Income Tax Appellate Tribunal - Delhi
Indian National Science Academy, vs Department Of Income Tax on 30 August, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' : NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A.No.4487/Del/2007
Assessment Year : 2004-05
Asstt. Director of Income-tax, Indian National Science Academy,
Trust Circle II, New Delhi. Vs. 1-Bahadur Shah Zafar Marg,
New Delhi.
(Appellant) (Respondent)
Appellant by : Shri P.K. Gupta, DR.
Respondent by : Shri R.S. Singhvi, CA.
ORDER
PER C.L. SETHI, JUDICIAL MEMBER.
The revenue is in appeal against the order, dated 30.08.2007 passed by the learned Commissioner of Income-tax (Appeals) in the matter of an assessment made under sec. 143(3) of the Income-tax Act, 1961 (the Act), pertaining to the Assessment Year 2004-05.
2. The grounds raised in this appeal by the revenue are as under:-
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the income of the assessee is exempt u/s 10(2) of Income Tax Act by virtue of assessee's case being notified u/s 35(1)(ii) of the Income Tax Act.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has grossly erred in overlooking the fact that as per notification dated 28th March, 2007 issued by CBDT, the 2 assessee's case is notified under the category of "other institution" and not under the category of "Scientific Research Association".
3. Ld. CIT(A) has erred in law in holding that the income of the assessee is exempted under section 10(21) of Income Tax Act ignoring the fact that the provisions of section 10(21) are applicable only to "Scientific Research Association" and not to the assessee notified under the category of "other institution".
3. The assessee academy filed its return of income on 1.11.2004 declaring total income at Rs.Nil. Return of income was accompanied by audit report dated 28.10.2004 in Form No.10B under section 12A(b) of the Act. The return was processed under sec. 143(1) of the Act on 31.3.2005.
Thereafter the case was selected for the scrutiny. Notice under section 143(2) was issued and was complied with by the assessee.
4. The assessee is registered under sec. 12A(A) of the Act vide registration dated 09.01.2006 effective from 01.04.2005. In the return of income the assessee claimed its income to be exempted under sec. 10(21) of the Act. However, while completing the assessment, the Assessing Officer rejected the assessee's claim by observing that the assessee academy is not approved under section 35(1)(ii) for the year under consideration. The Assessing Officer's observations in this regard are as under:-
"Claim of exemption u/s 10(21) of the I.T. Act.
During assessment proceedings the assessee has also claimed exemption u/s 10(21) of the I.T. Act on the basis of its 3 notification u/s 35(1)(ii) of the I.T. Act. Section 10(21) reads as under:-
"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".
On going through the Assessment records and submission made by the assessee during assessment proceedings, it is found that the assessee was notified u/s 35(1)(ii) of the I.T. Act vide notification dated 1.3.2001 which was effective for the period 1.4.2000 to 31.3.2003, as such, it is observed that the assessee is not approved u/s 35(1)(ii) of the I.T. Act for the year under assessment. Therefore, the assessee is also not entitled for exemption u/s 10(21) of the I.T. Act for the year under assessment."
5. Being aggrieved, the assessee preferred an appeal before the learned CIT(A) who allowed the assessee's claim by discussing and holding as under:-
"2. In response to notice of hearing, Shri P.K. Jain, CA, Authorized Representative of the appellant attended and submitted that Indian National Science Academy is a non profit organization fully funded by Department of Science & Technology, Ministry of Science and Technology, Govt. of India. CBDT had earlier approved our Academy under section 35(i)(ii) upto 31.3.2003. Indian National Science Academy had timely applied for renewal of approval under section 35(i)(ii) in 2003 but the said approval was not received till date of Assessment order i.e. 11.12.2006. therefore, exemption under section10(21) was not given by the Assessing Officer. He further submitted that CBDT has accorded approval to Indian National Science Academy under section 35(i)(ii) w.e.f. 1.4.2003 vide notification No.87/2007 (File No.203/42/ 2005/ITA-II) dated 28.3.2008. Therefore income of Association is exempted under section 10(21).4
3. I have considered the submission of the appellant. The Assessing Officer has denied exemption u/s. 10(21) of the IT Act on the ground that the assessee is not approved u/s 35(i)(ii) of the IT Act for F.Yr. 2003-04. I have gone through the copy of CBDT notification dated 28.03.2007 which was submitted and placed on record and have observed that CBDT has approved Indian National Science Academy under section 35(i)(ii) w.e.f. 01.04.2003. In view of it income of assessee for A.Yr. 2004-05 is exempted under section 10(21) of the IT Act. In the result the appeal of the appellant stands allowed."
