ICLEI LOCAL GOVERNMENT FOR SUSTAINABILITY SOUTH ASIA,NEW DELHI vs. ITO(EXEMPTION), WARD-1(2), NEW DELHI

PER N.K. CHOUDHRY, J.M. This appeal has been preferred by the Assessee against the order dated 19.03.2018, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)-40, New Delhi (in short “Ld. Commissioner”), u/s. 250 of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2014-15.

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level initiatives that assess specific priority problems of the local and global significance, to promote role of local government as a necessary innovator and implementer of sustainable development and sustainable policy.

2.1 The AOwhile noticing that the Assessee during the year under consideration, incurred the expensesin foreign currency to the tune of Rs.8,99,358/- on boarding & lodging on international travel and Rs.64,12,413/- for payment of consulting services and reimbursement of expenses, show caused as to why application of income outside India in respect of aforesaid expenses incurred in foreign currency, should not be disallowed, as the Assessee is not notified u/s. 11(1)(c) of the Act by the Central Board of Direct Taxes (CBDT).

2.2 The Assessee while relying upon the judgment of Hon’ble Supreme Court in the case of RadhasoamiSatsung vs. CIT, 193 ITR 32 (SC), contended that in the earlier assessment years, no such disallowances of application of income applied outside India was made, therefore, principle of res judicata will apply in its case and the provisions of section 11(1)(c) are not applicable in the case of the Assessee.

2.3 The ld. Assessing Officer rejected the said claim of the Assessee qua applicability of res-judicata and while relying on the judgment in the case of DIT(E) vs. National Association of Software and Services Companies (in short ‘NASCOM’ case) {2012} 21 taxmann.com 213 (Delhi), made the additions of Rs.8,99,358/-and Rs.64,12,413/- on account of the disallowances qua reimbursement of expenses incurred in foreign currency on boarding & lodging on international travel and payment of consulting services respectively.

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“4. Determination 4.1 Ground of appeal no.1 is general in nature and does not call for separate adjudication. 4.2 Grounds of appeal nos. 2 and 3 challenge the disallowance of expenditure of Rs.73,11,771/- pertaining to voting and lodging on international travel and making payment on account of consulting services and reimbursement of expenses and not considering that on the principle of consistency no addition can be made. 4.2.1 The Assessing Officer has disallowed the said amount since the same has been applied in foreign currency outside India and no application has been made to the CBDT for of attaining an order as required by the proviso to section 11(1)(c). The appellant has submitted that the provisions of section 11(1)(c)are attracted only when income derived property held under trust created on or after 01/04/1952 for charitable purposes which tends to promote international welfare in which India is interested is exempted to the extent to which such income is applied to such purpose outside India. It has also been submitted that payment pertains to persons/entities who have visited India in connection with execution of various projects undertaken by the appellant in India. It has further been submitted that the issue is covered by the orders of earlier years since no such disallowance made in the earlier years under section 143(3). 4.4.2. I have considered the assessment order and the submissions of the appellant. In the case of Director of Income-tax (Exemption) vs. National Association of Software and Services Companies [2012] 21 taxmann.com 213 (Delhi), 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 Assessing Officer took the view that the expenditure could not be considered as application of income in India for charitable purposes. The relevant extracts of the order of the Hon'ble Delhi High Court in the said case are as under: "The next question is whether the expenditure incurred by the assessee-trust on events/activities held in connection with the exhibition in Germany amounts to application of the income in accordance with section 11(1)(a). The argument put forward by the Revenue was that the

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expenditure, even if it is considered as application of the income, was outside India and the mandate of the section is that the income should be applied in India to charitable purposes and this condition not having been satisfied, the Tribunal was clearly wrong in holding that the expenditure should be considered as application of the income of the trust in India. The argument of the assessee is that there is no such mandate in the section to the effect that the income of the trust should be applied in India and that the only requirement is that the purposes should exist in India and if that is satisfied, the income can be applied for such purposes even outside India. According to the assessee, so long as the purposes are in India, it does not matter as to where the situs of the application is. [Para 13] A little historical background is necessary to be brought out in understanding the mandate of section 11. Section 11 corresponds to section 4(3) (i) of the Indian Income-tax Act, 1922. [Para 14] Under the provision as it existed prior to 1-4-1952, there was no difference maintained between application of the income of the trust within or without the taxable territories. The provision as it existed after the amendment made with effect from 1-4-1952 makes a reference to application or accumulation for application of the income of the trust ' to such religious or charitable purposes as relate to anything done within the taxable territories'. The assessee contended that the words 'as relate to anything done within the taxable territories' clearly show that the charitable purposes must be executed within the taxable territories and that it was immaterial where the income is actually applied. It is difficult to conceive of a situation under which the charitable purposes are executed within the taxable territories but the income of the trust is applied elsewhere in the implementation of such purposes. Be that as it may, the position is put beyond doubt by the proviso to section 4(3) (i) of the old Act. It says that the income of the trust shall stand included in its total income if it is applied to religious or charitable purposes throughout/within the taxable territories. The proviso is indicative of the object of the main provision. In the main part, it was provided that the income of the trust should be applied within the taxable territories to religious or charitable purposes and in the proviso an exception was carved out to provide that if the income is applied outside the taxable territories, even though to religious or charitable purposes, the trust will not secure the exemption from tax in respect of such income. Two situations were anticipated

