C I T vs. M/S PUNJAB ENERGY DEV. AGENCY

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ITA/666/2008HC Punjab & HaryanaPHHC01080679200831 July 2009Bench: MR. JUSTICE ADARSH KUMAR GOEL,MRS JUSTICE DAYA CHAUDHARY6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the interest income earned on grants received by the assessee is income derived from property held in trust for charitable purposes within the scope of Section 11(1)(a) of the Act. The Court found that none of the judgments relied upon by the revenue were in the context of Section 11. It clarified that the qualification for Section 11(1)(a) is that income should be derived from property held in trust for charitable purposes, and the CIT(A) and Tribunal had held that interest income from grants was covered. The Court further reasoned that even applying the test of income directly arising from the property of the trust, interest directly accrues on the funds of the trust. It cited C.I.T. v. Pruthivi Trust and the Privy Council's decision in CIT v. Kamakhya Narayan Singh to emphasize that the property must be the effective source from which income arises, and interest income meets this criterion. The Court concluded that the judgments relied upon by the revenue pertained to situations where benefits were permissible based on the special nature of income or its source, which is not relevant for income of charitable institutions under Section 11. Therefore, no substantial question of law arose for consideration.

What were the facts?

The Revenue appealed against an order of the Income Tax Appellate Tribunal (ITAT) concerning M/s Punjab Energy Development Agency (the assessee) for certain assessment years. The assessee, a public sector undertaking, received grants from Central and State Governments for its projects and earned interest income on these grants. The Assessing Officer disallowed a deduction claimed by the assessee under Section 11(1)(a) of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the assessee's claim. The ITAT then remanded the matter back to the Assessing Officer to examine the co-relation between the schemes and the amounts spent.

What were the issues?

1. Whether on the facts and circumstances of the case and in law, the ITAT was correct in sending back the issue of taxability of interest income to the Assessing Officer without appreciating that the assessee failed to prove that the interest was earned from a property held under a trust or a legal obligation? (Question of law, turning on Section 11(1)(a) of the Income Tax Act, 1961). Assessee's contentions: Not recorded. Revenue's contentions: The interest income was not derived from property held under a trust for charitable religious purposes. The revenue relied on judgments such as Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income Tax, Gujarat II; Commissioner of Income Tax v. Sterling Foods; Hindustan Lever Ltd. v. Commissioner of Income Tax; Commissioner of Income Tax v. Cement Distributors Limited; Commissioner of Income-Tax v. Pandian Chemicals Ltd.; Nanji Topanbhai and Co. v. Asstt. Commissioner of Income Tax & others; and Commissioner of Income Tax v. K.K. Doshi and Co. The primary reliance was on the Madras High Court's decision in Pandian Chemicals Ltd. concerning the expression 'income derived' for Section 80HH.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 11(1)(a)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.666 of 2008 (O&M) Date of decision: 31.7.2009 Commissioner of Income Tax, Chandigarh-II. -----Appellant. Vs. M/s Punjab Energy Development Agency. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MRS. JUSTICE DAYA CHAUDHARY Present:- Ms. Urvashi Dhugga, Advocate for the appellant. --- ADARSH KUMAR GOEL, J. 1. Delay in refiling is condoned. Heard on merits.

2.

Revenue has preferred this appeal under Section 260- A of the Income Tax Act, 1961 (for short, “the Act”), proposing to raise three questions of law, but learned counsel for the revenue presses only question No.3, which is as under:- “3. Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was correct in sending back the issue of taxability of interest income back to the file of the Assessing Officer without appreciating the fact that the assessee has failed to

I.T.A. No.666 of 2008 prove that the interest was earned from a property held under a trust or a legal obligation?” 2

