2019 (3) TMI 579 - HC - Income Tax

Exemption u/s 11(1)(a) - purchasing the leasehold rights in respect of the immovable property, an Auditorium - as per AO advance by the Assessee Trust did not crystalise in any application of income by the Assessee during the year itself and was in suspended animation and, therefore, the said expenditure or outgo of money would not amount to application of income by the Assessee during the relevant year - denial of exemption on an assumed distinction between the application and investment - whether the investment can also amount to application or not? - HELD THAT - Assessee in the present case while making the advance of ₹ 52.00 lakhs in question for purchase of immovable property in question even on lease basis, cannot be said to have not applied its income during the year in question for the charitable purposes within the meaning of Section 11(1)(a) of the Act and, therefore, the Assessee was clearly entitled to exemption under the said provision in respect of the said investment in immovable property. We cannot agree with the contention of the learned counsel for the Revenue that such advance did not crystalise in any application of income and was in suspended animation as we have already indicated above that nothing contrary was brought on record by Revenue that this advance did not crystalise in any application of income in favour of the assessee during the year or even subsequently. On the contrary, it was contended at the bar by the Assessee that the leasehold rights were secured by the Assessee with the said investment and building on the said leasehold land is under construction as of now. No hesitation in holding that the advance or investment in the said lease hold property by the Assessee s Charitable Trust in the year in question could be held to be application of income within the meaning of Section 11(1)(a) of the Act and therefore, the Assessee was entitled to the exemption.- Decided in favour of assessee

Summary

Issues Involved:
1. Whether the advance given for the purchase of property can be considered as 'application of income' within the ambit of Section 11 of the Income Tax Act.
2. Interpretation of the provisions in Section 11 of the Act regarding direct application of income and indirect benefits derived from such application.
3. Assessment of shortfall in the application of income earned and its taxability within the scope of Section 11 of the Act.

Issue-wise Detailed Analysis:

1. Whether the advance given for the purchase of property can be considered as 'application of income' within the ambit of Section 11 of the Income Tax Act:
The Assessee, a charitable trust, advanced ?52.00 lakhs for purchasing leasehold rights in an immovable property intended to serve the Trust's objectives. The Assessing Officer treated this advance as an 'investment' rather than 'application of income,' denying the exemption under Section 11(1)(a). The Commissioner of Income Tax (Appeals) reversed this decision, holding that the advance was in furtherance of the Trust's objectives and constituted 'application of income.' The Tribunal, however, sided with the Assessing Officer, prompting the Assessee's appeal to the High Court. The High Court concluded that the term 'application' is of wider import than 'expenditure,' citing various case laws, including the Supreme Court's decision in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax, which supports the view that investment in immovable property for charitable purposes qualifies as 'application of income.' The High Court held that the advance of ?52.00 lakhs was indeed 'application of income' and thus eligible for exemption under Section 11(1)(a).

2. Interpretation of the provisions in Section 11 of the Act regarding direct application of income and indirect benefits derived from such application:
The High Court examined whether the Tribunal's interpretation of Section 11 was correct, particularly regarding direct application versus indirect benefits. The Assessee argued that the investment in immovable property, intended to generate rental income for charitable purposes, should be considered 'application of income.' The Court referred to judicial precedents, including the Delhi High Court's decision in Director of Income Tax (Exemptions) v. Maharaja Agarsen Technical Education Society, which supported the view that amounts paid for acquiring capital assets for charitable purposes are covered under Section 11(1)(a). The High Court found that the Tribunal's narrow interpretation was incorrect, emphasizing that the scheme of Section 11 aims to advance charitable causes by allowing Trusts to employ their funds for such purposes.

3. Assessment of shortfall in the application of income earned and its taxability within the scope of Section 11 of the Act:
The Tribunal had sustained the assessment of a shortfall in the application of income, arguing that the advance did not crystallize into 'application of income' during the relevant year. The High Court disagreed, noting that the Revenue failed to provide evidence that the advance was not used for the Trust's objectives. The Court emphasized that investment in immovable property for charitable purposes, even if not immediately utilized, still qualifies as 'application of income.' The High Court rejected the Revenue's contention that the advance was in 'suspended animation,' affirming that the Assessee was entitled to the exemption under Section 11(1)(a).

Conclusion:
The High Court answered the substantial questions of law in favor of the Assessee, holding that the advance of ?52.00 lakhs for leasehold rights in immovable property constituted 'application of income' under Section 11(1)(a) and was thus eligible for exemption. The appeal was allowed, and the Tribunal's decision was reversed.