2016 (6) TMI 977 - AT - Income Tax

Approval under Section 10(23C)(vi) - whether the assessee-institution can invest any part of its accumulated income or the current income on the equity of non-resident subsidiary company and claim exemption as application of income? - Held that - The compliance of terms and conditions stipulated by the prescribed authority would be a matter of decision at the time of assessment. In the case before us, the assessee is an Indian institution investing its funds generated out of its charitable activity in India, outside the country. The Indian Income-tax Act provides for accumulation of its surplus funds to the extent of 15% and also provides the method of investment. The assessee invested its funds in the equity shares of a company incorporated outside India. The third proviso to Section 10(23C) of the Act clearly says that the assessee cannot invest in the equity shares of any company and the investment has to be made only as per the mode prescribed under Section 11(5) of the Act. In this case, the investment was made in violation of mode prescribed under Section 11(5) of the Act. Since the investment was made in violation of statutory provision, this Tribunal is of the considered opinion that the assessee-institution violated the statutory provision at the initial stage itself. Therefore, it is not entitled for approval under Section 10(23C)(vi) of the Act. - Decided against assessee

Summary

Issues:
1. Rejection of application under Section 10(23C)(vi) of the Income-tax Act, 1961 based on investment in a foreign company.
2. Interpretation of Section 10(23C)(vi) regarding the application of income in India.
3. Compliance with the mode of investment as per Section 11(5) of the Act.

Analysis:
1. The appeal was against the rejection of the assessee's application for approval under Section 10(23C)(vi) of the Income-tax Act due to investment in a foreign subsidiary company. The assessee argued that the subsidiary company was initially a profit organization but later converted to a non-profit entity. However, the Tribunal found that the investment in the foreign company violated the third proviso to Section 10(23C) as it was not in accordance with the prescribed mode of investment under Section 11(5) of the Act. Therefore, the assessee was not entitled to approval under Section 10(23C)(vi).

2. The debate centered on whether the application of income by the assessee institution in a foreign country, specifically Israel, could be considered compliant with Section 10(23C)(vi) which does not explicitly mention that income must be applied in India. The Departmental Representative argued that the Income-tax Act's exemption provisions are intended for application within India, and allowing income to be applied outside the country would defeat the purpose of the exemption. The Tribunal, however, noted that the Act permits accumulation of surplus funds up to 15% and provides for specific modes of investment under Section 11(5). The Tribunal concluded that the investment in a foreign company did not align with the prescribed modes of investment, leading to the rejection of the application.

3. The Tribunal emphasized that the third proviso to Section 10(23C) prohibits investment in equity shares of any company, requiring compliance with the modes of investment specified under Section 11(5) of the Act. Since the assessee's investment in the foreign subsidiary company did not adhere to the prescribed mode of investment, the Tribunal upheld the lower authority's decision to reject the application. Consequently, the Tribunal dismissed the appeal, confirming the rejection of the application under Section 10(23C)(vi) of the Act.

In conclusion, the Tribunal upheld the rejection of the assessee's application for approval under Section 10(23C)(vi) due to the investment in a foreign subsidiary company, which contravened the prescribed mode of investment under Section 11(5) of the Income-tax Act. The judgment clarified that the application of income by the educational institution must align with the statutory provisions to qualify for approval under Section 10(23C)(vi), emphasizing compliance with the specified modes of investment within the territorial jurisdiction of India.