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TMI Blog2012 (5) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessment proceedings the Assessing Officer examined the financial statements such as income and expenditure accounts, balance sheet, etc. On a perusal thereof he noted that the assessee had filed a declaration under the Voluntary Disclosure of Income Scheme, 1997 (VDIS) and had paid taxes of Rs. 43,76,812/- in respect of the income for several years up to and including the assessment year 1997-98. The payment of the taxes was claimed by the assessee to represent application of the income of the trust for purposes of Section 11(1)(a) of the Act. He also noticed that the assessee had incurred an expenditure of Rs. 38,29,535/- on events/activities held by the assessee outside India. (Hanover, Germany). The expenditure was also incurred outside India. The Assessing Officer took the view that the expenditure cannot be considered as application of income in India for charitable purposes. He accordingly considered the aggregate of these two amounts as income not applied for charitable purposes in India and computed the surplus of the assessee-trust in the following manner: - "Gross Receipts Rs. 2,56,84,141/- Less Exemption u/s 11(1) Amount ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Tribunal. After hearing both the sides, the following substantial questions of law is framed : - "1. Whether on a proper interpretation of Section 11(1)(a) of the Act, the Tribunal was right in law in holding that the payment of taxes- of Rs. 43,76,892/- under the VDIS amounted to application of income of the assessee trust to charitable purposes in India? 2. Whether on a proper interpretation of Section 11(1 )(a) of the Act, the Tribunal was right in law in holding that the expenditure of Rs. 38,29,535/- incurred outside India amounted to application of income to charitable purposes in India?" 8. Section 11(1)(a) of the Act runs as follows: - "11.(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the income available to the trust for application to charitable purposes, the availability of the income should be considered in the light of the commercial principles or whether such income is also to be arrived at or determined as ordained in the Act. This question has come up for consideration before several High Courts. We may briefly notice some of them. In CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612 the question arose as to whether the income tax liability of Rs. 77, 912/- should be allowed as a deduction while computing the income available for application to charitable purposes in accordance with Section 11(1)(a) of the Act.. The Gujarat High Court held that "income derived from trust property" for the purposes of Section 11(1)(a), must be determined on commercial principles and in doing so, all outgoings including outgoing by way of income tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise. The question was examined by the Madras High Court in CIT v. Janaki Ammal Ayya Nadar Trust [1985] 153 ITR 159. In this judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucted from the income of the trust for the purposes of arriving at the income available for application to charitable purposes. Similar view has been taken by the Calcutta High Court in CIT v. Birla Janahit Trust [1994] 208 ITR 372 and, by the Madhya Pradesh High Court in CIT v. Raipur Pallottine Society [1989] 180 ITR 579. 12. Thus, it appears that there is a consensus of judicial view on the question whether payment of taxes can be considered as a proper deduction while determining the income available to a trust for application to charitable purposes as required by Section 11(1)(a) of the Act. The question is not whether taxes are allowable while computing the business income of an assessee under the provisions of the Act. The question is whether the word "income" used in Section 11(1)(a) of the Act must be assigned the same meaning as the words "total income" as defined in Section 2(45) of the Act. The CBDT itself has opined in the circular cited above that it would be incorrect to assign to the word "income" used in Section 11(1)(a) the same meaning as "has been statutorily assigned to the expression "total income" under Section 2(45) of the Act. Having regard to the authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto: Provided that such income shall be included in the total income - (a) if it is applied to religious or charitable purpose without the taxable territories, but in the following cases, namely: (i) where the property is held under trust or other legal obligation created before the commencement of the Indian Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories; and (ii) where the property is held under trust or legal obligation created after such commencement, and the income therefrom is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is interested, the Central Board of Revenue may, by general or special order, direct that it shall not be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the trust within or without the taxable territories. The provision as it existed after the amendment made w.e.f. 1.4.1952 makes a reference to application or accumulation for application of the income of the trust "to such religious or charitable purposes as relate to anything done within the taxable territories". Mr. Vohra, learned counsel for the assessee, in an assiduously prepared argument, contended that the words "as relate to anything done within the taxable territories" clearly show that the charitable purposes must be executed within the taxable territories and that it was immaterial where the income is actually applied. It is difficult to conceive of a situation under which the charitable purposes are executed within the taxable territories but the income of the trust is applied elsewhere in the implementation of such purposes. Be that as it may, the position is put beyond doubt by the proviso to Section 4(3)(i) of the old Act. It says that the income of the trust shall stand included in its total income if it is applied to religious or charitable purposes throughout/within the taxable territories. The proviso is indicative of the object of the main provision. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary condition for invoking either the subsiantive part of the clause or the proviso thereto." 