A.P.S.R.T.C. V. The Commissioner of Income Tax

RC/141/2000

AI Insights

The case revolves around the Andhra Pradesh State Road Transport Corporation (A.P.S.R.T.C.), which sought exemption from income tax under Section 11 of the Income Tax Act, 1961, for the assessment years 1987-88 and 1988-89. The dispute centered on whether the corporation's activities, managed by paid employees, qualified as 'mainly carried on by the beneficiaries' as required by Section 11(4A). The Supreme Court had previously ruled that the corporation's activities were charitable, but the tax authorities denied the exemption based on the interpretation of Section 11(4A). The High Court examined whether the corporation's structure and management met the statutory requirements for exemption.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 810512 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 16-07-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. APSRTC, Surana Steels Pvt. Ltd. vs. Deputy Commissioner of Income Tax, Director of Income-Tax vs. Bombay Bullion Association Dharam No Kanto Trust
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S R ASHOK
• Assessee Lawyers: A V KOWNDINYA
• Keywords: Assessment years; Business income; Charitable purpose; Income tax exemption; Public trust
• Section: 11; 11(4A); 115J

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +R.C.No.141 of 2000 % Dated 16.07.2014 # A.P.S.R.T.C. ….Applicant $ The Commissioner of Income Tax. ….Respondent ! Counsel for the applicant : Sri A.V.Krishna Kowndinya ^ Counsel for respondents : Sri S.R.Ashok < GIST: > HEAD NOTE: ? Cases referred: 1. (1986) 159 ITR 0001 (SC) 2. (1999) 237 ITR 0777 3. (2002) 254 ITR 0708 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No.141 of 2000 JUDGMENT: (Per LNR,J) The applicant (for short ‘the corporation’) is an assessee under the Income Tax Act, 1961 (for short ‘the Act’). For the assessment years 1987-88 and 1988-89, it filed returns covering various aspects. One of the benefits claimed by the Corporation is referable to Section 11 of the Act. It provides for total exemption of the income earned by an assessee from the property held for charitable or religious purposes. Some dispute arose as to whether the activities of the Corporation are charitable in nature and whether it is entitled to the benefit under Section 11 of the act. Ultimately, in Commissioner of Income Tax vs. APSRTC[1], the Hon’ble Supreme Court held that the Corporation is entitled to the benefit under Section 11 of the Act. The Parliament amended Section 11 of the Act through the Finance Act 1983 by inserting Sub-section (4A). Before insertion of the said provision, the exemption from tax in relation to income of a charitable institution or trust was unqualified. Through Sub- section (4A) of Section 11 of the Act, two conditions are stipulated. The first is that if the assessee is a Trust, it must be only for public religious purposes; and its business consists of printing or publication of books; or is of a kind, notified in the Gazette by the Central Government in this behalf. The second restriction is that if it is an institution, it must be (a) wholly for charitable purposes; and (b) its work is mainly carried on by its beneficiaries. In the light of this amendment, the assessing authority refused to extend the benefit of the exemption under Section 11(4A) of the Act to the Corporation, for the assessment years in question mainly on the ground that its work is not carried on by the beneficiaries. An order of assessment to this effect was passed on 25.01.1995. Aggrieved by that, the Corporation preferred an appeal before the Commissioner (Appeals). Through its order, dated 21.08.1995, the Commissioner refused to interfere with the order of assessment, on this aspect. Thereupon, the Corporation filed I.T.A.Nos.1715 and 1716/Hyd/1995 before the Tribunal. The Tribunal dismissed the appeals through a common order dated 21.07.1997. The Corporation filed R.A.Nos.293 and 294/Hyd/97, with a request to frame four questions and to refer them to this Court, for answer. After hearing the matter at length, the Tribunal passed the order, referring the following questions: 1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the applicant was not entitled to deduction under Section 11 of the Income Tax Act, 1961, on the ground that the applicant corporation carried on the work of the applicant, ignoring the fact that by statute the employees of the corporation are regarded as a class of beneficiaries of the applicant? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the salaried employees were not beneficiaries in the teeth of Section 30 of the Road Transport Act, 1950? 3. Whether on the facts and in the circumstances of the case, the Tribunal was correct in not considering the distinction between an organisation carrying on business and an organisation carrying on the activities on business principles brought out by the Hon’ble Supreme Court in the applicant’s own case as reported in 159 ITR page 1, for the purposes of considering the applicability of section 11(4A) of the Income Tax Act, 1961? 4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that for the purposes of determining the taxable total income under Section 115J of the Act, the losses deductible of the earlier years is exclusive of depreciation? Before we undertake discussion on merits, we take note of the submission made by the learned counsel for the parties that question No.2 is covered by the judgment of the Hon’ble Supreme Court in Surana Steels Pvt. Ltd. vs. Deputy Commissioner of Income Tax[2]. Therefore, we answer that question in favour of the Corporation and against the Revenue. Sri A.V.Krishna Kowndinya, learned senior counsel for the Corporation submits that the view taken by the assessing authority, Commissioner and the Tribunal, as regards the eligibility of the Corporation to claim benefit under Section 11 of the Act cannot be sustained in law. He submits that as an institution covered by Section 11 of the Act, the Corporation was enjoying the benefit of exemption year after year and that there was no basis to deny that benefit by invoking Section 11(4A)(b) of the Act. He submits that the restriction placed through Clause (b) of Section 11(4A) of the Act is very limited in nature and it would apply only when the activities of an otherwise charitable institution are carried out by an agency or body