Karunya University, CHENNAI V. DIT, CHENNAI

ITA 1907/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9112 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 24-03-2016
• Assessment Year: 2014-2015
• Appeal Filed On: 27-08-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUNDAR RAO
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Charitable institution; Wholly owned subsidiary
• Section: 12

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , . !' , $ % BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.1907/MDS/2015 ' (' / ASSESSMENT YEAR : 2014-15 M/S KARUNYA UNIVERSITY, 16, D.G.S. DHINAKARAN ROAD, CHENNAI - 600 028. PAN : AAATK 0225 H V. THE DIRECTOR OF INCOME TAX (EXEMPTIONS), CHENNAI - 600 034. (*+/ APPELLANT) (,-*+/ RESPONDENT) *+ . / / APPELLANT BY : SH. R. VIJAYARAGHAVAN, ADVOCATE ,-*+ . / / RESPONDENT BY : SH. SUNDAR RAO, CIT 0 . 1$ / DATE OF HEARING : 24.03.2016 2!( . 1$ / DATE OF PRONOUNCEMENT : 01.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE CHIEF COMMISSIONER OF INCOME TAX-3, CHENNAI, DA TED 26.06.2015, REJECTING THE APPLICATION OF THE ASSESS EE FOR APPROVAL UNDER SECTION 10(23C)(VI) OF THE INCOME-TAX ACT, 19 61 (IN SHORT 'THE ACT'). 2 I.T.A. NO.1907/MDS/15 2. SH. R. VIJAYARAGHAVAN, THE LD.COUNSEL FOR THE AS SESSEE, SUBMITTED THAT THE ASSESSEE IS AN EDUCATIONAL INSTI TUTION APPLIED FOR APPROVAL UNDER SECTION 10(23C)(VI) OF THE ACT. THE LD.COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE-INSTITUTION EXI STS SOLELY FOR THE EDUCATION PURPOSE AND NOT FOR THE PURPOSE OF PROFIT . THE CHIEF COMMISSIONER REJECTED THE APPLICATION OF THE ASSESS EE ON THE GROUND THAT THE ASSESSEE INVESTED IN 10,000 EQUITY SHARES OF A WHOLLY OWNED SUBSIDIARY COMPANY, NAMELY, KARUNYA IS RAEL LTD., ISRAEL, CONTRARY TO THIRD PROVISO TO SECTION 10(23C ) OF THE ACT. THE CHIEF COMMISSIONER HAS ALSO FOUND THAT THE FUNDS OF THE ASSESSEE WERE NOT INVESTED IN INDIA AND IT WAS INVESTED IN I SRAEL. ACCORDING TO THE LD. COUNSEL, IN ORDER TO SET UP A LIAISON OF FICE IN JERUSALEM, ISRAEL, THE ASSESSEE INTENDED TO ACQUIRE A BUILDING AT JERUSALEM. THE LAWS OF ISRAEL DID NOT PERMIT ACQUISITION OF PR OPERTY BY TRUST OR INDIVIDUAL, THEREFORE, THE ASSESSEE WAS FORCED TO F ORM A COMPANY BY NAME KARUNYA ISRAEL LTD. AT THE TIME OF INCORPORAT ION ON 12.05.2011, THE COMPANY WAS INCORPORATED AS A PROFI T ORGANIZATION. SUBSEQUENTLY THE COMPANY WAS CHANGED TO A NON-PROFI T ORGANIZATION AND A FRESH CERTIFICATE OF INCORPORATI ON WAS ISSUED ON 04.05.2015. THEREFORE, ACCORDING TO THE LD. COUNSE L, KARUNYA ISRAEL LTD. WAS CHANGED FROM A PROFIT ORGANIZATION TO A NON-PROFIT 3 I.T.A. NO.1907/MDS/15 ORGANIZATION. HENCE, ACCORDING TO THE LD. COUNSEL, IT CANNOT BE SAID THAT THE EDUCATIONAL INSTITUTION OF THE ASSESSEE EX ISTS SOLELY FOR THE PROFIT. 