1. The short issue that we are required to adjudicate in this appeal is whether or not the CIT-III, Pune was justified in declining to renew approval under Section 80G of the IT Act, 1961 (hereinafter referred to as 'the Act'), for asst. yr. 2006-07 onwards.
2. The assessee is a society registered under the Societies Registration Act, 1860 and Bombay Trusts Act, 1950. The assessee is one of oldest educational institution in the city was established in the year 1888 which was set up 120 years ago, the main objective of the society was stated to impart education in vernacular language and to educate students about their duties to the society, self respect, self reliance and duties towards our nation. As on now, it has established and it runs several educational institutions at different places. When the assessee sought renewal of approval under Section 80G, vide application in Form 10G received by the CITs office on 9th Feb., 2007, the assessee was issued a questionnaire calling upon the assessee to furnish certain documents, information and clarification. This requisition was duly complied with. In the course of ensuing hearing on the renewal application, the CIT noted that, in terms of the findings of the AO for the asst. yrs. 2003-04 and 2004-05, there are certain irregularities as also contravention with rules in three out of 57 institutions of the following nature: --Action of the applicant society in making collection over and above the prescribed fees; --Maintaining accounts in respect of such unauthorized collections separately, viz. under miscellaneous account, and taking it directly to the balance sheet without admitting it as income; --Collecting from the students contribution to development fund which, considering the same are over and above the normal fees are in the nature of capitation fees; --Taking such development funds directly to the balance sheet without routing the same through P&L a/c; --Treat donations which have not been specifically given towards corpus donation as 'corpus donation' and thus not showing such donations as income, where the same should have been so shown as per the provisions of Section 12(1).
3. It was in this backdrop that the CIT required the assessee applicant to show cause as to why, in view of the above findings against the assessee in the assessment orders for the asst. yrs. 2003-04 and 2004-05 and in view of the fact that there has been a denial of complete exemption under Sections 11 and 12, the assessee should not be deemed to be not complying with the provisions of Section 80G(5)(i). It was explained by the assessee that the denial of exemption under Section 11 was in respect of three institutions only; and that, in any event, the assessment orders so passed have been carried in appeal before the CIT(A). It was also submitted that the surplus of these three institutions was used only to make good the shortfall in other institutions, and as such surplus was used for the purposes of attaining objectives of the trust and not for any business purposes.
These submissions did not impress the learned CIT, who was of the view that even such part denial of exemption amounts to non-fulfilment of the conditions and that the taxable unit being the assessee applicant, and not the individual institutions functioning under the assessee applicant, it is not really material whether or not the alleged violation is only in respect of three institutions. On the basis of this reasoning and taking note of the findings of the AO in the asst.
yrs. 2003-04 and 2004-05, the CIT rejected the renewal application. The assessee applicant is aggrieved and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. To properly adjudicate the issue in appeal, it is necessary to first appreciate the scheme of the Act, so far as approval under Section 80G is concerned. Sec. 80G(2)(a)(iv) provides that in computing total income of the assessee, in accordance with the provisions of the said section, there shall be deducted, an amount equivalent to fifty per cent of any sum paid by the assessee in the previous year, as a donation, to any fund or any institution, other than the ones specified in Section 80G, to which this section applies. Sec. 80G(5)(vi) provides that, in order to be eligible for deduction under Section 80G(2)(a)(iv), the institution or fund to which the amount is paid as donation, "is for the time being approved by the CIT in accordance with the rules framed in this behalf. Rule 11AA of the IT Rules provides for requirements for approval of any institution or fund under Section 80G.An institution or fund seeking approval under Section 80G is to move an application to CIT concerned, in. the prescribed proforma and along with a copy of (i) registration granted under Section 12A or copy of notification issued under Section 10(23) or Section 10(23C); (ii) notes on the activities of the institution or fund for the last three years or since inception, whichever is less, and (iii) copies of accounts of the institution or fund for the last three years or since inception, whichever is less. The CIT is also empowered to call for further documents or information from the trust or institution, or cause such enquiries to be made, as he deems fit, in order to satisfy himself about the genuineness of activities of such trust or institution. Where the CIT is satisfied that all the conditions laid down in Clauses (i) to (v) of Section 80G(5) are fulfilled by the applicant trust or institution, the CIT is to grant the approval specifying the year or years for which such approval is valid. In case the CIT is not satisfied about these conditions being satisfied, he shall reject the application for approval, after recording reasons for such rejection in writing. The provisions of Section 80G(5)(i) to (v), on the basis of which the CIT has to grant or reject the application seeking approval under Section 80G, are as follows : "(i) where the institution or fund derives any income, such income would not be liable to inclusion in its total income under any of the provisions of Sections 11 and 12 or Clause (23AA) or Clause (23C) of Section 10; (ii) the instrument under which the institution or fund is constituted does not, or the rules governing the institution or fund do not, contain any provision for the transfer or application at any time of the whole or any part of the income or assets of the institution or fund for any purpose other than the charitable purposes; (iii) the institution or fund is not expressed to be for the benefit of any particular religious community or caste; (iv) the institution or fund maintains regular accounts of its receipts and expenditure; and (v) the institution or fund is either constituted as a public charitable trust or is registered under the Societies Registration Act, 1860, or any law corresponding to that Act in force in any part of India or under Section 25 of the Companies Act, 1956 or is a university established by law, or is any other educational institution recognized by the Government or by the university established by law, or affiliated to any university established by law, or is an institution financed wholly or in part by the Government or a local authority.
