Madan B. Lokur, J.:— The petitioner is the branch office of a non-profit organization set up in America and carries on educational activities. It is aggrieved by an order dated October 12, 2004, passed by the Central Board of Direct Taxes (CBDT) rejecting its application dated April 7, 1999, for initial approval of exemption under section 10(23C)(vi) of the Income-tax Act, 1961 (for short “the Act”) for the assessment year 1999-2000. For convenience the petitioner is called the branch office, while the American organization is called the head office.

2. The head office of the petitioner enjoys tax exemption in America as an educational institution under section 501(c)(3) of the Internal Revenue Code of 1954. Some time in 1993, it entered into a memorandum of understanding (MoU) with the National Council for Hotel Management and Catering Technology under the Ministry of Tourism of the Government of India for offering its courses and expertise with a view to improve the quality of hospitality education and training in India. For the purposes of discharging its obligation under the MoU, the head office opened a liaison office at Bombay on or about July 6, 1994, when it obtained approval from the Reserve Bank of India to do so. Thereafter, as its activities increased, it was permitted by the Reserve Bank of India by a letter dated February 10, 1995, to convert its liaison office into a branch office for the purpose of undertaking the following activities:

(i) Research, reproduction, marketing etc. in relation to educational services and resources.

(ii) Provide educational services and resources to the target groups consisting of hospitality industry, training institutions and individuals.

3. With a view to clarifying its tax status in India, the head office filed an application on June 27, 1995, with the Authority for Advance Rulings (AAR) constituted under Chapter XIX-B of the Act. Although the head office sought a ruling from the Authority on several questions, it was noted by the Authority that the moot question is whether the activities of the applicant come within the definition of “income of educational institution” under section 10(22) of the Act. This provision reads as follows:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included— ….

(22) any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit.”

4. On a close analysis of the activities of the head office, the Authority concluded that it was carrying on purely educational activities or activities relating to the provision of educational facilities. It was held that the applicant fulfils the conditions precedent to the applicability of section 10(22) of the Act and that there was no profit motive in its activities. Under the circumstances, the Authority held that the applicant fulfils the conditions for grant of exemption under section 10(22) of the Act and thus its income arising or accruing from its sources mentioned in the questions referred to it would not be taxable. The decision of the Authority is reported as Educational Institute of American Hotel and Motel Association v. CIT, [1996] 219 ITR 183 (AAR).

5. Three facts are clear from the above and they are:

(a) The American Hotel and Lodging Association Educational Institute, of which the petitioner is a branch office is an educational institution and is recognized as such in USA.

(b) The head office carries on purely educational activities or activities relating to provision of educational facilities, without any profit motive.

(c) The head office fulfils the requisite conditions and is entitled to the grant of exemption under section 10(22) of the Act. Therefore, its income in India is not taxable.

6. With effect from April 1, 1999, section 10(22) of the Act was substituted by section 10(23C)(vi) thereof. However, the substantive provision of section 10(23C)(vi) remained the same as section 10(22) of the Act. Section 10(23C)(vi) of the Act reads as follows:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—…….

(23C) any income received by any person on behalf of—…….

(vi) any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the prescribed authority, or…”

7. There are certain provisos to this, which we propose to consider a little later.

8. In view of the change in law, the petitioner made an application on April 7, 1999, to the Commissioner of Income-tax in Bombay in the prescribed Form 56D and requested for approval for the purposes of section 10(23C)(vi) of the Act

9. For the assessment year 1999-2000, the petitioner had filed its return of income on April 7, 1999, declaring its income as nil. The total receipts received by the petitioner were Rs. 1,54,01,487. On this, a deduction of Rs. 23,71,199 was claimed on account of expenses incurred and the remaining income over the said expenditure coming to about Rs. 1,30,30,288 was claimed as exempted under section 10(23C)(vi) of the Act. The case was selected for scrutiny but during the assessment proceedings it was noticed that the assessee/petitioner was not authorised under the relevant provisions to claim the said exemption. In response, the petitioner stated that the application for approval of exemption under section 10(23C)(vi) of the Act in Form 56D has already been moved on April 7, 1999, and the same was pending before the concerned authority. At this stage, a further expenditure of Rs. 1,14,89,736 alleged to have been incurred by the head office, in respect of the branch office, was sought to be claimed as a deduction.

