Income Tax Appellate Tribunal - Delhi
Shri Ram Scientific And Industrial ... vs Additional Director Of Income Tax on 16 November, 2004
Equivalent citations: [2005]93ITD223(DELHI), (2005)92TTJ(DELHI)809
ORDER
Pradeep Parikh, A.M.
1. These are three appeals by the assessee. The appeal for asst. yr. 1996-97 is against the order of the learned CIT(A), dt. 9th Aug., 2001. The appeals for asst. yrs. 1997-98 and 1998-99 are against the combined order of the learned C1T(A), dt. 7th May, 2002. Since most of the issues involved in all the three appeals are common, we find it convenient to dispose of all the appeals by this consolidated order.
2. The first common grievance of the assessee in all the three appeals is against the denial of exemption under Section 10(21) of the IT Act, 1961 (the Act).
3. The assessee is a society registered under the Societies Registration Act, 1860, and is engaged in the field of industrial research in applied sciences. It had returned 'nil' income for asst. yr. 1996-97. In the course of assessment proceedings for asst. yr. 1996-97, the AO noted that the assessee was approved by the prescribed authority in the category of 'institution' for the purpose of Section 35(1)(ii) of the Act. The AO further observed that hitherto, the assessee had been claiming exemption under Section 10(21) r/w Section 35(1)(ii) and this claim had been accepted till asst. yr. 1995-96. However, according to the AO, this claim of the assessee was not in order as exemption under Section 10(21) was available only to a scientific research association subject to its approval under Section 35(1)(ii) and other prescribed conditions. The argument of the assessee that the claim should be accepted since it had always been accepted in the past was also rejected on the ground that a wrong committed in the past cannot be allowed to be perpetuated. Accordingly, the claim of the assessee for exemption under Section 10(21) of the Act was rejected on the ground that it was categorised as an "institution" and not as an "association". The assessee made a claim for exemption under Section 11 but the same was denied as there was no registration under Section 12A of the Act. Alternatively, the assessee contended that if the income is to be computed under Section 28 of the Act, then deduction under Section 35(1)(iv) may be given. However, this claim of the assessee was also negatived on the ground that deduction under Section 35(1)(iv) was available only to persons having business income and the case of the present assessee all through has been that it is not engaged in any business activity. Accordingly, the assessee was assessed at a net loss of Rs. 56,89,140 for asst. yr. 1996-97. For asst. yr. 1997-98 also, return showing 'nil' income was filed by claiming exemption under Section 10(21). However, for this year also, all the three claims were denied as in asst. yr. 1996-97 and the total income was assessed at Rs. 56,020. The assessment order for asst. yr. 1998-99 was framed on the same lines assessing the total income at a loss of Rs. 10,41,104.
4. Written submissions were filed by the assessee before the CIT(A) which were forwarded to the AO for his comments. The AO gave his comments on those submissions. The assessee was confronted with the comments of the AO. Finally, after considering all the arguments, the CIT(A) agreed entirely with the view taken by the AO on ail the aspects and dismissed the appeals in all the three years on the issues discussed above.
5. The learned counsel, at the outset, gave a brief background about the assessee and its activities. It was submitted that the assessee was registered as a society under the Societies Registration Act since its inception in 1945-46. For all these years, there had been no change either in its constitution or in the activities carried out by it. The only change that had taken place in all these years was that it had changed its name once from Shri Ram Institute for Industrial Research to "Shri Ram Scientific & Industrial Research Foundation". Next, it was pointed out by the learned counsel that the assessee had always been recognised under Section 35(1)(ii) of the Act as a result of which it had also been granted exemption under Section 10(21) for all the past years except for the three years under consideration. It was further pointed out that upto 1987, the assessee had always been approved as an "association" under Section 35(1)(ii). It was only by Notification dt. 27th Oct., 1987 (p. 63 of the paper book), that for the first time the assessee was categorised as an "institution" and moreover, the change was brought about without any opportunity being given to the assessee of being heard. However, despite being categorised as an institution, the assessee was always granted exemption under Section 10(21) till asst. yr. 1995-96. The learned counsel then drew our attention to the objections raised by ADIT (Exemptions) while considering the application for renewal of the approval under Section 35(1)(ii) for the period 1st April, 1996 to 31st March, 1999. The main objections were, (a) whether the activities carried out were for public benefit, and (b) whether the assessee was required to maintain separate books of account. The learned counsel pointed out as to how both these conditions stood fulfilled as was evident from the order dt. 23rd Sept., 1997, of the DGIT (Exemptions). It was submitted that despite the conditions being fulfilled, the assessee was categorised as an "institution" for the period 1996-99. It was contended that this defied the logic to draw distinction between the expressions "association" and "institution" which expressions otherwise also, according to the learned counsel, were interchangeable. Finally, it was contended that if the AO at all wanted to change the status of the assessee, he had no authority to do so and he should have referred the matter to the DGIT (Exemptions).
