Income Tax Appellate Tribunal - Mumbai
Indian Register Of Shipping vs Assistant Director Of Income Tax on 18 September, 1997
Equivalent citations: [1998]66ITD219(MUM)
ORDER
M. A. Bakshi, J.M.
1. These five appeals of the assessee relating to the asst. yrs. 1987-88 to 1991-92, involving common issue, are disposed of by this consolidated order, for the sake of convenience.
2. The dispute involved in these appeals is relating to the exemption under s. 10(21) of the Act. Rival contentions have been heard and records perused.
3. The relevant facts in this case are that the appellant is a company registered under s. 25 of the Companies Act 1956. The appellant company is rendering services in the field of classification of mercantile shipping, maintenance of machinery and equipment in mercantile shipping. Assessee had sought recognition under s. 31(1)(ii) as a scientific research association. Having its object, the undertaking of scientific research, assessee, claimed exemption under s. 10(21) and for the asst. yrs. 1987-88 and 1990-91 the exemption claimed was originally allowed. However, for the asst. yr. 1991-92, the AO observed that the appellant-company was receiving survey fee for rendering technical and special services to ship-owners in the matter of classification and relationships, machinery, equipment, design, etc. The AO has accordingly come to the conclusion that the income of the appellant was assessable as business income under s. 28(iii) of the Act. He accordingly denied the exemption claimed under s. 10(21) for the asst. yr. 1991-92.
On the basis of the decision of the AO for the asst. yr. 1991-92, the assessments for the asst. yr. 1987-88 to 1990-91 were reopened and the exemption granted earlier withdrawn. The assessee appealed to the CIT(A) challenging the validity of reopening of assessments for the asst. yrs. 1987-88 to 1990-91 as also the denial of exemption under s. 10(21) for all the assessment years under appeal. However, the CIT(A) confirmed the view of the AO and dismissed the appeals of the appellant. The assessee is in appeal before us against the decision of the CIT(A). For the asst. yr. 1991-92, the decision of the CIT(A) is dt. 6th February, 1995 and for the asst. yrs. 1987-88 to 1990-91 the CIT(A) has passed a consolidated order dt. 24th February, 1995.
4. The learned counsel for the assessee contended that the assessee is a scientific research association approved by the prescribed authority, viz. Director General of Exemptions. Notwithstanding the decision of the AO that assessee is not a scientific research association, the approval granted to the assessee under s. 35 has not been withdrawn. According to the learned counsel for the assessee the approval has been renewed from time to time and the same is in force even now. According to the learned counsel s. 35(1)(iii) provides that if any question arises as to whether and if so to what extent any activity of the association constitutes or any asset is used for scientific research the Board shall refer the question to the prescribed authority whose decision shall be final. It was further contended that the prescribed authority having granted approval to the appellant after satisfying itself about the activities of the assessee and as such it was not open to the AO to hold that the activities of the appellant were not that of scientific research. It was further contended that the AO has not made any reference to the Board in accordance with s. 35(1)(iii) for determination of the issue as to whether the activities of the assessee were that of scientific research. Attention was also invited to the provisions of s. 10(21) and it was contended that the conditions referred to therein are satisfied in this case and the exemption has wrongly been denied. Reliance was placed on the following judgments in support of the contention that if the AO does not accept the claim of the assessee under s. 35, he has to refer the matter to the CBDT and the Board, in turn, will make a reference to the prescribed authority and the decision of the prescribed authority shall be final. The AO cannot sit in judgment against the decision of the prescribed authority.
(1) J. K. Synthetics Ltd. vs. ITO (1976) 105 ITR 864 (All);
(2) CIT vs. Parrys (Eastern) (P) Ltd. (1989) 176 ITR 449 (Bom);
(3) Continental Const. Ltd. vs. CIT (1990) 185 ITR 178 (Del);
(4) Continental Construction Ltd. vs. CIT (1992) 195 ITR 81 (SC); and (5) CIT vs. Baichand Amoluk Consultancy (P) Ltd. (1994) 208 ITR 1 (Bom).
It was accordingly contended that exemption under s. 10(21) may be granted to the assessee.
