The Income-tax Act, 1961 (“the Act”) provides for various benefits to a trust formed for charitable or religious purposes. Section 11 of the Act exempts the income derived from property held under trust for charitable purposes from taxation, inter alia, to the extent to which such income is applied for such purposes ‘in India’. The phrase ‘applied for charitable purposes in India’ has been a subject matter of litigation in the recent past. Does the phrase necessitate the expenditure to be incurred in India, or does it only require the expenditure to result in promotion of charitable purpose in India, irrespective of the country in which the expenditure is incurred?
In order to interpret and appreciate the mandate of section 11, it is imperative to highlight the position as was under the Indian Income-tax Act, 1922 (“1922 Act”). Section 4(3)(i) of the 1922 Act corresponded to section 11 of the Act. Prior to the Indian Income-tax (Amendment) Act, 1953 (made applicable with retrospective effect from 01.04.1952), Section 4(3)(i) of the 1922 Act granted exemption to trusts without any qualification of applying the income for charitable purposes in India alone. The section, at that time, read as under:
“4. Application of Act. …(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them:
….(i) any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, ….., the income applied, or finally set apart for application, thereto.”
Thus, the statute provided a blanket exemption to all the income derived from property held under trust, irrespective of the country in which the charitable purpose is undertaken. Vide the amendment act of 1953, section 4(3)(i) of the 1922 Act stood as under:
“4. Application of Act. ... (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them:
(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, ….:
Provided that such income shall be included in the total income—
(a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases, namely: ….”
The amendment sought to restrict the amount of exemption to the things done within India. In other words, exemption was not extended to ‘things done’ outside India. The phrase ‘things done’ referred to charitable purpose and not the place where the expenditure was incurred. The position of law, both, before 01.04.1952 and thereafter, so far as section 4(3)(i) of the 1922 Act is concerned, has been noticed and contrasted by Subba Rao, J., in Nizam’s Religious Endowment Trust in following words:
“Under the said clause, trust income, irrespective of the fact whether the said purposes were within or without the taxable territories, was exempt from tax in so far as the said income was applied or finally set apart for the said purposes. Presumably, as the State did not like to forgo the revenue in favour of a charity outside the country, the amended clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories.”
A careful perusal of the law prior to 1954, the amendment made in 1954 and the above observation of the Supreme Court, would clearly show that the phrase “as relate to anything done within the taxable territories” relates to the charitable purpose being within the taxable territories of India, and that it was immaterial where the income was actually spent in India or not.
The 1961 Act, enacted by repealing the 1922 Act, couched the condition of ‘application to such charitable purposes as relate to anything done within the taxable territories’ with ‘application to such charitable purposes in India’. There seems to be no intention of the law makers to alter this condition for granting the exemption. Strangely, the question of whether the phrase ‘in India’ qualifies ‘application of income’ or ‘charitable purposes’ has been a subject of contrary interpretation by Courts.
The Mumbai Tribunal in Gem & Jewellery Export Promotion Council held that there was no doubt that the requirement under section 11 of the Act is for application of income for ‘purposes’ in India and it does not restrict the application of income within the ‘territory’ of India.
The Delhi Tribunal relied on the reasoning given by the Mumbai Tribunal, while dealing with a similar issue in the case of NASSCOM . It held that the application of income need not be in India, but the application should result and should be for charitable and religious purpose in India. However, on appeal, the Delhi High Court in NASSCOM held that the words ‘in India’ appearing in section 11(1)(a) of the Act qualifies the verb ‘applied’ appearing in the section and not the phrase ‘such purposes’.
The author believes that the judgment of the Delhi High Court does not lay down the correct law, for more than one reasons. Firstly, going by the intention of the Legislature, the Court implied that the law did not intend to forgo the revenue in favour of a charity outside the country. Though the principle is unquestionable, but the mere incurrence of expenditure in foreign currency would not imply carrying on a charitable activity outside India. To illustrate, where a hospital imports medical equipment by remitting foreign currency, the expenditure does not result in application of income outside India. Secondly, the Court observed that if it was accepted that it was only the place of purpose which is relevant for section 11(1)(a), then section 11(1)(c) would be rendered redundant. In this regard, it is highlighted that section 11(1)(c) provides for exemption in the cases where the object of the trust is international welfare in which India is interested, i.e. where the charitable purpose itself lies outside India. Contrary to the observation of the High Court, the exemption in section 11(1)(c) of the Act strengthens the argument that the intention of the Legislature to grant exemption under section 11(1)(a) is with respect to those cases where the purpose lies in India; where the charitable purpose lies outside India, exemption is granted under Section 11(1)(c) of the Act.
The Bangalore Tribunal in Ohio University Christ College has also concluded that, merely because the payments are made outside India, it cannot be said that the charitable activities were also conducted outside the country. The Tribunal has however not referred to the judgment of the Delhi High Court.
Considering the discussion in the foregoing paragraphs, it can be said that the mandate under section 11(1)(a) is only to apply the income in India for charitable purposes, while the actual expenditure could in fact be outside India. Therefore, if the expenditure is incurred outside India for the charitable purpose in India, then the exemption under section 11(1)(a) should not be denied.