CPT V24P7-Art1 (Content).pmd - Taxmann

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Direct Tax Laws within the taxable territories but the income of the Trust is applied elsewhere in the implementation of such purposes. The contention of the assessee, that the Supreme Court’s decision relied on by the High Court was not applicable to the present case, also did not find favour of the Court. The assessee’s argument was that in the case of H.E.H. Nizam’s Religious Endowment Trust (supra), the trustees had discretion to apply the income outside India and such application should have approval from CBR (present CBDT) which was not obtained by the Trust at that point of time. In the light of that particular situation the Supreme Court had held that the income did not qualify for exemption. The assessee also argued that the Supreme Court did not deal with the contentious issue debated in the present case, viz., with respect to the meaning of words “to such religious or charitable purposes as relate to anything done within the taxable territories” occurring in section 4(3)(i) of the old Act. The High Court also interpreted the natural grammatical meaning of the words “to the extent to which such income is applied to such purposes in India” appearing in section 11(1) (a) of the Act. The High Court observed that the word “applied” is a verb in the past tense used in a transitive form followed by words “such purposes” and “India” qualified with two prepositions “to” and “in”. This being the case, the words should be read as applicable to charitable purposes and also applied in India to such purposes. The assessee’s contention, that “in India” qualifies only the phrase “such purposes” so that only the purposes are geographically confined to India, was not acceptable to the High Court. The Court observed that if such meaning is assigned to the words, it would place a strain on the natural or grammatical interpretation of the words, “to the extent to which such income is applied to such purposes in India”. For this purpose the Court relied on a few rules of interpretation laid down in the cases 672 of Jugal Kishore Saraf v. Rao Cotton Co. Ltd. AIR 1955 SC 376; Kanai Lal Sur v. Paramnidhi Sadhukhan AIR 1957 SC 907 and Union of India v. Rajiv Kumar [2003] 6 SCC 516. AN ANALYSIS OF HIGH COURT’S DECISION August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 52 5. A close “look through” in the case discussed would reveal that the High Court had assigned a meaning “spent” for the word “applied” used in Section 11(1)(a) of the Act. However, “applied” need not necessarily imply “spent”, (CIT v. Trustees of H.E.H. The Nizam’s Charitable Trust [1981] 7 Taxman 178 (AP)). The Compact Oxford Thesaurus Dictionary meaning of the word is “bring into operation or use”. As per Webster Dictionary “applied” means “to put to practical use”; “engaged in for a utilization or contributory purpose”; “employed in the decoration, design or execution of useful object”. Therefore, “applied” is wider in import than the word “spent” or “to payout or distribute” or “expenditure”. In a charity, situs of beneficiary and benefits are predominant than situs of payment made for the procurement of such benefits for the beneficiary. When a charitable trust/institution was making payment outside India for acquiring a benefit for the beneficiaries in India, it was applying the money paid for charitable purposes in India. CONSEQUENCES OF HIGH COURT’S DECISION 6. In India there are a large number of NGOs engaged in various charitable activities. The income of such NGOs (subject to registration under section 12A of the Act) is exempted under sections 11, 11A and 12 of the Act. If the meaning assigned to the word “applied” in the section is “spent”, it would be interesting to ponder over the consequences of the above decision for NGOs.
NGOs undertake many kinds of charitable activities. The benefits may be in cash or in kind. If the benefits are in kind, it would be in the nature of supply of material or services for which the NGOs have to make payment to a third party who supplies the materials or provides the services. Let us look into the anomalies brought about by the decision of the High Court. Suppose a poor patient is in urgent requirement of certain lifesaving medicines which are available only abroad or are available at a significantly higher cost in India. If the NGO was to spend the money abroad for importing the medicine, such an expenditure would not be application of income according to the case decided. But if it was imported through an agency in India such an expenditure would be an application of income for charitable purpose. Let us look into another example. Take the case of a poor patient being sent abroad for special medical treatment. While the amount spent in India, say for, onward journey ticket booked in India, is considered as permissible application, the amounts spent abroad for treatment and homeward journey, if paid outside India, would be considered as non-application of income for charitable purposes. ANALYSIS OF DECISION UNDER DIRECT TAX CODE, 2010 7. The above anomaly would possibly be removed in the proposed Direct Code, 2010. Section 92 of the DTC provides the manner of computation of total income of a non-profit organisation. As per the said Section, the total income of any non-profit organisation in relation to any charitable activity, during the financial year, shall be the gross receipts as reduced by the amount of outgoings, as computed in accordance with the cash system of accounting. Section 94 of the DTC describes permissible types of “outgoings” of a non-profit organisation. • DT - Secs. 11(1)(a), 11A, 12 & 12A Clause (b) of the said Section states that “the amount paid for any expenditure, incurred for the purpose of carrying out any charitable activity” shall be one of the “outgoings”. Clause (b) of section 103 of the DTC defines charitable activity with a preamble,- “charitable activity” means the following activities carried out in India, namely:— (i) to (iii) *******, etc., Therefore, a combined reading of all these sections would make it possible for an NPO to incur expenditure outside India, if the expenditure is in relation to charitable activities carried out in India. CONCLUSION 8. The decision of the High Court in the above case has placed the NGOs in a peculiar situation. It is the considered opinion of the author that in light of this judgment, NGOs would not be able to tap foreign supplies and services that would be required for beneficiaries in India, if they have to make payments directly to the foreign suppliers or service providers. At the same time, it would become permissible transaction if the NGOs engage an Indian agent for provision of such supplies and services and pay the amount to them in India. In both the cases the beneficiaries are in India and the benefits also accrue in India, but in the former instance, the payment for supplies or services passes directly to a foreign party and in the latter case the payment is routed through an Indian agent. It is pertinent to note that the High Court, while concluding its order, noted such an anomaly but was of the opinion that such an anomaly could not be removed by the Courts by interpreting the words used in the Section contrary to what the words convey in the plain meaning of the words used in the Act. August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 53 ••• 673
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