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Income tax - Whether income of a Trust should be applied not only to charitable purposes but also applied in India to such purposes - YES; Delhi HC rules against NASSCOM
By TIOL News Service
NEW DELHI, MAY 22, 2012: THE issues before the Bench are - Whether the payment of taxes under the VDIS amounts to application of income of the trust to charitable purposes in India; Whether the words “is applied to such purposes in India” appearing in Section 11(1)(a) of the Act only mean that the purposes of the trust should be in India and that the application of the income of the trust need not be in India; Whether when the assessee-trust incures expenditure on participation in overseas trade fair, such expenditure qualifies as application of income to charitable purposes in India; Whether income of a Trust should be applied not only to charitable purposes but also applied in India to such purposes and Whether the annual subscription fees received by the assessee-trust from its members is taxable under the provision of Section 28(iii) of the Act. And the verdict partly goes in favour of the Revenue.
Facts of the case
The assessee is a trust registered u/s 12A. In respect of the AY 1998-99, it filed a return of income declaring “nil” income on 22.10.1998. In the course of the assessment proceedings the AO 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 AY 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 AO 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. The CIT (Appeals) upheld the view taken by the AO with regard to the payment of taxes and the expenditure incurred in Germany in connection with a trade fair held there.
The Tribunal found that the taxes paid under VDIS related to the AYs 1989-90 to 1997-98 and that they were paid to protect the existence of trust which was absolutely necessary for its continuance. According to the Tribunal, if the taxes paid are not to be treated as application of income of the trust, it would amount to reducing the corpus of the trust by the amount of taxes paid which would be to the detriment of the trust. The Tribunal held that the payment of taxes under the VDIS should be treated as application of income of the trust.
So far as the expenditure incurred in Germany was concerned, the Tribunal was of the view that the words “is applied to such purposes in India” appearing in Section 11(1)(a) of the Act only mean that the purposes of the trust should be in India and that the application of the income of the trust need not be in India. It was observed that “the fact that the legislature has put the words “to such purpose” between “is applied” and “in India” shows that the application of income need not be in India, but the application should result and should be for the purposes of charitable and religious purposes in India. In this view of the matter the Tribunal accepted the contention of the assessee in respect of both the payment of the taxes under the VDIS and the expenditure incurred outside India and held that both represented application of the income to charitable purposes in India.
The assessee received non-refundable admission fee from its members as well as annual subscription charges. In addition to the non-refundable admission fee, every member was required to pay an annual subscription of an amount based in relation to the turnover of the member. The AO brought the annual subscription fee received from each member to tax u/s 28(iii) of the Act. According to the AO, one of the main objectives of NASSCOM was to provide value added services to its members and further under clause 13 of the aims and objectives listed in the memorandum of association, the objects included “to act as a clearing house, as an information centre for the members of the association and provide co-operative services in their common benefits”. According to the AO, the assessee being a National Association of Software Service Companies, it was natural for it to provide such services to its members. The AO took the view that there were specific services rendered by the assessee to its members and therefore the annual subscription fee was assessable u/s 28(iii). On appeal, the CIT (Appeals) held that the annual subscription received from the members was not taxable u/s 28(iii). The same was upheld by the Tribunal.
On appeal, the High Court held 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 No.5 dated 19.06.1968 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” u/s 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;
++ the other question is whether the expenditure of Rs. 38,29,535/- incurred by the assessee-trust on events/ activities held in connection with the exhibition in Hanover, Germany amounts to application of the income in accordance with Section 11(1)(a) of the Act. The contention on behalf of the assessee that the words “to the extent to which such income is applied to such purposes in India” appearing in Section 11(1)(a) of the Act only require that the charitable purposes should be confined to India and the application of the income of the trust to the execution of such purposes can be outside India, appears to be opposed to the natural and grammatical meaning that can be ascribed to the words. The word “applied” is a verb used in past tense. In the provision, it is used in the transitive form because it is followed by the words “to such purposes in India”. It answers three questions which would arise in the mind of the reader: apply what? applied to what? and where? The answers would then make the meaning obvious. The answer to the first question would be: apply the income of the trust. The answer to the second question will be: applied to charitable purposes. The answer to the third question will be: applied in India. Thus even grammatically speaking it seems to us that the group of words “to such purposes in India” qualifies the preceding verb “applied”. It is a case of a verb being qualified by two prepositions which follow, viz., “to” and “in”. So read, it seems clear that grammatically also it would be proper to understand the requirement of the provision 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 the assessee 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 the assessee 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 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 or 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. Therefore, the words “in India” appearing in Section 11(1)(a) and the words “outside India” appearing in Section 11(1)(c) of the Act qualify the verb “applied” appearing in these provisions and not the words “such purposes”;
++ it cannot be said that by construing Section 11(i)(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;
++ the next submission of the assessee was that in case the expenditure incurred in Germany is not to be considered as application of the income of the trust in India for charitable purposes, then only the net surplus, that is to say the excess of the receipts in connection with the trade fair in Germany over the expenditure incurred there can be considered as a surplus and be excluded. In other words what is being contended is that out of the gross receipts of Rs. 2,56,84,141/-, the receipts in connection with the Hanover Trade Fair should be segregated and instead of excluding the entire receipts on the ground of improper application of the income of the trust, it should be reduced by the amount of expenditure of Rs. 38,29,535/- incurred in Hanover, Germany and only the balance amount shall be considered as income not applied for charitable purposes in India. In the absence of any specific provision permitting this, this contention cannot be accepted;
++ the last submission in this connection was that an opportunity may be directed to be granted to the assessee to make good the shortfall in the application of the income of the trust, as a result of the view we have taken, by permitting the assessee to apply for accumulation of the amount in shortfall for future application. The option to accumulate the income for future application to charitable purposes has to be exercised by the trust in writing before the expiry of the time allowed u/s 139(1) for furnishing the return of income, as provided in Explanation (iib) below Section 11(1) of the Act. In respect of all the years in which the question of application of income outside India arises, such time limit has already expired and there is no provision to condone the delay. In view of this difficulty, the prayer made on behalf of the assessee cannot be acceded;
++ therefore, the amount of Rs. 38,29,535/- spent by the assessee-trust in Hanover, Germany cannot be considered as application of the income of the trust in India for charitable purposes. The substantial question of law is thus answered in favour of the assessee in so far as the payment of taxes under the VDIS is concerned and in favour of the Revenue so far as the expenditure incurred outside India (Germany) is concerned;
++ 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, the Tribunal was not 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.