19. We should have thought that the position for which Mr. Vohra contends was quite unarguable after the aforesaid elucidation by the Supreme Court, but with his usual perseverance he claims that the judgment or the observations made therein are not against the proposition canvassed by him. In order to appreciate the argument of Mr. Vohra, it is necessary to refer briefly to the facts of the case cited supra. The Nizam of Hydrabad created a trust for charitable and religious objects, some of which had to be effectuated in the taxable territories and some outside the taxable territories (in Mecca and Madina). The income of the trust properties was directed to be accumulated until the death of the Settler. In the assessment made to income tax for the assessment years 1952-53 and 1953-54, the assessee claimed exemption in respect of the income arising from the trust property as per section 4(3)(i) of the old Act. The taxing authorities noticed that there were four religious objects enumerated in the trust deed out of which two were to be effectuated in Mecca and Madina. The trust deed al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r charitable purposes within the 'taxable territories, the accumulation of the income for such application cannot fall within the ambit of section 4(3)(i) of the Act." 20. It was the above judgment which was taken up in appeal to the Supreme Court by the trust, to which we have already referred. The Supreme Court dismissed the appeal. The argument of the learned counsel for the assessee that these judgments do not militate against the contention put forward by him is difficult to be accepted. The proviso to section 4(3)(i) of the old Act is clear. Coming to the present Act, which is the 1961 Act, section 11(1)(c) conveys the same idea which the proviso to section 4(3)(i) of the old Act conveyed. The section is couched in the following terms: - "11.(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) to (b)** ** ** (c) Income [derived] from property held under trust - (i) Created on or after the 1st day of April, 1952, for a charitable purposes which tends to promote international welfare in which India is interested, to the extent to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision in this way, that is, that the income of the trust should be applied not only to charitable purposes, but also applied in India to such purposes. The submission of Mr. Vohra that the words "in India" qualify only the words "such purposes" so that only the purposes are geographically confined to India does not appear to us to be the natural and grammatical way of construing the provision. That would break or clog the natural flow of the entire group of words "to the extent to which such income is applied to such purposes in India". The meaning sought to be attached by Mr. Vohra to the words "in India" as qualifying only the "purposes" places a strain on the natural or grammatical interpretation of the group of words. If what Mr. Vohra contends is correct, then Section 11(1)(c) may become redundant and otiose. If as he says, the income of the trust can be applied even outside India so long as the charitable purposes are in India, then there is no need for a trust which tends to promote international welfare in which India is interested and which was created after 1.4.1952 to apply to the CBDT for a general of special order directing that the income to the extent to which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly applied within the territorial limits of India. This was the result of the amendment made by the Income Tax (Amendment) Act, 1953 w. e. f. 1.4.1952 when Section 4(3)(i) of the old Act was recast to bring out clearly the territorial limits within which the income of the trust needs to be applied in officer to secure exemption. Thus whatever might have been the position prior to 1.4.1952, it is clear that after that date it was not the intention of the 'legislature to forego the tax as well as the benefits arising out of the application of income of the trust within the' territorial limits of India. The position has remained unchanged from 1.4.1952 for at least 60 years now. Therefore, it cannot be said that by construing Section 1l(1)(a) in the manner, that the requirement therein is that the income of the trust should be applied in India for charitable or religious purposes, we are doing any violence to the provisions nor can it be said that we are condoning an absurd result, 24. We do not intend to burden this order with a plethora of authorities on the construction of a Section, but since a point of grammar is also involved in the interpretation of the provision, we think it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view of the learned authors Kanga and Palkhivala in their treatise on "Law and Practice of Income Tax" is the same as ours. In their 4th Edition (1958), which is a treatise on the old Act, the following observations appear at page 197 of the book in the commentary of Section 4(3)(i): "(d) The exemption is restricted to such portion of the income as is in fact applied, or accumulated or set apart for application, to religious or charitable purposes within the taxable territories. The territorial limit of application of income -viz. the taxable territories - is as essential to secure exemption as the nature of the purpose-viz. religious or charitable. But it is not essential that the trust itself should be expressly confined to purposes within the taxable territories. If the trustees, as a matter of fact though not as a matter of legal obligation under the trust, restrict the application of the income to purposes within the taxable territories, that would be sufficient compliance with the clause" At page 219, the following observations appear as commentary on the proviso to the section: - "Proviso. Para. (a). - Foreign charities. - The substantive part of cl. (i) enacts that ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the income outside the taxable territory will ultimately trickle down to India. He also pointed out by way of example an anomaly that is likely to arise because of the interpretation which we have placed upon the provision. He says that in the case of a trust whose object is the giving away of scholarship; to meritorious student the cost of air tickets purchased in India and borne by the trust to enable the student to go abroad for higher studies will be exempted from tax because the application of the income is in India, whereas the amount of fees paid by the trust abroad to the University there would not be exempt because it amounts to application of the income of the trust outside India, even though there is no difference between the two so far as the charitable