2008 (5) TMI 17 - SC - Income Tax

s.10(23C)(vi) third proviso does not import 'in India'; Prescribed Authority may impose conditional approvals and percentage requirements

SC held that the third proviso to s.10(23C)(vi) does not import the words 'in India' for application of income, and the Prescribed Authority (PA) may, ... Scope of enquiry by the Prescribed Authority u/s 10(23C)(vi) read with the third proviso thereto inserted by Finance Act, 1998 w.e.f. 1.4.1999 - application or investment of funds or genuineness of activities - Non-profit organization set up in USA - interpretation of the words 'in India' - HELD THAT:- It is important to note that, even after the Finance Act, 1998 w.e.f. 1.4.1999, the third proviso to Section 10(23C)(vi), which refers to monitoring conditions, confines the words 'application of income' to the objects for which the Institution is established. The third proviso does not use the words 'in India' in the matter of application or accumulation of income though in several other sections like Sections 10(20A), 10(22B) and 11(1)(a) etc., Parliament has used the words 'in India'. Therefore, for this one more reason, we cannot read in the words 'in India' into the third proviso. As discussed, with the insertion of the provisos in Section 10(23C)(vi) of the 1961 Act, it is open to the PA to stipulate, while granting approval, that the approval is being given subject to utilization/application of certain percentage of income, in the accounting sense, towards impartation of education in India. Such exercise would be based on estimation. There is a difference between 'accounting income' and 'taxable income'. At the stage of Section 10, we are concerned with the accounting income. Therefore, it is open to the PA, if it deems fit, to stipulate that certain percentage of accounting income would be utilized for impartation of education in India. Therefore, in our view, it is always open to the PA to impose such terms and conditions as it deems fit. The interpretation we have given is based on harmonious construction of the provisos inserted in Section 10(23C)(vi) by the Finance Act, 1998. Lastly, we may reiterate that there is a difference between stipulation by the PA of such terms and conditions, as it deems fit under the provisos, and the compliance of those conditions by the appellant. The compliance of the terms and conditions stipulated by the PA would be a matter of decision at the time of assessment as availability of exemption has to be evaluated every year in order to find out whether the institution existed during the relevant year solely for educational purposes and not for profit. Thus, we set aside order dated 12.10.2004 passed by CBDT, we remit the matter to CBDT for fresh consideration in accordance with law. We may clarify that, in this case, appellant has fulfilled the threshold pre-condition of actual existence of an educational institution under section 10(23C)(vi) and, therefore, on that count CBDT will not reject the approval application dated 7.4.1999. 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.