Commissioner Of Income-Tax v. Nagpur Hotel Owners Association.

V.A Mohta, J.:— This is a reference at the instance of the Commissioner of Income-tax on the following two questions:

“(1) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the application in Form No. 10 under rule 17 of the I.T Rules, 1962, could be filed even after the assessment is completed?

(2) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that the I.T Rules could not fix any time limit for submitting an application in Form No. 10 under rule 17 of the I.T Rules, 1962?”

2. The assessee is an association of hotel owners of Nagpur.

3. It is duly registered under the Societies Registration Act. Its objects are to co-ordinate the activities of hotel owners and to help them in every possible manner in their business. The assessee filed its return of income for the assessment years 1974–75 and 1975–76 in February, 1977. It had claimed exemption as a charitable institution under section 11 of the Income-tax Act (“the I.T Act”). The exemption was refused by the Income-tax Officer since (i) it was not duly registered with the Commissioner of Income-tax Under section 12A(a) and (ii) no notice of accumulation of income as required under section 11(2) was filed. The assessee filed appeals and also applied for registration with a request for condonation of delay. The Appellate Assistant Commissioner quashed the assessments and sent back the case for reconsideration of the issue afresh, on the basis that it was duly registered. The Income-tax Officer held that the object of the; assessee was not charitable but was to carry on profit making activity. Consequently, he held that the income was not exempt under section 11. He further held that the assessee had not applied for accumulation of its income for charitable purposes as per section 11(2) of the Income-tax Act within the time specified in Rule 17 of the Income-tax Rules. Hence the income was brought to tax. The Appellate Assistant Commissioner confirmed the order on both counts in the appeal filed by the assessee. The matter was carried to the Tribunal in second appeal. The Tribunal, on the basis of the Supreme Court decision in the case of CIT (Addl.) v. Surat Art Silk Cloth Manufacturers Association, [1980] 121 ITR 1, held that the assessee's objects were charitable. It also held, relying on the Madras High Court decision in the case of Muthiah Chettiar Family Trust (M. CT.) v. Fourth ITO, [1972] 86 ITR 282, that the Income-tax Rules cannot prescribe a time limit for filing the application for accumulation of funds for future utilization for charitable purposes and, hence, the relief could not have been refused on the ground of limitation. The Revenue has accepted the finding of the Tribunal about the charitable nature of the assessee but not the finding on the second issue. Hence this reference.

4. Section 11(1) as it stood at the material time excluded from the total income, income derived from property held under trust wholly for charitable purposes to the extent to which such income is applied to such purposes in India. Section 11(2) permitted accumulation of income on fulfilment of the conditions specified therein. One such condition was requirement of its investment/deposit in certain forms/modes. section 11(2)(a) contemplated a notice in writing to the Income-tax Officer in the prescribed manner specifying the purpose and time (not exceeding ten years) for which the income is being accumulated or set apart. The point to be noted is that section 11(2)(a) speaks of the “prescribed manner” of giving notice but not of the limitation within which the notice is to be given. Rule 17 of the Income-tax Rules framed under section 295 reads:

“17. The notice to be given to the Assessing Officer or the prescribed authority under sub-section (2) of section 11 or under the said provision as applicable under clause (21) or clause (23) of section 10 shall be in Form No. 10 and shall be delivered before the expiry of the time allowed under sub-section (1) of section 139, for furnishing the return of income.”

5. The above rule as it stood before April 1, 1971, did not mention about the time-limit. The time-limit was mentioned in Form No. 10.