Hence the department is in further appeal before us.
6. This appeal came to be disposed of by the Tribunal vide order dated 11.04.2008 whereby this appeal filed by the department was dismissed.
Being aggrieved, department preferred an appeal under section 260A of the Act before the Hon'ble High Court. The Hon'ble High Court in ITA No.1345/08 vide order pronounced on 22nd January, 2010 remitted the matter back to the Tribunal for fresh adjudication in the light of certain comments and observations made in the order. The Hon'ble High Court's order runs as under:-
"1. Certain very prominent persons in the field of science, which included the then Director General of Council of Scientific and Industrial Research (CSIR) came together to form INSA. Most of these scientists were either the holders of prominent offices in Government/semi-Government bodies like CSIR, Planning Commission, Indian Agricultural Research Institute, Bhabha Atomic Research Centre, Central Drug Research Institute, Indian Council of Medical Sciences, National Institute of Oceanography or the Professors in prominent Universities like Universities of Delhi, Rajasthan, Calcutta, Punjab, etc. Certain scientists were retired persons, 5 who had held high positions in such institutions/bodies of prominence were also included. Dr. Atma Ram, Director, CSIR was the first President and renowned scientist M.S. Swaminathan was the first Secretary, when the original name, National Institute of Science of India established in January, 1935 was changed to Indian National Institute of Science Academy in February, 1970. It is adhering Institute of Science, ICSU on behalf of the country. It was established with the object of nurturing eminence and recognizing scientists in India and harnessing scientific knowledge for the cause of national welfare. Some of the prominent objects of the petitioners Society stated in its memorandum of association are as under:
a) The promotion of natural knowledge in India including its practical application to problems of national welfare.
b) To act as a body of scientists of eminence for the promotion and safeguarding of the interests of scientists in India; and to represent internationally the scientific work of India.
c) To act through properly constituted National Committees in which other learned academies and societies will be associated, as the National Research Council of India, for undertaking such scientific work of national and international importance as the Council may be called upon to perform by the public and by government.
d) To publish such proceedings, journals, memoirs and transactions and other publications as may be found desirable.
There is no change in the object. It is for this reason that the INSA for the last more than twenty five years has been granted approval as a Scientific Association under Section 35(1)(ii) of the Income Tax Act (hereinafter referred to as 'the Act') and recognized Scientific and Industrial research Organization 6 (SIRO) BY THE government in respect of the year in question as well as later years.
2. Section 35 of the Act allows certain deductions in respect of expenditure on scientific research. Clause (ii) of sub-section (1) thereof, with which we are concerned, permits deduction of an amount equal to one and one-fourth times of any sum paid to scientific research institution, which reads as under:
(ii) an amount equal to one and one-fourth times of 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 university, college or institution is for the time being approved for the purposes of this clause by the Central Government by notification in the Official Gazette;"
As proviso to this clause puts a condition of obtaining approval by the Central Government becoming entitled to get this deduction, the INSA had also applied for this approval for last more than twenty five years, approval has been granted by the Central Government as a "Scientific Research Association". The gist of these approvals granted from time to time is provided by the appellant as under:
"1. As per records INS was approved u/s.
35(1)(ii) of the Act w.e.f. 01.07.1977 as per the vide letter dated 05.03.1980 issued by DST. Min. of Finance had issued a gazette notification No.2139 File No.203/143/77 ITA-II dated 28.01.1978.