10. The Assessing Officer and the Commissioner of Income-tax (Appeals) in their respective assessment/appellate orders recorded concurrent findings and pointed out that the assessee had failed to produce any documentary evidence to substantiate its claim for further expenditure of Rs. 1,14,89,736 alleged to have been incurred by the head office, in respect of the branch office, although this claim was not raised initially and neither was this claim reflected in the relevant books of account nor were these expenses debited to the income and expenditure account.

11. Unfortunately, the application dated April 7, 1999, remained pending for a considerable period of time. During this period, there was some correspondence exchanged between the petitioner and the Central Board of Direct Taxes, the prescribed authority under section 10(23C)(vi) of the Act. Eventually, the petitioner was given a letter dated September 13, 2002, in which it was stated by the respondents that the petitioner has not applied its accumulated income for the purpose of education in India, which is one of the primary conditions under section 11 of the Act for being notified under section 10(23C)(vi) thereof. The petitioner was asked to submit a clarification in this regard and explain why its application be not rejected in view of the above.

12. The petitioner sent its reply on October 8, 2002, and the contents of this letter are of some significance. The petitioner explained that it is only a branch office of the American Educational Institution. It acts as a mere facilitating and a co-ordinating section—collecting the fees/charges for materials supplied by the head office. These receipts are collected for and on behalf of the head office and this amount is actually owed to the head office and is remitted after making some deductions for office expenses in India. According to the petitioner, the surplus is only the sum of funds available with the branch office which it owes to the head office and in that sense it is not a genuine surplus in the nature of income. The petitioner clarified that the terms of section 10(23C)(vi) of the Act as well as the third proviso thereof do not require the income to be applied in India or accumulated for the application towards the objects of the institution in India. While this may be a requirement under the provisions of section 11(1) and (2) of the Act, section 10(23C)(vi) thereof is independent and reading an application or accumulation for application of the income towards the objects of the institution in India would be against the legislative intent. As an alternative, it was stated that the surplus amounts are maintained by the petitioner with Dena Bank, Overseas Branch and are invested in short term deposits. To that extent, the requirement of the third proviso to section 10(23C)(vi) of the Act is met. The petitioner also placed reliance upon the decision of the Authority for Advance Rulings in support of its case (see [1996] 219 ITR 183 (AAR)).

13. Eventually, by the impugned order dated October 12, 2004, the application of the petitioner was rejected leading to the present writ petition.

14. The respondents have filed a counter affidavit in which it has been admitted that although basically the facts have remained the same throughout, the circumstances have not remained the same in the light of the changes in the legal and administrative framework. In other words, the issue that is required to be considered is really one of law, the facts being admitted and undisputed.

15. For convenience, the operative portion of the impugned order dated October 12, 2004, is reproduced below:

“12. As per section 1(2) of the Income-tax Act, 1961, it extends to the whole of India. The third proviso to section 10(23C)(via) says that it ‘applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established…’ The application of the income by the institutions under section 10(23C)(vi) should be within India. In the present case, the surplus is being expatriated outside India. Hence, the expatriation of funds cannot be treated as application of the income for the educational purposes by the applicant. The conditions as stipulated for grant of exemption under section 10(23C)(vi) are neither verifiable nor enforceable in this case as the institution is established outside the territory of India.

13. The discussion in the above paras clearly indicates that the applicant does not fulfil the conditions stipulated under section 10(23C)(vi). The applicant has not applied its income for the purpose of education in India and thereby does not fulfil the stipulated condition. The investment in one of the scheduled banks by the applicant has no relevance, as the surplus has not been utilised for the charitable purpose in India. The contention of the applicant that the surplus has been utilised for educational purposes in USA is not acceptable and is extra territorial. The utilisation of income of the assessee should be within the parameters of section 11. The applicant is claiming exemption under the Indian Income-tax Act. Therefore, the application of income and funds have to be in India.

14. In view of the above facts, I am directed to say that the application in Form No. 56D dated April 7, 1999, filed by the ‘Educational Institute of American Hotel and Motel Association, MI 48823, USA’ for initial approval of exemption under section 10(23C)(vi) of the Income-tax Act, 1961, for the assessment year 1999-2000 is rejected as the institution does not fulfil the conditions as prescribed under section 10(23C)(vi) of the Income-tax Act, 1961.”

16. We heard learned counsel for the parties on 1st, 4th and 5th September, 2006 when orders were reserved. We find no error in the view taken by the respondents.

