Expenses incurred outside India on charitable Purposes confined to India not allowable

IN THE ITAT DELHI BENCH ‘C’

India Brand Equity Foundation

V/s.

Assistant Commissioner of Income-tax (E), Trust Ward-II

IT Appeal NO. 787 (DELHI) OF 2011

[ASSESSMENT YEAR 2007-08]

JULY 11, 2012

ORDER

U.B.S. Bedi, Judicial Member – This appeal of the assessee is directed against the order of CIT(A)-XII, New Delhi, relevant to assessment year 2007-08, whereby besides challenging confirmation of Assessing Officer’s order in treating a sum of Rs. 1,95,26,116/- spent outside India for participating in Hannover Fair, 2006, as taxable income of the assessee, assessee also challenged confirmation of the action of the Assessing Officer in reducing application relating to charge of depreciation amounting to Rs. 2,77,149/-.

2. As regards first issue, it was submitted before Assessing Officer that the assessee is a registered society, which came into being on 9.7.1996. The trust was set up under the seal of President of India, Ministry of Commerce & Industries. The entire corpus was provided by Govt. of India to promote India Brand Overseas. The trust is treated to be formed by Government of India is not for the benefit of any particular section of community, but is meant for larger interest of the country. The objects transcends the boundaries of so-called charity or charitable purposes, though by and large are confined to a particular section of a society. Here, the trust is for the benefit of whole nation. So, any contrary view, as submitted by the assessee, would be unpragmatic and retrogressive. Assessing Officer did not accept the contention of the assessee, but treated the amount of Rs. 1,95,26,111/- spent in participation of Hannover Fair in Germany by discussing and considering the issue has held as falling in the mischief u/s 11(1)(a) & 11(1)(b) of the Act and was taxed accordingly.

3. Assessee took up the matter in appeal and it was submitted before first appellate authority, for allowing claim of the assessee being not taxable, but the CIT(A) upheld the order of the Assessing Officer as per paras.4 to 4.4 of his order as under:

“4. The assessee has taken various grounds of appeal but the effective ground is against the disallowance of Rs. 1,95,26,116/- on account of the fact that this amount is spent outside India for participating in the Hannover Fair.

4.1 The appellant is aggrieved because the Assessing Officer has disallowed a sum of Rs. 1,95,26,116/- as the appellant had spent this amount outside India at the Hannover Fair and as per the provision or section 11(1)(a) the amount has to be applied for such purposes in India. The appellant had also moved an application before the Central Board of Direct Taxes vide letter dated 09/11/2009 for claiming exemption but has not received any approval till date from CBDT.

4.2 Under section 11(1)(c) of the income tax Act, any income applied on activities outside India is not eligible for exemption. A charitable organization cannot have activity outside India unless it happens to be a trust created before 1-4-1952 or it is engaged in promotion of international welfare in which India is interested. In other words, NGOs registered after 1-4-1952 are not allowed to have any international activity unless such activity is specifically exempted by CBDT. Provisions of section 11(1)(c) are as under:-

(c) Income derived from the property held under trust-

* Created on or after the 1st day of April, 1952 for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes, outside India, and

* For charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that board, by general or special order, has directed in either case that all not be included in the total income of the person in receipt of such income:

From the above provisions, it is clear that organization created after 1-4-1952 are empowered to carry out activities outside India. However, CBDT in certain circumstances may direct by a general or specific order permitting certain activities, which tend to promote international welfare in which India is interested.

4.3 As section 11(1)(a) specifically states, that the application has to take place in India we have to analysis what is the meaning of the word application. The word applied means “to put the use” or “to turn to use” or “to make use” and section 11(1)(a) further puts a geographical restriction for its application in India.

