1986 (11) TMI 4 - HC - Income Tax

Summary

Issues involved: The judgment deals with the entitlement of income tax exemption under section 11(1) of the Income-tax Act, 1961 for a public charitable institution, and the justification of the Income-tax Appellate Tribunal's decision regarding the satisfaction of requirements under section 13(2)(a) and the inapplicability of section 13(2)(h).

Entitlement to Exemption under Section 11(1): The assessee, a charitable institution, aimed at the establishment and maintenance of educational institutions. The Income-tax Officer initially denied exemption under section 11, citing that the institution's funds were lent to a firm where the founder had substantial interest, violating section 13(2)(h). However, the Appellate Assistant Commissioner and the Appellate Tribunal ruled in favor of the assessee, stating that the funds were lent for adequate interest and the firm was financially sound, thus entitling the institution to exemption under section 11.

Interpretation of Section 13: Section 13 of the Income-tax Act outlines conditions that may disqualify an institution from exemption under section 11. The provision prohibits diversion of income to benefit specific individuals, including the founder of the institution. The controversy in this case revolved around the distinction between "lending" and "investment." While lending requires adequate interest or security under section 13(2)(a), investment alone, as per section 13(2)(h), can lead to exemption denial. The Tribunal found that the transaction in question constituted lending, supported by adequate interest, thus not falling under the purview of section 13(2)(h).

Decision and Conclusion: The Tribunal's decision was upheld, affirming the entitlement of the assessee to exemption under section 11 and satisfying the conditions of section 13(2)(a) while ruling out the applicability of section 13(2)(h). The judgment favored the assessee, answering the referred questions in the affirmative. Additionally, a separate reference under the Wealth-tax Act was also decided in favor of the assessee based on a previous decision.