5. The learned Departmental Representative sought to support the orders of the Revenue authorities. The learned Departmental Representative further contended that the assessee had not raised the ground before the CIT(A) against the decision of the AO in not making a reference to the Board in regard to the approval to the institution and as such, the appellant was precluded in raising the objection relating to the jurisdiction at this stage. It was further contended that s. 10(21) relates to exemption of income and as such, assessee was duty-bound to establish that the conditions for grant of exemption are satisfied. According to the learned counsel the onus is on the assessee to establish that it is a scientific research authority and the conditions for granting exemption are fully satisfied.
6. The learned Departmental Representative relied upon the decision of the Delhi High Court in the case of Continental Construction Ltd. (supra) in support of the contention that the approval granted to any assessee is not a unqualified one. Whether the assessee is entitled to exemption and whether all the conditions for grant of exemption under s. 10(21) are satisfied is to be decided by the AO. According to the learned Departmental Representative, the mere fact that the approval had been granted to the assessee under s. 35 was not a bar for the AO to decide about the claim of exemption made by the assessee under s. 10(21). The learned Departmental Representative pointed out that this view has been approved by the Supreme Court in the case of Continental Construction Ltd. vs. CIT (supra).
7. It was further contended that s. 35 is for the benefit of the donors and the same has no application in the present case. According to the learned Departmental Representative deduction is allowable to the tax-payers under s. 35(1)(ii) for any sum paid for scientific research association which has as its object the undertaking of scientific research or to an university, college or other institution to be used for scientific research. This exemption is allowable subject to the condition that any such institution or association is approved by the prescribed authority in this regard. It was further contended that sub-s. (3) of s. 35 is attracted only when a question arises under s. 35 in a case where deduction is claimed under the said section. According to the learned Departmental Representative the issue in this case is relating to exemption under s. 10(21) and not relating to a deduction under s. 35. It was accordingly contended that all the decisions cited on behalf of the assessee are not applicable to the facts of this case. Reliance was placed on the following decisions in support of the contention that it is for the AO to consider as to whether the conditions for grant of exemption in a case are satisfied or notwithstanding the fact that the association or institution is approved by the prescribed authority.
(1) Saksaria Biswan Sugar Factory Ltd. vs. IAC (1990) 184 ITR 123 (Bom);
(2) Hindustan Transport Co. vs. IAC (1991) 189 ITR 326 (All);
(3) J. K. Synthetics Ltd. vs. ITO (supra); and (4) Continental Construction Ltd. vs. CIT (supra).
It was accordingly contended that the appeals of the assessee may be dismissed.
8. We have given our careful consideration to the rival contentions. Since the issue in this case relates to exemption under s. 10(21), it will be useful to reproduce the said section as under :
"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 :
(21) any income of a scientific research association for the time being approved for the purpose of cl. (ii) of sub-s. (1) of s. 35 :
Provided that the scientific research association :
(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established, and the provisions of sub-s. (2) and sub-s. (3) of s. 11 shall apply in relation to such accumulation subject to the following modifications, namely :
(i) in sub-s. (2) :
(1) the words brackets, letters and figure "referred to in cl. (a) or cl. (b) of sub-s. (1) read with the Explanation to that sub-section." shall be omitted;
(2) for the words "to charitable or religious", the words "for the purposes of scientific research" shall be substituted;
(3) the reference to "AO" in cl. (a) thereof shall be construed as a reference to the "prescribed authority" referred to in cl. (ii) of sub-s. (1) of s. 35;
(ii) in sub-s. (3), in cl. (a), for the words "charitable or religious purposes", the words "the purposes of scientific research" shall be substituted; and
(b) does not invest or deposit its funds, other than :
(i) any assets held by the scientific research association where such assets from part of the corpus of the fund of the association as on the 1st June, 1973;
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation), acquired by the scientific research association before the 1st day of March, 1983;
(iii) any accretion to the shares, forming part of the corpus of the fund mentioned in sub-cl. (i) by way of bonus shares allotted to the scientific research association;
(iv) voluntary contributions received and maintained in the form of jewellery, furniture or any other article as the Board may, by notification in the Official Gazette, specify, for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-s. (5) of s. 11 :
Provided further that the exemption under this clause shall not be denied in relation to voluntary contribution, other than voluntary contribution in cash or voluntary contribution, of the nature referred to in cl. (b) of the first proviso to this clause, subject to the condition that such voluntary contribution is not held by the scientific research association, otherwise than in any one or more of the forms or modes specified in sub-s. (5) of s. 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, 1992, whichever is later :
Provided also that nothing contained in this clause shall apply in relation to any income of the scientific research association, being profits and gains of business unless the business is incidental to the attainment of its objectives and separate books of accounts are maintained by it in respect of such business."
