R. N. MISRA J. - These are four applications by a common petitioner-Dalmia Institute of Scientific and Industrial Research (hereinafter referred to as the 'Research Institute') - and have been filed challenging the validity of the notices issues under s. 148 of the I. T. Act of 1961 (hereinafter referred to as 'the Act') in respect of the assessment years 1973-74, 1974-75, 1975-76 and 1976-77 and asking for a writ of prohibition against the revenue in the matter of acting upon such notices.
Admittedly, the petitioner is a society registered under the Societies Registration Act, 1860 (Central Act XXI of 1860). On 1st January, 1972, the Government of India notified the approval of the Council of Scientific and Industrial Research being the prescribed authority for the purpose of cl. (ii) of sub-s. (1) of s. 35 of the Act that any sum paid to the Research Institute for being used for scientific research would be allowed as a deduction under s. 35 of the Act. The petitioner maintains that under s. 10(21) of the Act, any income of the Research Institute which is applied solely for the purpose of that institute is not to be included in the computation of total income. The Research Institute received two donations from M/s. Orissa Cement Ltd. being Rs. 45,00,000 during the assessment year 1973-74 (accounting period ending with December, 1972) and Rs. 75,00,000 during the assessment year 1974-75 (accounting period ending with December, 1973). According to the petitioner, the total contribution of Rs. 1,20,00,000 could not be readily utilised as an appropriate building for housing the research institute had yet to be raised, requisite apparatus had not yet been obtained, personnel were still to be appointed and research themes had yet to be picked up. As the money had to be safely held, a part was utilised for acquiring dividend-earning stock in dependable companies. In respect of dividend, tax was deducted at source and the petitioner applied to the ITO in the assessment year 1974-75 for refund of Rs. 13,511 which had been deducted out of the dividend claiming that since no tax was leviable, the entire tax deducted at source was refundable to it. The ITO by an order dated September 6, 1974 (annex. 3), examined the claim laid before him and held :
'Return filed by the assessee along with the application for refund of Rs. 13,511. In Part III of the return was mentioned that the entire income as per income and expenditure account for the year ending 31-12-1973 is exempt under section 10(21) of the I.T. Act, 1961.
The assessee is an institution engaged in scientific and industrial research and has been approved as such by the Council of Scientific and Industrial Research, New Delhi. From the notification it is found that the institution, namely, Dalmia Institute of Scientific and Industrial Research, Rajgangpur (Orissa), has been approved by the prescribed authority as mentioned above. The institution has been registered under the Societies Registration Act, 1860.
The institute derives income from contributions and from interest and dividend. As per income and expenditure account for the year ending December 31, 1973, the income including contributions received amounted to Rs. 79,12,236. This amount includes the dividend income of Rs. 77,004 on which the tax amounting to Rs. 13,511 has been deducted. Dividend warrants have been filed, and tax deduction verified.
Assessed as above u/s. 143(3). Issue demand notice and R. V. for Rs. 13,511 and a copy of the order accordingly.'
In respect of the assessment year 1975-76 (accounting period ending with December 31, 1974) the petitioner made a similar refund application along with a return. The ITO found that the petitioner had earned Rs. 1,37,690 from dividend and a tax amount of Rs. 24,543 had been deducted at source. As he found that the total income was exempted, he issued a refund order for the collected tax. In April, 1975, the ITO issued a certificate as provided by law to the effect that the dividends may be paid to the petitioner-research institute without deduction of income-tax out of them. On the basis of such certificate, no deduction having been made at the time of payment of the dividends, there was no occasion for the petitioner to file any further return and claim refund. The petitioner was served with notices by opposite party No. 1 dated January 9, 1978, purporting to be under s. 148 of the Act in respect of assessment years 1973-74, 1974-75, 1975-76 and 1976-77, on the allegation that income had escaped assessment, and those notices are assailed in these applications.
In support of the challenge against the notices, it is contended on behalf of the petitioner that the donations received from M/s. Orissa Cement Ltd. did not constitute income; when the petitioner invested out of such amount either in the shape of fixed deposits or for acquiring and holding stocks, there was no expenditure; the entire money was held to be spent for purposes of research and in the absence of any allegation of diversion of funds for other purposes and in view of the fact that the funds acquired were not required to be spent during the year of accrual of income, there was no occasion to entertain the view that there was escapement. It is also claimed that the income was not to be taken into account for computing the total income and since the petitioner had no other income excepting those which were not includible in total income, it had no liability to make a return under s. 139(1) of the Act which, so far as relevant, provides :
'Every person, if his total income.... during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner....'