3. REFERRING TO THIRD PROVISO TO SECTION 10(23C) OF THE ACT, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSE SSEE WAS EXPECTED TO APPLY ITS INCOME OR ACCUMULATE THE SAME WHOLLY AND EXCLUSIVELY TOWARDS ITS OBJECTS FOR WHICH IT WAS ES TABLISHED. PLACING RELIANCE ON THE JUDGMENT OF APEX COURT IN AMERICAN HOTEL & LODGING ASSOCIATION EDUCATIONAL INSTITUTE V. CENTRA L BOARD OF DIRECT TAXES (2008) 301 ITR 86, THE LD.COUNSEL SUBMITTED T HAT SECTION 10(23C)(VI) OF THE ACT DOES NOT REQUIRE THE ASSESSE E TO APPLY ITS INCOME IN INDIA. HOWEVER, WHILE GRANTING APPROVAL UNDER SECTION 10(23C)(VI) OF THE ACT, THE PRESCRIBED AUTHORITY MA Y INSIST THAT CERTAIN PERCENTAGE OF ACCOUNTING INCOME TO BE APPLI ED FOR IMPARTING EDUCATION IN INDIA. THE LD.COUNSEL FURTHER SUBMITT ED THAT SECTION 10(23C)(VI) OF THE ACT CLEARLY SAYS APPLICATION OF INCOME TO THE OBJECT FOR WHICH THE INSTITUTION WAS ESTABLISHED AN D DOES NOT USE THE WORD IN INDIA. IN THE ABSENCE OF THE WORD IN IN DIA IN SECTION 10(23C)(VI) OF THE ACT, THE CHIEF COMMISSIONER CANN OT IMPORT THE WORD IN INDIA WHILE READING THE THIRD PROVISO SEC TION 10(23C)(VI) OF 4 I.T.A. NO.1907/MDS/15 THE ACT. ACCORDING TO THE LD. COUNSEL, SECTION 10( 23C)(VI) OF THE ACT DOES NOT REQUIRE APPLICATION OF INCOME IN INDIA , THEREFORE, MERELY BECAUSE THE ASSESSEE APPLIES ITS INCOME AT J ERUSALEM AT ISRAEL THAT DOES NOT STAND IN THE WAY OF GRANTING A PPROVAL UNDER SECTION 10(23C)(VI) OF THE ACT. 4. ON THE CONTRARY, SHRI SUNDAR RAO, THE LD. DEPART MENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE IS AN E DUCATIONAL INSTITUTION AND WAS GRANTED DEEMED UNIVERSITY STATU S BY UNIVERSITY GRANTS COMMISSION. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS INVESTED ITS FUNDS IN EQUITY SHARES OF A WHOLLY OWN ED SUBSIDIARY COMPANY INCORPORATED AT ISRAEL. ACCORDING TO THE L D. D.R., INDIAN INCOME-TAX ACT PROVIDES EXEMPTION IN RESPECT OF INC OME EARNED BY INDIAN RESIDENT ON ITS APPLICATION FOR CHARITABLE P URPOSE, EITHER UNDER SECTION 11, 12 OR 10(23C) OF THE ACT. IT IS NOT TH E INTENTION OF THE PARLIAMENT TO GIVE EXEMPTION FOR APPLICATION OF INC OME OUTSIDE THE COUNTRY. ACCORDING TO THE LD. D.R., THE INCOME-TAX ACT IS APPLICABLE ONLY WITHIN THE TERRITORIAL JURISDICTION OF INDIA A ND ITS APPLICATION CANNOT BE EXTENDED