4.4 In the case of CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.) where it was categorically held that word ‘applied’ does not necessary mean spent. But this decision was in context of section 4(3)(i) of the Act. It may be noted that in the old Act, the income was exempt irrespective of application or accumulation. In other words, even 100 per cent accumulation was permissible therefore application or non-application did not have may tax implications. The implication of the term ‘application’ is different under the new Act. On the basis of recent case laws currently the term, ‘applied’ is more or less closer to the term ‘spent’ unless there is no doubt about the authenticity 01 application. The accounting standards and the guiding principles of ‘accrual accounting’ are also relevant. And showing application through book entries is not permissible. In the case of Nachimuthu Industrial association v. CIT [1999] 235 ITR 190, the Supreme Court upheld the decision of Madras High Court where it was held that sums transferred to a donation reserve fund could not be treated as application of funds.

From the above discussion it is clear that the word applied is synonymom the word spent in the context of section 11 of the IT Act and hence it is mandatory the amount should be spend and applied in India. The plea taken by the appellant had participated in the Hannover Fair at the insistence of Ministry of Commerce cannot over ride the Income Tax Act. There is no bar in applying for charitable purpose India if there is an approval from CBDT. In the absence such approval the, Officer was correct in subjecting to tax the amount of Rs. 1,95,26,116/-.”

4. Still aggrieved, assessee took up the matter in further appeal and raised following grounds on this issue:

 1.  That the authorities below have overlooked the fact that a sum of Rs. 3,00,00,000/- was specifically given by Ministry of Commerce and Industry. Government of India body for participating in “Hannover Fair 2006”

 2.  That the participation in Hannover Fair was at the behest of Ministry of Commerce and Industry, Government of India.

 3.  That the authorities below have erred both in law and on the facts of the case to treat a sum of Rs. 1,95,26,116/- spent outside India for participating in Hannover Fair as taxable income of the trust on the ground that it falls under the mischief of section 11(1)(c) of the I.T. Act.

 4.  That the authorities below have overlooked the fact that the amount of Rs. 3,00,00,000/- provided by Engineering Export Promotion Council at the behest of Ministry of Commerce and Indust5ry was a tied up grant specifically provided for purposes of participating in Hannover Fair and did not constitute the income of the trust. This being so the receipt of Rs. 3,00,00,000/- did not fall within the ambit of section 11(1)(a) of the I.T. Act.

 5.  That the authorities below were, therefore, highly arbitrary and unjust in bringing the amount of Rs. 1,95,26,116/- under the tax net.”

5. During the hearing of appeal, it was pleaded by the Ld. Counsel for the assessee that since purpose of participating and other details were submitted and relevant provisions provide for such allowance to be allowed, so addition was not called for and prayed, for deletion of the addition/disallowance made by the Assessing Officer and confirmed by the CIT(A). Elaborating further that all policy with regard to functioning of the trust is formulated by the Government of India, Ministry of Industry and having been implemented through the board of trustees. For the purpose of overseeing the participation in Hannover Fair, 2006, Ministry constituted a steering committee under the chairmanship of Commerce Secretary. Modalities of participation was decided by the Organizing Committee under the Chairmanship of Additional Secretary, Ministry of Commerce and Industry. From the minutes, it is clear that entire control was with the Ministry and India Brand Equity Foundation (assessee trust) and Engineering Export Council roles were decided by the organizing committee for role of India Branch Equity Foundation (IBEF) and in this regard minutes of meeting of India Hannover Fair can be referred to as is apparent, even the role was chalked out by the Ministry and IBEF had no free control over the event. IBEF was participating as agent for the Ministry. For the purpose of participation in fair, Ministry of Commerce & Industry directed its sponsored body Engineering Export Promotion Council to transfer Rs. 3 crores to the assessee trust for setting up Indian Pavilion in the fair as a partner country. By relying upon Cotton Textiles Export Promotion Council [1968] 67 I.T.R. 539, Nirmal Agriculture Society [1999] 71 I.T.D. 152 (Hyd.), Sukhdeo Charity v. CIT [1984] 19 Taxman 222 (Raj.), it was pleaded that for the purpose of participation in the fair, Ministry of Commerce and Industry directed its sponsored body, namely, Engineering Export Promotion Council to transfer Rs. 3 crores to the assessee trust for setting up Indian pavilion in the fair as partner country and grant for specific purposes has been held as tide up grants and amount of Rs. 19526116/- spent in attending Hannover fair in Germany at the behest of Ministry cannot be taxed by treating it as application outside India by bringing it into the mischief of section 11(1)(a), 11(1)(b) to tax it so disallowance should be deleted.

