IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:19.03.2010 CORAM: THE HON'BLE MR.JUSTICE P.JYOTHIMANI WRIT PETITION Nos.24214 to 24216 OF 2009 and connected miscellaneous petitions. .. M/s.Valliammai Society No.3 Veerasamy Street West Mambalam Chennai 600 033. .. Petitioner in all the W.Ps., vs. 1.The Director General of Income-tax (Investigation) New Income Tax Building No.46 (Old No.108) Mahathma Gandhi Road Chennai 600 034. 2.The Assistant Commissioner of Income-tax, Central Circle I (3) No.46 (Old No.108) Mahathma Gandhi Road Chennai 600 034. .. Respondents in all the W.Ps., Writ Petitions filed under Article 226 of the Constitution of India praying for issuance of Writs of; I Certiorari Calling for the records in F.No.2097(2)/08-09 dated 22.10.2009 relating to the assessment year 2007-08 2008-09 respectively on the file of the 1st Respondent and quash the same (WP.Nos.24214/09 and 24215/09 and; II Certiorarified Mandamus quashing the said proceedings in F.No.2097 (2)/09-10 dated 21.10.2009 and directing the respondent to grant approval to the petitioner under section 10(23C) (VI) for the assessment year 2009-10 (WP.No.24216/09 respectively. https://hcservices.ecourts.gov.in/hcservices/ For petitioner : Mr.M.Ramachandran,Sr.Counsel for Dr.Anitha Sumanth For respondents : Mr.K.Subramaniam Senior Central Government Standing Counsel. .. COMMON ORDER These writ petitions are directed against the orders of the first respondent withdrawing the approval under section 10(23C)(vi) of the Income-tax Act, for the assessment year 2009-10 and issuing show cause notices in respect of 2007-08 and 2008-09 relating to the petitioner Society. 2. The petitioner Society which is registered under the Tamil Nadu Societies Registration Act,1975 with the object of setting up and establishing and administering educational institutions, both engineering and medical colleges and hostels, is stated to have been started not with profit motive. The petitioner Society had started SRM Engineering College and thereafter, many institutions under its control and the petitioner institutions are recognized as minority institutions, as declared by the High Court and the petitioner Society has been regularly filing audit reports in the prescribed manner, after complying with various statutory requirements of the Income-tax Act. 2(a). The petitioner is eligible for exemption in respect of income as per section 10(23C) of the Income-tax Act and application has been made to the first respondent through the Commissioner of Income- tax for exemption under the said provision. It is stated that the petitioner Society has been granted exemption up to 2008-09. 2(b). It is stated that for the year 2007-08, the first respondent by order dated 4.3.2008 accorded approval under the above said provision read with rule 2CA of the Income-tax Rules, 1962 and the approval was subject to certain conditions which included that the accumulated income has to be spent for the object of the Society and the Society should not invest or deposit its funds otherwise than the modes specified under section 11(5) of the Income-tax Act and the said approval is not applicable to any income received by way of profit or gain of business and the Society should regularly file return and the approval would be void if it is subsequently found that the same has been obtained by fraud or misrepresentation, apart from various other conditions. 2(c). For the year 2008-09, the petitioner applied for the continuance of the approval and the first respondent granted approval in the order dated 30.10.2008 subject to the conditions as set out for the year 2007-08. It is the case of the petitioner that the petitioner https://hcservices.ecourts.gov.in/hcservices/ complied with the said conditions. The petitioner filed an application on 30.10.2008 before the Chief Commissioner of Income-tax/ Director General of Income-tax seeking approval of exemption for the assessment year 2009-10 with all details. 2(d). By the impugned order dated 22.10.2009, the first respondent found that the petitioner Society which was constituted with the object of education is not fit for approval and accordingly, rejected the application for approval for the assessment year 2009-10. It is stated that there was a search conducted in SRM Group on 12.8.2004 and certain C.Ds. and loose sheets in respect of accounts of various years were found and seized and in respect of certain difference in the figures between the C.Ds. and the returns relating to the assessment years 1999-2000 to 2003-04, explanation was submitted by the petitioner, which was not accepted by the respondents and on the basis of legal presumption, order came to be passed. 