2014 (7) TMI 909 - HC - Income Tax

Exemption u/s 11 and 12 Investment being 5% - Whether the Appellate Authorities were correct in holding that the investment made would be less than 5% of the capital of the assessee if the borrowed amount is treated as capital and the investment is made in furtherance of the objective of the Trust and exemption u/s 11 and 12 should be granted Held that - If the funds invested in a concern in which any person referred to in section 13(3) has substantial interest, does not exceed 5% of the capital of that concern, the exemption u/s 11 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. Relying upon Commissioner of Wealth Tax Vs. Lallubhai Gordhandas Charitable Trust 1999 (9) TMI 85 - GUJARAT High Court - especially while granting the benefit to the charitable institution, when the legislature consciously provided for the funds of the Trust by way of investment and they have fixed a limit of 5%, by placing an interpretation which is contrary to the expressed words, benefits cannot be denied to the assessee - computation is to be made for investment by charitable trust - The word capital of the concern should be understood as the total capital of the concern - Both the Tribunal and the Appellate Authority were justified in holding that the capital of the concern with regard to a company cannot be considered as only a share capital no substantial question of law arises for consideration Decided against Revenue.

Summary

Issues:
1. Interpretation of the term "capital" in relation to exemption under Sections 11 and 12 of the Income Tax Act, 1961.
2. Whether the investment made by the trust exceeds 5% of the capital of the concern.
3. Applicability of Section 13(4) of the Act in determining exemption eligibility.

Issue 1: Interpretation of the term "capital"
The case involved a dispute over the interpretation of the term "capital" in the context of Sections 11 and 12 of the Income Tax Act, 1961. The assessing officer contended that the investment made by the trust in a company exceeded 5% of the capital, thereby denying the income tax exemption under Section 13(2)(h). The trust argued that the term "capital" should not be limited to share capital and relied on various High Court judgments to support their claim. The Commissioner of Income Tax (Appeals) accepted the trust's argument, emphasizing that the term "capital" should not be restricted to share capital alone.

Issue 2: Investment exceeding 5% of the capital
The main contention was whether the investment made by the trust in the company exceeded 5% of the capital, as stipulated in Section 13(4) of the Act. The trust invested in a company owning a hospital, utilizing part of the facility for educational purposes. The revenue authorities argued that if share capital alone was considered, the investment exceeded the threshold. However, the Tribunal held that the term "capital" should encompass both share capital and borrowed capital. As the trust's investment was less than 5% of the total capital of the company, the exemption under Sections 11 and 12 was granted.

Issue 3: Applicability of Section 13(4)
The appeal raised the question of whether the investment made by the trust in the company, which was less than 5% of the total capital, qualified for exemption under Sections 11 and 12. Section 13(4) of the Act was crucial in determining the eligibility for exemption based on the percentage of funds invested in a concern. The Tribunal and the Appellate Authority both ruled in favor of the trust, emphasizing that the term "capital" should not be narrowly construed to only include share capital. The judgment highlighted that the legislative intent was to grant benefits to charitable institutions, and therefore, a broader interpretation of the term "capital" was warranted.

In conclusion, the High Court of Karnataka dismissed the revenue's appeal, upholding the interpretation that the term "capital" in the context of exemption under Sections 11 and 12 should encompass the total capital of the concern and not be restricted to share capital alone. The judgment emphasized the importance of considering the legislative intent while interpreting tax provisions, especially concerning charitable institutions.