2024 (11) TMI 1393 - HC - Income Tax

Denial of exemption granted u/s 11 - income from investment which is made in violation of Section 13(1)(d) - HELD THAT - In the instant case, the assessee is a charitable institution and invested the funds in the shares of the joint venture companies - The said joint venture companies are neither the Government Companies nor the Corporations established under Central or Provincial Acts. The investment was made by the assessee as a promoter in the joint venture companies. The essential nature of the investment made by the assessee was an investment in the shares of the joint venture companies. Assessee continues to hold share even beyond the cut-off date i.e., 30.11.1983. The funds invested from the assessee corporation was from the profit of previous year relevant to the assessment year 1984-85. Therefore, the assessee had violated the provisions of Section 13 (1) (d) - assessee is, therefore, not entitled for exemption u/s 11 of the Act. From perusal of Sections 11 and 13 of the Act, it is evident that the Legislature did not contemplate the benefit of denial of Section 11 of the Act, to the entire income and only the income from an investment made in violation of Section 13 (1) (d) of the Act is liable to tax. The aforesaid view has been taken in DIT (Exemption) v. Sheth Mafatlal Gagalbahai Foundation Trust 2000 (10) TMI 26 - BOMBAY HIGH COURT and in IT (Exemption) v. Agrim Charan Foundation 2001 (8) TMI 78 - DELHI HIGH COURT respectively We may examine whether the entire income from such an investment made in violation of Section 13 (1) (d) of the Act, which has accrued to the assessee has to be taxed. From perusal of Sections 11 and 13 of the Act, it is evident that the Legislature did not contemplate the benefit of denial of Section 11 of the Act, to the entire income and only the income from an investment made in violation of Section 13 (1) (d) of the Act is liable to tax. The substantial question of law framed in these Appeals is answered by stating that the investment made by the assessee in its joint venture companies is an investment made in violation of Section 11 (5) read with Section 13 (1) (d) of the Act and, therefore, the assessee is not entitled to claim the benefit of exemption under Section 11 of the Act. However, only the income from such an investment made in violation of Section 13 (1) (d) of the Act is liable to tax.

Summary

Issues:
Whether equity participation in joint venture companies can be treated as an investment in violation of Income Tax Act, leading to denial of exemption under Section 11.

Analysis:
The case involved appeals by a State Civil Supplies Corporation regarding the denial of exemption under Section 11 of the Income Tax Act for the assessment years 1994-1995 to 2001-2002. The main issue was whether the equity participation made by the corporation in joint venture companies could be considered an investment in violation of the Act. The corporation's primary objective was to ensure the supply of essential commodities to the poor and school children. The assessing officer and the Tribunal held that the investments in joint ventures fell under the category of investment made in violation of the Act, leading to the denial of exemption under Section 11.

The corporation argued that the investments were made to achieve its charitable purposes and were not driven by profit motives. They contended that the investments were in furtherance of their objectives and should not result in the denial of exemption under Section 11. The corporation cited legal definitions of "investment" and referred to precedents to support their argument.

The Revenue, on the other hand, supported the Tribunal's decision, emphasizing that the investments did not fall under the exceptions provided in the Act. They argued that once a violation of the Act is established, the entire income from such investments must be taxed. The Revenue relied on various court decisions to strengthen their position.

The Court analyzed the provisions of Section 11 and Section 13 of the Act. It noted that the legislature did not intend to deny the entire income under Section 11 and that only income from investments made in violation of the Act should be taxed. The Court referred to previous judgments supporting this interpretation and agreed with the view that only income from such investments should be taxable.

Ultimately, the Court held that the corporation's investments in joint venture companies violated the Act, leading to the denial of exemption under Section 11. However, it clarified that only income from these investments made in violation of the Act would be liable to tax. The Court partially allowed the appeals and modified the orders of the Income Tax Appellate Tribunal for the relevant assessment years.

In conclusion, the judgment clarified the treatment of equity participation in joint venture companies under the Income Tax Act, emphasizing that only income from investments made in violation of the Act should be taxable, while upholding the denial of exemption under Section 11 for the corporation.