2(e). It is also stated that a reference was made to the Commissioner of Income-tax under section 263 of the Act in respect of SRM Systems and Software Private Limited for the assessment year 2004- 05, wherein it was held that the petitioner is not qualified for approval under section 10(23C)(vi) read with Third Proviso. It was also held that the petitioner does not exist solely for educational purposes. It is also stated that the respondents found that between 31.3.2005 to 31.3.2007, the petitioner received deposits from various persons and also paid interest and that is construed to be a profit- oriented activity and therefore, the presumption has been drawn against the petitioner. 2(f). Though there was a detailed enquiry conducted by the respondents, it is the case of the petitioner that no discrepancy was found in respect of assessment year 2009-10, for which an application for approval was made and the averments made were relating to the year up to 2003-04 and not in respect of later years. It is based on the said rejection of the application for the year 2009-10, the respondents proposed to withdraw the approval granted by the Director General in respect of assessment years 2007-2008 and 2008-09 for the reason that for the assessment year 2009-10, the approval has been withdrawn. 2(g). It is stated that the rejection for the year 2009-10 with the reason given is not relating to that year and not even relating to 2007-08 and 2008-09 and the allegations are relating to 1999-2000 to 2000-01 and 2003-04. 3. The said impugned order and show cause notices are challenged by the petitioner on various grounds that without any evidence of contravention of conditions by the petitioner, the orders have been passed; that as per section 10(23C), 13th Proviso, the violation must be only in respect of the relevant year; that under the 3rd proviso, the prescribed authority must notice that there are violation of conditions set out in respect of the assessment year for which the approval has been sought for; that in respect of certain irregularities stated to https://hcservices.ecourts.gov.in/hcservices/ have been found for the previous years, the rejection for the assessment year 2009-10 is not valid; that the petitioner has complied with various conditions set out in section 10(23C)(vi) as well as various provisos for the respective assessment years and therefore, there are absolutely no grounds for withdrawing the approval for the assessment year 2009-10 and also for issuing show-cause notice for the years 2007-08 and 2008-09. 4. In the counter affidavit filed by the first respondent, it is denied that the petitioner Society exists solely for educational purposes and the same has been discussed in detail in the impugned order. It is stated that the Society has been suppressing its receipts and inflating its expenses and maintaining duplicate books of account. It is stated that the Society has been showing the receipt of huge deposits from sundry persons and paying interest to them but, the same is not supported by confirmation of identifiable creditors and therefore, they are to be treated as illegal capitation fees charged from the students in violation of the public policy and the charging of capitation fees is another way of earning profits. 4(a). It is stated that the search and seizure carried out on 12.8.2004 resulted in discovery of various documents evidencing payment to the Chairman and other members of the Society which is in contravention of section 13(1)(c) read with section 13(3) of the Act and certain amounts are stated to have been paid to ICICI Bank towards repayment of loan taken by the Chairman in his personal capacity, and advances were made in the name of sister concerns including a firm of chartered accountants and the same is in contravention of section 10 (23C)(b) read with section 11(5) of the Act and the said Chartered Accountant of the assessee, by name, Shri K.S.Subramanian admitted that besides his fees, rest of the amounts were routed through his concern, M/s.K.S.& Co. for the personal benefits of the members of the Society. 4(b). It is stated that these are the business ventures and the said activities are with business motive and the Supreme Court has heavily condemned any such practice in TMA Pai Foundation v. State of Karnataka (AIR 2003 SC 355). It is also stated that SRM Engineering college has been taken over by a separate Trust by name, SRM Institute of Science and Technology under a Trust deed dated 30.6.2001 and the said institute which is distinct from the assessee society, has been granted approval under section 10(23C)(vi) in the order dated 26.10.2009. 4(c). It is stated that false accounts have been maintained and the Society have not satisfied the conditions stipulated in section 10 (23C)(vi) of the Act. It is stated that the approval granted to the petitioner Society on 11.12.2002 for the assessment years 1999-2000 to 2001-02 was given prior to the discovery of incriminating materials which were found during the search made on 12.8.2004 and the proceedings for rescinding of the notification are still pending. 