6. The learned Departmental Representative, firstly, submitted that there was no documentary evidence to support the claim of the assessee that it was ever categorised as an "association". The learned Departmental Representative next pointed out the distinction between the provisions of Section 35(1)(ii) and Section 10(21). It was contended that whereas Section 35(1)(ii) was for the benefit of donors contributing to scientific research associations, university, college or such other institutions, Section 10(21) was for the benefit of only scientific research associations and not to institutions. It was contended that the AO was not bound by the fact that since the assessee was granted exemption upto asst. yr. 1995-96, he should grant it for the years under consideration also, Thus, the argument was that since the language of Section 10(21) was clear and since the assessee was not categorised as an "association", it was rightly denied exemption under Section 10(21) of the Act.
7. We have duly considered the rival submissions and the material on record. The issue before us is whether the Revenue authorities are justified in denying the benefit under Section 10(21) to the assessee. The main provision of Section 10(21) of the Act reads as follows :
"Section 10-In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included :
(1)to(20).............
(21) any income of a scientific research association for the time being approved for the purpose of clause (ii) of Sub-section (1) of Section 35."
There are certain provisos to this section also, but we shall refer to them only if need be. Thus, the benefit under Section 10(21) to the assessee flows from the approval it has obtained under Section 35(1)(ii) of the Act. The provisions of Section 35(1)(ii). as they were for the years under consideration, are as follows :
"Section 35-In respect of expenditure on scientific research, the following deductions shall be allowed-
(i)........
(ii) any sum paid to a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research :
Provided that such association, university, college or institution is for the time being approved for the purposes of this clause by the prescribed authority by notification in the Official Gazette."
A plain reading of the above provision indicates that the organisations, the payments to whom qualify for deduction, are broadly classified into two categories. They are, (a) a scientific research association which has as its object the undertaking of scientific research, and (b) university, college or other institution which uses the money for scientific research. It is important to note the difference in wordings used for the two categories of organisations. For the first category, the wordings used are "..... which has as its object the undertaking of scientific research.....". These wordings indicate that an organisation which has as its sole object of undertaking scientific research, the payment to such an organisation will qualify for deduction once it is approved by the prescribed authority and notified in the Official Gazette. It also presupposes that the entire money received by such an organisation will be utilised towards the object for which it is established and that it has no other activity except to carry out scientific research, On the other hand, the wordings used for the second category of organisations are "to be used for scientific research". This indicates that the second category of organisations are not solely established to carry out scientific research, but they may carry out scientific research over and above other activities for which they are established. In other words, these are multi-object organisations and by virtue of their being so, it has been specifically provided that the money received by them for scientific research shall be used for scientific research only and not for any other object.
8. Now, what are these second category of organisations. Section 35(1)(ii) refers to them as a "university, college or other institution." University and college are undoubtedly educational institutions. Following the principle of ejusdem generis, the expression "other institutions" will take colour from the expressions preceding it. Thus, the expression "other institution" is meant to be an institution imparting education in any discipline which may, in addition, carry out scientific research. This, to us, appears to be the basic distinction between the expressions "association" and "institution" drawn by the Government while issuing notifications according its approval to various organisations under Section 35(1)(ii) of the Act. Otherwise, neither any rule nor any circular/instruction of the Board is brought to our notice which lays down any criteria to distinguish between the two, Various dictionaries and lexicons have given a variety of meanings for the two expressions. Nonetheless, we can ascertain a common theme running through all these meanings which we shall now see briefly. The Law Lexicon by P. Ramanatha Aiyar (1997 edition) describes the term "association" as a body of persons associated for a common purpose, or joining in any action or in companionship for a common purpose. Black's Law Dictionary (5th edition) describes it as an act of persons in uniting together for some special purpose or business. On the other hand, one of the meanings of the term "institution" as per The Law Lexicon referred to above is an undertaking formed to promote some defined purpose having in view generally the instruction or education of the public, Similarly, Black's Law Dictionary also, amongst the various meanings given by it, describes it as an established or organised society or corporation for educational purpose like college or university. Thus, the term "association" will not mean or include an educational institution, whereas the term "institution", will include as one of its meanings, an educational institution. It is this distinction which appears to have been incorporated in Section 35(1)(ii) and in the notifications issued under the said provision. In common parlance, the two expressions may seem to be interchangeable, but atleast, so far as the provisions of Section 35(1)(ii) are concerned, they are not. Further, so far as Section 35(1)(ii) is concerned, the expression "other institution" would necessarily mean an educational institution imparting education in any discipline, be it science, commerce, law, medicine, arts, fine arts, etc. Further, the notifications issued under Section 35(1)(ii) approving organisations as "association" do not require them to maintain separate accounts. This strengthens the view expressed earlier that the associations will have a sole object of scientific research. In contrast, notifications placing the organisations in the category of "institutions" mandates them to maintain separate books of account, meaning thereby that these institutions will be carrying out scientific research over and above their main object of imparting education.
