2019 (4) TMI 715 - HC - Income Tax

Court overturns denial under Income Tax Act, directs reevaluation within 8 weeks.

The court set aside the respondent's denial of approval under Section 35(1)(ii) of the Income Tax Act, finding it based on an incorrect understanding of ... Denial of approval u/s 35(1)(ii) - educational and research activities - deemed university - demonstrate the significant scientific research activity undertaken - HELD THAT:- The reasons assigned by the respondents are, in our view, not in keeping with the statutory regime. The respondents seem to have proceeded on the basis that every department of the applicant university must undertake scientific research. However, as stated above, that is not a proper understanding of the provisions, at least insofar as they relate to universities colleges and other institutions. Similarly, Rule 5E(2) expressly recognizes that research activities may be carried out through faculty members or enrolled students of the institution. The respondents were, therefore, in error in disregarding the materials placed by the petitioner on the basis that the research projects were undertaken as part of the students’ curriculum. The respondents have also placed undue emphasis on the nature of the research undertaken and its commercialization. The petitioner submitted a significant amount of material showing the activities undertaken by it, including publication of research papers, patents granted, and grants and funds received from various national and international agencies. These have been discarded by the respondent on the ground that these research activities “have not materialized in a significant way either in form of new theories/models, new hypothesis which has wide acceptance, copyrights, earnings from patents etc.” The research papers and patents referred to by the petitioner have also been characterized as the work of particular faculty members rather than attributable to the contribution to the petitioner's university. The respondent’s focus on the impact and/or commercial success of the petitioner’s research activities is not relatable to any statutory or prescribed criteria for grant of approval under Section 35(1)(ii). Section 43(4) of the Act contains a much broader definition which has been entirely overlooked in the impugned order. Scientific research is no less so because the researcher has not discovered a new theory or invented a patentable product. These results may be achieved only after years of research, or not at all. An assessment of the “value” of the research at the hands of the respondents, is not contemplated by the Act or the Rules. Further, in view of Rule 5E (2) expressly contemplating research activity carried out through faculty members, the analysis of the respondent appears to be rather sketchy. The question required to be considered by the respondent was whether the activities claimed by the petitioner were genuine, and whether the funds being paid to the petitioner were intended for the stated purpose. On these, the impugned order is silent. It is, therefore, set aside and the respondents are directed to reconsider the petitioner's application dated 23.06.2014 in accordance with the procedure prescribed, and the principles laid down above. Issues Involved:1. Denial of approval under Section 35(1)(ii) of the Income Tax Act, 1961.2. Compliance with statutory provisions and rules for approval.3. Evaluation of scientific research activities.4. Genuineness and purpose of funds utilization.5. Jurisdictional questions regarding the Central Board of Direct Taxes and the Government of India.Issue-wise Detailed Analysis:1. Denial of Approval under Section 35(1)(ii) of the Income Tax Act, 1961:The petitioner, a registered trust and deemed university, was denied approval under Section 35(1)(ii) of the Act by an order dated 30.07.2015. The denial was based on the respondent's assessment that the petitioner did not meet the necessary criteria for approval, particularly in terms of scientific research activities.2. Compliance with Statutory Provisions and Rules for Approval:The relevant statutory provisions and rules, including Section 35(1) and Rules 5C, 5D, and 5E of the Income Tax Rules, 1962, were examined. These rules outline the conditions and procedures for approval, emphasizing the need for genuine scientific research activities and proper utilization of funds. The petitioner argued that it met these conditions and provided necessary documentation.3. Evaluation of Scientific Research Activities:The respondent's analysis focused on whether the petitioner’s institutions were engaged in significant scientific research. The impugned order highlighted that many of the petitioner’s departments, such as nursing, business management, and arts, did not demonstrate substantial scientific research activities. The respondent also noted that the petitioner’s offshore campuses and certain departments were primarily involved in teaching rather than research.4. Genuineness and Purpose of Funds Utilization:The court emphasized that the primary consideration should be the genuineness of the petitioner’s activities and the intended use of funds for scientific research. The respondent’s focus on the impact and commercialization of research was deemed inappropriate. The court noted that scientific research includes a wide range of activities and does not necessarily result in immediate commercial success or new theories.5. Jurisdictional Questions Regarding the Central Board of Direct Taxes and the Government of India:Although the petitioner raised issues regarding the respective jurisdictions of the Central Board of Direct Taxes and the Government of India under Section 35, the court did not find it necessary to address these questions in light of its other findings.Conclusion:The court found that the respondent’s denial of approval was based on an incorrect understanding of the statutory provisions and rules. The court noted that the respondent failed to properly assess the genuineness of the petitioner’s activities and the intended use of funds. The impugned order was set aside, and the respondent was directed to reconsider the petitioner’s application, giving due consideration to the principles laid down by the court. The respondent was instructed to complete this exercise within eight weeks, allowing the petitioner to submit additional documents and providing an opportunity for a hearing. The writ petition was allowed in these terms.