6. section 11(2)(a) does not itself prescribe the limitation for giving the notice. The crux of the matter is whether the expression “prescribed manner” used in that provision would include within its fold even the time element so as to delegate to the rule-making authority the power to prescribe not only the mode and manner of notice but also the limitation within which it ought to be given. In this context, the first question that must arise is whether the prescription for limitation pertains to procedural rights or substantive rights? There is no single test to demarcate the limit where procedural law ends and substantial law starts. All depends upon the context and the purpose. Here is an Act, several substantive provisions of which refer to limitation. section 11(2) confers certain benefits of exemption to the taxpayer. It prescribes certain conditions for availing of those benefits which are in the nature of safeguards in the interest of proper application of the trust fund. Those conditions include giving of a notice in a prescribed manner. There is no reference to any time factor in it. It is, therefore, very difficult to imagine that Parliament intended to permit whittling down or nullifying that substantive right by prescribing limitation for giving a notice. Power to prescribe the manner of giving a notice is delegated but the provision of delegation is conspicuously silent about the time element. All this clearly means that the Legislature never intended to bring the time element in the process. Had the legislative intention been otherwise, it would have been clearly expressed. It is, therefore, clear that to bring in the time element in the matter of giving notice was not within the “delegated authority”. Hence, that part of rule 17 which deals with limitation is clearly beyond section 11(2)(a) and is, therefore, illegal.

7. In this context useful reference may be made to the decision of the Supreme Court in the case of STO v. Abraham (K.I), [1967] 20 STC 367 wherein a similar expression “prescribed manner” used in section 8(4) of the Central Sales Tax Act is interpreted thus (at page 372):

“But the phrase ‘in the prescribed manner’ in section 8(4) does not take in the time element. In other words, the section does not authorise the rule-making authority to prescribe a time-limit within which the declaration is to be filed by the registered dealer. The view that we have taken is supported by the language of section 13(4)(g) of the Act which states that the State Government may make rules for ‘the time within which, the manner in which and the authorities to whom any change in the ownership of any business or in the name, place or nature of any business carried on by any dealer shall be furnished.’ This makes it clear that the Legislature was conscious of the fact that the expression in the manner would denote only the mode in which an act was to be done, and if any time-limit was to be prescribed for the doing of the act, specific words such as ‘the time within which’ were also necessary to be put in the statute. In Stroud's Judicial Dictionary, it is said that the words ‘manner and form’ refer only ‘to the mode in which the thing is to be done, and do not introduce anything from the Act referred to as to the thing which is to be done or the time for doing it’.”

8. In the case of Bharat Barrel and Drum Manufacturing Co. P. Ltd. v. Employees' State Insurance Corporation, [1971] 40 FJR 339; (1971) 2 SCC 860 : AIR 1972 SC 1935, the Supreme Court has laid down—though in the context of section 75 read with section 96(1)(b) of the Employees' State Insurance Act, 1948—that the expression “such procedure as may be prescribed by rules” does not cover the time factor. It is observed (at (1971) 2 SCC 724 : page 1942 of AIR 1972 SC and at page 350 of 40 FJR):

“It is, therefore, apparent that the Legislature does not part with the power to prescribe limitation which it jealously retains to itself unless it intends to do so in clear and unambiguous terms or by necessary intendment.”

9. The limitation prescribed in Form No. 10 of rule 17 before its amendment in 1971 has been held to be invalid not only by the Madras High Court in the case of Muthiah Chettiar Family Trust (M. CT.), [1972] 86 ITR 282 but also this court in the case of CIT v. Trustees of Shri Teckchand Chandiram Trust, [1990] 184 ITR 537. The Revenue contends that the ratio of these decisions will have no application to the amended rule 17 by which limitation is prescribed in the body of the rule and not in the body of Form No. 10. These decisions proceed only on the basis that limitation is neither prescribed in the Act nor the Rules, which, according to the Revenue, means by implication that if limitation is prescribed by the rule it would be valid. This submission is not correct. A close examination of these judgments will reveal that reference to the absence of limitation in the rule is only factual. There is no scope to read in those judgments a ratio that limitation could have been legally prescribed in the rule in the absence of any specific power to that effect. The Supreme Court decisions referred to above are clear. They specifically speak of the rules and not the form. In principle also no distinction between the form and the rule can be drawn to judge the extent of delegation under section 11(2)(a) where the language does not permit delegation of power to prescribe limitation to give notice.

10. The conclusion is thus inevitable that the Income-tax Rules could not fix a time-limit for submitting the application in Form No. 10 under rule 17 and, therefore, the Tribunal was correct in its conclusion.

11. Under the circumstances, both the questions are answered in the affirmative and in favour of the assessee. No order as to costs.