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Commissioner of Income-tax/Wealth-tax Vs. Polisetty Somasundaram Charities - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred Nos. 185 of 1980 and 140 of 1982
Judge
Reported in[1990]183ITR377(AP)
ActsIncome Tax Act 1961 - Sections 2(15), 11, 11(1), 12, 13 and 13(2)
AppellantCommissioner of Income-tax/Wealth-tax
RespondentPolisetty Somasundaram Charities
Appellant AdvocateM.S.N. Murthy, Adv.
Respondent AdvocateA. Satyanarayana, Adv.
Excerpt:
.....tax charitable trust--exemption under s. 11--bar of s. 13(2)(h)--security and rate of interest adequate--exemption could not, therefore, be denied held: the amount is advanced on an agreed rate of interest and, therefore, the transaction is within the fold of lending and it cannot be considered as an investment. the lending in cl.(a) should be supported by adequate interest or security. the aac found that the rate of interest at 12% is normal and adequate and the firm is financially sound and the tribunal confirmed the finding. therefore, the assessee is entitled to exemption under s. 11 and the conditions under s. 13(2)(a) are satisfied and s.13(2)(h) is not applicable. income tax act 1961 s.11 - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim,..........the transaction is within the fold of lending and it cannot be considered as an investment. the lending in clause (a) should be supported by adequate interest or security. the appellate assistant commissioner found that the rate of interest at 12% is normal and adequate and the firm is financially sound and the appellate tribunal confirmed the finding. therefore, the assessee is entitled to exemption under section 11 and the conditions under section 13(2)(a) are satisfied and section 13(2)(h) is not applicable. 7. in the result, the questions are answered in the affirmative and in favour of the assessee. no costs. 8. referred case no. 140 of 1982: 9. this reference arising under the wealth-tax act has to be answered in favour of the assessee following the decision referred case no......
Judgment:

Rama Rao, J.

1. The questions referred under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner are:

'(1) Whether, on the facts and in the circumstances of the case, the Income of the assessee was entitled to exemption under section 11(1) of the Income-tax Act, 1961?

(2) Whether, on the facts and in the circumstances of there case, the Income-tax Appellate Tribunal was justified in holding that the assessee satisfied the requirements of section 13(2)(a) and that the provisions of section 13(2)(h) were not applicable?'

2. The concerned assessment years are 1972-73, 1973-74 and 1974-75. The assessee is a public charitable institution the objects of which are the establishment of educational institutions for the advancement of knowledge and education and running and maintenance of educational institutions of any kind. The Income-tax Officer found that the objects were within the provisions of section 2(15) of the Act but, however, held that the income of the institution is taxable as the entire funds of the institution were lent to Messrs. Polisetty Somasundaram in which the founder of the institution has substantial interest even after January 1, 1971, and that provisions of section 13(2)(h) are violated and, therefore, exemption under section 11 is not available. On appeal,the Appellate Assistant Commissioner held that the money was lent to the firm for adequate interest and the firm is financially sound and the assessee is entitled to exemption. On appeal at the instance of the Revenue, the Appellate Tribunal confirmed the order of the first appellate authority.

3. Learned standing counsel for the Revenue contended that there its a division of funds to an institution where the settlor has substantial interest and this cannot be considered as lending and even if lending is assumed, it is not supported by adequate interest and security.

4. To appreciate the contention, it is necessary to have a close look at section 13 which is as follows to the extent relevant:

'13(1). Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof -

(c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof -

(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures or

(ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to sub-section (3)';

'Section 13(2). Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purpose of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),-

(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both...

(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest.'