17. At the outset, we may notice a dichotomy in the stand taken by the petitioner. On the one hand it is contended (where convenient) that the head office and the branch office are one and the same entity. If so, any amounts received by the branch office in India are actually amounts received by the head office. Therefore, there is no question of any expatriation of the amounts to the head office and the head office is earning in India and taking its earnings (less domestic expenses) to the USA. On the other hand, it is contended (where convenient) that the head office and the branch office are two different entities. If so, then the branch office has to stand on its own legs. In that event, the branch office is earning in India and taking its earnings to the USA, without any reference to the head office. We are, however, proceeding on the basis that the head office and the branch office are really one entity, one subordinate to the other.

18. The first question that needs to be answered is whether the amounts generated by the petitioner in India are its income or not. Learned counsel submitted that the petitioner is only a branch office of an American organization and has no independent status as such. It has been set up for the purposes of carrying on the educational activities of the head office situated in the USA. For the convenience of Indian students and institutions, the petitioner collects the charges for course materials etc. for and on behalf of the head office. It is against such receipts that the petitioner obtains course materials from the head office. Were this arrangement not made, the only alternative for the Indian students and institutions desirous of participating in the course would be to directly remit the amount for the course material to USA and then receive the course materials. It is that inconvenience which is sought to be avoided by the petitioner and that is why it acts essentially for the convenience of the Indian students and institutions in India. In the words of the petitioner as mentioned in its letter dated October 8, 2002:

“Any customer (individual, industry/institutions) wanting to buy course materials makes a purchase request to the branch office. Pro forma invoice is provided by the head office through fax on advice by the branch office. The pro forma invoice indicates the charges inclusive of shipment. The customer on receipt of the pro forma sends the payment to the branch office in Indian rupees at the prevailing rate. The branch office advises the head office to process shipment and also deposits the payment received into the QA22 account maintained by the branch office. Stamped receipt is issued for any payment received. The customer on arrival of shipment takes delivery of the consignment following the customs procedures.

Any individual wanting to enroll for courses or professional certification fills up the application and sends the same to the branch office with the fees in equivalent Indian rupees. The branch office then processes the application with the head office and facilitates the provision of study text/guides and the conducting of exam etc.”

19. According to the petitioner, the receipts arise from the following sources:

(1) Course fees—which includes individual courses, group courses and institutional networking.

(2) Training resources e.g books, videos, CD-ROMs supplied.

(3) Training programs i.e seminars and workshops conducted.

20. It appears, as contended by learned counsel for the petitioner, that the cost incurred by the head office in respect of intellectual inputs and efforts are not passed on to the petitioner but are accounted for by the head office only. If this cost is passed on to the petitioner, perhaps it may not have any surplus as contended by its learned counsel and, therefore, it would have no income that is taxable in India. In other words, the petitioner merely acts as a post office for all intents and purposes vis-a-vis its relationship with the head office located in the USA. Learned counsel for the petitioner is in error, we feel, in equating surplus with income. That cannot be so. We are of the opinion that the amount generated by the petitioner in India is its income. Any income generated by the petitioner may be income generated for and on behalf of the head office—nevertheless it is the income of the petitioner. Thereafter, the petitioner deducts administrative expenses incurred by it and the “surplus”, is then remitted to the head office. What follows from this is that the petitioner generates income in India, but it may or may not have any surplus. If it does have some surplus, it remits the amount to America, otherwise not.

21. The next question that arises for our consideration is whether the income generated by the petitioner is required to be applied by it in India for obtaining approval from the prescribed authority under section 10(23C)(vi) of the Act so as to enable it to compute its total income without including that amount. This question arises from the impugned order, which relies, inter alia, upon the third proviso to section 10(23C)(via) of the Act. This proviso reads as under:

“Provided also that the fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via)—

(a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent, of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent, of its income shall in no case exceed five years; and

(b) does not invest or deposit its funds, other than—

(i) any assets…….

(ii) any asset,……

(iii) any accretion….

(iv) voluntary contributions….

for any period during the previous year otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11.”

22. According to learned counsel for the petitioner, the third proviso does not mention that the income generated is required to be applied in India. In fact, the words in India are totally missing and the respondents have unnecessarily imported these into section 10(23C)(vi) and the third proviso. We cannot agree with learned counsel. The fact of the matter is that exemption from payment of tax is being granted in India. It would appear irrational if exemption from tax is granted in India so that the amount can be applied outside India. Surely, Parliament could not have intended such a result to follow. From a pragmatic standpoint also, such an interpretation cannot be accepted. Take for instance a situation where the amount is applied in country X, say in South America. Obviously, the Revenue does not have any machinery to ensure that the amount is applied for educational purposes in that country. Is it, therefore, reasonable to expect the Revenue to nevertheless ensure that the amount is being applied in that country for educational purposes ? The answer must clearly be in the negative. Consequently, it must be held that application of the income is required to be in India for the purposes of section 10(23C)(vi) of the Act read with the third proviso thereto.

