Only Income From Investment Made By Charitable Institution In Violation Of S.13(1)(d) Income Tax Act Is Liable To Tax: Telangana HC
The Telangana High Court has held that the benefit of exemption under Section 11 of the Income Tax Act, 1961, can be denied only on income from such investments made by charitable or religious institutions, which are in violation of Section 13(1)(d) of the Act. Section 11(1) of the Act mandates that any income derived from the property held under the trust wholly for charitable purpose...
The Telangana High Court has held that the benefit of exemption under Section 11 of the Income Tax Act, 1961, can be denied only on income from such investments made by charitable or religious institutions, which are in violation of Section 13(1)(d) of the Act.
Section 11(1) of the Act mandates that any income derived from the property held under the trust wholly for charitable purpose or religious purpose is exempted from the total income to the extent to which such income is applied to charitable or religious purpose in India.
The provision is however subject to Section 13 sub-section (1)(d)(iii) whereof provides that if any funds of the trust or charitable institution is invested or deposited before first of March, 1983, otherwise than in any one or more of the forms or modes specified in Section 11(5), continue to remain so invested or deposited after November 30, 1983, the assessee shall not be entitled to the benefit of exemption.
In the case at hand, the Andhra Pradesh State Civil Supplies Corporation Limited, a charitable Undertaking of State Government engaged in distribution of essential commodities on subsidy, was denied exemption under Section 11 on account of its equity investment in its Joint Venture companies in the year 1982-83.
ITAT had held that the investment made by the assessee in the joint ventures would fall under the category of investment made in violation of Section 13(1)(d) of the Act and therefore, the assessee is not entitled for exemption under Section 11.
In its appeal, the Assessee claimed that the investment was not with 'profit motive' and that it was made on the advice of the Central and State Government, to ensure adequate supply of dal and edible grade rice bran oil to the poorer section of the society.
Revenue on the other hand claimed that the joint venture companies were not government companies or corporations established under the Central, State or provincial companies.
Agreeing, the division bench of Chief Justice Alok Aradhe and Justice J.Sreenivas Rao noted,
“The said joint venture companies are neither the Government Companies nor the Corporations established under Central or Provincial Acts. The investment was made by the assessee as a promoter in the joint venture companies. The essential nature of the investment made by the assessee was an investment in the shares of the joint venture companies.
The assessee continues to hold share even beyond the cut-off date i.e., 30.11.1983. The funds invested from the assessee corporation was from the profit of previous year relevant to the assessment year 1984-85. Therefore, the assessee had violated the provisions of Section 13 (1) (d) of the Act. The assessee is, therefore, not entitled for exemption under Section 11 of the Act.”
The next question before the Court was whether the entire income from such an investment made in violation of Section 13(1)(d) has to be taxed?
The Assessee had contended that only the income from investment which is made in violation of Section 13(1)(d) is liable to tax and it does not result in blanked denial of exemption under Section 11 of the Act.
The Revenue submitted that the exemption provision should be interpreted strictly and once the violation of Section 13(1)(d) of the Act is established, the entire income from such investment has to be taxed.
The High Court however agreed with the Assessee and held that the Legislature did not contemplate the benefit of denial of Section 11 of the Act, to the entire income. It held,
“only the income from an investment made in violation of Section 13 (1) (d) of the Act is liable to tax.”
Reliance was placed on Bombay High Court's decision in DIT (Exemption) v. Sheth Mafatlal Gagalbahai Foundation Trust (2001) and Delhi High Court's decision in IT (Exemption) v. Agrim Charan Foundation(2002), which took a similar view.
“...the investment made by the assessee in its joint venture companies is an investment made in violation of Section 11 (5) read with Section 13 (1) (d) of the Act and, therefore, the assessee is not entitled to claim the benefit of exemption under Section 11 of the Act. However, only the income from such an investment made in violation of Section 13 (1) (d) of the Act is liable to tax,” the Court thus observed and allowed Assessee's appeal in part.
Appearance: Senior Counsel AV Krishna Kaundinya for Appellant; Senior Standing Counsel JV Prasad for Revenue.
Case title: AP State Civil Supplies Corporation Limited v. Income Tax Officer
Case no.: I.T.T.A.Nos.325, 326, 327 AND 328 OF 2007, 79, 80, 81, 82 AND 83 OF 2008