OUTSIDE THE TERRITORIAL JURISDIC TION OF INDIA. IF THE EXEMPTION PROVIDED UNDER SECTION 11, 12 OR 10(23C) OF THE ACT IS EXTENDED TO APPLICATION OF INCOME OUTSIDE THE COUNT RY, THEN IT WOULD 5 I.T.A. NO.1907/MDS/15 DEFEAT THE VERY PURPOSE FOR WHICH THE EXEMPTION WAS GRANTED. ACCORDING TO THE LD. D.R., THE INDIAN TAXPAYERS MO NEY CANNOT BE ALLOWED TO BE INVESTED OR DIVERTED OUTSIDE THE COUN TRY IN THE GUISE OF APPLICATION FOR CHARITABLE PURPOSE. THEREFORE, ACC ORDING TO THE LD. D.R., THE INCOME HAS TO BE APPLIED ONLY IN INDIA. ON A QUERY FROM THE BENCH, WHEN THE SUPREME COURT HELD THAT SECTION 10(23C) OF THE ACT DOES NOT SAY THAT INCOME HAS TO BE APPLIED IN INDIA, CAN THE CHIEF COMMISSIONER RE-WRITE INCOME-TAX ACT BY INCOR PORATING THE WORD IN INDIA? THE LD. D.R. FAIRLY SUBMITTED THA T HE LEAVES THE MATTER TO THE DISCRETION OF THE TRIBUNAL. THE LD. D.R. FURTHER SUBMITTED THAT ADMITTEDLY THE FUNDS OF THE ASSESSEE WERE INVESTED IN EQUITY SHARES OF THE SUBSIDIARY COMPANY AT ISRAE L. THE COMPANY WAS HELD BY THE ASSESSEES EDUCATIONAL INSTITUTION. THEREFORE, IT IS A VIOLATION OF THIRD PROVISO TO SECTION 10(23C)(VI) O F THE ACT. THE LD. D.R. FURTHER SUBMITTED THAT WHAT IS PROHIBITED UNDE R PROVISO TO SECTION 10(23C) OF THE ACT IS INVESTMENT IN FOREIGN COMPANY. SINCE THE ASSESSEE-INSTITUTION INVESTED THE FUNDS IN THE COMPANY OTHER THAN THE MODE PRESCRIBED IN SECTION 11(5) OF THE AC T, THE ASSESSEE IS NOT ENTITLED FOR APPROVAL UNDER SECTION 10(23C) OF THE ACT. REFERRING TO SECTION 11(5) OF THE ACT, THE LD. D.R. SUBMITTED THAT THE FUNDS OF THE EDUCATIONAL INSTITUTION HAVE TO BE INV ESTED AS PER THE 6 I.T.A. NO.1907/MDS/15 MODE PRESCRIBED IN SECTION 11(5) OF THE ACT. THE I NVESTMENT IN THE EQUITY SHARES OF A COMPANY OUTSIDE THE COUNTRY IS N OT ONE OF THE MODES PRESCRIBED UNDER SECTION 11(5) OF THE ACT. T HEREFORE, ACCORDING TO THE LD. D.R., THE ASSESSEE IS NOT ENTI TLED FOR APPROVAL UNDER SECTION 10(23C) OF THE ACT. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE CHIEF COMMISSIONER REJECTED THE APPLICATION OF THE ASSESS EE ON THREE GROUNDS (I) THE ASSESSEE-COMPANY APPLIED ITS FUN DS OUTSIDE THE COUNTRY; (II) THE ASSESSEE INVESTED FUNDS IN THE E QUITY SHARES OF THE SUBSIDIARY COMPANY; AND (III) THE ASSESSEE-COMPANY EXISTS FOR PROFIT MOTIVE. THE APEX COURT IN AMERICAN HOTEL & LODGING ASSOCIATION EDUCATIONAL INSTITUTE (SUPRA) EXAMINED THE PROVISIONS OF SECTION 10(23C)(VI) OF THE ACT ELABORATELY AND FOUN D THAT THIRD PROVISO TO SECTION 10(23C)(VI) OF THE ACT CONFINES THE WORDS APPLICATION OF