COMMISSIONER OF INCOME TAX ALW vs. M/S MODEL PUBLIC SCHOOL SOCIET

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR. (i) DB INCOME TAX APPEAL NO.98/2008 The Commissioner of Income Tax, Alwar. Versus M/s. Model Public School Society, Bhiwadi. (ii) DB INCOME TAX APPEAL NO.728/2008 The Commissioner of Income Tax, Alwar. Versus M/s. Model Public School Society, Bhiwadi. DATE OF ORDER ::: 22.11.2016. HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE MAHENDRA MAHESHWARI Ms. Parinitoo Jain, for the appellant. Mr. Anant Kasliwal for the respondent. 1. In both these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeals filed by the revenue and allowed the appeals preferred by the assessee. 2. The brief facts of the case are that the assessee is a registered society working under the name and style of Model Public School Society. It is running a Model Public School at Bhiwadi. The assessee filed its return of income for the relevant period declaring income at NIL after claiming exemption u/s 10(22) of the Act of Rs.16,15,090/- and Rs.9,76,030/- for the A.Y.1997-98 and 1998-99 respectively. The returns was processed u/s 143(1) of the Act at NIL income. The AO subsequently found that the assessee had not obtained an

2 approval from the appropriate authority for claiming exemption from tax u/s 10(23C)(iv)/10(22). He accordingly issued a notice u/s 148 of the Act on 25.03.2004 after recording reasons in this regard. The ld. CIT(A) vide para 4.3 to 8 of his order observed that he is of the opinion that the impugned notice has been issued on mere pretext without having found for holding any belief that income has escaped assessment and without application of mind to the provisions of law of which violation is assumed. Formation of subjective belief in such a case cannot be sustained. The conclusion is irresistible that initiation of proceedings u/s 147 de-hors the provisions of Section 10(22), 10(23C)(iv) and 11 of the Act which makes it ultra vires and void. As a result the assessee succeeds in his first ground of appeal in both the assessment years. The AO has recorded the reasons that the assessee has claimed the exemption of income u/s 10(23C)(iv)/10(22) of the Act which is not allowable as the assessee has not obtained the approval of the prescribed authority for the purpose. We concur with the finding ld.CIT(A) in this regard vide para 4.3 to 8 of his order. At the first instance, the AO before recording the reasons is not sure whether the assessee has claimed the deduction u/s10(23C)(iv) or u/s 10(22) of the Act. During the impugned assessment year the provisions of section 10(23C)(iv) were not applicable and the said section was inserted by the Finance (No.2) Act, 1998 w.e.f. 01.04.1999 relevant for assessment year 1999-2000. As regards section 10(22) no approval from the prescribed authority

3 is required though the said section has been omitted by the same Act w.e.f. 01.04.1999. therefore, the only reason for which the proceedings u/s 147 were initiated by the AO are without any material of whatsoever kind and the income of the assessee for the impugned year, therefore, cannot be said to have escaped assessment. The words 'reason to believe' in section 147 contemplates existence of reasons on which the belief is founded and not merely a belief in the existence of reasons. 3. This Court while admitting the appeals framed the following substantial questions of law: DB INCOME TAX APPEAL NO.98/2008 “(i) Whether under the facts and circumstances of the case and in law the order of the Tribunal is perverse in quashing the proceedings initiated u/s.147/148 of the Act.?” “(ii) Whether under the facts and circumstances of the case and in law the order of the Tribunal is perverse in not giving any finding with regard to the activities of the assessee society so as to enable the assessee to claim exemption from Income Tax Act?” “(iii) Whether the assessee society which is deriving income from running a public school in the name of 'Modern Public School' can be said to be exempt from Income Tax Act?” “(iv) Whether under the facts and circumstances of the case and in law, the income of the assessee cannot be said to be exempt u/S. 10(23C)(vi) when there was no prior approval but only the application for seeking prior approval has been filed by the assessee?” DB INCOME TAX APPEAL NO.728/2008

4 “(i) Whether under the facts and circumstances of the case and in law the order of the Tribunal is perverse in quashing the proceedings initiated u/s.147/148 of the Act.?” “(ii) Whether under the facts and circumstances of the case and in law the order of the Tribunal is perverse in not giving any finding with regard to the activities of the assessee society so as to enable the assessee to claim exemption from Income Tax Act?” “(iii) Whether under the facts and circumstances of the case and in law, the income of the assessee cannot be said to be exempt u/S. 10(22) and whether the registration granted u/s. 12A(a) of the Act can have any bearing on this?” 4. The counsel for the appellants contended that the Tribunal has seriously committed an error in interpreting Section 10(22) which has came into effect from assessment year 1991 to 1999. 5. However, the Tribunal while, considering the questions, has considered the same and has given finding in paragraph 64 & 65 more particularly in Para 66 and 67 which reads as under: “(64) In Ground No.5, the assessee is aggrieved that the ld. CIT (A) has erred in holding that the interest income of Rs.18,11,744/- was not exempt u/s 11 and 12 of the I.T.Act and was taxable under the head Income from other sources.” “(65) The Brief facts in the grounds are that the AO has taxed the building fund amounting to Rs.3,16,500/-, development fund amounting to Rs.7,79,250/- annual fees amount to Rs.10,01,500/- and interest on FDRs amounting to Rs.18,11,744/-. It has been argued by the ld. AR that building fund and development funds were received by the assessee

towards

specific

objects. Therefore, it cannot be equated with normal tuition fee. Similarly it has been argued that the nature of annual fees is different from

5 tuition fees. Therefore, it cannot be taxed on similarly footings. It has further been argued that interest on FDRs was exempt under the provisions of Section 11 of the Act. The ld. CIT(A) confirmed the action of the AO.” “(66) We have perused the facts of the case. The issue relating to the exemption u/s 11 of the Act has already come up before us in this appeal as well as in assessee's own appeal for the preceding years as in ITA No.168 to 171/JP/2007 of even date where the assessee's income has been treated as exempt u/s 11 of the Act. In the present case there is nothing brought on the record by either of the authorities below that the said funds, the fees or the interest income have been used for other purpose other than the objects of the assessee society. The assessee enjoys the exemption u/s 11 of the Act having registration u/s12A(a) of the Act as mentioned in our various orders hereinbefore and also the exemption u/s 10(23C)(iv) of the Act and there is nothing on record that the assessee has diverted the income to the specified persons u/s13 of the Act and therefore no addition can be made on these accounts and the order of the ld. CIT(A) confirming the action of the AO is reversed. Thus ground no.2,3,4,&5 of the assessee are allowed. “(67) The Ground No.6 of the assessee is with regard to charging of interest u/s 234A and 234B which is mandatory and is consequential in nature.” 6. We are in complete agreement with the view taken by the Tribunal, and we confirm the same, therefore, all issues raised are answered in favour of the assessee and against the department. 7. The appeals stand dismissed. Copy of this order be placed in the connected file.

(MAHENDRA MAHESHWARI), J. (K.S. JHAVERI), J. Asheesh Kr. Yadav 98-107