CPT V24P7-Art1 (Content).pmd - Taxmann

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DIRECT TAX LAWS 670 Tax Implications for NGOs that Source Foreign Goods CA JAMES JOSEPH INTRODUCTION 1. Recently, the Hon’ble Delhi High Court delivered an interesting judgment in the case of DIT(Exemption) v. National Association of Software & Services Companies [2012] 21 taxmann.com 213, which could have certain long-term implications on tax interpretations for NGOs. In this case, the High Court took a view that expenditure incurred outside India by a charitable trust/institution for a charitable purpose in India does not conform to the condition provided under section 11(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). This section provides that in the case of a charitable trust/Institution registered under section 12A of the Act, the income shall not be included in the total income of the previous year to the extent to which such income is applied to charitable purposes in India. The relevant part of the section reads as follows: “11. (1). Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of income- (a) Income derived from property held under Trust wholly for charitable or and Services religious purposes, to the extent to which such income is applied to such purpose in India............ (b) to (d) ********” FACTS OF THE CASE August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 50 2. The assessee was a Trust registered under section 12A of the Act. As per the annual report published by the Trust, the assessee was the industry association for the IT-BPO sector in India. Being a not-for-profit organisation funded by the industry, its objective was to build a growth-led, sustainable, technology and business services sector in the country. In respect of AY 1998-99, it filed a tax return declaring ‘nil’ income. When the return was taken up by the Assessing Officer for scrutiny under section 143(2) of the Act, he noticed that expenditure incurred on events/activities held at Hanover, Germany amounting to ` 38.30 lakhs was claimed as application of income in terms of section 11(1)(a) of the Act. The Assessing Officer concluded the assessment holding that expenditure incurred in Germany was not an application of income, since it was incurred outside India and, therefore, the surplus
of income as declared by the assessee was liable for further enhancement to that extent. DECISIONS OF THE APPELLATE FORUMS 3. While as the learned CIT(A) upheld the view of the Assessing Officer, the Hon’ble Delhi Tribunal reversed the order of the lower authorities. The Tribunal focused on the words “is applied to such purposes in India” used in section 11(1)(a) of the Act. The Tribunal was of the view that the Legislature had put the words “to such purposes” between “is applied” and “in India” to mean that the application need not be in India but needs only to result in, and should be for the purposes of a charitable activity in India. The Tribunal further went on to state that the expenditure incurred by the assessee in Germany was for the purpose of attaining charitable objects in India. Hence, the assessee rightly claimed the expenditure as application of income in terms of section 11(1)(a) of the Act. To conclude its decision, the Tribunal also relied upon the decision of the Hon’ble Mumbai Tribunal in the case of Gem & Jewellery Export Promotion Council v. Sixth, ITO [1999] 68 ITD 95 and distinguished the ratio laid down by the Hon’ble High Court of Andhra Pradesh in the case of Trustees of H.E.H The Nizam’s Pilgrimage Money Trust v. CIT [1988] 36 Taxman 154. DECISION OF THE HIGH COURT 4. The Revenue challenged the decision of the Tribunal before the Delhi High Court on the same grounds that were raised before the appellate forums. The High Court reversed the decision of the Tribunal stating that such an expenditure could not be considered as an application of income in India as same had been incurred in Germany. Once again before the High Court, the contentious issue between the Revenue and the assessee boiled down to the meaning of the words “is applied to such purposes in India” appearing in section 11(1)(a) of the Act. The High Court discussed the meaning of these words in the light of the mandate for which it had been enacted. The Court compared section 11 of the Act with that of section 4(3)(i) of the erstwhile Indian Income-tax Act, 1922. The Court observed that the object of these two Sections in their respective Acts are same and, therefore, the ratio laid down by the Hon’ble Supreme Court in the case of H.E.H. Nizam’s Religious Endowment Trust v. CIT [1966] 59 ITR 582 in the context of section 4(3)(i) of the Indian Income-tax Act, 1922 was equally applicable to section 11(1)(a) of the Act. The High Court observed that the Supreme Court in the case of H.E.H. Nizam’s Religious Endowment Trust (supra) laid out that “application of income of the Trust to such religious or charitable purpose as relate to anything done within taxable territories” only qualifies for exemption under the old Act. Since the basic object of both, the old Act and new Act was same, the High Court held that the ratio laid out in the Supreme Court’s decision was equally applicable to the present case also. The High Court observed that as the assessee had incurred the expenditure in Germany, and, as such, this expenditure was not related to anything done within the taxable territories of India, it could not be considered as application of income for charitable purposes in India. The High Court did not find any merit in the argument of the assessee that the words “as relate to anything done within the taxable territories” mean that the charitable purposes must be executed within the taxable territories and that it was immaterial where the income was actually applied. The assessee contended that the words “is applied to such purpose in India” used in section 11(1)(a) of the Act also conveyed the same meaning. However, the High Court could not conceive of a situation under which the charitable purposes are executed August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 51 671
Page 3 and 4: August 1 to 15, 2012 u TAXMANN’S
Page 5 and 6: Accounts & Audit 701 707 FOUNDER ED
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Page 9 and 10: and the capital gains on transfer o
Page 11 and 12: used to introduce new rules of law,
Page 13 and 14: for earning tax exempt income. Howe
Page 15 and 16: of the hearing before the Tribunal
Page 17 and 18: (P.) Ltd.’s (supra) before the IT
Page 19 and 20: the ITAT Rules, 1946, vis-à-vis th
Page 21 and 22: Two recent instances of such practi
Page 23 and 24: ut CIT(A) are not bothered by any s
Page 25 and 26: say, twice the latter amount or mor
Page 27 and 28: Taxing the Expenditure on Litigatio
Page 29 and 30: PENALTY CHARGES FOR BREACH OF LAW C
Page 31 and 32: Exclusive Owner v. Joint Owner DIRE
Page 33 and 34: to agree with the assessee’s cont
Page 35 and 36: Retrospective Amendments - Courts D
Page 37 and 38: Court and if such party is still ag
Page 39 and 40: of the Act. It will not apply to de
Page 41 and 42: ank. It follows that if the amount
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Page 45 and 46: The true profits of the insurance b
Page 47 and 48: expenditure or allowance which is n
Page 49 and 50: the same have not yet been adopted
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Page 57 and 58: in the above judgment observed that
Page 59 and 60: ground not raised earlier in appeal
Page 61 and 62: As per section 145 of the IT Act bu
Page 63 and 64: enhanced rates shown as receipts in
Page 65 and 66: a common passage, common kitchen, e
Page 67 and 68: The Tribunal concluded the decision
Page 69 and 70: ent free accommodation was not bein
Page 71 and 72: (c) Lease rental shall be paid at t
Page 73 and 74: of the above definition, the assess
Page 75 and 76: The High Court held in favour of as
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Page 79 and 80: or any form in which such Director
Page 81 and 82: invests in a fair manner. Generally
Page 83 and 84: Disclosure of Borrowings under Revi
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Page 89 and 90: ACCOUNTS & AUDIT IN BRIEF A Fortnig
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