9. A perusal of the aforementioned section reveals that the exemption of income is available if the following conditions are satisfied :
(i) that the assessee is a scientific research association;
(ii) it is approved for the purpose of cl. (ii) of sub-s. (1) of s. 35; and
(iii) it applies its income or accumulates it for application wholly and exclusively to the objects for which it is established.
The provisions of s. 11 sub-s. (2) and sub-s. (3) also apply with certain modifications referred to above.
10. As per the proviso exemption shall not be available even if all the conditions referred to above are satisfied if the scientific research association derives income from profits and gains of business. The proviso is however not applicable in such cases where the scientific research association has carried on the business which is incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such business.
11. In this case, the finding of the Revenue is as under :
(i) The activities of the appellant are not relating to any research work and, therefore, the association is not a scientific research association; and
(ii) The assessee has derived income from carrying on of business.
12. We have reproduced s. 10(21) in para 8 of this order and it is observed that one of the conditions for grant of exemption is that the scientific research association is for the time being approved for the purpose of cl. (ii) of sub-s. (1) to s. 35. Whereas we agree with the contentions raised on behalf of the Revenue that s. 35(1)(ii) relates to the grant of deduction on account of donations to the scientific research association, one cannot lose sight of the fact that it is material for the purpose of exemption under s. 10(21). It is the case of the assessee that once the association has been approved for purposes of cl. (ii) of sub-s. (1) of s. 35, one of the conditions for grant of exemption under s. 10(21) is satisfied. Once scientific research association is approved for the purposes of cl. (ii) of sub-s. (1) of s. 35, is it open to the AO to find out as to whether the assessee is a scientific research organisation or not, is a matter for our consideration. In this connection it may be useful to refer to the decision of the Supreme Court in the case of Continental Construction Ltd. (supra). The issue in that case related to the deduction under s. 80-O. One of the conditions for grant of deduction under s. 80-O is that the contract between the parties from which the assessee has derived income must have been approved by the CBDT. The question in that case arose as to whether after the CBDT having approved the contract between the parties the AO can go behind or question the maintainability of the claim for deduction. Their Lordships, at p. 133 held as under :
"We have, in view of the above discussion, no doubt at all that, while granting the approval under s. 80-O, the Board has not only the jurisdiction but also the responsibility of examining the agreement submitted for approval from all angles relevant to the deduction provided for under s. 80-O and that it is not competent to the Department to question the maintainability of the claim for deduction under s. 80-O in respect of the aspects gone into and decided upon by the Board.
We should, however, make it clear that our conclusion does not mean the deprivation of all functions of the AO while making the assessment on the applicant."
13. Their Lordships have further referred to the other conditions under s. 80-O on the satisfaction of which, deduction under the said section is available to the assessee. It has been held that the AO has to satisfy himself about the other conditions and determine the claim accordingly.
14. From the aforementioned decision, it is evident that once the scientific research association has been approved by the prescribed authority, it will not be open to the AO to question the approval granted to the scientific research association. Sec. 35(3) provides the procedure to be followed by the AO in the event of any question arising as to whether the activities of the association constitute the activities of scientific research. The AO has to refer the question to the prescribed authority whose decision shall be final. This section, however, is relevant for purposes of s. 35(1), which provides for a deduction for any expenditure laid out or expended on scientific research related to the business, barring the expenditure of capital nature. Whereas the assessee claims that the AO is bound to make a reference to the prescribed authority in the event of any doubt being raised about the activities of the association not being of scientific research, the claim of the Revenue is that sub-s. (3) of s. 35 has got limited application for the purposes of sub-s. (1) of s. 35. In our view, this controversy is unnecessary, in view of the decision of the Bombay High Court in the case of Seksaria Biswan Sugar Factory Ltd. & Anr. vs. IAC & Ors. (supra). In this case, approval granted to the assessee under s. 35(1)(ii), was sought to be withdrawn with retrospective effect. It was held by their Lordships of the Bombay High Court that the approval cannot be withdrawn retrospectively.