6. Ld. DR submitted that since assessee organization was set up after 1.4.1952, was not empowered to carry out activities outside India, as per section 11(1)((a), it is specifically stated that application has to take place in India and the word ‘application’ means “to put the use” or “to turn to use” or “to make use” and section 11(1)(a) further puts a geographical restriction for its application in India only and moreover the courts have held that word “applied” does not necessarily mean spent as held by Allahabad High Court in the case of CIT v. Radhawsami Satsang Sabha [1954] 25 I.T.R. 472 (All.), though, this decision was in the context of section 4(3)(i) of the Act, and in the old Act, the income was exempt irrespective of application or accumulation was in other words, even 100% accumulation was permissible. Therefore, application or non-application did not have any tax implication since, the implication of term application is different under the new Act and on the basis of recent case laws, currently the term ‘apply’ is more or less closer to the term ‘spent’, unless there is no doubt about the authenticity of the application The accounting standard and guiding principles of ‘accrual accounting’ are also relevant and showing application through book entries is not permissible. In the case of Nachimuthu Industrial Association v. CIT [1999] 235 I.T.R. 190, the Hon’ble Supreme Court upheld the decision of Madras High Court, where it was held that sum transferred to a donation reserve fund could not be treated as application of funds. Considering the above discussion, it becomes clear that word applied is synonymous with the word spent in the context of section 11 of the I.T. Act, 1961. So, it is mandatory that the amount should be spent and applied in India. As regards plea taken by the assessee, it has participated in Hannover Fair at the instance of the Ministry of Commerce, cannot override the Income-tax Act and there is no bar in applying for charitable purpose outside India, if there is an approval from CBDT which is not there. So, in the absence of such approval, Assessing Officer was correct in subjecting to tax the amount of Rs. 1,95,26,116/- and Ld. CIT(A) has justifiably confirmed the order of Assessing Officer in this regard, whose action being perfectly justified needs further confirmation and may be confirmed.

7. In order to counter the submissions of Ld. DR, Ld. Counsel for the assessee while laying stress on the language of section 11(1)(a), 11(1)(b) & 11(1)(c) of the Act has pleaded that though charitable purposes should be confined to India, and the application of the income of the trust the execution of such purposes can be outside India, as provided in relevant provisions of law. Therefore, it was pleaded for deletion of he impugned addition.

8. We have heard both the sides, considered the material on record as well as case laws cited. It is not in dispute that amount of Rs. 1,95,26,116/- was spent for participating in Hannover Fair held in Germany and for such participation, Steering Committee under the chairmanship of Commerce Secretary was constituted and modalities of participation was decided by the Organizing Committee under the Chairmanship of Additional Secretary, Ministry of Commerce & Industry, and as stated, the entire control was with the Ministry. The roles of Indian Brand Equity Foundation and Engineering Export Promotion were decided by the Organizing Committee which was chaleked out by the Ministry IBEF and they had no free control over the event. IBEF was participating as agent for the Ministry. For the purpose of participation in fair, Ministry of Commerce & Industry directed its sponsored body Engineering Export Promotion Council to transfer Rs. 3 crores to the assessee trust for setting up Indian pavilion in the fair as a partner country. However, a sum of Rs. 1,95,26,116/- was spent for participating in Hannover Fair held in Germany and has been treated as falling in the mischief of section 11(1) by Assessing Officer whose action has been confirmed in first appeal.