4(d). It is stated that after the search, no approval was granted under section 10(23C)(vi) for any assessment year up to the assessment https://hcservices.ecourts.gov.in/hcservices/ year 2006-07 and the approval was granted only for the assessment years 2007-08 and 2008-09 without appreciating the seized records and therefore, a notice for withdrawal of approval for those two years was issued under the impugned proceedings dated 22.10.2009 and such notice is authorized as per section 10(23C), 13th Proviso. 4(e). It is stated that the conclusion arrived at by the first respondent based on the seized accounts is in consonance with the order of the Income-tax Appellate Tribunal, Chennai Bench. It is stated that the assessee has failed to produce confirmation letters from three of the depositors viz., Subapriya, S.V.Pandurangan and P.Kalaiselvi. It is stated that the approval granted under section 10(23C) was not for a specific assessment year, but from a particular assessment year onwards for an indefinite period subject to withdrawal as provided under 13th Proviso and therefore, the question of approval has to be decided on the basis of past records of the assessee and the withdrawal order has been passed only on the basis of tangible records and the same cannot be said to be vague. 4(f). It is also stated that the assessee was never granted approval for the years 2003-04 to 2005-06 and for the year 2006-07, it was denied ab initio because of late filing of application and the approval was granted only for 2007-08 and 2008-09 and the proceedings for rescinding and withdrawal are pending by way of show-cause notice. It is reiterated that the disposal of application must be based on the past records and not on the records relating to a particular year. 5. Mr.M.Ramachandran, learned senior counsel appearing for the petitioner would reiterate that the consideration of exemption under the said provision of the Act is based on the assessment of the said year and not on the past conduct and in the present case, the transaction that is stated to have taken place nine years ago, is for the purpose of refusal of renewal of concession and for withdrawal of concession for the years 2007-08 and 2008-09. It is also his contention that in view of the averment made in the counter affidavit filed by the respondents that the term, ‘capitation fees’ does not find a place in the impugned order, the intention of the respondents is to deprive the petitioner of such concession under one pretext or the other. 6. On the other hand, it is the contention of the learned senior Central Government standing counsel for Income-tax, Mr.K.Subramaniam, that the case of the petitioner is one relating to capitation fees which is a social evil to be curtailed and the Supreme Court has heavily come down on the same in TMA Pai Foundation Case. It is his contention that when the department has found tangible, incriminatory materials against the petitioner Society, the petitioner is not entitled to continuation of such concession at all. It is his submission that the withdrawal or refusal of grant of such concession can only be based on the past conduct and he would rely upon various judgments in Dhansiram Agarwalla vs. Commissioner of Income-tax [(1993) 201 ITR 192], Coimbatore Spinning & Weaving Co., Ltd., vs. Commissioner of Income-tax [(974) 95 ITR 375] to substantiate his contention that https://hcservices.ecourts.gov.in/hcservices/ the past conduct can be taken into consideration. According to him, if the conditions of exemption are violated, certainly the petitioner is not entitled for the grant of exemption for subsequent years and even if a mistake has been committed earlier, such mistake cannot be permitted to continue. 7. I have heard the learned senior counsel for the petitioner and the learned senior Central Government standing counsel for the respondent department and perused the records and given my anxious thoughts to the issue involved in this case. 8. It is an admitted case as it is seen in the counter affidavit filed by the respondents that the petitioner Society was granted approval under section 10(23C)(vi) of the Income-tax Act for the assessment years from 1999-2000 to 2001-02 and a search operation was effected by the department on 12.8.2004 and thereafter, approval was granted for the years 2007-08 and 2008-09. It is based on certain incriminating materials, it was concluded that the petitioner Society violated the conditions of approval, and the application for approval for the year 2009-10 was rejected by the first respondent and simultaneously show-cause notice was issued by the first respondent for the purpose of cancellation of approval granted for the years 2007-08 and 2008-09 and the show-cause notice as well as the order of rejection for the said assessment years are challenged in these writ petitions. 