23. Learned counsel suggested that importing the words “in India” in the third proviso is impermissible. That may be so, but similarly importing the words “anywhere in the world” is equally impermissible. But that is not really the issue. The words “in India” have necessarily to be read into the third proviso to make it workable and to keep it in conformity with the application of the Act. The respondents have rightly noted in the impugned order that the Act applies to the whole of India—it is not extraterritorial in operation. If we agree with learned counsel, then the Revenue would be given powers to apply the provisions of the Act even outside India—something that is not even postulated by Parliament. Consequently, whichever way we look at the issue, it is not possible to agree with learned counsel for the petitioner.

24. The thrust of the contentions of learned counsel appear to be intended to persuade us to accept the view canvassed by the hon'ble Mr. Justice Oxford University Press v. Commissioner Of Income Tax, [2001] 247 ITR 658 (SC). Unfortunately, that is the minority view and, therefore, we cannot accept it. We also find that that decision would not strictly be applicable in view of the difference in the language of the statute after the incorporation of section 10(23C)(via) of the Act and its third proviso. Nevertheless, we may note two significant propositions stated by the hon'ble Mr. Justice Y.K Sabharwal concurring with the hon'ble Mr. Justice D.P Mohapatra which, we believe, squarely apply to the facts of the present case. Firstly, relying upon K.P Varghese v. ITO, [1981] 131 ITR 597 it was said that (page 679):

“It is a well recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided…. It is said that it is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the court may modify the language used by the Legislature or even do some violence to it, so as to achieve the obvious intention of the Legislature and produce a rational construction.”

25. Secondly, in the context of section 10(22A) of the Act, it was said (page 684):

“If the contention urged on behalf of the assessee is accepted, it would result in an university or other educational institution clause (22) or hospital or other institution as contemplated by clause (22A), without providing in India any educational or philanthropic activity, as the case may be, claiming the benefit of exemption on the ground that such a service is being provided in some part of the world though in India such body is engaged itself or through its branch in an activity akin to a business or profit making activity.”

26. It is well-settled that when the object of a provision is to plug leakage and prevent evasion of tax, a construction which would defeat and obliterate it from the statute book should be eschewed. If two constructions are possible then the one that would preserve its workability and efficacy is to be preferred to one which will render it otiose (See State of Tamil Nadu v. M.K Kandaswami, [1975] 36 STC 191 (SC); (1975) 4 SCC 745 : AIR 1975 SC 1871). The courts will have to reject that construction which will defeat the plain intention of the Legislature even though there may be some inexactitude in the language used. (See Salmon v. Duncombe, [1886] 11 App. Cas 627 (PC), referred to in Commissioner Of Income Tax, Delhi v. S. Teja Singh , [1959] 35 ITR 408 (SC)). When the scope of the words used is sought to be curtailed by construction, as it was pointed out in CIT v. Shahzada Nand and Sons, [1966] 60 ITR 392 (SC) and we quote (page 400):

“the approach suggested by Lord Coke in Heydon's case [(1584) 3 Rep. 7b] yields better results:

To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider according to Lord Coke:

1. What was the law before the Act was passed; 2. What was the mischief or defect for which the law had not provided; 3. What remedy Parliament has appointed; and 4. The reason of the remedy.”

27. In view of the rule cited with approval in Shahzada Nand, [1966] 60 ITR 392 (SC), we may briefly examine the legislative history of the amended provision. The purpose, nature and import of the legislative amendment brought by the Finance (No. 2) Act, 1998, with effect from the assessment year 1999-2000 has been explained in paragraph 8 of the Central Board of Direct Taxes Circular No. 772 dated December 23, 1998 [1999] 235 ITR (St.) 35. The said paragraph is reproduced below (page 44):

“8. Provisions relating to exempting the income of educational institutions, universities, hospitals and other medical institutions:

8.1 Under the provisions of clauses (22) and (22A) of section 10 of the Income-tax Act, before amendment, educational and medical institutions enjoyed a blanket exemption from income-tax if they existed solely for educational purposes and not for the purposes of profit. In the absence of any monitoring mechanism for checking the genuineness of their activities, these provisions have been misused.

8.2 The Act omits the aforesaid clauses (22) and (22A) from the statute. The exemption would, however, continue in respect of any university or other educational institution, hospital or other medical institution which is wholly or substantially financed by the Government, under the new sub-clauses (iiiab) and (iiiac) inserted in section 10(23C) of the Income-tax Act by the Finance (No. 2) Act, 1998.