2. Further to the omission of Section 35 in Income Tax Act 1987 and consequent to the introduction of Scheme on Recognition of Scientific and Industrial Research Organizations - 1988, INSA was recognized 7 under SIR-1988 for the period from 01.04.1988 to 31.03.1989.
3. Renewal under SIRO-1988 extended from 01.04.1989 to 31.03.1992. The recognition under SIR-1988 has been renewed continuously renewed and the present renewal is upto 31.03.2009.
4. The Section 35 of Income Tax Act was restored with modifications by Direct Tax Laws (Amendment) Act, 1989 from 01.04.1989, vide DST letter No. 4/220/89- TU-V, dated 08.11.1989. Accordingly, INS applied for recognition under 35(i)(ii) on 12.01.1990.
5. The Academy was approved u/s. 35(i)(ii) of Income Tax Act under category "Association" from 01.04.1992 to 31.03.1995 as per notification issued by Department of Revenue, Min. of Finance.
6. Further renewed from 01.04.1995 to 31.03.1996, 01.04.1996 to 31.03.1999, 01.04.1999 to 31.03.2000 and 01.04.2000 to 31.03.2003 under category "Association"."
3. Once an approval is granted as scientific association to an institute, such an institute becomes entitled to avail tax exemption under Section 10(21) of the act, in the following terms:
10. Incomes not included in total income - 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 clause (ii) of sub- section (1) of section35:"
We may note only that proviso to this sub-section (21) stipulates certain conditions on the scientific research 8 association to enable it to get the tax exemption. However, as we are not concerned with those, that part is not reproduced.
4. Notification dated 01.03.2001 was effective only upto 31.03.2003 and did not cover the year under consideration, though at that time application for this purpose was pending with the CBDT. The AO accordingly framed the assessment at an income of Rs.1,38,44,790/-. Against this order, the NISA filed an appeal before the CIT(Appeals). By that time Notification dated 28.03.2007 had been issued granting approval to the NISA under section3 5(1)(ii) of the Act in view thereof CIT(A) allowed the appeal vide orders dated 30.08.2007 granting exemption under Section 20(21) of the Act to the NISA. The Revenue went in appeal against this order of the CIT(A). The Income Tax Appellate Tribunal (hereinafter referred to as `the Tribunal'), however, has maintained the order of the CIT(A) in view of the aforesaid Notification issued under Section 35(1)(ii) of the Act and dismissed the appeal vide its decision dated 11.04.2008. Against this order, the present Appeal is preferred and the plea of the Revenue is that since the NISA is granted approval under Section 35(1)(ii) as in "other institutions", which would mean it was partly engaged in research activities, and not "Scientific Research Association", benefit of exemption under Section 10(21) of the Act would not be available.
5. Since the last approval was coming to end of 31st March, 2003, the INSA again made an application dated 14.01.2003 to the Director, Income Tax (Exemptions) seeking renewal of the approval from 01.04.2003 to 31.03.2008. This approval was granted after vigorous and constant follow-up for almost three and half years with effect from 01.04.2003 vide Notification dated 28.03.2007. However, this time, this approval was given to the INSA under the category of "Other institutions". Due to change in category from "Scientific Research Association" to "other institutions", Income Tax authorities are of the view that INSA is not entitled to avail tax exemption under Section 10(21) of the 9 Act. Though the INSA has also submitted representation to the Director, CBDT on 15.05.2007 requesting to place it under "Association Category". This application is still pending with CBDT.
6. The order of the CIT(A) shows that it went by the approval granted by Notification dated 28.03.2007 and held that since this Notification was available as per which approval was granted with effect from 01.04.2003, which had not been issued when the assessment order was passed, the assessee would be entitled to exemption. In appeal, the Revenue had specifically averred that the CIT(A) had erred in overlooking the fact that the Notification was put to the NISA under the category of "other institutions" and not "Scientific Research Institutions". It is clear from the ground No.2 raised in the appeal and the arguments based thereupon reads as under:
"2. On the facts and in the circumstances of the case, the ld. CIT(A) has grossly erred in overlooking the fact that as per Notification dated 28th March, 2007 issued by CBDT, the assessee's case is notified under the category of "other institution" and not under the category of Scientific Research Association."
