2016 (6) TMI 299 - AT - Income Tax

Application for approval under Section 10(23C)(vi) rejected - 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 fact remains that 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 by the Chief Commissioner.
2. Interpretation of Section 10(23C)(vi) regarding the application of income for educational institutions.
3. Investment of funds in equity shares of a foreign subsidiary company.
4. Compliance with statutory provisions under Section 11(5) of the Act for investment by educational institutions.

Analysis:
1. The appeal was against the Chief Commissioner's order rejecting the application under Section 10(23C)(vi) of the Income-tax Act, 1961. The assessee, an educational institution, applied for approval, emphasizing its non-profit motive. The rejection was based on investment in a foreign subsidiary company, Karunya Israel Ltd., and the application of funds outside India.

2. The assessee argued that Section 10(23C)(vi) does not mandate income application specifically in India. The Ld. counsel cited the American Hotel case, emphasizing application to the institution's objectives without the requirement of being in India. The debate centered on the interpretation of the Act's language and the absence of "in India" in Section 10(23C)(vi).

3. The Departmental Representative contended that the exemption under the Act is intended for charitable purposes within India. Investing in a foreign company, as done by the assessee, was seen as a violation of the Act's provisions. The Tribunal deliberated on the mode of investment as per Section 11(5) and found the investment in a foreign company to be non-compliant.

4. The Tribunal analyzed the American Hotel case and the specific provisions of Section 10(23C)(vi) regarding the application of income by educational institutions. It was concluded that investing in a foreign subsidiary company violated the prescribed mode of investment under Section 11(5) of the Act. As a result, the Tribunal upheld the lower authority's decision to reject the application, as the assessee failed to comply with statutory provisions.

In summary, the Tribunal confirmed the rejection of the assessee's application under Section 10(23C)(vi) due to non-compliance with the prescribed mode of investment by investing in a foreign subsidiary company. The judgment emphasized the importance of adhering to statutory provisions for educational institutions seeking approval under the Income-tax Act.