15. In this case, it is not disputed that the prescribed authority has approved the appellant as a scientific research association, within the meaning of s. 35(1)(ii). There has been no attempt to withdraw the approval granted to the appellant. Even if it were to be held that AO could follow the procedure under s. 35(3), for purposes of removing any doubts regarding the activities of the association, it will be a futile exercise in so far as the approval granted to the appellant cannot be withdrawn retrospectively. When the approval cannot be withdrawn retrospectively, no purpose would be served for making a reference to the prescribed authority, as per the procedure under s. 35(3) r/w r. 6 of the IT Rules, 1962. Their Lordships of the Supreme Court in the case of Continental Construction Ltd. (supra), as already pointed out, have held that the AO does not have the power to go into the validity of the approval granted by the prescribed authority. We have also pointed out that a reference under s. 35(3) would be a futile exercise, in view of the fact that withdrawal of the approval cannot be done retrospectively. From this it follows that one of the conditions for grant of exemption under s. 10(21), viz., that the assessee is a scientific research association approved for the purpose of cl. (ii) of sub-s. (1) of s. 35, stands satisfied.
16. So the issue as to whether the assessee is a scientific research association approved for the time being for the purposes of cl. (ii) of sub-s. (1) of s. 35, has got to be decided in favour of the assessee. As a matter of fact, it is only a question of fact and no investigation or enquiry is required to be made to get an answer to this query.
17. The second condition for grant of exemption under s. 10(21) is that the income derived from the association has been applied or accumulated for the application wholly and exclusively to the objectives for which it is established. The Revenue has not gone into this area of enquiry. In our considered view this area is also important and ought to have been looked into by the Revenue authorities as even when a scientific research association is approved for the purposes of cl. (ii) of sub-s. (1) of s. 35, if it does not apply its income or does not accumulate it for the application wholly and exclusively to the objectives for which it is established, it will lose right of exemption and the AO shall be within his powers to deny the same. Since this issue has not been looked into, we consider it reasonable to direct the AO to decide the same also in accordance with law after giving an opportunity of being heard to the appellant.
18. The next area which has been discussed in detail by the AO as well as by the CIT(A) is that the assessee has in fact engaged itself in the business. We have reproduced s. 10(21) in para 8 of this order and as per the proviso to the said section, the exemption will not be available to the scientific research association in respect of the income derived from profits and gains of business unless the business is incidental to the attainment of its objective and separate books of account are maintained by it in respect of such business. Whereas the Revenue has recorded a finding, as already pointed out, relating to the appellant, having derived income from profits and gains of business, no finding has been recorded relating to the very important aspect as to whether the business was incidental to the attainment of the objectives of the association and whether separate books of account are maintained by it in respect of such business.
19. The CIT(A), in para 11.11, has held that as per the third proviso to s. 10(21), the income of the assessee is clearly taxable. It has been held that the income derived by the assessee has no connection with scientific research because neither the income is received for the purpose of scientific research nor any income is applied to scientific research. This finding of the CIT(A) is related to the earlier finding that assessee is not a scientific research association at all. We have decided that ground in favour of the assessee on the basis of the approval granted by the prescribed authority under s. 35(1)(ii).
20. In our view, for purposes of application of third proviso to s. 10(21), the area of enquiry is different than adopted by the Revenue authorities. The said proviso provides for denial of exemption in respect of the income derived from business by any scientific research association. However, exemption shall not be denied to such association, if it is found that the business carried on by the scientific research association was incidental to the attainment of the objects of the association and that separate books of account have been maintained in respect of such business. The Revenue has to record a finding about the objectives of the association and to consider as to whether the business carried on by the assessee was incidental to the attainment of the objectives of the association.
21. Since this enquiry has not been made by the Revenue authorities, we consider it just and reasonable to remit the matter to the file of the AO for deciding this issue also, which is crucial for determination of the issue for grant of exemption under s. 10(21) to the assessee, in accordance with law.
22. In the light of our above decision, the issue as to whether the assessee has derived income from profits and gains of business, at this stage, becomes academic. This is so because even if the assessee has derived income from profits and gains of business, if it is found that the said business carried on by the assessee was incidental to the attainment of its objects and separate books of account are maintained by it in respect of such business, exemption under s. 10(21) cannot be denied to the assessee.
23. We, therefore, set aside the orders of the CIT(A) and that of the AO for the respective assessment years and remit the matter to the file of the AO for fresh decision in respect of exemption under s. 10(21), in accordance with law and in the light of our above directions.
24. No other ground has been pressed before us. The same are accordingly dismissed.
25. For statistical purposes, the appeals of the assessee are partly allowed.