3. Ld. CIT(A) (sic) CIT(A) has erred in law in holding that the income of the assessee is exempted u/s 10(21) of the Income Tax Act ignoring the fact that the provisions of the Section 10(21) are applicable only to "Scientific Research Association" and not to the assessee notified under the category of "Other Institutions'."
7. Notwithstanding this specific plea, the Tribunal while dismissing the appeal of the Revenue did not even advert to this plea and summarily rejected the appeal again relying upon the Notification dated 28.03.2007 in the following words:
"4. The AO did not treat assessee as Scientific Research Association for the purposes of sec.10
35(1)(ii) which is the pre-requisite for claim of exemption u/s 10(21) of I.T. Act, 1961. The AO did not grant such exemption on the ground that the certificate earlier granted to the assessee was not renewed for the year under consideration. Ld. CIT(A) had held that the assessee is eligible for exemption u/s 10(21) of the Act as approval has been granted by CBDT to consider the assessee as Scientific Research Association in accordance with provisions of sec. 35(1)(ii) of the Act vide their order dated 28.3.2007 which is subsequent to the passing assessment order i.e. 11.12.2006.
5. At the time of hearing a copy of approval by CBDT was given by ld. AR to ld. DR and time was allowed to ld. DR to go through the said approval of CBDT. After going through the said approval ld DR submitted that it is a proper approval. In this view of the situation, we find no infirmity in the order of CIT(A), therefore departmental appeal is dismissed.
8. No doubt, the learned DR had conceded that it was a proper approval. However, such a concession in law would not be binding upon the party, viz., Revenue in this case. Since, the basic issue is as to whether exemption under Section 10(21) is applicable "only to Scientific Research Institution" and not to "other institutions" and this aspect has not been dealt with at all by the Tribunal. We have no option but to set aside the order of the Tribunal and remit the case back to the Tribunal for afresh consideration.
Before we part with, we would like to make certain comments. AS noted above, the NISA had been allowed approval under section 35(1)(ii) of the Act for the last twenty five years, i.e., till 31.03.2003 as of "Scientific Research Association". Reason why the approval is now granted as "other institution", is not discernible. It was stated by the learned counsel for the assessee that application for reconsideration and put the NISA under 11 athe category of "scientific research association" is pending. We hope and expect that CBDT shall decide such an application as expeditiously as possible. It is also necessary to point out that in case representation of the INSA is rejected, it would be open to the INSA to file suitable appeal against such an order. Furthermore, from the perusal of the order of the CIT(A) shows that it was argued before him that the INSA is a non-profit organization fully funded by Department of Science & Technology, Ministry of Science and Technology, Government of India. If it is correct, it would be open to the INSA to press this fact before the Tribunal to support its plea that being an institution 100% financed by the Central Government, it is not liable to pay any tax. The party shall appear before the Tribunal on 11.2.2010."
This is how this appeal has again come up for hearing before us.
7. The learned DR has submitted that the assessee academy is not entitled to any exemption under section 10(21) of the Act inasmuch as the assessee academy is not notified as Scientific Research Association under section 35(1)(ii) of the Act but it has been notified under the category of "Other institution". He further submitted that the institutions other than scientific research association are not entitled to exemption provided under sec. 10(21) of the Act.