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for which provision was made in the proviso itself. In these two situations, the Central Board of Revenue (CBR, the present CBDT) was empowered to direct by general or special order, that in such cases the income of the trust shall not be included in the total income merely because the income was applied to charitable purposes outside the taxable territories. The first situation was where the property was held under a trust or other legal obligation created before 1-4-1952. The second situation was where the property was held under trust or other legal obligation created after the aforesaid date and the income therefrom is applied outside the taxable territories to charitable purposes as are done to promote international welfare in which India is interested. In these two cases the income of the trust could be applied or spent outside India without losing exemption, provided the CBR passes an appropriate order. [Para 17] It may be noticed that sub-clause (ii) ofclause(c) of sub- section (i) of section 11, in substance provides for the same condition which was imposed by sub-clause (i) of clause (a) of the proviso to section 4(3)(i) of the old Act. Sub-clause (i) of clause (c) of sub-section (1) of section 11 is in the same terms as sub-clause (ii) of clause (a) of the proviso to section 4(3)(i) of the old Act. [Para 21 ] The assessee's contention that the words 'to the extent to which such income is applied to such purposes in India' appearing to section 11(1)(a) 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 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,

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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 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 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 what assessee contends is correct, then section 11(1)(c) may become redundant and otiose. If as assessee says, 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 ll(l)(c ) of the Act qualify the verb 'applied' appearing in these provisions and not the words 'such purposes'. [Para 22] In view of the above, it is held that the amount ofRs. 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... [Para 31]" 4.2.3 In the case of the appellant it is admitted fact that the said sum was paid for boarding and lodging and consulting services and remuneration of expenses paid outside India. As regards, the submissions that section 11(1)(c) is not applicable to it, it is to be noted that as per the said provisions a charitable organization cannot have activities outside India unless it happened to be a trust created before 01-04-1952 or it's engaged in promotion of international welfare in which India is interested. In short, under the provisions of Income-tax Act, 1961, income applied on activities outside India is not eligible for exemption unless the following conditions are satisfied:

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a) The charitable organization happens to be a trust created before 1-4-1952 or it is engaged in promotion of international welfare in which India is interested, b) Central Board of Direct Taxes (CBDT) has by general or special order granted the exemption for carrying out such activities. 4.2.4 As regards the contention that this aspect is covered by the principle of consistency since no such addition was made in the past under section 143(3), it is to be noted that in the assessment orders there is no reference as to whether this aspect has been examined and no adverse interference drawn. It appears that the issue was not even examined during the assessment proceedings and hence this principle cannot be applied. In view of the discussion above, the addition made is upheld. Grounds of appeal nos. 2 and 3 are dismissed.”

(a). Res-judicata is applicable to the instant case. (b). The Assessee’s charitable activities/events and purpose are in India. (c). Decision in the case of NASCOM (supra) is factually dissimilar to the facts of the instant case as in that case, the events/activities have been arisen outside of India, but in the instant case of the Assessee, it is in India only.

(d). Mere factum of payment for the expenses in foreign currency and its transfer overseas cannot be considered an application of income in foreign currency u/s. 11(1)(a) of the Act.

(e) Further, the case of the Assessee is squarely covered by the judgment of Hon’ble jurisdictional coordinate Bench of the tribunal in the case of DDIT(E) Versus The associated Chambers of Commerce and Industry of India { ITA no. 6525/Del/2013 decided on 31-08- 2015} which has been confirmed by the Hon’ble Delhi High Court in the case of CIT Vs The associated Chambers of Commerce and Industry of India (ITA no. 343/2016 decided on 24-05-2016).

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With regard to such contention of the Assessee qua covering the case of the Assessee by the principle of consistency/res judicata on the ground that no such addition was made in the past u/s. 143(3), the Assessing Officer did not get impressed with the said claim of the Assessee and held that that principle of res judicata is not applicable in all the proceedings under the Income Tax Act, 1961 as the provisions of section 11(1)(c) are clear and unambiguous and cast statutory duty on the assessing Officer to allow expenditure incurred outside India in accordance to the provisions laid down. The Assessing Officer while relying upon the judgment of jurisdictional High court in the case of

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(NASCOM){supra}, wherein the ratio laid down by Hon’ble Apex Court in the case of HEH Nizam’s Religious Endowment Trust vs. CIT (1966) 59 ITR 582 to the effect that the state did not like to forgo the revenue in favour of charity outside the country, was followed, held that income applied outside India cannot be considered as application of income of the trust in India for charitable purposes and consequently disallowed the said expenses of Rs.73,11,771/- incurred on Boarding and Lodging on international travel and for payment of consulting services and reimbursement of expenses in foreign currency.

