Introduction

1. Chapter III of the Income-tax Act, 1961 ("the Act") contains provisions pertaining to "income which does not form part of total income". Section 11 of the Act relates specifically to "income from property held for charitable or religious purposes". The relevant text of the section is 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 the income—

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] per cent of the income from such property;

(b)**                                                                                    **                                                                                     **

 

(c) income [derived] from property held under trust—

(i) 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

 

(ii)**                                                                                     **                                                                                         **

 

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;….."

As provided in section 11, where income derived from property held by a trust wholly for charitable purposes is applied to such purposes in India, such income is allowed to be excluded while computing the total income. However, there has been a debate regarding the scope and situs of application of income derived from trusts created for charitable purposes under section 11(1)(a). For determining the extent of income applied for charitable purposes, the geographical limits for such application are in question. The phrase "to the extent such income is applied to such purposes in India" has come up for deliberation and has been interpreted by the judicial authorities in a few recent rulings.

2. Case Laws

2.1 Case of India Brand Equity Foundation v. Asstt. CIT - A recent ruling was pronounced by the Delhi Bench of the Tribunal in the case of India Brand Equity Foundation v. Asstt. CIT [2012] 23 taxmann.com 323. The main question for determination before the Tribunal was whether it was sufficient for the charitable purpose to be confined to India for the purposes of utilizing the beneficial provisions of section 11(1)(a) or whether the income also needed to be applied only within the geographical boundaries of India to claim the expenses incurred?

The assessee, M/s. India Brand Equity Foundation, was a trust created in public interest for promoting India Brand overseas and the entire corpus was provided by the Government of India. The trust under monitoring of the Government of India, was not for the benefit of any particular section of community, but was meant for the larger interest of the country. The assessee, during the previous year relevant to assessment year 2007-08, had received a sum of Rs. 3 crores from the Engineering Export Promotion Council, the Ministry of Commerce & Industry for participating in Hannover Fair in Germany and incurred an expenditure of Rs. 1,95,26,116/- for attending the said fair.

The Assessing Officer disallowed the amount spent by the assessee for participation in the Hannover Fair in Germany. On appeal by the assessee, the first appellate authority made an analysis of the provisions of section 11(1) and upheld the order of the Assessing Officer.

Before the Tribunal it was urged that the trust was under the supervision of the Ministry of Industry, Government of India and was implemented through the board of trustees. The submission of the assessee was that the grant of Rs. 3 crores received for setting-up Indian Pavilion in the fair as a partner country was a grant for specific purpose and, hence, expenses incurred for attending the fair outside India should not be taxed by treating the same as an application outside India. It was submitted that the provisions of section 11 only require that the charitable purposes should be confined to India, however, the application of income and the execution of such purposes can be outside India.

The Department took the view that mere fact that the assessee attended the fair on the insistence of the Ministry of Commerce could not override the Income-tax Act and contended that as the application of income was made outside India, the assessee could have taken recourse to section 11(1)(c) and no disallowance would have been made, had the assessee been granted an approval from the CBDT for application outside India.

The Tribunal rejected the plea of the assessee that only the charitable purpose should be confined to India and application of income could be outside India. It observed that such an interpretation would break the natural flow of the group of words "to the extent to which such income is applied to such purposes in India", in addition to the effect of making section 11(1)(c) redundant. The Tribunal observed as under:

'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, 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".'

2.2 Case of National Association of Software and Services Companies v. DDIT (Exemptions) - In National Association of Software & Services Companies (Nasscom) v. Dy.DIT (Exemptions) [2010] 130 TTJ 377, the Delhi Tribunal relied upon the decision of a co-ordinate bench in the case of Gem & Jewellery Export Promotion Council v. Sixth ITO [1999] 68 ITD 95 (Mum.), which held that a bare reading of section 11(1)(a) left no doubt in that the requirement under the section does not restrict the application of income within the territory of India.

While considering the allowability of expenditure incurred outside India for charitable purposes, the Tribunal was of the view that the words "is applied to such purposes in India" appearing in section 11(1)(a) of the Act only mean that the purposes of the trust should be in India and that the application of the income of the trust need not be in India. It relied on the fact that the Legislature had put the words "to such purpose" between "is applied" and "in India" to make it clear that application of income need not necessarily be confined to India.

However, the ruling was reversed by the Hon'ble Delhi High Court in DIT (Exemption) v. National Association of Software & Services Companies [2012] 345 ITR 362/208 Taxman 178/21 taxmann.com 213, which rejected the assessee's contention that the situs of application of income is not material, as long as the charitable purposes are in India.