nature of the purpose is concerned. In both the cases, according to him, the income is applied to the charitable purposes only. 28. What Mr. Vohra says is not without force or merit but we are required to interpret the statute as it is and not in the manner in which we think the law ought to be. We need to distance ourselves from matters of policy. Innovative thinking has its limits. Judicial adventurism, masquera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of all the years that are before, us in which the question of application of income outside India arises, such time limit has already expired and we are informed by the learned Sr. Standing Counsel that there is no provision to condone the delay. In view of this difficulty, we are unable to accede to the prayer made on behalf of the assessee. We have also gone through the judgment of the Division Bench of this Court relied upon by the assessee. That was a case where the assessee was denied the benefit of Section 80-O of the Act. The decision of the taxing authorities was upheld by the Court. The assessee bad also raised an alternative claim for deduction under Section 80HHB of the Act. The eligibility of the assessee to the claim under Section 80HBB was not disputed by the assessing authorities. The Division Bench of this Court noticed that the income tax authorities did not allow the assessee's claim under Section 80HHB because the assessee had not complied with certain formalities such as creation of reserves in its accounts. It is in this background that this Court held that it will be extremely unfair not to give the benefit to the assessee under Section 80HHB. It was thus d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee being a National Association of Software Service Companies, it was natural for it tip provide such services to its members. He noted that the services, also included the following: - ♦ "It provides information on the Indian domestic Market It has successfully launched the Domestic trade Net, wherein tender enquiries on computers and related' product and compiled and sent to member. ♦ "It informs its members on changes in policies of Government of India with regard to computer software and software services. ♦ "It organizes seminars/conferences/exhibitions in India and abroad. This is aimed at helping members in their business promotion, ♦ "On an annual basis, it sends about 150-200 circulars to all its members explaining new policies of Government agencies, market information and other relevant statistics." From the above, the Assessing Officer took the view that, there were specific services rendered by the assessee to its members and therefore the annual subscription fee was assessable under Section 28(iii). 33. On appeal the CIT (Appeals) held that the annual subscription received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the members. If this test is applied to the present case it will be seen that in consideration of the receipt of the annual subscription fees, the assessee-trust has not been shown to have performed any specific services to the members. Whereas the annual subscription fees is a "recurring receipt, receivable by the assessee-trust by mere efflux of time Irrespective of whether any services are rendered or not to the members, what is contemplated in Section 28(iii) is the receipt of fees from particular members to whom specific services have been rendered by the trust. The annual subscription fee is paid merely to keep the membership alive on yearly basis. The distinction between the two being clear, and in the absence of any evidence to show that the assessee receives fees from the members as a "quid pro quo" for specific services rendered to them, we are unable to hold that the Tribunal was wrong in holding that the annual subscription fees was not assessable under the section. The substantial question of law is thus answered in the affirmative, in favour of the assessee and against the Revenue. 35. Turning to the other appeals, we take up the appeal for the assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 which arise's out of ITA. No.172/Del/2008 in the file of the Tribunal. ITA No. 172/Del/2008 before the Tribunal is an appeal by the Revenue relating to the assessment year 2004-05 in which three issues were raised: - (i) Applicability of Section 28(iii) of the Act in respect of annual subscription fees. (ii) Exemption in respect of the corfus donation received. (iii) Deduction for provision made for doubtful debts. With regard to the applicability of Section 28(iii), in line with our . decision in the appeal for the assessment year 1998-99 the substantial question of law is answered in favour of the assessee and against the Revenue. As regards the exemption allowable in respect of the corpus donation, here also the substantial question of law, following our decision for the assessment year 1998-99, is answered in favour of the assessee and against the Revenue. 40. As regards the provision for bad and doubtful debts, the question again is whether in computing the income of the trust on commercial principles, the provision can be deducted or where the deduction can be allowed only in accordance with the provisions of Section 36(i)(vii) read wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue.
42. ITA No.480/2011 arises out of ITA No. 3625/Del/2008 which was an appeal by the assessee before the Tribunal in which it challenged the decision of the departmental authorities that the expenditure incurred outside, India did not amount to application of income for charitable purposes in India within the meaning of Section 11(1)(a) of the Act. This issue and the substantial question of law arising therefrom in line with our earlier decision is decided/answered in favour of the assessee and against the Revenue.
43. We now turn to the assessment year 2006-07. ITA No. 519/2011 arises out of ITA No. 4468/Del/2009 in the file of the Tribunal which was an appeal by the assessee. Before the Tribunal the assessee had taken only one issue in appeal, namely, whether the expenditure of Rs. 1,70,85,034/-incurred outside India on events and activities held outside India did not qualify for exemption under Section 11(1)(a) of the Act. In line with our earlier decision, the substantial question of law arising from this issue is decided in favour of the Revenue and against the assessee.
44. In the result the appeals are disposed of as above with no order as to costs. X X X X Extracts X X X X X X X X Extracts X X X X
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