I.T.A. No.666 of 2008 It is fairly stated that other questions relate to findings of fact and are, thus, not substantial questions of law. 2. The assessee is a public sector undertaking and received grants from Central and State Governments for its various projects. On the grants of Governments received, it earned interest income. It claimed deduction on the said income under Section 11(1)(a) of the Act, which was not allowed by the Assessing Officer. However, the CIT(A) upheld the claim of the assessee. The Tribunal remanded the matter to examine whether there was co-relation between schemes and the amounts spent. 3. Learned counsel for the revenue submits that the interest income was not derived from the property held under the Trust for charitable religious purposes. 4. Though learned counsel refers to judgments in Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income Tax, Gujarat II 113 ITR 84 (SC), Commissioner of Income Tax v. Sterling Foods 237 ITR 579(SC), Hindustan Lever Ltd. v. Commissioner of Income Tax 239 ITR 297(SC), Commissioner of Income Tax v. Cement Distributors Limited 208 ITR 355 (Del), Commissioner of Income-Tax v. Pandian Chemicals Ltd. 233 ITR 497 (Madras), Nanji Topanbhai and Co. v. Asstt. Commissioner of Income Tax & others 243 ITR 192 (Ker.) and Commissioner of Income Tax v. K.K. Doshi and Co. 245 ITR 849 (Bom.), her main reliance is on judgment of 3

I.T.A. No.666 of 2008 the Madras High Court in Pandian Chemicals Ltd. (supra), which dealt with the expression income “derived” from the interest for claiming benefit under Section 80 HH of the Act, which is permissible in respect of income derived from new undertaking. It was held that the interest income was not income derived from new undertaking. 5. We are unable to hold that interest income “derived from” amount of grants is not income “derived from” property held in Trust for charitable purposes within the scope of the said expression in Section 11(1)(a). None of the judgments relied upon is in the contact of Section 11. Qualification for attracting Section 11(1)(a) is that income should be derived from property held in Trust for charitable purpose. The CIT(A) as well as the Tribunal held that interest income from grants was fully covered under Section 11(1)(a). In CIT v. Thanthi Trust (2001) 247 ITR 785 (SC), it was held that income from incidental business was also covered under Section 11(1)(a). 6. Even if test of income directly arising from property of Trust is applied, interest directly accrues on funds of the Trust. In C.I.T. v. Pruthivi Trust (1980) 124 ITR 488 (Bom.), it was observed:- “In order to ascertain the scope and ambit of the expression “income derived from property held under trust” reference can be held to the decision of this Court in J.K. Trust v. CIT [1955] 23 ITR 143. In this case, the High Court has held that in order to claim 4

I.T.A. No.666 of 2008 exemption it is not sufficient that the property is indirectly responsible for the income. The income must directly and substantially arise from the property held under trust. For arriving at this conclusion this Court referred to the decision of their Lordships of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325 at p. 328, where the definition of the expression has been given of the word “derived”. At page 151 (of 23 ITR) this Court pointed out: “Reference might also be usefully made to the definition of the expression ‘derived’ given by the Privy Council in Commissioner of Income-tax v. Kamakhya Narayan Singh [1948] 16 ITR 325. It is true that their Lordships were there considering the question of agricultural income, but the interpretation placed upon the expression ‘derived’ by their Lordships is not without assistance for interpreting the same expression in section 4(3)(i). The expression used in this section is ‘any income derived from property held under trust’, and to put upon it the interpretation put by the Privy Council, the property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly responsible for the income. The income must directly and substantially arise from the property held under trust.....” Even on above test, interest income will fall under Section 11(1) (a). 7. The judgments relied upon relate to cases where benefit is permissible on account of special nature of the income and income derived from source other than the specified source 5

I.T.A. No.666 of 2008 does not quality for exemption. In case of income of charitable institutions, the said consideration is not relevant. The scheme of Section 11 is not to include income derived from the property of the Trust in total income. This being the position, interest income from property of the Trust clearly falls under Section 11 of the Act. 8. Same will be position with regard to income from sale of solar cooker and other equipments developed by the Energy Development Agency. 9. We, thus, do not find that any substantial question of law arises for consideration. 10. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE July 31, 2009

( DAYA CHAUDHARY ) ashwani JUDGE 6

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