COMMISSIONER OF INCOME-TAX Vs. PEOPLES EDUCATION SOCIETY

JUDGEMENT

(1.) These two appeals arise out of the two assessment orders passed in respect of the assessment years 1999-2000 and 2001-2002 - respectively, where a common question of law is involved. The Revenue has preferred these appeals against the order passed by the Tribunal holding that the assessee is entitled under Section 10(23C)(vi) of the Income-tax Act, 1961, (hereinafter referred to as 'the Act' for brevity), in respect of the contribution made to the Model Chit Fund and that there is no violation of the provisions of Section 11(5) of the Act.

(2.) The assessee is a charitable society running an educational institution. The assessee made an application for grant of approval in the prescribed form on 21.9.1999 for grant of recognition and for exemption of income under section 10(23C)(vi) of the Act, for the assessment years 1999-2000; 2000-2001 and 2001-2002. By an order dated 12.5.2004, the Central Board of Direct Taxes accorded approval to the assessee-society for the purpose of Section 10(23C)(vi) of the Act. It imposed certain conditions on the assessee-society subject to which an approval was granted. The relevant condition for the purpose of these cases is condition No. 2 relating to the mode of investment of funds. The Society has also made an application under Section 12AA of the Act with the prescribed authority in respect of its educational activity on the ground of "charitable" within the meaning of Section 2(15) of the Act and consequently for claiming benefits under Sections 11 and 12 of the Act, in addition to the exemption under Section 10(23C)(v) of the Act. The DIT (Exemption) registered the assessee-society under Section 12AA by its order dated 5.5.2003. The assessee-society had filed its return of income for the assessment year 1999-2000 on 5.7.2000, reporting NIL income. They enclosed a balance sheet as on 31.3.1999 showing the income and expenditure, receipt and payments for the relevant period. The Assessing Officer issued a notice under Section 148 of the Act on 11.9.2003 on the ground that the assessee-society was neither granted approval by C.B.D.T. under Section 10(23C)(vi) nor was the assessee-society registered under Section 12A of the Act. The assessee entered appearance and brought to the notice of the Assessing Officer, the order passed by the C.B.D.T. on 12.5.2004, granting approval for exemption under Section 10(23C)(vi) of the Act. They also brought to the notice of the Assessing Authority the order of the Tribunal dated 14.1.2004 in I.T.A. No. 1217/Bang/2003 where the Tribunal had allowed the assessee's appeal and directed grant of exemption under Section 11 of the Act. Inspite of the same, the Assessing Authority declined to grant the exemption on the ground that the assessee had made investments in violation of the conditions stipulated by the Board. Therefore, the approval granted by the Board was withdrawn by the Assessing Officer. In the said assessment order, the Assessing Authority referred to an advance of Rs. 10 lakhs to Kammavari Sangha and the contributions to the chits conducted by Model Chit Fund of Rs. 15 lakhs. Aggrieved by the said order, the assessee-society preferred an appeal to the Commissioner of Income-tax (Appeals). The Appellate Authority accepted the contention of the assessee insofar as the advance of Rs. 10 lakhs to Kammavari Sangha, but declined to accept the contributions made to Model Chit Fund, however, dismissed the appeal. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal on consideration of the material on record and the rival contentions, held that the order passed by the Assessing Authority is unsustainable because in view of the twelfth proviso to Section 10(23C) and the proviso inserted under Section 143(3) w.e.f. 1.4.2003. It was incumbent on the Assessing Authority to intimate the prescribed authority of any alleged contravention noticed by him in the assessment proceedings and only after the withdrawal of the exemption and approval granted by the prescribed authority, the Assessing Authority could have passed an order denying the exemption under Section 10 of the Act. The Tribunal also held on merits that the contribution to the chit fund has an element of savings attached to it, one cannot ignore that the predominant object of the chit fund scheme is to act as a lending instrument to the members of the chit and therefore, there was no reason for denial of exemption granted by the assessee. Further, the Tribunal held that there is no violation of the provisions of Section 11(5) of the Act. Therefore, the Tribunal partly allowed the appeal and set aside the order passed by the Assessing Authority as well as the Appellate Authority. Aggrieved by this order, the Revenue is in appeal.

(3.) In the light of the aforesaid facts, the following substantial questions of law do arise for our consideration in this appeal: