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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Chief Commissioner of Income Tax-3, Chennai, dated 26.06.2015, rejecting the application of the assessee for approval under Section 10(23C)(vi) of the Income-tax Act, 1961 (in short 'the Act').
Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee is an educational institution applied for approval under Section 10(23C)(vi) of the Act. The Ld.counsel further submitted that the assessee-institution exists solely for the education purpose and not for the purpose of profit. The Chief Commissioner rejected the application of the assessee on the ground that the assessee invested in 10,000 equity shares of a wholly owned subsidiary company, namely, Karunya Israel 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 Israel. According to the Ld. counsel, in order to set up a Liaison Office in Jerusalem, Israel, the assessee intended to acquire a building at Jerusalem.
The laws of Israel did not permit acquisition of property by Trust or individual, therefore, the assessee was forced to form a company by name Karunya Israel Ltd. At the time of incorporation on 12.05.2011, the company was incorporated as a profit organization.
Subsequently the company was changed to a non-profit organization and a fresh certificate of incorporation was issued on 04.05.2015. Therefore, according to the Ld. counsel, Karunya Israel Ltd. was changed from a profit organization to a non-profit organization. Hence, according to the Ld. counsel, it cannot be said that the educational institution of the assessee exists solely for the profit.
Referring to third proviso to Section 10(23C) of the Act, the Ld.counsel for the assessee submitted that the assessee was expected to apply its income or accumulate the same wholly and exclusively towards its objects for which it was established. Placing reliance on the judgment of Apex Court in American Hotel & Lodging Association Educational Institute v. Central Board of Direct Taxes (2008) 301 ITR 86, the Ld.counsel submitted that Section 10(23C)(vi) of the Act does not require the assessee to apply its income in India. However, while granting approval under Section 10(23C)(vi) of the Act, the prescribed authority may insist that certain percentage of accounting income to be applied for imparting education in India. The Ld.counsel further submitted that Section 10(23C)(vi) of the Act clearly says application of income to the object for which the institution was established and does not use the word “in India”. In the absence of the word “in India” in Section 10(23C)(vi) of the Act, the Chief Commissioner cannot import the word “in India” while reading the third proviso Section 10(23C)(vi) of 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 Jerusalem at Israel that does not stand in the way of granting approval under Section 10(23C)(vi) of the Act.
On the contrary, Shri Sundar Rao, the Ld. Departmental Representative, submitted that the assessee is an educational institution and was granted deemed university status by University Grants Commission. It is an admitted fact that the assessee has invested its funds in equity shares of a wholly owned subsidiary company incorporated at Israel. According to the Ld. D.R., Indian Income-tax Act provides exemption in respect of income earned by Indian resident on its application for charitable purpose, either under Section 11, 12 or 10(23C) of the Act. It is not the intention of the Parliament to give exemption for application of income outside the country. According to the Ld. D.R., the Income-tax Act is applicable only within the territorial jurisdiction of India and its application cannot be extended outside the territorial jurisdiction of India. If the exemption provided under Section 11, 12 or 10(23C) of the Act is extended to application of income outside the country, then it would defeat the very purpose for which the exemption was granted.
According to the Ld. D.R., The Indian taxpayer’s money cannot be allowed to be invested or diverted outside the country in the guise of application for charitable purpose. Therefore, according 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 incorporating the word “in India”? The Ld. D.R. fairly submitted that 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 Israel. The company was held by the assessee’s educational institution. Therefore, it is a violation of third proviso to Section 10(23C)(vi) of the Act. The Ld. D.R. further submitted that what is prohibited under 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 Act, 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 invested as per the mode prescribed in Section 11(5) of the Act. The investment in the equity shares of a company outside the country is not one of the modes prescribed under Section 11(5) of the Act. Therefore, according to the Ld. D.R., the assessee is not entitled for approval under Section 10(23C) of the Act.
We have considered the rival submissions on either side and perused the relevant material available on record. The Chief Commissioner rejected the application of the assessee on three grounds – (i) the assessee-company applied its funds outside the country; (ii) the assessee invested funds in the equity 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 found that third proviso to Section 10(23C)(vi) of the Act confines the words “application of income” to the objects for which the 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. Therefore, the Apex Court found that the prescribed authority can impose stipulations insisting on certain percentage of accounting income to be utilized / applied for imparting education in India. The compliance of terms and conditions stipulated by the prescribed authority would be a matter of decision at the time of assessment. In the case before us, the assessee is an Indian institution investing its funds generated out of its charitable activity in India, outside the country. The Indian Income-tax Act provides for accumulation of its surplus funds to the extent of 15% and also provides the method of investment.
The question arises for consideration is whether the assessee-institution can invest any part of its accumulated income or the current income on the equity of non-resident subsidiary company and claim exemption as application of income?
Apparently, this issue was not the subject matter of discussion before the Apex Court in American Hotel & Lodging Association Educational Institute (supra). However, the fact remains that the assessee invested its funds in the equity shares of a company incorporated outside India. The third proviso to Section 10(23C) of the Act clearly says that the assessee cannot invest 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 case, the investment was made in violation of mode prescribed under Section 11(5) of the Act. Since the investment 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.
In view of the above discussion, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
In the result, the appeal of the assessee is dismissed.
Order pronounced on 1st June, 2016 at Chennai.