According to the petitioner, it had, therefore, no obligation to make any return and the returns that had been made for the two years in the manner indicated above had become necessary for claiming refund of the tax deducted at source out of the dividend due to it. The petitioner was served with the following notice by the ITO :
'Whereas I have reason to believe that...... your income...... chargeable in respect of which you are assessable to tax for the assessment year 1975-76, escaped assessment within the meaning of section 147 of the Income-tax Act, 1961.
I, therefore, propose to------------------------
for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the
prescribed form of---------------------------------------- in respect of which the income of the person
you are assessable for the said assessment year.....'
Under s. 147 of the Act provision has been made for action in the vent of escapement of income from being taxed. Sub-section (2) of s. 148 requires the ITO before issuing any notice for reopening an assessment to record his reasons for the issue of the notice. Learned standing counsel for the revenue has produced the assessment record for our perusal where in compliance with the requirement of s. 148 of the Act, the ITO has recorded his reasonings. On behalf of the revenue, it has been contended by learned standing counsel relying on the authority of the decision of the Supreme Court in the case of STO v. Uttareswari Rice Mills : 89ITR6(SC) , that the petitioner is not entitled to the reasons at this stage and merely because a writ application has been filed, the reasons should not be made available to the petitioner right now. The petitioner has already complies with the notices inasmuch as the returns for the years showing nil liability have already been filed. The present case is not one where there is any allegation of fraud or suppression. As we find, the entire matter turns on grounds of law, If the reasons are disclosed to an unscrupulous assessee before he makes a return in answer to a notice under s. 148 of the Act, the revenue is likely to be prejudiced and in any cases the purpose of reopening the assessment may be frustrated. Here, however, we find that there are essentially two reasons and, as a fact, both the reasons are more or less disclosed in the counter-affidavit. In the circumstances, we do not find any justification for the reiterated submission of the learned standing counsel that it would be improper to disclose the reasons at this stage. For the considerations indicated above, we propose to extract the reasons as record by the ITO in the file relating to assessment year 1974-75. Learned standing counsel has told us that similar reasons have been recorded for the other three years :
'Seen opinion of the department of Science and Technology communicated under C.I.T.s letter dated 17-11-1977, placed in miscellaneous correspondence folder (letter No. 27725 dated 17-11-1977). According to the prescribed authority, i.e., C. S. I. R., investment made by the assessee in purchase of shares and making loans is not expenditure incurred for the purpose of scientific research. Utilisation of income in such investments would not, therefore, qualify for exemption from income-tax under section 10(21) of the I.T. Act.
In this connection my findings on the affairs of the assessee-association, vide my letter dated 1-2-1977 to I. A. C., Sambalpur Range, Sambalpur, show that the assessee earned substantial income from dividend on shares and bank interest. Most of it has remained unutilised for the purpose of scientific research.
The assessment for this year has been completed treating the entire income as non-taxable. According to the provision of the I. T. Act, vide section 10(21), only so much of the income as has been wholly applied for the purpose of the scientific research association should be exempt from tax. The assessment has thus resulted in allowing exemption to income which should have been taxed. Thus, income assessable to tax has escaped assessment. Issue notice u/s. 148.'
It may be stated that returns for two years only being assessment years 1974-75 and 1975-76 had been filed. In the assessment year 1974-75, as would appear from the order of the assessment in annex. 3, the ITO was aware of the fact that the assessee was receiving contribution and was having income from interest and dividend. From the assessment order it appears that the income and expenditure account had been placed before the ITO and from the said account, the ITO came to find that the assessees total income worked out to Rs. 79,12,236. This figure does find mention in the said account. The total dividend income for the year was also disclosed therein. The petitioner had, therefore, disclosed to the ITO the entire sum in its hands including the carried forward contribution and interest and dividend accrued during the year and there does not seem to be any suppression on the part of the assessee in the matter of placing primary facts before the ITO.
The ITO in his reasons dated January 9, 1978, has noted that the petitioner had earned substantial income from dividend on shares and bank interest and most of it has remained unutilised for the purpose of scientific research. There is no dispute about this fact. In answer to this, it has been stated on behalf of the petitioner that registration as a society was obtained some time in 1971, and soon thereafter, the first instalment of donation was received. It was though necessary that before any research work be undertaken, an appropriate building should be raised and requisite apparatus obtained. For housing the research institute, the land was proposed to be acquired and until 1976, the building had not been made ready. On that account, the contribution which had been received earlier could not be contemporaneously spent and had been allowed to accumulate and were carried forward to be utilised when research proper would be undertaken. There is thus no dispute that the income earned during these years had not been fully utilised.