8. The learned AR for the assessee has submitted that the assessee academy has been approved by the Central Government for the purpose of clause (ii) of sub-sec.(1) of sec. 35 of the Income-tax Act read with Rule 5C and 5D of the Income-tax Rules with effect from 1.04.2003 in the category 12 of "Other institutions" partly engaged in research activities vide letter dated 28th March, 2007 of Government of India, Ministry of Finance (Department of Revenue), (Central Board of Direct Taxes), a copy of which has been placed on record. This Notification is numbered as Notification No.87/2007 (F.No.203/42/2005/ITA-II). He further pointed out that Ministry of Science & Technology, Department of Scientific & Industrial Research, Technology Bhawan, New Mehrauli Road, New Delhi has renewed the recognition of the assessee institute under the scheme of recognition of Scientific and Industrial Research Organization for the period from 1.04.2003 to 31.3.2006 vide letter dated 28th March, 2003. He further submitted that the assessee has been allowed exemption under sec. 10(21) by the AO himself for the Assessment Year 2005-06 as would be clear from the assessment order dated 26.09.20-07 made under section 143(3) of the Income-tax Act, 1961 on the basis of Notification dated 28.03.2007 effective from 1.04.2003 issued under section 35(1)(ii) of the Act. He further submitted that the academy is fully funded by the Ministry of Science & Technology, Department of Scientific & Industrial Research Technology, Government of India and as such its income is otherwise exempted under the provisions of the Income-tax Act.
The learned counsel for the assessee also pointed out that though the assessee was categorized as an other institution under sec. 35(1)(ii) of the 13 Act in the Notification issued by the Ministry of Finance, the assessee would be entitled to exemption under sec.10(21) of the Act as so held by the Coordinated Bench of the Appellate Tribunal i.e. ITAT, Delhi Bench `B' in the case of Shri Ram Scientific & Industrial Research Foundation vs. Additional Director of Income-tax (2005) 93 ITD 223(Del). He therefore, prayed that the order of the CIT(A) be upheld whereby the learned CIT(A) has allowed exemption to the assessee academy under sec. 10(21) of the Act.
9. We have heard both the parties and have carefully perused the orders of the authorities below. We have also gone through the order of the Hon'ble High Court remanding the matter to us for fresh consideration in the light of the certain observations made therein. The object of the Institution has been set out in the Hon'ble High Court's order. It has also been noted that the assessee has been granted approval as a scientific association under sec. 35(1)(ii) of the Act for last more than 25 years. The assessee academy has also been recognized as Scientific & Industrial Research Association by the Government in respect of the year in question as well as in later years.
Section 35 of the Act allow certain deduction in respect of expenditure incurred on scientific research. The Proviso to clause (ii) of sub-sec. (1) of sec. 35 of the above puts a condition of obtaining approval by the Central Government for becoming entitled to get the deduction. The assessee 14 academy had also applied for this approval for last several years and approval has been granted by the Central Government as a scientific research association in the past. Current approval granted by the Government of India, Ministry of Finance for the purpose of sec.35(1)(ii) of the Act speaks of granting approval in the category of other institutions partly engaged in research activities with effect from 1.04.2003. The assessee society has also been recognized as scientific and industrial research organization by the Ministry of Science & Technology for the period from 1.4.2003 to 31.3.2006. The revenue's case is that since the assessee has been granted approval in the category of "Other institution"
partly engaged in research activities, it has not satisfied the condition of sec.
10(21) of the Act inasmuch as the income of the assessee is exempted under sec. 10(21) of the act only in case of a scientific research association and not in the category of "Other institutions". However, it is not in dispute that the approval has been granted to the assessee academy by the Ministry of Finance for the purpose of sec. 35(1)(ii) of the Act. Merely because it has been categorized under the head "Other institutions" would not by itself is sufficient to deny exemption under sec. 10(21) of the Act to the assessee academy as so held by the coordinated Bench in the case of Shri Ram 15 Scientific & Industrial Research Foundation (supra) where the Tribunal has held as under:-
"7. We have duly considered the rival contentions 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 organizations, the payments to whom qualify for deduction, are 16 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 organizations. For the first category the wordings used are "...which has as its object the undertaking of scientific research...". These wordings indicate that an organization which has as its sole object of undertaking scientific research, the payment to such an organization 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 organization will be utilized 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 organizations are 'to be used for scientific research'. This indicates that the second category of organizations 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 organizations 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 organizations.
