Trust can have Foreign Expenditure and claim exemption in Income Tax ITAT Tata Trust

ITAT allows exemption of Rs 220 cr to Tata Education & Development Trust

Section 11 of Income Tax Act, 1961 pertains to Income from property held for charitable or religious purposes. According to Section 11, any income derived from the property held under trust for charitable or religious purposes shall not form part of the total income. The income which shall not form part of the total income of the trust includes following:

Any income derived from the property held under trust for charitable or religious purposes provided such income is utilised for charitable or religious purposes in India.
Any income derived from property held partially under trust (incorporated before commencement of Income-tax Act) provided such income is utilised for charitable or religious purposes in India.
However if such income (as mentioned in the above 2 points) is not utilised for these purposes but accumulated or set apart for the purpose of its application for these purposes then also such income shall not form part of the total income.
Maximum of 15% of the total income derived from such property is allowed to be accumulated or set apart.
Any income which is derived from a property held under the trust created on or after April 1, 1952, only for charitable purpose and is tending to promote international welfare in which India is interested.
Such income is exempted to the extent to which such income is applied for welfare purposes outside India.
However, in case of a charitable or religious trust which is established before April 1, 1952, exemption is available if the income is applied to such welfare purposes outside India.
Any income in form of voluntary contributions which are made with the specific direction that these contributions shall form part of corpus of a trust or institution shall not form part of the total income.

In a major relief for Tata Education and Development Trust, the Income Tax Appellate Tribunal (ITAT) bench consisting of Justices PP Bhatt, President, ITAT, on 24^th July, 2020 ruled in favour of the trust in their appeal against commissioner income tax (CIT) appeal order wherein a demand of more than Rs.220 crore was levied by the tax department .ITAT also stayed the matter of that demand without any minimum pay.

Issue in Appeal

The appeal, raised by the assessee is on the issue- “whether or not the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in denying deduction for the income applied outside India under section 11(1)(c) of the Income Tax Act, 1961, even though the appellant had an order from CBDT as required by the proviso to Section 11(1)(c) for assessment years 2011-12 and 2012-13
Assessee trust had spent monies for creation of endowment funds, through contribution at the Cornell University USA, for scholarship of Indian students, as well as for foreign collaboration project between Indian and Cornell scientists, and grant of financial assistance to Harvard Business School for construction of a new executive building named Tata Hall.
The question is whether the amounts so spent by the assessee trust will be treated as permissible application of the trust income, and, accordingly, will the assessee be eligible for tax exemption, under section 11, in respect of that income.

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Facts of the Case:-

The assessee is a public charitable trust registered under Maharashtra Public Trust Act 1950.
It is also a charitable institution under the Section 12A of the Income Tax Act, 1961.
In both the assessment years (2011-12 and 2012-13), the assessee had returned NIL income, but had also claimed amounts remitted to the educational universities outside India as application of income under section 11(1)(c).
During the scrutiny assessment proceedings, the Assessing Officer (AO) noticed that in terms of proviso to Section 11(1)(c), unless the CBDT, specifically approves that the income derived from property held under trust, applied for the purposes of specified under section 11(1)(c)(i) and (ii) shall be excluded in the total income of the person in receipt of such income, then it shall not be excluded from the total income of the person in receipt of such income.

The AO further noticed that no such approval from the CBDT was granted.
Therefore, the amounts remitted abroad for application of trust funds were required to be included in the income of the assessee and those amounts were thus added to the income of the assessee trust.
Aggrieved, assessee carried the matter in appeal before the CIT(A).
As the appeal was pending before the CIT(A), the CBDT, granted approval under section 11(1)(c), which was specifically stated to have effect for the period covered by assessment years 2009-10 to 2016-17
The approval permitted application of funds, by the trust, for charitable purposes:-
for grant of creation of endowment funds through contribution at the Cornell University USA, for scholarship of Indian students as well as for foreign collaboration project between Indian and Cornell scientists
grant of financial assistance to Harvard Business School
for construction of a new executive building named Tata Hall, which included US $ 43.75 million for the assessment year 2011-12 and US $ 5 million for the assessment year 2012-13.
Based on this approval issued by the CBDT, the AO rectified, under section 154 of the Act, the assessment orders for the assessment year 2011-12 and 2012-13.
The additions in question, i.e. on account of application of funds abroad without specific approval of the CBDT- Rs 197.79 crores for the assessment year 2011-12 and Rs 25.37 crores for the assessment year 2012-13, were thus deleted by the AO himself.

