2020 (1) TMI 461 - AT - Income Tax

Validity of Exemption Withdrawal Notice Upheld with Emphasis on Compliance and Restoration

The Tribunal held that the show-cause notice was valid as it reflected the CIT(E)'s satisfaction. The exemption withdrawal under Section 10(23C)(vi) was ... Withdrawal of exemption granted u/s 10(23C)(vi) - thought process and application of mind by the ld. CIT(E) - delegation of power - educational institution - separate and distinct classes - genuiness of activity - Assessee is a self-regulated autonomous statutory body established by an Act of State Legislature, as a society - expenses incurred for hospital building or creating healthcare facility for staff and students - Held that:- The ratio decidendi of the decision [2017 (12) TMI 1475 - ITAT JAIPUR] rendered by the Coordinate Bench is that the 13th proviso to section 10(23C)(vi) confers the power/ jurisdiction to withdraw the approval to the prescribed authority i.e, ld. CIT(E) and therefore, the satisfaction of the ld CIT(E) is a must before issuing the show cause notice for the proposed action of the withdrawal of the approval granted u/s 10(23C)(vi) of the Act. Therefore, what is material and mandatory condition is the satisfaction of the ld CIT(E) and no one else. Further, the language and tenor of the show cause notice must exhibit the thought process and application of mind by the ld. CIT(E) and thus an expression of the satisfaction of ld. CIT(E) even though the same may be signed by the DCIT (Hqr.) or any other subordinate authority. However, where the ld. CIT(E) has delegated his powers to any other authority to issue show cause notice and it is based on the satisfaction of that other authority and not of ld. CIT(E), it won’t satisfy the mandatory condition. The language and tenor of the show cause notice do clearly exhibit the thought process and application of mind by the ld. CIT(E) with inputs from the ITO (Hqr.) and the Assessing officer, and thus an expression of his satisfaction of the proposed action to withdraw the exemption so granted to the assessee university. - The legal proposition so emerging from the said decision in fact supports the case of the Revenue. Genuineness of activities of the institution - Held that:- Similarly, we also note that the cancellation of registration granted to any educational institution under Section 12AA(3) of the Act can happen in two scenarios; one where the activities of the educational institution are not genuine and secondly, where the activities of the educational institution are not being carried out in accordance with the objects for which the educational institution has been established. The legislature has thus envisaged a distinction between an activity not being genuine and an activity which is not in accordance with the stated objects. An activity therefore could be genuine even though the same may not be in accordance with the stated objects. - Therefore, merely because an activity is not in accordance with the stated objects, it will not result in such activity to be classified as nongenuine. On the question of whether the activities of the university of conducting these courses are genuine or not, we do not have to travel too far, as we noticed from perusal of record and pointed out during the course of hearing to both the parties, as the answer is given by the Revenue itself where it has subsequently granted approval to the assessee university as a charitable institution u/s 12AA. Though these are two independent provisions, there are similarities in the sense that at the time of grant of registration/approval, the genuineness of the activities are examined by the ld CIT(E) in both the cases and similarly, at the time of withdrawal, the test of non-genuineness is applied in both the cases, as we have noted earlier. In the instant case, we wonder how the University can be said to be carrying on non-genuine activities by conducting such courses resulting in withdrawal of exemption under section 10(23C)(vi) and conducting the same courses as genuine activities resulting in grant of approval under section 12AA of the Act within a span of less than a year when the same courses are being conducted during this period. It is a medical research and teaching hospital with the sole object of providing teaching and training to the students in medical courses such as Nursing, Paramedical etc. and also taking care of general healthcare and wellness of the students and staff of the assessee University. CIT(E) directed to restore the exemption approval under section 10(23C)(vi) - Decided in favor of assessee. Issues Involved:1. Validity of the show-cause notice.2. Withdrawal of exemption under Section 10(23C)(vi) of the Income Tax Act.3. Running courses beyond approved objects.4. Running a hospital and its impact on the exemption.5. Accumulation of funds and discrepancies in audit reports.Detailed Analysis:1. Validity of the Show-Cause Notice:The assessee challenged the validity of the show-cause notice dated 03.05.2016, arguing it was issued by the Income Tax Officer (Hqrs.) instead of the CIT(E). The Tribunal referred to the decision in the case of Modern School Society v. CIT(E), where it was held that a notice issued by an authority other than the prescribed authority is invalid, rendering the consequential order void ab initio. The Tribunal found that the show-cause notice in this case was issued after the CIT(E) had reviewed and corrected the draft, thus reflecting the CIT(E)'s thought process and satisfaction. Therefore, the Tribunal dismissed the additional ground raised by the assessee regarding the validity of the show-cause notice.2. Withdrawal of Exemption under Section 10(23C)(vi):The CIT(E) withdrew the exemption granted to the assessee University under Section 10(23C)(vi) on the grounds that the University was running courses beyond its approved objects and was not existing solely for educational purposes. The Tribunal noted that the genuineness of the activities was already accepted by the Revenue when it granted registration under Section 12AA of the Act to the University. The Tribunal emphasized that the parameters for withdrawal of exemption under Section 10(23C)(vi) are specific and must be strictly followed. The Tribunal found no basis for the withdrawal of the exemption and directed the CIT(E) to restore the exemption approval.3. Running Courses Beyond Approved Objects:The CIT(E) argued that the University was running courses like A.N.M., G.N.M., and B.Ed. without legal authority and beyond its approved objects. The Tribunal referred to the judgments of the Hon'ble Rajasthan High Court, which held that degrees awarded by the University in these courses were valid. The Tribunal concluded that the genuineness of conducting such courses could not be disputed and that the withdrawal of exemption on this ground was not warranted.4. Running a Hospital:The CIT(E) contended that the University was running a hospital, which indicated that it was not existing solely for educational purposes. The Tribunal found no evidence suggesting that the hospital was run on a commercial basis. It accepted the University's argument that the hospital was a teaching facility for medical courses and for the welfare of students and staff. The Tribunal held that this did not affect the University's status as existing solely for educational purposes.5. Accumulation of Funds and Discrepancies in Audit Reports:The CIT(E) pointed out discrepancies in the audit reports and issues related to the accumulation of funds under Section 11(2). The Tribunal noted that the University had provided necessary details and there was no specific adverse finding recorded by the CIT(E) regarding any violation of the conditions specified in the third proviso to Section 10(23C)(vi). Therefore, this could not form a basis for the withdrawal of the exemption.Conclusion:The Tribunal concluded that there was no basis for withdrawing the exemption granted to the University under Section 10(23C)(vi) of the Income Tax Act. The Tribunal directed the CIT(E) to restore the exemption approval from the date it was withdrawn. The appeal of the assessee was allowed.