THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. M/S LAKSHADWEEP DEVELOPMENT CORPORATION LTD.

The Principal Commissioner of Income Tax, Kochi- 1/Revenue is the appellant. M/s. Lakshadweep Development Corporation Ltd, Panampilly Nagar, Kochi/assessee is the respondent. The subject tax appeals are directed against the common order dated 01.08.2017 in ITA Nos.18 & 19/Coch/2017 of Income Tax Appellate Tribunal (for short ‘the Tribunal’), Cochin Bench, Cochin. The details of the Assessment Years etc are stated in the following tabular form:

1 The appeals are admitted on the following substantial questions of law. “1. Whether, on the facts and in the circumstances of the case. - i. Does the assessee, a company registered under the Companies Act, come within the true ambit of section 10(26B) of the Income Tax Act? ii. Is the assessee entitled to the benefit of Section 10(268) of the Income Tax Act?

Whether, on the facts and in the circumstances of the case and the reasoning and conclusion of the Tribunal being based on the submissions, statements and written submissions of the assessee and without any independent finding being rendered and evidence relied on by the Tribunal, is not the conclusion of -5- the Tribunal perverse and unreasonable?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and in fact interfering with the order of the Assessing Officer?”

ITA No.5/2018 is treated as the representative appeal and consideration of details and circumstances of this appeal would be sufficient for disposing of the other matter as well. In both the appeals, the questions arising for consideration are under Section 10(26B) of the Income Tax Act, 1961 (for short ‘the Act’). The controversy is whether the assessee being a Company formed under the Companies Act, in spite of satisfying the qualifying requirements of Section 10(26B), can, being a Corporation incorporated by the Central Government under the Companies Act, claim exemption of income from income tax. ITA No.5/2018

The assessee for the Assessment Year 2011-12 filed its -6- return on 30.09.2011 and also revised return dated 24.12.2012. The return has been taken up for scrutiny by issuing notice under Section 143(2) dated 31.07.2012. The assessee filed ‘Nil’ return claiming exemption of income under Section 10(26B) of the Act. In response to the notice issued by the Assessing Officer, it was stated that the assessee is a 100% Government of India owned Company in Lakshadweep Union Territory. The Company is registered under the Companies Act, 1956. The Revenue does not seriously dispute the aims and objects of the assessee and the prime object of the assessee is to work for the development and uplifting of the Scheduled Tribe community of the Union Territory of Lakshadweep. The claim for exemption under Section 10(26B) was rejected by the Assessing Officer, firstly by noting that the assessee is not a Corporation constituted/established under an Act of the Centre, State or Provincial Act, but a Company formed under the Companies -7- Act. The assessee never claimed the status under Section 10(26B) of the Act in any of the previous assessment years. The claim of the assessee that it is a 'body wholly financed by the Government' and is entitled to claim the benefit under Section 10(26B), was also rejected, because the assessee is a Corporation and the expression ‘body’, ‘institution’ or ‘association’ in Section 10(26B) is about residuary class of organisations and not specific, such as Quasi-Government Organisations, Autonomous Bodies, Affiliated Bodies etc. The conclusion of the above consideration is that the assessee is a Corporation under the Companies Act, therefore, not entitled to the exemption under Section 10(26B). The CIT (Appeals) confirmed the findings of the Assessing Officer in all aspects, including the claim of exemption under Section 10(26B) of the Act.

Being aggrieved by the orders denying exemption under Section 10(26B), as noted above, the assessee filed appeal -8- before the Tribunal. The Tribunal examined the factual and legal aspects and by following the decisions reported in CIT v. Harijan Evam Nirbal Varg Avas Nigam1 and Arunachal Pradesh Forest Corporation Ltd v. ACIT2, held as follows: “ 7.9 In the light of the above said reasoning and the judicial pronouncements cited supra, we are of the view that the assessee which is financed and established by the Government for promoting the interest of the members of the scheduled tribes living in the Lakshadweep Islands, is entitled to the benefit of section 10(26B) of the I.T. Act. Since we hold that the assessee is entitled to the benefit of section 10(26B) of the I.T. Act, the other grounds relating to the issue of disallowances/additions made by the Assessing Officer has been rendered infructuous and we dismiss the same as not adjudicated. It is ordered accordingly. Hence the appeals filed by the assessee for the assessment years 2011-12 and 2012-13 are partly allowed as indicated above.”

The learned counsel appearing for the parties have made detailed submissions on substantial question no.1, and, independent of the instant observation, we are of the view that substantial question nos.2 and 3 are dependent on the outcome of substantial question no.

