TMI Blog2012 (5) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable for application to charitable purposes – in favour of assessee. Expenditure incurred outside India on events/activities held in connection with the exhibition – Held that:- The provision as it existed after the amendment made in Section 11(1)(a) 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" - even if relocate the words "in India" in the manner in which assessee suggests in the definition , it would make no difference to the -meaning to be ascribed to the group of words - the amount spent by the assessee-trust cannot be considered as application of the income of the trust in India - against assessee. Non Applicability of Section 28(iii) on trust - non-refundable admission fee from its members as well as annual subscription charges – Held that:- 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 membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 actually applied* Rs. 77,94,166/- Application applied u/s 11(2) Rs. 33,00,000/- 25% of Income accumulated for application. Rs. 64,21,035/- Assets purchased Rs. 1,12,011/- Surplus Rs. 80,56,929/-" Rs. 1,76,27,212/- 4. The CIT (Appeals) upheld the view taken by the Assessing Officer with regard to the payment of taxes and the expenditure incurred in Germany in connection with a trade fair held there. He accordingly confirmed the computation: of the surplus at Rs. 80,56,929/- as made by the Assessing Officer. 5. The assessee carried the matter in further app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or set apart is not in excess of [fifteen] per cent of the income from such property;" 9. So far as the first question regarding payment of the taxes is concerned, the argument of the Revenue before us is that the taxes paid represent the share of the government in the profits or surplus of the trust and neither under the Act nor under commercial principles can taxes be considered as an appropriate deduction in ascertaining the amount available to the assessee for application to charitable purposes. It is submitted that payment of taxes no doubt may deplete the liquid resources of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 judgment, the Court placed reliance on circular No. 5 dated 19.06.1968 issued by the CBDT. The relevant portion of the circular is extracted below: "2. Section 11(1) provides that subject to the provisions of sections 60 to 63, 'the following income shall not be included in the total income of the previous year.............. ' The reference in sub-section (1)(a) is invariably to 'income' and not to 'total income'. The expression 'total income' has been specifically defined in section 2(45) of the Act as 'the total amount of income computed in the -manner laid down in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 authorities noticed above and keeping in view the fact that the long-settled position, which has also been accepted by the CBDT, should not be upset, particularly where the statute which we are dealing with is an all India statute, we express our agreement with the judicial trend and hold that the payment of taxes under the VDIS is to be deducted before arriving at the commercial income of the assessee-trust that is available for application to charitable purposes. We are thus in agreement with the view taken by the Tribunal on this point. 13. We now proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 included in the total income; ( b ) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either ( i ) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or ( ii ) the work in connection with the business is mainly carried on by beneficiaries of the institution; ( c ) if it is applied to purposes other than religious or charitable purposes or ceases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted 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 the main part, it was provided that the income of the trust should be applied within the taxable territories to religious or charitable purposes and in the proviso an exception was carved out to provide that if the income is applied outside the taxable territories, even though to religious or charitable purposes, the trust will not secure the exemption from tax in respect of such income. Two situations were anticipated for which provision was made in the proviso itself. In these two situations, the Central Board of Revenue (CBR, the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 also conferred absolute discretion upon the trustees to apply the income of the trust to one or more of the four categories of religious purposes. The Income Tax Officer, on a construction of the trust deed held that so far as the income that was to be applied, to religious and charitable purposes situated outside the taxable territories was concerned, since no order had been made by the CBR under clause ( a ) of the proviso to section 4(3)( i ) of the old Act, the income did not qualify for exemption. His view was upheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 such income is applied to such purposes outside India, and (ii) For charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India; Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;" 21. Here again it may be noticed that sub-clause (ii) of clause (c) of sub-section (i) of Section 11, in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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 is applied to the. promotion of international welfare outside India shall not be denied the exemption, nor would it be necessary for a charitable or religious trust created before the aforesaid date to seek such an order from CBDT in respect of its income which is applied to charitable or religious purposes outside India. In our opinion, therefore, the words "in India" appearing in Section 11(l)(a) and the words "outside India" appearing in Section 11(1)(c) of the Act qualify the verb "applied" appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fit and appropriate to briefly refer to a few rules of interpretation laid down in some of the decided cases. In Jugalkishore Saraf v. M/s. Raw Cotton Co. Ltd., AIR 1955 SC 376, S.R, Das, J. speaking for the Supreme Court observed as follows:- "The cardinal rule of construction of statutes is to read the statute literally, that is by giving to the words used by the legislature their ordinary, natural and grammatical meaning. If however, such a reading leads to absurdity and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exemption can be claimed in respect of only such portion of the trust-income as is applied to religious or charitable purposes within the taxable territories. Para (a) of the Proviso is a corollary to that substantive provision and it provides that such portion of the income of a religious or charitable trust is to be included in the total income as is in fact applied to religious or charitable purposes outside the taxable territories. In other words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, masquerading as judicial innovativeness should not result in legislation. Policy, so far as we are concerned, is uncharted territory into which we should feel chary of making forays. Secondly, we ought to be wise enough to know that in the matter of exemption from tax in all India statute, judicial restraint, and not innovativeness or novelty, may be the proper approach to follow in order that, the long settled legal position is not turned upside-do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 directed that the Income Tax Department should not stand on Mere technicalities and must give an opportunity to the assessee to fulfil the requirements of Section 80HHB(3) within a reasonable time. It has to be remembered that the writ court can issue such direction based on equitable considerations and in the interest of justice, but our jurisdiction under Section 260A of the Act is not so wide as writ jurisdiction. We have no such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bers 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 the members was not taxable under Section 28(iii). The Revenue carried the matter in appeal to the Tribunal. We note that the Tribunal has not separately dealt with the, assessability or otherwise the annual subscription fee, though it has referred to the assessability of the non-refundable admission fee and decided that issue specifically. We also find that in paragraph 13, the Tribunal has considered the non-refundable admission fee and the annual subscription charges in a cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 2002-03 which is ITA No.520/2011. In this order the first substantial question of law relates to the applicability of Section 28(iii) of the Act. For the reasons stated by us in ITA No.472/2011 and 18/2011, this question is answered in the affirmative, in favour of the assessee and against the Revenue. 36. The only other substantial question of law which arises in this appeal relates to the corpus donation of Rs. 7,70,000/- received by the assessee. The finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 with Section 36(2)(i) of the Act. We have already held that the income of the trust available for application to charitable purposes in India should be computed not in accordance with the strict provisions of the Income Tax Act but should be computed in accordance with commercial principles and it is on this footing that the payment of Income Tax Act under the VDIS was treated as a deduction and as proper amplication of the income of the trust. The same line of reasoni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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