Dr. Pal for the petitioner has emphatically urged that it is not a requirement of the law that the contribution or any earning out of the accumulation of it should be spent during the year. Reliance is placed by Dr. Pal on two letters of the Board of Direct Taxes addressed to two separate institutions. The first letter dated January 8, 1976, is addressed to the Secretary, Institute of Chartered Accountants of India, while the second dated May 17, 1976, is addressed to the Secretary-General of Federation of Indian Chambers of Commerce and Industry. Both these letters have been appended as annex. 10 to a subsequent affidavit filed on behalf of the petitioner. It has been clearly stated therein that there is nothing in s. 10(21) of the Act which requires that the income to qualify for exemption should be wholly spent in the relevant year itself without any accumulation. Learned standing counsel has not been able to place his hand on any provision of law or even any direction of the Board of Direct Taxes to the contrary. In this view of the matter, the assumption of the ITO that income has not been spent during the year and that it provides a reason for reopening the assessment is without basis and being a wholly untenable ground cannot be utilised for sustaining the action for reopening the assessment.
The only other reason indicated by the ITO is that the entire income has been treated as non-taxable while, according to s. 10(21) of the Act, only so much of the income as has been wholly applied for the purpose of the research institute should be exempted from tax. It is not the case of the revenue that any part of the income has been spent for a purpose other than scientific research. Undoubtedly investment by way of fixed deposits or in any stock holding is not expenditure. Acquisition of shares or converting cash into the shape of fixed deposit cannot be taken to be expenditure of the income of the research institute. At the best, certain capital investment had been made. The petitioners stand has been that only small portions of the income that had been earned had been spent during these years for the purpose of land and machinery and the income was allowed to accumulate for utilisation in subsequent years. The second reason indicated by the ITO, therefore, has also no foundation.
According to Dr. Pal, counsel for the petitioner, all relevant information had been disclosed in the shape of primary facts to the ITO in the two assessment years where returns had been filed and refund of tax deducted at source had been claimed. The ITO on examining the relevant papers was satisfied that the assessee was not earning income liable to tax. Since the assessees entire income was covered by section 10(21) for being exempted in the matter of computation of total income, there was no liability to make a return under section 139 of the Act and this being the legal position which does not made the petitioner liable to make a return of its income for any year, no fault can be found with the petitioner for not having made the return for the other two years. learned standing counsel vehemently argued that as no return had been filed for the other two years it would not be appropriate for this court to interfere at this stage by making the rule nisi for a writ of prohibition absolute and thereby preventing the ITO from making an appropriate investigation into the matter. It there was really any matter to be looked into and if we were satisfied that quashing the notices at this stage would prejudice the revenue, we would certainly have accepted learned standing counsels submission. For all the years, one common stand has been taken by the revenue and even for the two years where no return has been filed the factual position is not different. Once we accept the basis that the income was not necessary to be spent during the year and could be allowed to accumulate and be carried forward and we further hold that in making investments by way of fixed deposits and holding of stocks there was no diversion of the income of the research institute, we do not think a distinction should be made for the two years where no return had been filed. It is pertinent to indicate here that there is no force in the contention of the learned standing counsel that the donation received by the petitioner constitutes income. Even if it be, it is available to be excluded while computing the total income and, therefore, whether it is the donation proper of the dividend income of bank interest, the same principle is applicable and the income under all these heads is exempt under s. 10(21) of the Act.
We are satisfied that the petitioner had made no suppression and all the primary facts had been appropriately placed before the ITO when the two assessments were made. From the record, it is clear that there is no tenable reason for issuing the notices under s. 148 of the Act and to initiate proceedings for the four years in question. In these circumstances, allowing the proceeding to continue would unnecessarily prejudice the petitioner and would be futile and vexatious. We accordingly allow the applications and quash the notices under s. 148 of the Act dated January 9, 1978, for each of the four years referred to above. We restrain the ITO, opposite party No. 1 herein, from taking any further action on the basis of these notices.
The petitioner shall be entitled to costs in these applications. Consolidated hearing fee of Rs. 250 (two hundred and fifty) is allowed to it.
P. K. MOHANTI J. - I agree.