The ld. Commissioner with regard to applicability of res- judicata also categorically held that in the assessment order, there is no reference as to whether this aspect has been examined and no adverse inference drawn, hence, this principle cannot be applied. We are in concurrence with the conclusion drawn by the Ld. Commissioner, therefore no interference is warranted on this aspect.

6.1 The Assessee before us mainly focussed that the coordinate Bench in the case of DDIT (E) vs. The Associated Chambers of Commerce and Industry of India, (supra) has decided the identical issue as involved in the instant case. Further, the said judgment of the coordinate Bench has been affirmed by the Hon’ble High court in the case of CIT(Exemption) vs. Associated Chambers of Commerce and Industry of India (supra).

We have given thoughtful consideration to the judgment of the Tribunal referred by the Assessee, wherein it has been clearly held by the Coordinate Bench:

That the expense towards foreign travelling of delegation sent by the Assessee association for the purposes of promotion of trade

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and industry in India which is the main object of the Assessee association. From the Article of Association as available at page 3 to 38 of Assessee’s paper book, it is vivid that the main objects as contained in clause (3) of theMemorandum of Association, objectives cannot be fulfilled without sendingforeign delegation and, therefore, foreign travelling expenses incurred by theAssessee cannot be held as application of income outside taxable territories ofthe Assessee.

The Hon’ble jurisdictional High Court affirmed the said judgment of the Coordinate Bench on the ground that the ITAT examined the Article of Association of the Assessee and came to the conclusion that the foreign travel expenses incurred by it cannot be termed as application of income outside the territory of the Assessee. The Court does not find any legal infirmity in the view taken by the ITAT.

We observe that before the authorities below, the Assessee mainly focussed on the point of res judicata instead of establishing that incurring of expenditure on international travel and for consulting services and reimbursement of expenses in foreign currency was necessary to fulfil the main objects as enshrined in memorandum of association of the Assessee trust. Hence for the ends of justice andfor just decision of the case, we deem it appropriate and expedient, to give an opportunity to the Assessee to establish and justify that incurring of expenditure on international travel and for foreign consulting services and reimbursement of expenses in foreign and foreign currency was necessary to fulfil the objects as enshrined in memorandum of association of the Assessee trust and scope of its operation. Consequently we remit the issue in hand to the file of Ld. Commissioner for decision afresh, suffice to say onus would be on the Assessee.

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6.2 The Assessee also claimed that the provisions of section 11(1)(c) of the Act are not applicable to the case of the Assessee. The Assessee also submitted that the total remittance towards consulting expenses incurred by the appellant, may be regarded as spent outside India, however, the same have been ‘applied’ for the purpose in India. Further such expenses have not been incurred for any objectives of International welfare in which India has a national interest that require prior approval of CBDT, hence, such remittance do not attract provisions of section 11(1)(c) of the Act. Likewise, the reimbursement of travelling, boarding and lodging expenses is towards meetings and conferences in relation to India project and the remittance, in any case, is not for the purpose of International welfare.

We observe that though the Ld. Commissioner clearly held and not denied by the Assessee that the said sum was paid for boarding and lodging and consulting services and remuneration of expenses paid outside India. As regards, the submissions that section 11(1)© is not applicable to it, it is to be noted that as per the said provisions a charitable organization can not have activities outside India unless it happened to be a trust created before 01.04.1952 or it is engaged in the promotion or welfare, in which India is interested.

The ld. Commissioner further held that in short, under the provisions of the Act, income applied on activities outside India is not eligible for exemption unless the following conditions are satisfied:

(a) The charitable organization happens to be a trust created before 01.04.1952 or it is engaged in the promotion of international welfare, in which India is interested.

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(b) Central Board of Direct Taxes (CBDT) has by general or special order granted the exemption for carrying out such activities.

We have given thoughtful consideration to the conclusion drawn by the Ld. Commissioner qua non-applicability of the provisions of section 11(1)© of the Act and find that the Ld. Commissioner though referred the conditions of the said provisions, however failed to give any definite findings qua applicability of the said provisions to the case of the Assessee and with regard to the contention of the Assessee to the effects that the reimbursement of travelling, boarding and lodging expenses is towards meetings and conferences in relation to India project and the remittance, in any case, is not for the purpose of International welfare and with regards to claim of the Assessee that decision of the Hon’ble high Court in the case of NASCOM (supra) is factually dissimilar to the facts of the instant case, hence for the just decision of the case, theseaspects also needs fresh examination with the relevant documents/approvals etc.which the Assessee is supposed to produce and to discharge its onus.

6.3 In the cumulative effects, the impugned order is set aside and the case is remanded to the file of the Ld. Commissioner for decision afresh on the terms as stated above, suffice to say by affording reasonable opportunity of being heard to the Assessee. The Assessee is also directed to cooperate with the proceedings and to appear before the Ld. Commissioner as and when would be required and to file the relevant document(s) necessitates for just decision of the case and in case of default shall not be entitled for any leniency.

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Order pronounced in the open court on 26/08/2022 Sd/- Sd/- (N.K. BILLAIYA) (N.K. CHOUDHRY) ACCOUNTANT MEMBER JUDICIAL MEMBER

*aks/-