1. These two appeals are filed by the department against the combined order of the learned Commissioner (Appeals) both dated 1-6-2005, for assessment years 1997-98 and 1998-99. As common issues are involved in these appeals, they are being disposed of together, by this combined order.
2. The first common ground is against the observations of the Commissioner (Appeals) that the issuance of notice under Section 148 of the Income Tax Act, 1961 (the 'Act') is weak in nature and is not sustainable in the eyes of law.
3. The assessee is a society registered under the Public Societies Registration Act, and is assessed as an Association of Persons (AoP).
The main object of the Society is to establish aid and administer educational and other institutions to impart education at all stages in all subjects including medicine, engineering, etc. for diffusion of knowledge. One of the projects undertaken by the society was to establish medical college at Khammam.
For want of approval, the Society could not take up any activity other than construction of building for Medical College and Teaching Hospital. The Teaching Hospital became functional from 25-8-1996. The consent letter of the University of Health Sciences, granting affiliation to the Medical College was received on 4-11-1996 and the Government of Andhra Pradesh issued essentiality certificate on 21-9-1996. The Society was registered under Section 12A of the Act with effect from 28-5-1992. During the assessment year 1997-98, the assessee earned interest of Rs. 3,89,223 on fixed deposits. During assessment year 1998-99, besides earning interest of Rs. 10,55,587, the assessee also received tuition fees, application money and other collections.
However, for both the years, the assessee did not file any income-tax return. The assessing officer was of the view that under Section 139(4A) of the Act, the assessee was required to file its return of income. Since no returns were filed, notice under Section 147 was issued. In response to the said notice, the assessee filed its return of income for both the years. For assessment year 1997-98, the assessee declared the earlier mentioned interest income and also miscellaneous income of Rs. 2,100. The assessee claimed 100% exemption under Section 10(22) of the Act. For assessment year 1998-99, the assessee declared total income of Rs. 37,82,249 and claimed exemption under Section 11 of the Act. The contention of the assessee was that it had already filed its audited annual accounts which clearly depicted the activities carried on by the society and there was no fresh information warranting the reopening of the assessment. However, the assessing officer did not agree with the contention of the assessee and proceeded with the assessment. The Commissioner (Appeals) held that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, according to him, the initiation of the proceedings under Section 147 was weak in nature and was not sustainable in the eyes of law.
4. No serious arguments were advanced on this issue by either side.
From the perusal of the records, it is seen that for assessment year 1997-98 no return was filed at all and only the audited accounts were filed. Undoubtedly, under Section 139(4A) of the Act, the assessee was under an obligation to file its return of income, as it exceeded the maximum amount which is not chargeable to tax before giving effect to the provisions of Sections 11 and 12. Since no return had been furnished, it clearly fell within Clause (a) of Explanation 2 to Section 147 of the Act. Mere filing of accounts does not tantamount to filing of return and the return of income being the basic document to set the assessment machinery rolling, not filing the same would certainly amount to escapement of assessment and hence, the notice was validly issued. For assessment year 1998-99, the assessee did furnish the return of income which was processed under Section 143(1) of the Act. Here also, since the return was processed under Section 143(1) of the Act, the assessing officer cannot be said to have expressed any opinion and hence, he was justified in issuing notice under Section 148 of the Act. Thus, the Commissioner (Appeals) was not justified in observing that the issuance of notice under Section 148 was weak in nature and not sustainable in law. Accordingly, first ground of the both the appeals is allowed.
5. In the next common ground, the department is aggrieved by the granting of exemption under Section 11 to the assessee. After referring to certain dates relating to the grant of affiliation, essentiality certificate, etc. which are mentioned above, the assessing officer observed that during the two years under consideration, barring the commencement of civil works, the assessee had not carried out any educational activity. Therefore, according to him, the income earned by the assessee was chargeable to tax. In response to the show-cause letter issued by the assessing officer, the assessee made elaborate submissions. The gist of the submissions is that the establishment of educational institutions involves creation of infrastructure and other ancillary and incidental facilities. During the two years, the society was engaged in the creation of necessary infrastructure for the Medical College. It was contended that creation infrastructure is a part and parcel of establishment of an educational institution. Several judgments were relied upon by the assessee in its submissions. However, the assessing officer was not satisfied with the explanation and held that Section 11 contemplates the computation of income in order to find out whether income has been applied for charitable purposes or not.
Considering the dates on which the relevant approvals, as mentioned above, were obtained by the assessee, the assessing officer finally concluded that no educational activity had been undertaken during the two years and hence, did not grant any exemption under Section 11 of the Act.
6. The Commissioner (Appeals), besides accepting the explanation of the assessee in toto, also observed that during the previous year 1997-98, all the requisite permissions for the establishment of Medical College were received by the assessee. The admission process had started and the fees were also being collected from the students. The classes actually commenced from 13-5-1998. Thus, according to him, for all practical purposes, the Medical College had become functional.
Accordingly, he directed the Assessing Officer to recompute the income after considering the exemption under Section 11 of the Act.
7. The learned departmental Representative relied on the order of the assessing officer and also on the judgment of the Madras High Court in the case of CIT v. Devi Educational Institution . The learned counsel relied on the judgment of the Madras High Court in the case of MR.AR. Educational Society v. OT and also on the judgment of the Bombay High Court in the case of Trustees of Vanita E. Vishram v. CIT .
8. In the case of Devi Educational Institution (supra), the court wasconstruing the word 'existing' appearing in Section 10(22) of the Act andheld that the existence of the institution, such existence being construedas imparting of education during the relevant year, was an essential precondition for claiming benefit under that provision. The court reconsidered this judgment in MR.AR. Educational Society's case (supra) and Fobserved that the word 'existing' is not the same thing as being functional.The prima facie view of the court was that the width of the provision is notrequired to be cut down by insisting that the educational activity musthave been carried on during the relevant previous year, even though there is no doubt whatsoever that the Society was engaged in taking the steps required to make the educational activity operative, the steps so taken being the construction of the building and other facilities in which the task of imparting the education was to be carried out. In view of this prima facie view, the High Court directed the Tribunal to refer the question of law which was proposed. Thus, the reliance of the learned departmental Representative on the judgment in the case of Devi Educational Institution (supra) cannot come to its rescue. In the case of Trustees of Vanita Vishram (supra), the assessee-trust claimed exemption under Section 10(22) in respect of interest income earned by it. The exemption was denied on the ground that the source from which the income was generated was interest earned from investment of surplus and it was not an income directly earned from the educational activities qualifying exemption. The High Court held that granting exemption to the income of the educational institutions is to enable such institutions to utilize the monies available with them for the purposes of running the educational institutions. The source from which the monies are received is of no consequence, what is relevant is the application of income. In the present case, it is not disputed that the assessee was engaged in creating the infrastructure for the purpose of setting up of Medical College. It is common knowledge that it takes considerable time to set up such an infrastructure. Since the activity of setting up the infrastructure was towards the fulfilment of the main object for which the Society was established, the assessee should not be denied the benefit of Section 11. In fact, the Teaching Hospital of the Society had come into existence during the previous year 1996-97 itself. It is also not the allegation of the department that the monies were utilised for purposes other than the object of the Society.
Therefore, viewing the facts of the case in the light of the judgments referred to above, we are of the opinion that the Commissioner (Appeals) was justified in granting exemption to the assessee under Section 11 of the Act.