Ita/86/2008 Of The Commissioner Of Income Tax v. Islamic Academy Of Education

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATBD THIS THE 3 DAY OF JUNE 2014 PRESENT THR HON’BLE MR.JUSTICE N. KUMAR AND THR HON’BLE MR.JUSTICE B.MANOHAR INCOME TAX APPEAL NO.86 OF 2008 BETWEEN: 1.The Commissioner of Income-tax,C.R.Building, Attavara,Mangalore 2.The Income-Tax Officer|Ward— 1(1),C.R.Building,Attavara,Mangalore~ APPELLANTS (By Sri K.V.Aravind, Adv.) | AND: Islamic Academy of EducationNithyananda NagarDerlakattaMangalore — 575 O18 ~ RESPONDENT (By Sri 8.Parthasarathi, Adv.) This is filed under Section 260-A of I.T. Act, 1961|arising out of Order dated 07.09.2007 passed in ITA|No.9/72/BNG/2006, for the Assessment Year 2002-03,praying that this Hon'ble Court may be pleased to: 1.formulate the substantial questions of law stated|therein, ll.allow the appeal and set aside the order passed by theITAT, Bangalore in ITA No.9/72/BNG/2006, dated07.09.2007 confirm the orders of the Appellate)Commissioner and Income Tax Officer, Ward — 1(1),/Mangalore, in the interest of justice and equity. This Appeal coming on for final hearing this day,|KUMAR J., delivered the following: JUDGMENT The revenue has preferred this appeal challengingthe order passed by the appellate authority as well asthe Tribunal holding that the assessees investment wasless than 5% of the capital of the concern in whichinvestment is made and therefore, they cannot bedenied the benefit under Sections 11 and 12 ot the'Income Tax Act, 1961 (hereinafter referred to as ‘theAct’). The assessee — Islamic Academy of Education atMangalore, has been granted exemption under Sectionsll and 12 oft the Act. The trustees of the assessee -|Trust were the directors of Yenepoya Institute of MedicalScience Research Private Limited. The funds of the!assessee Trust were invested in the said YenepoyaInstitute of Medical Science Research Private Limited. ©The assessing officer held that the funds investedexceeds 0% of the capital and therefore, Section 13(4) of the Act is not applicable and accordingly, held that theincome of the assessee is not exempted in view ofsection 13(2)(h) of the Act. Aggrieved by the same, theypreferred an appeal to the Commissioner of Income Tax(Appeals). Betore the Appellate Authority it was|contendedthat.theTrustWaSrunningDental Institutions and the campus was set up at Derelakatte,13 kms. away from the city. The construction of thehospital at the campus was in progress. In themeantime, the trust proposed to set up a medicalcollege. As per MCI guidelines, the college was requiredto have a hospital attached to it. No other hospital waswilling to provide the needed access to the hospitalfacility. Therefore, the trust invested Rs.20,00,000/- inthe shares of Yenepoya Institute of Medical ScienceResearch Private Limited, a company owning andrunning a hospital within the Mangalore city. The trustutilized three floors of the hospital building owned bythe said company exclusively for the dental section. Thehospital was also being used by the dental and medicalstudents. The investment was made so that the trust| may have a say in the decision making process of thecompany so that the interest of the trust is notjeopardized. Therefore, they contended that the amountinvested did not exceed 5% of the share capital as thecapital of Yenepoya Institute of Medical ScienceResearch Private Limited works out to Rs.4,39,91,594/- may have a say in the decision making process of thecompany so that the interest of the trust is notjeopardized. Therefore, they contended that the amountinvested did not exceed 5% of the share capital as thecapital of Yenepoya Institute of Medical ScienceResearch Private Limited works out to Rs.4,39,91,594/- 2. It was also contended that the word ‘Capital’ isnot been defined. Therefore, the word ‘Capital’ shouldnot be restricted to share capital. In support of theircontention they also relied on various judgments ofvarious High Courts. Accepting the case of theassessee, the Commissioner of Income Tax (Appeals)held that the assessee is entitled to the benefit under|sections 11 and 12 of the Act. Aggrieved by the saidorder, the revenue preferred an appeal to the Tribunal. |They contended that the capital of that concernmentioned in Section 13(4) of the Act means sharecapital of the company. It does not include theborrowed capital. If share capital is taken into|consideration the amount of investment made by thetrust in the said company exceeds 9% and thereiore, they are not entitled for the benefit of exemption. TheTribunal aiter taking note of the various judgments has_held that the capital of the concern cannot be restrictedto only share capital. Therefore, the word ‘Capital’includes not only the share capital but even theborrowed capital. Admittedly, the investment made bythe trust in the company is less than 9% of the capitalof Yenepoya Institute of Medical Science ResearchPrivate Limited and has’ extended the benefit ofexemption. Accordingly, the appeal came to bedismissed. Aggrieved by the said order, the revenue isin appeal. 