9. The discussion in paras 7 and 8 revolved around the provisions of Section 35(1)(ii). Now, our attempt would be to see how and to whom the approval obtained under Section 35(1)(ii) culminates into the benefit envisaged under Section 10(21) of the Act. Section 10(21) gives exemption only to a scientific research association. It has clearly left out a university, a college or other institution. In para 7 above, we have noted that Section 35(1)(ii) broadly classifies the organisations into two categories. Section 10(21) very clearly eliminates the second category of organisations, viz., university, college or other institution. It grants exemption only to the first category, i.e., a scientific research association. In other words, exemption under Section 10(21) is granted only to an organisation having scientific research as its sole objective. Multi-objective organisations are left out of the purview of Section 10(21). The reason for their exclusion from Section 10(21) is not far to seek. The multi-objective organisations are, as mentioned earlier, educational institutions: It is not that a partial treatment is meted out to scientific research associations as compared to the educational institutions. Total exemption had been provided for educational institutions in Section 10(22) till asst. yr. 1998-99 and in Section 10(23C) thereafter. The fact that a university, college or other institution is provided exemption separately, it explains their exclusion from Section 10(21). Thus, we hold that Section 10(21) provides exemption only to those organisations whose sole object is scientific research and who are categorised as associations under Section 35(1)(ii) in the notification issued for the purpose. We further hold that "other institution" referred to in Section 35(1)(ii) imply educational institutions and they are not covered under Section 10(21) of the Act. They will be covered under Section 10(22) or 10(23C), as the case may be.
10. Let us revert to the facts of the case. It is not in dispute that the assessee was granted approval under Section 10(2)(xiii) [akin to Section 35(1)(ii) of the 1961 Act] of the IT Act, 1922, under the category of an "association" upto 31st March, 1987. It was only while renewing the approval for the period 1st April, 1987 to 31st March, 1989, that the assessee was, or the first time, categorised as an "institution" vide Notification dt. 27th Oct., 1987. This sudden shift from one category to the other is quite intriguing given the fact that there has been no change in the objects of the assessee-society or in the activities carried out by it. This is evident from the correspondence that took place between the assessee and DG (Exemptions) in 1997 when certain objections were raised against the assessee while renewing its approval under Section 35(1)(ii) for the period 1st April, 1996 to 31st March, 1999. The objections raised by the ADIT (Exemptions) by his letter dt. 10th Sept., 1997, are summarised as follows :
(a) all your research activities are sponsored by various private sector/public organisations. Thus, yours is a purely commercial research, the results of which are passed on to the sponsors and the public gets no benefit;
(b) yours is a multi-object organisation and research is only one of those objects. As such, you have been placed under the category of institution and the previous approvals were given subject to the condition that you will maintain separate books of account for your research activities.
Hearing took place before the DG(Exemptions). His findings vide his order dt. 23rd Sept., 1997, are as follows :
(a) From the list of various research projects submitted also it is seen that most (underline, italicised in print, by the DG) of the research projects are sponsored by the Government or public sector bodies, the beneficiaries of which are obviously the general public.
(b) As regards separate research account, the organisation replied that it had been carrying on scientific research only and, as such, it is not required to maintain separate books of account. This statement also finds support from the AO's report (underline, italicised in print, ours).
Despite the above finding of the DG (Exemptions), we fail to understand as to why the assessee has been put in the category of "institution" and not in the category of "association". Since it is put in the category of "institution", the AO may perhaps be bound to deny the exemption under Section 10(21), but atleast the CIT(A) should have appreciated the above facts and ought to have granted the exemption. The fourth proviso to Section 10(21) provides for withdrawal of exemption under Section 10(21) by Central Government if certain conditions are not fulfilled. It also provides that the exemption can be withdrawn only after giving a reasonable opportunity of showing cause against the proposed withdrawal. Of course, this provision is effective from 1st April, 2003, only by virtue of the Finance Bill, 2002. However, the memorandum explaining the provisions of the Finance Bill, 2002, mentioned the reason for this amendment to be that under the existing provisions, there was no explicit power with the Central Government or the prescribed authority to withdraw approval or rescind the notification issued in cases of a scientific research association referred to in Section 10(21). It follows, therefore, that the withdrawal of exemption in the years under consideration is without any authority of law. Moreover, though the fourth proviso is effective from 1st April, 2003, the assessee was atleast entitled to an opportunity of being heard by the prescribed authority when a major exemption was being withdrawn. The principle of natural justice was violated once in 1987 when the assessee was categorised as an "institution", and again in 1997 when despite clear findings being in favour of the assessee, it was notified as an "institution". In 1999 and in 2002, the assessee did make a representation to the DG (Exemptions) and to the Board, but it appears that the representation has not been responded to.
11. Thus, considering all the legal and factual aspects of the matter, we hold that the assessee, though categorised as an "institution" under Section 35(1)(ii) of the Act, is entitled to exemption under Section 10(21) of the Act for all the three years and the AO is directed to allow the same.
12. Since we have allowed the main ground raised by the assessee, rest of the grounds raised in the appeal are rendered infructuous and hence are not required to be adjudicated upon.
13. In the result, all the three appeals of the assessee are allowed.