of persons, totally unconnected with the beneficiaries of the institution. He submits that the Corporation is a creature under the Road Transport Corporations Act, 1950 and ever since its inception, its activities are being carried out by the employees of the Corporation, who are none other than the representatives or the authorised persons of the beneficiaries i.e., the ultimate public. He contends that there was no qualitative difference at any point of time as to the nature of activities of the Corporation warranting any different approach. He has placed reliance upon the judgment of the Bombay High Court in Director of Income-Tax vs. Bombay Bullion Association Dharam No Kanto Trust[3]. Sri S.R.Ashok, learned senior counsel for the Income Tax Department, on the other hand, submits that the amendment through insertion of Sub-section (4A) was made by the Parliament, with an avowed object of curtailing the misuse of the facility created under Section 11 of the Act. He contends that after reviewing the situation pertaining to the exemption granted in favour of public trusts and institutions, Parliament decided to restrict the benefit only to agencies covered by Sub-section (4A). He contends that whether one goes by the undisputed facts or the general purport of the activity of the Corporation, the view taken by the Tribunal cannot be found fault with. As is too well-known, that Section 11 occurs in Chapter-III of the Act, which deals with the list of incomes, which do not form part of total income. The determination of total income is one of the important steps in the process of levying income tax and that has to be done by taking into account Section 5 of the Act. In the process of determination of total income, incomes of certain descriptions are excluded from the purview. Section 11 of the Act, insofar as it is relevant for the purpose of this case reads: “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 twenty-five per cent of the income from such property.” For the financial year 1983-84, Parliament sought to do away with the entire benefits referable to sub-sections (1),(2),(3) and (3A) of Section 11 of the Act, in relation to income of the trusts or institutions, if it is in the form of profits and gains of the business. However, in the ultimate analysis, such a far-reaching proposal was dropped and sub-section (4A) was inserted, which reads: (4A) Sub-section ()1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income, being profits and gains of business, unless- (a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or its of a kind notified by the Central Government in this behalf in the Official Gazette; or (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution. From a perusal of this, it becomes clear that the provision is intended to narrow the scope of the applicability of Section 11 of the Act. In the light of Sub-section (4A), the benefit under Section 11 of the Act can be claimed, by a trust, only when (i) it is for public religious purpose; (ii) its business consists of printing and publication of books; and (iii) it figures in the list notified by the Central Government in the official Gazzette. On the other hand, if it is an institution, it must satisfy two tests viz., (i) it is wholly for charitable purposes; and (b) the work in connection with the business of the institution is mainly carried on by its beneficiaries. That the corporation is an institution, and it derives income from the property held under trust for charitable purposes, stood finally decided with the judgment of the Hon’ble Supreme Court in APSRTC’s case (1 supra). Even in the assessment under examination, the Income Tax Officer himself was satisfied that the Corporation answered the description of institution, being run for charitable purposes. The basis, on which he denied the benefit of exemption is that it does not satisfy the test under Sub- section 4A(b) of Section 11 of the Act. This view was affirmed by the appellate Commissioner as well as the Tribunal. All of them proceeded on the assumption that the Corporation is being run by the paid employees and not the beneficiaries; and thereby, it cannot claim the benefit under Section 11 of the Act. One of the best methods of understanding the purport of a provision of law, which is in the form of amendment, is to take note of the law which existed before it, and to identify the purpose, which the law making authority intended to achieve, through the amendment. Learned senior counsel has made available to this Court, the Budget Speech of the Finance Minister for the financial year 1983-84. He summarized his speech ccovering this aspect as under: “I have since considered the matter carefully. It see no justification for permitting investment of trust funds in business concerns, including shares of companies in the private sector. I accordingly propose to provide that all trust funds should be invested in specified modes, such as, Government securities, units of the Unit Trust of India, deposits with scheduled banks, approved financial corporations, etc. Investment in immovable properties will, however, continue to be allowed. I am giving notice to all charitable and religious trusts to divest their shareholdings and other investment in business concerns by 30th November, 1983. However, trusts will be allowed to keep shares in companies, which formed part of the original corpus as on June 1, 1973, and bonus shares received up to that date. Some trusts carry on business on commercial lines and derive income therefrom. There is no reason why such business income should not be brought to tax. I, therefore, propose that business income of all charitable and religious trusts including those which have hitherto been exempted by notification will be brought to tax with effect from assessment year 1984-85. Trusts having business income will also be required to conform to the new investment pattern if they wish to seek tax exemption in respect of their other income.” From this, it is clear that the emphasis or the objective was to ensure that the profits earned through business of the charitable and religious trusts are invested in a particular manner. Nowhere in the speech, it is mentioned that the State intends to withdraw the facility of exemption granted in favour of charitable trusts and institutions, altogether. The proposal under the Finance Bill was to substitute Sub-section (4) of