The jurisdictional HC observed that if the words "in India" are read in manner so as to qualify only the words "such purposes", with the effect that only the purposes need to be geographically confined to India, it would break or clog the natural flow of the entire group of words. Such an interpretation would place a strain on the natural or grammatical interpretation of the group of words resulting in rendering section 11(1)(c) redundant and otiose. This view was then relied upon by the Tribunal in the case of India Brand Equity Foundation(supra).

2.3 Case of Jugal Kishore Saraf v. Raw Cotton Co. Ltd. - The Court also referred to the rules of interpretation laid down in a few cases. In Jugal Kishore Saraf v. Raw Cotton Co. Ltd. AIR 1955 SC 376, 381, S.R. Das J., speaking for the Supreme Court, observed as follows:

"The cardinal rule of construction of statutes is to read the statute literally, that is, by giving to the words used by the Legislature their ordinary, natural and grammatical meaning. If, however, such a reading leads to absurdity and the words are susceptible of another meaning the Court may adopt the same. But if no such alternative construction is possible, the Court must adopt the ordinary rule of literal interpretation. In the present case, a literal construction of the rule leads to no apparent absurdity and, therefore, there can be no compelling reason for departing from that golden rule of construction."

The Hon'ble High Court, thus, interpreted the provision in the literal sense, in the form of their plain grammatical meaning and held that application of income must be made within the boundaries of India for claiming exemption under section 11(1)(a).

Discussions on scope and situs of application of income with the help of decided cases

3. Let us now discuss the issue at hand with the help of the following examples as cited by the learned counsels in different cases.

Where, for instance, in the case of a trust whose object is giving away of scholarship to meritorious students, the cost of air tickets purchased in India and borne by the trust to enable the student to go abroad for higher studies will be exempted from tax, because the application of the income is in India, whereas the amount of fees paid by the trust abroad to the University there would not be exempt, because it would amount to application of income outside India, even though there is no difference between the two so far as the charitable nature of the purpose is concerned. In both the cases, the income is applied for charitable purposes only.

Similarly, where a library functioning in India purchases books from abroad and makes payment therefor, the purpose for which the expenditure has been incurred is in India, though the expenditure has been incurred outside India.

Where would such situations fall? Will they get covered under section 11(1)(a)? According to the recent decisions, section 11(1)(a) would not apply to these cases, as application of income has been done outside India. Should the same then be covered under section 11(1)(c)?

Section 11(1)(c) covers situations where underlying motive is promotion of international welfare

4. At this juncture, it must be noted that the provisions of section 11(1)(c) relate to a situation wherein income derived by a trust held for charitable purposes tends to promote international welfare in which India is interested in and such income is applied outside India. What it covers is situations where the underlying motive of application of income is promotion of international welfare. In the light of the facts of the instant case and the examples cited above, it is pertinent to note that income in all the cases mentioned above has been applied for a charitable purpose. Consequently, it can be safely said that such application of income cannot fall under the ambit of 'international welfare' so as to be governed by section 11(1)(c).

A tricky turf indeed

5. It must be appreciated that the judiciary, while delivering the ruling in the aforementioned cases, must have faced a tricky turf, as there is no provision in the Act which covers situations where income earned by a trust held for a charitable purpose has applied such income outside India. While section 11(1)(a) governs only those situations where application of income and charitable purpose are confined to India (as held by the Delhi Tribunal and the Hon'ble Delhi High Court) and section 11(1)(c) pertains to application of income outside India for the purposes of international welfare in which India is interested in, there is no express clause for determining the allowability of application of income, as has been done in the present case.

Although the Court took the arguments presented by the assessees into consideration and agreed with that the same weren't without merit, the Court was nonetheless hesitant in interpreting the section in this light. The Court resorted to a narrow view or a restricted literal interpretation of section 11(1)(a). Giving reasons for the same, it was held that the law needs to be interpreted the way it is and not the way it should be.

Conclusion

6. Our existing Income-tax Act is half a century old. With the advent of globalization, it is common to have a situation wherein expenditure might be made by the assessee in one country, with the benefit flowing to another country, as can be seen with the help of the examples. As there is no provision in the Act expressly covering such situations where income is applied outside India, the existing provisions must be construed in a manner so as to cover such situations within its ambit, as has been held by the Gujarat High Court in the recently decided case of General Motors India (P.) Ltd. v. Dy. CIT [SCA No. 1773 of 2012] :

Excerpts from said ruling are as follows :

"While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the Legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied."

Considering fact that the tax laws in India have been drafted decades ago, should the Courts be bound by strict literal interpretation or adopt a purportive construction, to keep pace with the present day state of affairs ?

Indeed, charity begins at home, but should it end there only?

[Citation: [2013] 30 taxmann.com 48  (Article)]