THE COMMISSIONER OF INCOME TAX V. ISLAMIC ACADEMY OF EDUCATION

ITA/86/2008

AI Insights

The case revolves around the Islamic Academy of Education, a trust, which invested Rs. 20,00,000 in Yenepoya Institute of Medical Science Research Private Limited. The investment was made to secure a say in the decision-making process of the company, ensuring the trust's interests were protected, as the trust was planning to set up a medical college requiring an attached hospital. The Income Tax Department challenged the exemption of the trust's income under Sections 11 and 12 of the Income Tax Act, 1961, arguing that the investment exceeded 5% of the company's capital. However, both the Appellate Authority and the Tribunal found that the investment was within the permissible limit when considering the total capital, including borrowed funds, and not just the share capital. The High Court upheld this interpretation, dismissing the revenue's appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 729034 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 03-06-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Wealth Tax Vs. Lallubhai Gordhandas Charitable Trust
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Respondent
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Charitable Trust; Exemption; Income tax appeal; Investment; Substantial questions of law
• Section: 11; 12; 13(4); 260-A; 13(2)(h)

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 3RD DAY OF JUNE 2014 PRESENT THE HON’BLE MR.JUSTICE N.KUMAR AND THE HON’BLE MR.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.86 OF 2008 BETWEEN: 1. The Commissioner of Income-tax, C.R.Building, Attavara, Mangalore 2. The Income-Tax Officer Ward – 1(1), C.R.Building, Attavara, Mangalore ..APPELLANTS (By Sri K.V.Aravind, Adv.) AND: Islamic Academy of Education Nithyananda Nagar Derlakatta Mangalore – 575 018 .. RESPONDENT (By Sri S.Parthasarathi, Adv.) This is filed under Section 260-A of I.T. Act, 1961 arising out of Order dated 07.09.2007 passed in ITA No.572/BNG/2006, for the Assessment Year 2002-03, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, 2 ii. allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.572/BNG/2006, dated 07.09.2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward – 1(1), Mangalore, in the interest of justice and equity. This Appeal coming on for final hearing this day, KUMAR J., delivered the following: JUDGMENT The revenue has preferred this appeal challenging the order passed by the appellate authority as well as the Tribunal holding that the assessees investment was less than 5% of the capital of the concern in which investment is made and therefore, they cannot be denied the benefit under Sections 11 and 12 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The assessee – Islamic Academy of Education at Mangalore, has been granted exemption under Sections 11 and 12 of the Act. The trustees of the assessee - Trust were the directors of Yenepoya Institute of Medical Science Research Private Limited. The funds of the assessee Trust were invested in the said Yenepoya Institute of Medical Science Research Private Limited. The assessing officer held that the funds invested exceeds 5% of the capital and therefore, Section 13(4) of 3 the Act is not applicable and accordingly, held that the income of the assessee is not exempted in view of Section 13(2)(h) of the Act. Aggrieved by the same, they preferred an appeal to the Commissioner of Income Tax (Appeals). Before the Appellate Authority it was contended that the trust was running Dental Institutions and the campus was set up at Derelakatte, 13 kms. away from the city. The construction of the hospital at the campus was in progress. In the meantime, the trust proposed to set up a medical college. As per MCI guidelines, the college was required to have a hospital attached to it. No other hospital was willing to provide the needed access to the hospital facility. Therefore, the trust invested Rs.20,00,000/- in the shares of Yenepoya Institute of Medical Science Research Private Limited, a company owning and running a hospital within the Mangalore city. The trust utilized three floors of the hospital building owned by the said company exclusively for the dental section. The hospital was also being used by the dental and medical students. The investment was made so that the trust 4 may have a say in the decision making process of the company so that the interest of the trust is not jeopardized. Therefore, they contended that the amount invested did not exceed 5% of the share capital as the capital of Yenepoya Institute of Medical Science Research Private Limited works out to Rs.4,39,91,594/- 2. It was also contended that the word ‘Capital’ is not been defined. Therefore, the word ‘Capital’ should not be restricted to share capital. In support of their contention they also relied on various judgments of various High Courts. Accepting the case of the assessee, the Commissioner of Income Tax (Appeals) held that the assessee is entitled to the benefit under Sections 11 and 12 of the Act. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. They contended that the capital of that concern mentioned in Section 13(4) of the Act means share capital of the company. It does not include the borrowed capital. If share capital is taken into consideration the amount of investment made by the trust in the said company exceeds 5% and therefore, 5 they are not entitled for the benefit of exemption. The Tribunal after taking note of the various judgments has held that the capital of the concern cannot be restricted to only share capital. Therefore, the word ‘Capital’ includes not only the share capital but even the borrowed capital. Admittedly, the investment made by the trust in the company is less than 5% of the capital of Yenepoya Institute of Medical Science Research Private Limited and has extended the benefit of exemption. Accordingly, the appeal came to be dismissed. Aggrieved by the said order, the revenue is in appeal. 3. This appeal came to be admitted on 19.12.2008 to consider the following substantial question of law:- a. Whether the Appellate Authorities were correct in holding that the investment of Rs.20 Lakhs made in Yenepoya Institute of Medical Science Research Private Limited, would be less than 5% of the capital of the assessee if the borrowed amount is treated as capital and the investment is made in furtherance of the objective of the Trust 6 and exemption under Sections 11 and 12 should be granted? 4. The facts are not in dispute. The trustee have invested Rs.20,00,000/- in Yenepoya Institute of Medical Science Research Private Limited. The total capital of the said company including the borrowed capital is Rs.4,39,91,594/- and Rs.20,00,000/- invested by the trust is less than 5%. Section 13(4) of the Act on which the reliance is placed reads as under: Section 13(4): Notwithstanding anything contained in clause (c) of sub-section (1) [but without prejudice to the provisions contained in clause (d) of that sub-section], in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed five per cent of the capital of that concern, the exemption under section 11 [or section 12] shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the [funds] of the trust or the institution have been invested in a concern in which such person has a substantial interest. 5. A reading of the aforesaid Section makes it clear that if the funds invested in a concern in which any person referred to in sub-Section (3) of Section 13 of the 7 Act has substantial interest, does not exceed 5% of the capital of that concern, the exemption under Sections 11 and 12 of the Act shall not be denied. The word used is ‘Capital’ of the concern, the word ‘Capital’ has not been defined under the Act. The word ‘Capital’ is also not defined in the Companies Act. However, reliance was placed on the judgment of the Commissioner of Wealth Tax Vs. Lallubhai Gordhandas Charitable Trust reported in (1999) 239 ITR page 448 (Guj), where it has held as under: “Exemption under S. 5(1)(i) – Property held under trust – Applicability of s. 21A – Trust made investments in share capital of two companies exceeding five per cent of their share capital in which persons specified in s. 13(3) of IT Act did have substantial interest – Assessee – trust was not entitled to exemption under s. 5(1)(i) in view of s. 21A – Capital of a company means share capital in the context of provisions of second proviso to s. 21A and not the entire assets and the reserves of the company – Benefit of second proviso to s. 21A was not therefore available.” That was a case where the assessee Trust claimed exemption under Section 5(1)(i) of the Wealth Tax Act, 1957. In that context, it was held that the capital of the company would mean share capital in context of the 8 provisions of the second proviso to Section 21A of the Wealth Tax Act and the meaning of the word ‘Capital’ cannot be made mercurial by attaching it to all the assets that the company may own, nor can it include the reserves of the company, which can at any subsequent time can be distributed as dividend. The instant case is not a case under the Wealth Tax Act. 6. The expression used is ‘Capital’ of the concern. If the intention of the legislature was to restrict it to share capital, then they would have expressly stated so. In the absence of any such expression, before the word ‘Capital’ if we were to read ‘Share’, it amounts to Court’s Legislating which is not permissible. Therefore, especially while granting the benefit to the charitable institution, when the legislature consciously provided for the funds of the said Trust by way of investment and they have fixed a limit of 5%, by placing an interpretation which is contrary to the expressed words, said benefits cannot be denied to the assessee. Therefore, keeping in mind the objective with which exemption is granted, computation is to be made for 9 investment by such charitable trust. The word “capital” of the concern should be understood as the total capital of the concern. Both the Tribunal and the Appellate Authority were justified in holding that the capital of the concern with regard to a company cannot be considered as only a share capital. Therefore, we find no merit in the appeal. The substantial question of law is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE nvj "