9. The main grievance of the petitioner is that the approval has to be granted for every assessment year based on the existing facts and in respect of earlier year, if any material has been found so as to create a doubt in the mind of the authority that the petitioner is not entitled for the approval which in effect is a privilege, the approval granted for that year can be cancelled and there cannot be a presumption that such mistake will continue in future years also. It is stated that it is not even the case of the respondent department that any material, which is incriminating in nature, was found against the petitioner Society in respect of the assessment years 2007-08, 2008-09 and 2009-10 and it is on the basis of incriminating materials found in the search made in the year 2004, which showed the adverse conduct of the petitioner, a presumption was drawn against the petitioner and on the basis of such presumption, the impugned order came to be passed apart from the issuance of show-cause notice. Therefore, the issue to be decided is, as to whether the approval granted under the said provision relating to every assessment year is to be passed on the basis of conduct of the parties in that particular year or an inference can be drawn against the assessee based on the previous conduct of the assessee. 10. Section 10 of the Income-tax Act, in computing the total income of the previous year of any person, excludes certain incomes like, (i) agricultural income; (ii) income of a member of a Hindu undivided family where such sum has been paid out of the income of the family; (iii) share income of a partner in the total income of the firm which is separately assessed; (iv) any income by way of interest on https://hcservices.ecourts.gov.in/hcservices/ securities or bonds or savings certificates of a non-resident; (v) the value of any travel concession or assistance received by or due to an individual from his employer; (vi) the remuneration received by an individual who is not a citizen of India as an official of an embassy, etc.; (vii) the remuneration received by an individual who is not a citizen of India as an employee of a foreign enterprise for services rendered by him during his stay in India; (viii) income chargeable under the head, ‘salaries’ received by or due to any individual being a non-resident as remuneration for services rendered in connection with his employment on a foreign ship; (ix) remuneration received as an employee of the Government of a foreign State during his stay in India; (x) allowance or perquisites paid or allowed outside India by the Government to a citizen of India; (xi) any remuneration or fee received by a consultant out of the funds made available to an international organization, etc. 11. In sub-section (23) of section 10, any income of an association or institution established in India, notified by the Central Government, having regard to the fact that the association or institution has as its object the control, supervision, regulation or encouragement in India of the games of cricket, hockey, etc., does not form part of total income computed for the purpose of income-tax. The said sub-section was subsequently omitted by the Finance Act, 2002 with effect from 1.4.2003. Further, under sub-section (23A) of section 10, exemption is granted to the income from house property or any income received for rendering any specific services of an association or institution established in India having as its object the control, supervision, regulation or encouragement of the profession of law, medicine, accountancy engineering or architecture or such other profession as the Central Government may specify in this behalf by notification. 12. It was in that category relating to the exemption to the assessment, sub-section (23C) was introduced exempting the income received by a person on behalf of the Prime Minister’s National Relief Fund, the Prime Minister’s Fund (Promotion of Folk Act), the Prime Minister’s Aid to Students Fund, or the National Foundation for Communal Harmony, etc. and in sub-section (23C), clause (vi) was introduced with effect from 1.4.1999 which is as follows: “ Section - 10(23C)(vi). Any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority.” 