9. Now, it is to be seen that the words “to the extent to the which such income is applied to such purposes in India” appearing in section 11(1)(a) of the Act only require that the charitable purposes should be confined to India on the application of the income of the trust to the execution of such purposes can be outside India, appears to us to be also 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 to us 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 to us that grammatically also it would be proper to understand requirement of the provision in this way, 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 submissions of Ld. Counsel that the words “in India” qualify only the words “such purposes” so that only the purposes are geographically confirmed to India does not appear to us 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 Ld. Counsel 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 Ld. Counsel contends is correct, then section 11(1)(c) may become redundant and otiose. If as he 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. In our opinion, therefore, the words “in India” appearing in section 11(1)(a) and the words “outside India” appearing in section 11(1)(c) of the Act qualify the verb “applied appearing in these provisions and not the words “such purposes.”

10. In the light of above discussion and carefully considering the relevant provisions of law, we are of the opinion that disallowance of the amount of Rs. 1,95,26,116/-incurred by the assessee on account of amounts spent outside India for participating in Hannover Fair in Germany during the year under consideration cannot be treated as application of income of the trust to the execution of such purpose. Hence, in our view, disallowance in this regard could validly be made. Our view is fortified by the decision of the jurisdictional Delhi High Court in the case of DIT v. National Association of Software in I.T.A. No. 17/2011 etc. vide order dated 10.05.2012, in which it was observed as per paras.31 & 43 as under:

“31. We, therefore, hold that the amount of Rs. 38,29,535/- spent by the assessee-trust in Hannover, Germany cannot be considered as application of the income of the trust in India for charitable purposes. The substantial question of law is thus answered in favour of the assessee insofar as the payment of taxes under the VDIS is concerned and in favour of the Revenue insofar as the expenditure incurred outside India (Germany) is concerned.

43. We now turn to the assessment year 2006-07, I.T.A. No.518/2011 arises out of I.T.A. No. 4468/Del./2009 in the file of the Tribunal which was an appeal by the assessee. Before the Tribunal the assessee had taken only one issue in appeal, namely, whether the expenditure of Rs. 1,70,85,034/- incurred outside India on events and activities held outside India did not qualify for exemption under section 11(10)(a) of the Act. In line with our earlier decision, the substantial question of law arising from this issue is decided in favour of the Revenue and against the assessee.”

Therefore, action of authorities below allowing the claim of the assessee is justified and proper. As such, while confirming the amount of disallowance, we dismiss this ground of appeal of the assessee.

11. As regards ground no. 6 regarding disallowing the deprecation on Rs. 2,77,149/- as application of the income. It is the contention of the Ld. Counsel of the assessee that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Punjab and Haryana High Court in the case of C.I.T. v. Tiny Tots Education Society 330 ITR 21, which has followed the decision of the Punjab and Haryana High Court in the case of C.I.T. v. Market Committee, Pipli 330 ITR 16, so it was prayed for deletion of disallowance made by the Assessing Officer and confirmed by the CIT(A).

12. Ld. DR did not object to such factual aspect, but relied upon the orders of the authorities below to plead for confirmation of the order in this regard.

13. We have heard both the sides and considered the material on record as well as precedents relied upon by the Ld. Counsel for the assessee and find that the issue raised in this appeal is squarely covered by the decision of the Hon’ble Punjab and Haryana High Court in the case of C.I.T. v. Tiny Tots Education Society 330 ITR 21, which has followed the decision of the Punjab and Haryana High Court in the case of C.I.T. v. Market Committee, Pipli 330 ITR 16 and the relevant portion thereof is reproduced as under:-

“In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. The Judgement of the Hon’ble Supreme Court in Escorts Ltd. case [1993] 199 Income Tax Rules, 1962 43 is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee.”

14. Since the issue is squarely covered in favour of the assessee, therefore while following the aforesaid decision of the Punjab and Haryana High Court, we direct to delete the impugned addition made by the Assessing Officer and confirmed by the CIT(A).

15. As a result, the appeal filed by the assessee gets partly accepted.