Senior Advocate Mr P K Ravindranatha Menon appearing for Revenue argues that the assessee cannot and could not be brought within the ambit of Section 10(26B) of the Act. Firstly, the logic being, the assessee is a Company incorporated under the Companies Act. A Company incorporated under the Companies Act, from a reading of S.10(26B), is not included for the purpose of exemption under -10- Section 10(26B). Secondly, the assessee though a Company, i.e., a Government Company, is not established by an Act of Parliament to get the benefit under Section 10(26B). The words, namely, “where such corporation….....has been established……”, further emphasize the necessity of maintaining consistency with the former portion of Section 10(26B). The expression “such corporation” given literal meaning does not take within its fold a Company incorporated under the Companies Act, but exemption is attracted only to corporations established by law. For the purpose of demonstrating the meaning of the word ‘established’ and the meaning of words under construction is appreciated in the company of other words in the same section, he relies on the judgment in Dalco Engineering Private Limited v. Satish Prabhakar Padhye3 and Salem Co-operative Central BankLtd v. Commissioner of Income Tax4. 3 (2010) 4 SCC 378 4 (1993) 201 ITR 697 -11-

1 He further argues that even assuming that the assessee is a fully Government-of-India owned company, the objects of the assessee, even if are for the benefit of Scheduled Tribe residents of Lakshadweep Union Territory, the exclusion from the computation of income of the assessee would arise if the assessee falls within one or the other entities contemplated by Section 10(26B) of the Act. A Company incorporated per se is outside the benefit of the sub-section granting exemption. The approach of the Tribunal is illegal and erroneous. Thus, warrants interference of this Court under Section 260A, by answering substantial question no.1 in favour of the Revenue and against the assessee.

2 The learned Senior Counsel commends to the Court that the rule of construction: Noscitur a Sociis is also an apt interpretative tool to the case on hand, and the meaning of an unclear word is to be judged by the company it keeps.

Adv. Bobby John prefaces his arguments that to answer substantial question no.1, the origin and existence of the assessee read with the assessee’s objectives are appreciated. The assessee is a Government-owned Company established for the people of Union Territory of Lakshadweep. It is not in 5 (1996) 101 Sales Tax Cases 1 -13- dispute that the assessee is established to provide benefits and welfare measures to Scheduled Tribes of Lakshadweep Union Territory. The construction now commended by the Revenue to this Court excludes an entity of Government of India from availing the exemption benefit, even though the entity satisfies the entities covered by words “body, institution, or association”, the second portion of Section 10(26B) of the Act. The assessee, a company/corporation incorporated under the Companies Act, comes within the fold of 'other body' wholly financed by the Government, and such other body has been established or formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. There is no ambiguity whatsoever in Section 10(26B) of the Act, it deals with a few entities and not individuals, the constitution and eligibility depend upon the formal and legal manner in which -14- the assessee is brought into existence. According to him, the understanding of the Revenue is erroneous, for, it is adding words into the first limb of Section 10(26B) of the Act. He relies on the very same judgments considered by the Tribunal and concludes by arguing that the assessee is legally and by the proper interpretative process of Section 10(26B), has been granted exemption under Section 10(26B). He prays for answering the question against the Revenue and in favour of the assessee.

We have perused the record and noted the rival submissions.

1 In the case on hand, this Court is called upon to construe Section 10(26B) and apply to the admitted circumstances of the case, and also, whether the Tribunal is right in granting exemption to the assessee under Section 10(26B) of the Act. An attempt has been made to challenge the -15- findings recorded by the Tribunal and the resultant construction of Section 10(26B). Answer to substantial question no.1 can be addressed in two ways: firstly, by finding out the approach adopted by the Tribunal- whether is correct or not and, secondly, construct Section 10(26B) and find out the applicability to the different situations, including the case on hand. We are examining the issue by dealing with the legal argument advanced by both the counsel on Section 10(26B) of the Act. Section 10(26B) reads as follows: “(26B) any income of a corporation established by a Central, State or Provincial Act or of any other body, institution or association (being a body, institution or association wholly financed by Government) where such corporation or other body or institution or association has been established or formed for promoting the interests of the members of the or of any two or all of them.”

2 Section 10 is part of Chapter III dealing with incomes -16- which do not form part of total income. In other words, it deals with the income exempted from computation under the Act. By applying the interpretative tool of literal construction to Section 10(26B), we notice that the sub-section deals with entities that fall within the exempted purview and the qualification required for claiming status and the purpose for which the entity is established. Section 10(26B) literally read, deals with exemption from income computation in the following cases: Firstly, any income of a Corporation established by a Central (Government), where such Corporation has been established for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. Secondly, any income of a Corporation established by a State (Government), where such Corporation has been established for -17- promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. Thirdly, any income of a Corporation established by a provincial Act, where such Corporation has been established for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. Fourthly, any income of any other body wholly financed by Government, where such other body has been formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. Fifthly, any income of any other institution or association, wholly financed by Government, where such institution or association was formed for promoting the interests of the -18- members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them.