13. The authority, who is prescribed for such approval is the Chief Commissioner or Director General. Rule 2CA which relates to the guidelines for approval in respect of clause (vi) of sub-section (23C) of section 10 which applies to the present facts of the case, is as follows: https://hcservices.ecourts.gov.in/hcservices/ “ Rule 2CA. (1) The prescribed authority under sub-clauses (vi) and (via) of clause (23C) of section 10 shall be the Chief Commissioner or Director General, to whom the application shall be made as provided in sub-rule (2). (1A) The prescribed authority under sub-clauses (vi) and (via) of clause (23C) of section 10 shall be the Central Board of Direct Taxes constituted under the Central Board of Revenue Act, 1963 (54 of 1963) for applications received prior to 3rd day of April 2001: Provided that in case of applications received prior to 3rd day of April, 2001 where no order has been passed granting approval or rejecting the application as on 31st day of May,2007, the prescribed authority under sub-clauses (vi) and (via) of clause (23C) of section 10 shall be the Chief Commissioner or Director General. (2) An application for approval shall be made in Form No.56D by any university or other educational institution or any hospital or other medical institution referred to in sub- clause (vi) or sub-clause (via) of clause (23C) of section 10. (3) The approval of the Central Board of Direct Taxes or Chief Commissioner or Director General, as the case may be, granted before the 1st day of December, 2006 shall at any one time have effect for a period not exceeding three assessment years. [Explanation.- For the purposes of this rule, “Chief Commissioner or Director General” means the Chief Commissioner or Director General whom the Central Board of Direct Taxes may, authorise to act as prescribed authority, for the purpose of sub-clause (vi) or sub-clause(via) of clause (23C) of Section 10, in relation to any university or other educational institution or any hospital or other medical institution.]” 14. The proviso to the said rule which enables an application for approval to be made in Form 56D, in column 7 mandates that the assessee should enclose the audited accounts and the balance sheet for the last three years and the said clause is as follows: “ 7. Enclose copies of audited accounts and balance sheets for the last three years along with a note on the examination of accounts and on the activities as reflected in the accounts and in the annual reports with special reference to the appropriation of income towards objects of the university or other educational institution or hospital or other medical institution referred to in serial number 1.” 15. The said rule especially sub-rule (3) makes it clear that the approval granted before the 1st December, 2006 at one time shall be https://hcservices.ecourts.gov.in/hcservices/ effected for the period of not exceeding three assessment years. Therefore, it is clear that the exemption granted once is not final or continuing one and it can always be revoked. 16. The various clauses of income referred to in section 10(23C) (vi) which are eligible for exemption are explained in various provisos indicating the manner of making application, etc. For the better appreciation of the facts in issue it is desirable to extract the provisos which are relevant for the purpose of this case, as follows: “ Provided that the fund or trust or institution [or any university or other educational institution or any hospital or other medical institution] referred to in sub-clause (iv) or sub-clause (v) [or sub-clause (vi) or sub-clause (via)] shall make an application in the prescribed form and manner to the prescribed authority for the purpose of grant of the exemption, or continuance thereof, under sub-clause (iv) or sub-clause(v) [or sub-clause (vi) or sub-clause (via)]: [Provided further that the prescribed authority, before approving any fund or trust or institution or any university or other educational institution or any hospital or other medical institution, under sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via), may call for such documents (including audited annual accounts) or other educational institution or any hospital or other medical institution, as the case may be, as it thinks necessary in order to satisfy itself about the genuineness of the activities of such fund or trust or institution or any university or other educational institution or any hospital or other medical institution, as the case may be, and the prescribed authority may also make such inquiries as it deems necessary in this behalf:] Provided also that the fund or trust or institution [or any university or other educational institution or any hospital or other medical institution] referred to in sub- clause (iv) or sub-clause (v) [or sub-clause (vi) or sub- clause (via)]- [(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and] [(b) does not invest or deposit its funds, other than- (i) any assets held by the fund, trust or institution [or any university or other educational institution or any hospital or other medical institution] where such assets form part of the corpus of the fund, trust or institution [or any https://hcservices.ecourts.gov.in/hcservices/ university or other educational institution