6. A plain look at the provisions of Section 80G of the IT Act, r/w Rule 11AA of the IT Rules, thus makes it clear that the decision on whether to grant or not grant the approval under Section 80G essentially rests on CIT's satisfaction that the above five conditions are satisfied by the applicant. Each case must, therefore, be examined on the touchstone of the above five tests which are fairly objective and unambiguous. We also find that under Rule 11AA(3), the CIT has the powers to call for such further information and documents, and to have such enquiries conducted, as he considers appropriate to satisfy himself about 'genuineness of activities of trust or institution', but then there is no further elaboration about the connotations of expression 'genuineness' in this context, nor does that criterion find any place in the test on which the CIT must satisfy himself before granting the approval under Section 80G.7. At this stage, we may take note of order dt. 6th Aug., 2007 issued by the Chief CIT-II Pune granting exemption under Section 10(23C) to the assessee applicant, from asst. yrs. 2006-07 onwards. This document was filed before us as an additional evidence as the assessee received the above notification after proceedings before the CIT were already concluded. Having heard the parties on the petition seeking admission of this additional evidence, we deem it fit and proper to admit the same. By way this notification, exemption under Section 10(23C) is granted on the following conditions: (i) The assessee will apply its income or accumulate for application, wholly and exclusively to the objects for which it is established; (ii) The assessee will not invest or deposit its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture, etc.) otherwise than in any one or more of the forms or modes specified in Sub-section (5) of Section 11; (iii) This notification will not apply in relation to any income being profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of accounts are maintained in respect of such business; (iv) The assessee will regularly file its return of income before the IT authority in accordance with the provisions of the IT Act, 1961; (v) In the event of dissolution, its surplus assets will be given to an organization with similar objectives and no part of the same will go to any of the members of this institution.
8. One of the contentions canvassed before us is that now that the assessee is eligible for exemption under Section 10(23C), the very foundation of the rejection order ceases to exist, and there is, therefore, no good reason for declining approval under Section 80G. The opposition to this contention is, inter alia, on the grounds (a) that the grant of exemption is conditional and the assessee's conduct does not inspire that he will scrupulously comply with these conditions; (b) that, as evident from the findings of the AO, the assessee is not carrying out any genuine charitable activities, (c) that the educational facilities by the assessee are extended on commercial lines by charging excessive fees and by charging capitation fees, and, as such, the assessee is not engaged in any charitable activities; (d) that unless the assessee is able to establish that genuine chartable activities are carried out, approval under s. 80G cannot be granted; (e) that the accounts maintained by the assessee are not correct since, as pointed out by the AO, certain receipts are taken directly to the balance sheet without routing the same through P&L a/c; and (f) that the assessee has contravened rules by way of charging excessive fees.
Learned counsel (argued) that these submissions are factually incorrect and legally invalid. He elaborately takes us through various documents to demonstrate that the allegations of the AO are factually incorrect, and, in the process of doing so, he takes up each objection of the AO in the asst. yrs. 2003-04 and 2004-05 and makes effort to show the fallacies inherent in such objections and the incorrect assumption of material facts. For the reasons we will set out a little later, we are not inclined to address ourselves to these factual aspects in greater detail. The other plea of the learned counsel is that all that is required to be seen by the CIT is whether or not the conditions set out in Section 80G(5)(i) to (v) are satisfied, and once the objective tests contemplated in these provisions are satisfied, it is not open to the CIT to decline approval under Section 80G on the basis of his subjective perceptions about genuineness of the charitable activities or on the basis of his apprehensions about possible non-fulfilment of the conditions subject to which exemption from income if granted.