8.3 Further, under sub-clauses (iiiad) and (iiiae) in section 10(23C), the income of other educational and medical institutions would also be exempt if their annual receipts are below a limit to be prescribed. The limit has since been prescribed at Rs. 1 crore, vide Notification No. S.O 897(E), dated October 12, 1998 (see [1998] 234 ITR (St.) 11).

8.4 The income of the remaining educational and medical institutions would be exempt if they are approved by the prescribed authority on application made by them under sub-clauses (vi) and (via) of section 10(23C). This approval would be subject to their adherence to conditions similar to those specified for sub-clauses (iv) and (v) of section 10(23C) regarding maintenance of accounts, expenditure and accumulation of funds and investment of funds in specified assets. The accumulated income is required to be invested in the modes specified in section 11(5). These institutions are given time up to March 30, 2001, to transfer their investments to specified securities. The rules and forms in this regard have since been notified, vide Notification No. S.O 897(E), dated October 12, 1998 (see [1998] 234 ITR (St.) 11). By this notification the Central Board of Direct Taxes has been designated as the prescribed authority for the purpose of approval under sub-clauses (vi) and (via) of section 10(23C).

8.5 These amendments will take effect from April 1, 1999, and will, accordingly, apply in relation to the assessment year 1999-2000 and subsequent years.”

28. Circular No. 779 also issued by the Central Board of Direct Taxes on September 14, 1999 (see [1999] 240 ITR (St.) 3), in clause (vi) states as follows (page 42):

“(vi) The provisions of clause (23c) of section 10 are rationalised so that the Central Government before notifying a fund, trust or institution may call for any information and may hold any enquiry so as to determine the genuineness of such fund, trust or institution. The second proviso to this clause has been substituted so as to empower the prescribed authority to call for information or to hold such enquiry as it deems fit before the university or other educational institution or a hospital is approved for exemption under clause (23C) of section 10.”

29. Reference may also be made to the speech made by the Finance Minister on July 17, 1998, while replying to the debate after incorporating amendments to the Finance (No. 2) Bill, 1998 reported as [1998] 232 ITR (St.) 11 at 13.

“In the Budget I had proposed that the blanket exemption available to educational and medical institutions would be withdrawn. The proposal stipulated that these institutions will have to file their returns of income and make an application after adhering to certain conditions which are similar to those prescribed for persons deriving income from property held for charitable or religious purposes. This proposal emanated from the background that a large number of educational and medical institutions exist as profitable commercial ventures but they continue to enjoy the exemption without filing their returns of income. However, the proposal invited large number of representations stating that this would impose hardship on small educational and medical institutions who will have to go to the Income-tax Officer time and again to avail of the tax exemption with all attendent consequences. In response to these suggestions, I propose that all educational and medical institutions which are financed and managed by the Government should continue to enjoy the benefit of exemption. Other institutions whose annual receipts do not exceed Rs. 1 crore, which is proposed to be prescribed in the rules, should also continue to avail of this exemption as in the past. But the remaining educational and medical institutions would be required to follow the same conditions as are prescribed for funds, institutions and trusts established for charitable purposes or for public religious purposes. Hence these institutions would be required to make an application to the prescribed authority for grant of exemption. To enable these institutions to shift their investments to specified investments, I propose to give them time up to March, 2001. I hope these proposals would be welcomed by the educational and medical institutions as they would ensure that only institutions that are actually running for philanthropic purposes and not for purposes of profit will be able to avail of the exemption without much inconvenience.”

30. It is, therefore, clear that Parliament amended the law by introducing section 10(23C)(vi) and other consequential amendments while at the same time deleting section 10(22) of the Act precisely to limit the exemption from taxation to only such educational institutions which fulfil the prescribed conditions with regard to the application and accumulation of income. The final (alternative) contention of learned counsel for the petitioner was that the petitioner is entitled to exemption in view of the fact that it has invested its surplus fund in a short-term fixed deposit in the Dena Bank Overseas Branch in accordance with clause (b) of the third proviso to section 10(23C) read with section 11(5) of the Act. We cannot accept this argument for the simple reason that clauses (a) and (b) of the third proviso are cumulative and not disjunctive. The petitioner does not satisfy the condition of clause (a). Merely satisfying clause (b) by itself is not enough.

31. Under the circumstances, we see no reason to set aside the impugned order. The writ petition is dismissed. No costs.