INCOME TO THE OBJECTS FOR WHICH TH E INSTITUTION WAS ESTABLISHED AND IT DOES NOT USE THE WORDS IN INDIA FOR ACCUMULATION OF INCOME. THE ASSESSEE BEFORE THE APEX COURT IS A FOREIGN ENTITY ESTABLISHED EDUCATIONAL INSTITUTION IN INDIA. THER EFORE, THE APEX COURT FOUND THAT THE PRESCRIBED AUTHORITY CAN IMPOS E STIPULATIONS 7 I.T.A. NO.1907/MDS/15 INSISTING ON CERTAIN PERCENTAGE OF ACCOUNTING INCOM E TO BE UTILIZED / APPLIED FOR IMPARTING EDUCATION IN INDIA. THE COMP LIANCE OF TERMS AND CONDITIONS STIPULATED BY THE PRESCRIBED AUTHORI TY WOULD BE A MATTER OF DECISION AT THE TIME OF ASSESSMENT. IN T HE CASE BEFORE US, THE ASSESSEE IS AN INDIAN INSTITUTION INVESTING ITS FUNDS GENERATED OUT OF ITS CHARITABLE ACTIVITY IN INDIA, OUTSIDE TH E COUNTRY. THE INDIAN INCOME-TAX ACT PROVIDES FOR ACCUMULATION OF ITS SUR PLUS FUNDS TO THE EXTENT OF 15% AND ALSO PROVIDES THE METHOD OF INVES TMENT. 6. THE QUESTION ARISES FOR CONSIDERATION IS WHETHER THE ASSESSEE-INSTITUTION CAN INVEST ANY PART OF ITS ACC UMULATED INCOME OR THE CURRENT INCOME ON THE EQUITY OF NON-RESIDENT SUBSIDIARY COMPANY AND CLAIM EXEMPTION AS APPLICATION OF INCOM E? APPARENTLY, THIS ISSUE WAS NOT THE SUBJECT MATTER O F DISCUSSION BEFORE THE APEX COURT IN AMERICAN HOTEL & LODGING A SSOCIATION EDUCATIONAL INSTITUTE (SUPRA). HOWEVER, THE FACT R EMAINS THAT THE ASSESSEE INVESTED ITS FUNDS IN THE EQUITY SHARES OF A COMPANY INCORPORATED OUTSIDE INDIA. THE THIRD PROVISO TO S ECTION 10(23C) OF THE ACT CLEARLY SAYS THAT THE ASSESSEE CANNOT INVES T IN THE EQUITY SHARES OF ANY COMPANY AND THE INVESTMENT HAS TO BE MADE ONLY AS PER THE MODE PRESCRIBED UNDER SECTION 11(5) OF THE ACT. IN THIS 8 I.T.A. NO.1907/MDS/15 CASE, THE INVESTMENT WAS MADE IN VIOLATION OF MODE PRESCRIBED UNDER SECTION 11(5) OF THE ACT. SINCE THE INVESTME NT WAS MADE IN VIOLATION OF STATUTORY PROVISION, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSESSEE-INSTITUTION VIOLATED THE STATUTORY PROVISION AT THE INITIAL STAGE ITSELF. THEREFORE, IT IS NOT ENTITLED FOR APPROVAL UNDER SECTION 10(23C)(VI) OF THE ACT. 7. IN VIEW OF THE ABOVE DISCUSSION, THIS TRIBUNAL D O NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUT HORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED ON 1 ST JUNE, 2016 AT CHENNAI. SD/- SD/- (. !' ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) $ / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 4 /DATED, THE 1 ST JUNE, 2016. KRI. . ,156 76(1 /COPY TO: 1. *+ /APPELLANT 2. ,-*+ /RESPONDENT 3. CHIEF CIT-3, CHENNAI 4. 68 ,1 /DR 5. 9' : /GF.