5. The income of the trust held wholly for charitable or religious purposes is exempt from tax subject to the conditions regarding applicability of income in India and other conditions. It is not dispute that the assessee is a charitable institution eligible for exemption under section 11. The exemption under section 11 is denied in the event of existence of diverse circumstances and contingencies chronicled in section 13. Clauses (a) and (b) of sub-section (1) provide that the exemption is not available if the income is not available for the benefit of the public and is confined to the benefit of any particular religious, community or caste and the trust carried on some business. Clause (c) of sub-section (1) seeks to deny exemption if the income is used directly or indirectly for the benefit of a person listed out in sub-section (3). The author of the institution or the founder of the institution is one of the persons mentioned in sub-section (3). Sub-section (2) elucidates and amplifies the nature of benefit to the category of persons in sub-section (3) and clause (a) of sub-section (2) provides that the benefit should be deemed to have been conferred if any part of the income is lent to the person referred to in sub-section (3) without adequate security or interest or both. Clause (h) provides that the benefit should be deemed to have been conferred if the funds of the institution are invested in any concern in which the person referred to in sub-section (3) has substantial interest. It must be said that the provisions in section 13 have been jumbled up lacking systematic layout and arrangement of sub-sections. Section 13 cuts at the exemption visualised under section 11 and the exemption contemplated under section 11 is hedged in by the conditions catalogued in section 13 apart from the built-in conditions in sections 11. Section 13 up to sub-section (3) comprises three facets. The initial aspect is concerned with channelling the income to the destination which militates against the concept of public charitable or religious purpose. Another circumstance is that any part of the income is diverted to the benefit the persons enumerated in sub-section (3) of which one of them is founder of the institution. The benefit to the prohibited persons listed out in sub-section (3) is elucidated and should be deemed to have been conferred in the circumstances detailed in sub-section (2). The two crucial provisions for the purpose of this reference are clause (a) of sub-section (2) wnich postulates the benefit in the event of lending the amount without adequate interest or security and clause (h) adverts to the benefit in the event of investment alone. The controversy is focussed upon the connotation of the words 'lend' and 'invest'. As these expressions are sought to be made applicable in different situations, the legitimate inference is that they bear a distinct interpretation in the context of the set up and synonymity is ruled out. In commercial parlance, lending is associated with advancing money for an agreed rate of interest returnable within a specified period or on demand. Though the expression 'invest' in a broad sweep takes in lending also, it can be considered as confinde to laying out the amount in a venture or institution with a profit motive and with no promise of assured return. It is not feasible to survey the multifarious mode of investment and it is sufficient to indicate prominent modes to convey the width of the expression 'invest'. Investment involves laying out the amount in partnership firms, shares in joint stock companies, real estate business and such other concerns or businesses. In the process of investment, an element of risk is involved and the expectation of return or profit is not assured and the depletion of capital itself is not an abnormal feature. In the case of lending, the return by way of interest is generally assured and the element of risk is minimal. In Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 , in the context of considering the connotation of the expression 'investment' in section 23A and whether 'investments' in section 23A can be stretched to house property or capital gains apart from the holding of shares, debentures, stocks or other securities, the Supreme Court held that 'investment' covers acquisition of house property or capital gains and 'investment' primarily means the act of laying out moneys in the acquisition of some species of property. In CIT v. External Science of Man's Society : [1981]128ITR456(Delhi) , the Delhi High Court held that the interest income received by a charitable institution has to be excluded from the taxable income of the assessee in view of clause section (2) and clause (h) is not attracted. We are in agreement with this view.

6. Section 13(2)(a) provides that the exemption under section 11 cannot be denied in the event of lending the amount jacked up by interest or adequate security or both. The lending as such is not prohibited if adequate security are taken care of Section 13(2)(h) interdicts investment and the act of investment alone is sufficient to deny the exemption. In view of this seminal distinction, the Revenue endeavoured to bracket the transaction under investment so as to attract the denial of exemption under clause (h). The amount is advanced on an agreed rate of interest and, therefore, the transaction is within the fold of lending and it cannot be considered as an investment. The lending in clause (a) should be supported by adequate interest or security. The Appellate Assistant Commissioner found that the rate of interest at 12% is normal and adequate and the firm is financially sound and the Appellate Tribunal confirmed the finding. Therefore, the assessee is entitled to exemption under section 11 and the conditions under section 13(2)(a) are satisfied and section 13(2)(h) is not applicable.

7. In the result, the questions are answered in the affirmative and in favour of the assessee. No costs.

8. Referred Case No. 140 of 1982:

9. This reference arising under the Wealth-tax Act has to be answered in favour of the assessee following the decision Referred Case No. 185 of 1980. No cost.


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