3. This appeal came to be admitted on 19.12.2008 to consider the following substantial question of law:- a.Whether the Appellate Authorities were|correct in holding that the investment ofRs.20 Lakhs made in Yenepoya Institute ofMedical Science Research Private Limited,would be less than 5% of the capital of theassessee if the borrowed amount ts treatedas capital and the investment is made infurtherance of the objective of the Trust|correct in holding that the investment ofRs.20 Lakhs made in Yenepoya Institute ofMedical Science Research Private Limited,would be less than 5% of the capital of theassessee if the borrowed amount ts treatedas capital and the investment is made infurtherance of the objective of the Trust| and exemption under Sections 11 and 12Should be granted?| 4. The facts are not in dispute. The trustee have.invested Rs.20,00,000/- in Yenepoya Institute ofMedical Science Research Private Limited. The total|capital of the said company including the borrowedcapital is Rs.4,39,91,594/- and Rs.20,00,000/- investedby the trust is less than 5%. Section 13(4) of the Act onwhich the reliance is placed reads as under: section 13(4): Notwithstanding anythingcontained in clause (c) of sub-section (1) [but|without prejudice to the provisions contained|in clause (d) of that sub-section/, in a case|where the aggregate of the funds of the trust|or institution invested in aq concer in whichany person referred to in sub-section (3) has a|substantial interest, does not exceed five percent of the capital of that concern, the|exemption under section 11 for section 12]/Shall not be denied in relation to any income.other than the income arising to the trust or|the institution from such investment, by|reason only that the [funds/ of the trust or the|institution hque been invested in a@ concern inwhich such person has a substantial interest. o. A reading of the aforesaid Section makes it clear|that if the funds invested in a concern in which anyperson referredto in sub-Section (3) of Section 13 of the. o. A reading of the aforesaid Section makes it clear|that if the funds invested in a concern in which anyperson referredto in sub-Section (3) of Section 13 of the. Act has substantial interest, does not exceed 5% of the)capital of that concern, the exemption under Sections11 and 12 of the Act shall not be denied. The word|used is ‘Capital’ of the concern, the word ‘Capital’ has.not been defined under the Act. The word ‘Capital’ isalso not defined in the Companies Act. However,reliance|WaS placedOT]thejudgmentoT|theCommissioner of Wealth Tax Vs. Lallubhai GordhandasCharitable Trust reported in (1999) 239 ITR page 448. (Guy), where it has held as under: “Exemption under S. S(1)(tl) — Propertyheld under trust — Applicability of s. 21A —|Trust made investments in share capital of|two companies exceeding five per cent of their|Share capital in which persons specified in s. 13(3) of IT Act did have substantial interest —|ASSeESSECCrustLUaAnot.entitledTo exemption under s. 5(1)(l) in view of s. 21A —-Capital of a company means share capital in|the context of provisions of second proviso to|S. DIA and not the entire assets and the'reserves of the company — Benefit of second|proviso to s. 21A was not therefore available.” That was a case where the assessee Trust claimed|exemption under Section 5(1)(i) of the Wealth Tax Act,19957. In that context, it was held that the capital of thecompany would mean share capital in context of the provisions of the second proviso to Section 21A of theWealth Tax Act and the meaning of the word ‘Capital’cannot be made mercurial by attaching it to all theassets that the company may own, nor can it includethe reserves of the company, which can at anysubsequent time can be distributed as dividend. Theinstant case is not a case under the Wealth Tax Act. | 6. The expression used is ‘Capital’ of the concern.If the intention of the legislature was to restrict it toshare capital, then they would have expressly stated so. —In the absence of any such expression, before the word‘Capital’ if we were to read ‘Share’, it amounts to Court’s.Legislating which is not permissible. Theretiore,|especially while granting the benefit to the charitableinstitution, when the legislature consciously providedfor the funds of the said Trust by way of investment andthey have fixed a limit of 9%, by placing aninterpretation which is contrary to the expressed words,said benefits cannot be denied to the assessee.,Therefore, keeping in mind the objective with whichexemption is granted, computation is to be made for investment by such charitable trust. The word “capital”of the concern should be understood as the total capitalof the concern. Both the Tribunal and the AppellateAuthority were justified in holding that the capital of theconcern with regard to a company cannot be consideredas only a share capital. Therefore, we find no merit inthe appeal. The substantial question of law is answeredin favour of the assessee and against the revenue. —Accordingly, the appeal is dismissed. Sd/- JUDGE Sd/-. JUDGE| nvj