Section 11 of the Act, which is to the following effect: “(4) Nothing contained in sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall apply in relation to any income being profits and gains of business.” This provision, if enacted, would have resulted in devastating effect, in the context of extending the benefit under Section 11 of the Act. Ultimately, what emerged was Sub-section (4A) of Section 11 of the Act. There is no statement of objective in relation to Sub-section (4A) of Section 11 of the Act, obviously because it emerged during the course of discussion. However, one thing which becomes clear is that the Parliament intended to narrow the scope of Section 11 of the Act in its application to Trusts on the one hand, and institutions on the other hand. That the corporation does not answer the description of a Trust and it is an institution covered by Section 11 of the Act, is beyond any pale of doubt. It is equally clear that the activities carried out by it are purely charitable in nature. The only controversy is as to whether its business is mainly carried out by the beneficiaries. This in turn involves examination of two aspects. The first is as to who are the beneficiaries of the corporation, and the second is as to who mainly carry on the business of the corporation. Even on the first aspect, the matter is settled with the judgment of the Hon’ble Supreme Court and it is only the public at large, that is beneficiary of the corporation. The second requirement under clause (b) of sub-section (4A) of Section 11 of the Act is that the work in connection with the business must be mainly carried out by the beneficiaries. The Bombay High Court placed a fairly liberal construction on this part of the provision. It has demonstrated as to what absurdities, would the provision lead to, if a direct and categorical interpretation is placed upon it. The relevant portion reads: “The crux of the controversy is: can it be said that a method followed by the trust for running the business activities of the trust in the stated manner answers the requirement of sub-clause (4A) of Section 11 of the Act; can it be treated that the business activities carried on in the manner provided in the trust deed are being carried on by the beneficiaries of the trust. In order to deal with the question, it would be necessary to examine the operation of sub-clause (4A)(b) and of section 11 of the Act, application thereof to various types of trusts. Let us consider the case of a trust in which the beneficiaries are handicapped or blind persons or a trust wherein the beneficiaries are the minors. If sub-clause (4A)(b) is to be implemented in its literal sense, then the question is how such beneficiaries of such institution or trust themselves, can be expected to carry on the business activities of the trust. The trust wherein beneficiaries are general public in such a case the beneficiaries themselves because of their peculiarity are not expected to carry on business activities of the trust. The activities of the trust meant for the benefit of handicapped or blind persons cannot be carried on by them, personally, because of their physical incapacity. The trust wherein minors are beneficiaries, minors cannot carry on business of the trust because of their legal infirmity. No activities of such trust can be carried on by the beneficiaries because of the peculiar class of beneficiaries to which they belong. The crucial question is, can such a trust be kept away from the benefits by adopting literal interpretation of sub-section (4A)(b) of section 11 of the Act on the specious ground that they do not fulfil the literal compliance of sub-section (4A)(b) extracted above. No provision of law can be interpreted in such a manner which would take away the very spirit, object and purpose of the provision itself and make it a dead letter. It will have to be interpretation in a manner which will not only put life in the provision, but would make it workable. In that case, the Trust was a Dharmakanta, where the public in general would be entitled to avail the free benefit of accurate weighment, of the bullion purchased by them. The Bombay High Court took the view that though the Trust activities and maintenance are undertaken by paid employees, the work is for and on behalf of the beneficiaries and thereby the requirement under Clause (b) of sub-section (4A) of Section 11 of the Act is fulfilled. Reverting to the facts of the case, the beneficiaries of the Corporation can be said to be the entire public. They use the facilities created by the Corporation for travelling and other allied activities. If the provision is to be understood in such a way that the work in connection with the business must be carried out by the beneficiaries, it must result in a situation, where every passenger must have a say in the administration and business. It is not difficult to imagine chaotic condition that would emerge as a result of that. Obviously realizing this, the Parliament has chosen to employ the word “mainly”. The ultimate test is to see as to whether the persons, who are in actual management of the institution, are the persons working for and on behalf of the beneficiaries or whether they have an independent and personal interest of their own. Viewed from that angle, the employees of the corporation; in the ultimate analysis are none other than the public employees working for and on behalf of the beneficiaries. The role played by the Government is nothing but a systematic activity, through which the will of the public is transmitted or is translated. It hardly needs any mention that where two views are possible while interpreting a provision of taxation law, the one that helps the assessee or beneficiary must be chosen. In the instant case, the assessee is a corporation serving the needs of the travelling public in the State and was enjoying the benefit for the past several decades. Further, Section 4A ceased to be in force on its being deleted in the year 1991. Therefore, we are of the view that question Nos.1,3 and 4 also deserve to be answered in favour of the applicant i.e., corporation and against the respondent. The reference is answered accordingly. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 16.07.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C.No.141 of 2000 Date: 16.07.2014 JSU [1] (1986) 159 ITR 0001 (SC) [2] (1999) 237 ITR 0777 [3] (2002) 254 ITR 0708 "