3 The argument that a Company incorporated under a Companies Act is out of the purview of exemption needs to be adverted to. The argument of Revenue is based on the understanding that the assessee, since being a Company incorporated under the Companies Act, is not deriving its existence under an enactment, therefore cannot be permitted to claim status of exemption under Section 10(26B) of the Act. The understanding of the nature of establishment of assessee, by the Revenue, is erroneous.

4 Let us keep in perspective the entities as occasioned in the same sequence in which they are incorporated in Section 10(26B) and such understanding would make it clear that when it comes to Corporation it is established by a Central or State or by Provincial Act, the entities refer to the existence of a -19- Corporation established by Central, State or Provincial Act. ‘Or’ is used in a disjunctive sense in Section 10(26B) between the words Central, State, or Provincial Act or of any other body, institution or association. The Section deals with not only a Corporation established by Central/State, but it also deals with income of any other body, institution or association, which is fully financed by the Government, and such body, institution or association has been formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. The requirement of sub-section (26B) is not that it is limited only to entities brought into existence by an Act of Parliament or Legislature.

5 There could be an instance of establishing a Corporation under an enactment by the Centre/State. Centre/State can also establish a Corporation in the manner known to law. These entities automatically do not become -20- eligible for exemption under section 10(26B). They become eligible for claiming exemption only when these entities are formed for promoting the interests of the members of the or of any two or all of them. When it comes to income of any other body, institution or association, firstly it is wholly financed by Government and Sub-section (26B) refers to such body, institution or association formed for promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. The incorporation of assessee under the Companies Act gives the assessee the status of a body corporate and the objects, indisputably, of the assessee are promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them of Lakshadweep Union Territory. The argument of -21- learned Senior Counsel that Corporation established by Provincial Act does not fit into the literal or plain reading of Section 10(26B). The argument that the Corporation is established by the Centre/State by an enactment is unavailable from the expression used in Section 10(26B) of the Act.

6 The argument of the Revenue omits to notice another inconsistency in the argument. Section 10(26B) provides exemption to any other body, institution or association wholly financed by the Government and formed for the purpose of promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. To come within the ambit of a body, institution or association, the requirement is - such body, institution or association is fully financed by the Government and promotes the interests of Schedule Tribe individuals. The words are not limiting the application only to a body, institution or -22- association formed by the Central or the State Governments. So a body formed but financed by the Central or the State Governments can claim exemption; now through the construction of section 10(26B) a Corporation brought into existence under the Companies Act by the Government of India, ought not be denied the benefit of Section 10(26B). The parameters on which the final analysis of the construction of Section 10(26B) are: (i) a Corporation established by Centre/State/Provincial Act; (ii) any other body, institution or association fully financed by the Government; (iii) the corporation, body, institution or association established or formed for promoting the interests of the members of the or of any two or all of them. The word 'established' used in sub- section (26B) is attributable where the Section deals with Centre/State/Provincial Act. When it comes to body, -23- institution or association, the corresponding expression used is 'formed'. Incorporation of a Company under the Companies Act is again incorporating a body with legal identity and status. By having incorporated as a Corporation or Company under the Companies Act, ought not to be used against the assessee for denying the benefit of exemption under Section 10(26B) of the Act.

7 The decisions on which reliance is made by the Revenue are clearly distinguishable and the ratio is not applicable to the case on hand. This Court is construing Section 10(26B), both by keeping in mind the golden rule of construction and also Noscitur a Sociis, and the inescapable

8 We take judicial notice of the fact that Centre/State -24- Governments, as the case may be, bring into existence what is known as Government Companies. All these companies are not immediately entitled to be bracketed within the ambit of Section 10(26B) because the existence of that Company is relatable to the primary aim of promoting the interests of the members of the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of them. The assessee is a body viz., incorporated under the Companies Act and formed to achieve or promote the interests of the members of the or of any two or all of them, receives full financial assistance from the Government, hence is entitled to exemption. We are in agreement with the reasoning and the conclusion recorded by the Tribunal and for the above reasons as well, substantial question no.1 is answered in favour of the assessee and against the Revenue.

Having regard to the view expressed in question no.1, question nos.2 and 3 consequently are to be answered in favour of the assessee and against the Revenue. ITA No. 7/2018

By following the aforementioned discussions and the reasons, the substantial questions framed in this appeal is answered in favour of the assessee and against the Revenue. Income Tax Appeals fail, accordingly dismissed. No order as to costs. S.V.BHATTI JUDGE VIJU ABRAHAM JUDGE jjj -26-