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 expression "association" and "institution" drawn by the Government while issuing notifications according its approval to various organizations 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 17 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 organized 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 at least, 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 organizations 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 organizations 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.
189. The discussion in paras 7 & 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 organizations into two categories. Section 10(21) very clearly eliminates the second category of organizations, 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 organization having scientific research as its sole objective. Multi-objective organizations 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 assessment year 1998-99 and in section 10(23C) thereafter. The fact that a university, college or other institution are 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 categorized as associations under section 35(1)(iii) in the notification issued for the purpose. We further hold that "other institutions" 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 Indian Income- tax Act, 1922 under the category of an "Association" up to 31- 3-1987. It was only while renewing the approval for the period 1-4-1987 to 31-3-1989 that the assessee was for the first time categorized as an "Institution" vide Notification dated 27-10- 19 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 1- 4-1996 to 31-3-1999. The objections raised by the ADIT (Exemptions) by his letter dated 10-9-1997 are summarized as follows :
(a) all your research activities are sponsored by various private sector/public organizations. 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 organization 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 dated 23-9-1997 are as follows :
(a) From the list of various Research projects submitted also it is seen that most (italicised 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 organization 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 Assessing Officer's report (Italicised 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 20 it is put in the category of "Institution", the Assessing Officer may perhaps be bound to deny the exemption under section 10(21), but at least 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 1-4-2003 only by virtue of 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 1-4-2003, the assessee was at least 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 categorized 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 categorized 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 Assessing Officer is directed to allow the same."
10. Respectfully following the decisions of the coordinate Bench, we therefore, uphold the order of the learned CIT(A) in directing the AO to 21 allow the assessee the exemption available under section 10(21) of the Act.
Grounds raised by the revenue are thus rejected. Even otherwise, the assessee would be entitled to exemption of its income for the reason that it is fully funded by the Department of Scientific & Industrial Research, Ministry of Science & Technology, Government of India. In the order of the High Court, the Hon'ble High Court has also observed that from perusal of the order of the CIT(A) it was seen that an argument was made before him that the assessee is a non-profit organization fully funded by the Department of Science & Technology, Ministry of Science & Technology, Government of India, and if it is correct, it would be upon the assessee to press this fact before the Tribunal to support its plea that being an institution hundred per cent finance by the Central Government, it is not liable to pay any tax. In the instant case, it is not in dispute that the assessee institution is fully funded by the Department of Science & Technology, Ministry of Science & Technology as so stated by the Assessing Officer in the assessment order for the Assessment Year 2005-06 where the AO has stated that the academy is fully funded by the Department of Science & Technology. Thus, the fact that the assessee academy is fully funded by the Department of Science & Technology is not in dispute. Since the assessee academy is fully funded by the Department of Science & Technology, its income variably would be 22 exempted under section 10(23)(iiiab) of the Act. Therefore, on this count also, the assessee shall be entitled to exemption as it exists solely for educational purposes and not for the purpose of profit and it is fully funded by the Government of India.
11. Before parting with this issue, we may further observe that on the strength of Notification dated 28.03.2007 effective from 1.04.2003 notified under sec. 35(1)(ii) of the Act, the AO has himself allowed exemption under sec. 10(21) to the assessee in the subsequent Assessment Year 2005-06 vide his order under section 143(3) dated 26.09.2007. Therefore, the department is precluded from denying the exemption to the assessee for the Assessment Year in question.
12. In the result, the appeal filed by the revenue is dismissed.
13. This decision is pronounced in the Open Court on 10th September, 2010.
Sd/- Sd/-
(SHAMIM YAHYA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 10th September, 2010.
Copy of the order forwarded to:-
1. Appellant
2. Respondent
3. CIT By Order
4. CIT(A)
5. DR
*mg Deputy Registrar, ITAT.