9. In our considered view, for the purpose of deciding on whether or not to grant approval under Section 80G, a CIT has to only examine whether or not the conditions set out in Section 80G(5)(i) to (v) are satisfied. The first and foremost thing to be seen is whether or not any income earned by the assessee is not being liable to inclusion in its total income under any of the provisions of Sections 11 and 12 or Clause (23AA) or Clause (23C) of Section 10. It has to be borne in mind that since the assessee is granted approval for the future years, and since there is no way that anyone can have the clairvoyance of knowing whether or not the assessee will be able eventually to comply with the conditions, if any attached to the exemptions, as long as the exemption is available in principle and as long as the assessee can reasonably claim to be able to satisfy the conditions attached to such exemption, one has to proceed on the basis that the condition laid down under Section 80G(5)(i) is satisfied. It cannot (be) open to the CIT to reject the approval under Section 80G only on the ground that it is not conclusively established now that the assessee will be finally eligible in future for exemption under Sections 11, 12 and 10(23AA) or 10(23C).
Such an interpretation can only lead to absurdity that in year x, the assessee must have a finding about applicability for exemption in years x+1, x+2, x+3 and so on particularly when even the eligibility for exemption is dependent on the conduct of the assessee, such as filing of return and maintenance of books of accounts, in the years x+1, x+2, x+3 and so on. In principle eligibility for exemption, and existence of the conditions, if any, attached to the exemption, which can be reasonably complied with in our considered view, sufficient to satisfy Section 80G(5)(i). That condition is satisfied on the facts of this case. The next thing to be ensured by the CIT is non-existence, in the instrument, constitution or rules governing the institution of any provision for the transfer or application at any time of the whole or any part of the income or assets of the institution or fund for any purposes other than the charitable purposes. That can of course be done by examining the provisions in instruments and rules of the institution. The assessee had duly furnished the documents to the CIT, and no such discrepancy is noted therein. The provision of Section 80G(5)(iii) is also thus satisfied. The next thing to be ensured is that the institution or fund is not expressed to be for the benefit of any particular religious community or caste. That is also not the case before us, and there is no dispute on that aspect. As regards the requirements of Section 80G(5)(iv), all that is to be seen is that the assessee maintains accounts of its receipts and expenditure. The discrepancies pointed out by the Departmental Representative in wrong accounting treatment to receipts by taking the same directly to balance sheet are not really relevant in this context, because all that law requires is that accounts of receipts and expenditure be maintained by the assessee. The correctness of fine issue in accounting treatment are not covered by the scope of Section 80G(5)(iv). The accounts having been regularly maintained by the assessee, it cannot even be case of the CIT that the assessee is wanting in this respect. Finally, in terms of the provisions of Section 80G(5)(v), the CIT has to ensure that the assessee institution or fund has the nature of one of the organizations specified in that clause. The societies registered under Societies Registration Act, 1960, as admittedly the assessee is, are one such form of organization. This condition is also therefore satisfied. In the course of hearing before us, there was good deal of discussion on the objections raised by the AO in the course of asst. yrs. 2003-04 and 2004-05 and arguments on merits were advanced by both the sides.
However, as learned CIT(A) is in seisin of the matter, we refrain from making any specific observations on these aspects. Suffice to say that prima facie correctness of the findings of the AO cannot be said to be entirely free from doubt and, in any event, these findings at best challenge assessee's compliance with certain rule and procedures which do not, in any way, challenge the fact charitable activities actually having been carried out. Therefore, based on these findings, one cannot come to the conclusion that the charitable activities of the assessee society were not genuine in any event, as we have stated earlier as well, all that the learned CIT has to see, for the purpose of deciding whether or not the approval is to be granted for the purpose of Section 80G is whether or not the conditions of Section 80G(5)(i) to (v) are satisfied, and, as per the mandate of Rule 11AA(4), once these conditions are satisfied, he has to grant the approval. Genuineness of the charitable activity, in the absence of any specific mention about connotations of that expression in the IT Act or IT Rules, must remain confined to the aspect that the charitable activities are actually carried out by the assessee. The accounting treatment of receipt and fixation of fees in excess of the norms laid down by the controlling bodies, even if that be so do not decide the genuineness of activities of trust or institution.
10. In view of the above discussions, in our considered view, effectively all the necessary requirements under Rule 11AA(4) are satisfied and the CIT ought to have granted approval under Section 80G(2)(iv). We, therefore, uphold the grievance of the assessee and accordingly direct the CIT to grant approval under Section 80G. In the result, the appeal is allowed.