescribed Authority (CBDT) must undertake under Section 10(23C)(vi) of the Income-tax Act, 1961. The appellant's application for approval was rejected by CBDT on the grounds that there was a surplus repatriated outside India, implying that the income was not applied for educational purposes in India. The Supreme Court held that the scope of enquiry at the approval stage should focus on the nature, existence for non-profit purposes, and genuineness of the institution. The compliance with conditions like application of income, accumulation, and investment in specified assets, as stipulated in the third proviso, are monitoring conditions and are to be examined at the assessment stage, not at the initial approval stage.

2. Application of Income for Educational Purposes in India:
CBDT and the Delhi High Court interpreted that the gross receipts collected by the appellant's branch office in India constituted "income" chargeable to tax, and since this income was not applied for educational purposes in India, the application for approval was rightly rejected. The Supreme Court clarified that the term "application of income" in the third proviso refers to the objects for which the institution is established and does not specifically mandate that the income must be applied in India. The court emphasized that the focus should be on whether the institution exists solely for educational purposes and not for profit.

3. Interpretation of the Words "in India" in Section 10(23C)(vi):
The Delhi High Court and the Department argued that the words "in India" should be read into the third proviso to Section 10(23C)(vi), requiring that the income must be applied for educational purposes in India. The Supreme Court rejected this interpretation, stating that the plain words of the third proviso do not require the application of income to be in India. The court noted that similar words "in India" are found in other sections like Sections 10(20A), 10(22B), and 11(1)(a) of the Act, but not in Section 10(23C)(vi). Therefore, the court concluded that the educational institution must impart education in India to claim exemption under Section 10(23C)(vi).

4. Compliance of Conditions Stipulated by the Prescribed Authority:
The Supreme Court highlighted that the Prescribed Authority (CBDT) has the power to stipulate conditions subject to which approval may be granted. These conditions could include the utilization/application of a certain percentage of income towards imparting education in India. The court emphasized that compliance with these conditions should be monitored at the assessment stage, and if any breach is found, the approval can be withdrawn as per the thirteenth proviso to Section 10(23C)(vi). The court remitted the matter to CBDT for fresh consideration, directing that the appellant's application should not be rejected on the ground of non-compliance with the third proviso at the approval stage.

Conclusion:
The Supreme Court set aside the order dated 12.10.2004 passed by CBDT and the impugned judgment dated 24.11.2006 of the Delhi High Court. The matter was remitted to CBDT for fresh consideration in accordance with the law, emphasizing that the appellant had fulfilled the threshold pre-condition of actual existence of an educational institution under Section 10(23C)(vi). The court allowed the civil appeal with no order as to costs.