However, CIT(A) disregarded these rectification orders by observing that the rectification order under section 154 does not merit consideration in this appeal as the present appeal has been filed against the order of the AO passed under section 143(3)
He proceeded to hold that the CBDT’s approval was not retrospective in nature and, therefore, it cannot apply to the assessment year 2011-12 and 2012-13.
The impugned additions were restored by the CIT(A), even though, based on the CBDT approval, the AO himself had deleted those additions in the rectification proceedings.
Aggrieved by the action of the CIT(A), the assessee appealed before ITAT.

Proceedings of ITAT

Can the CIT(A) restore the additions when the same was subsequently deleted by the AO?

According to the ITAT, when the very disallowance of exemption, which was agitated in appeal, stood deleted, it was not open to the CIT(A) to judge on the correctness of the disallowance.
Once a grievance does not survive because of some other order having been passed giving relief by some other authority, it is not open to the CIT(A) to adjudicate on that grievance.

Once the disallowance of exemption was deleted by the AO, by way of a rectification order which stood merged with the assessment order, it was not open to the CIT(A) to still examine the merits of such a disallowance of exemption and declare his legal opinion on the same.
Even if the CIT(A) was personally of the opinion that the rectification order should not have been passed, once such a rectification order was passed, he must abide by the discipline of a quasi-judicial structure and respect the order as it stands.
Even if CIT(A)’s reservations, had any merits, the remedy was not with him.
Therefore, the very adjudication on denial of exemption, in respect of monies spent on application of charitable objectives of the appellant trust outside India, by the CIT(A) was incorrect in law and was liable to be set aside.

Power of granting approval for the purpose of application of income lies with CBDT

Once an authority, which has the jurisdiction to pass an order, passes an order, unless that order is set aside by the process of law, it cannot be ignored.
The powers of granting approval for the purpose of application of income of the trust, for objects of the charitable institution, vests with the CBDT, and, in exercise of these powers, the CBDT had granted the approval.
It was, therefore, not open to the CIT(A) to question, directly or indirectly, the decision of the CBDT in granting approval, under section 11(1)(c), to the assessee.
In any case, whether the approval was justified on merits or not, as long as that order subsisted, it was not open to the CIT(A) to ignore the same.

Observations of the ITAT pertaining to Departmental Representative’s stand that the approval granted by the Board was a conditional approval:

Section 11(1)(c)(i) provides that so far as any income from any property held under trust (created on or after 1st April 1952) is concerned, as long as such income is applied for a charitable purpose which tends to promote international welfare, in which India is interested. Such income is exempted to the extent to which such income is applied for welfare purposes outside India
There is, however, a common proviso to Section 11(1)(c) (i) and 11(1)(c)(ii) which lays down the condition that the CBDT, by general or special order, can direct that such applied income shall not be included in the total income of the person in receipt of such income.
A plain reading of the CBDT approval would show that only condition attached to in the CBDT approval, is that the claim of the applicant (regarding contributions made to Cornell University USA and Harvard University USA) to the extent such income is applied outside India will be subject to verification during the course of assessment proceedings.
While it is true that, the approval of the CBDT does require verification in the assessment proceedings, but that verification is only with respect to “the extent to which such income is applied for such purposes outside India”.

It is also important to bear in mind the fact that the approval of the CBDT does require verification, needs to be read in conjunction with paragraph 1 of the CBDT approval which sets out amounts up to which contributions are permitted by the CBDT.
Paragraph 1 of the approval would show that for the assessment years 2011-12 and 2012-13, permitted contribution is US $ 43.75 millions and US $ 5 millions respectively.
Where the income of the trust is applied for such purposes upto the specified amount, the actual application of income, and not the amount so specified in the CBDT approval, will be covered by exemption available under section 11(1)(c).
Where the actual application of income of the trust exceeds the permitted contribution as per the CBDT approval, the exemption under section 11(1)(c) will be available only to the extent specified in paragraph 1 of the CBDT approval. That is the limited verification, in terms of the CBDT approval, which is required to be made by the AO.

When ITAT asked, as to what verifications would the AO like to carry out, learned Departmental Representative, as also the AO, submitted that the verification required is for the purposes of ensuring that such an application of income of the trust outside India, i.e. by contributions to the Cornell University and Harvard University, tend to promote “international welfare in which India is interested”.
That exercise cannot be conducted by the AO (for the reasons given above), nor does the scheme of the Act, or facts of the case permit so.
AO has in the other assessment years covered by the same CBDT approval, allowed the benefit of Section 11(1)(c) in the course of scrutiny assessment proceedings under section 143(3).
Therefore, it was accepted that either the verification about promotion of international welfare in which India is interested was not required as the same was done by the CBDT, or, in the opinion of the AO, the application of income outside India as such tends to promote the international welfare in which India is interested.

Observations of the ITAT pertaining to plea of the AO that the verification could not be carried out in these two years:-

The order under section 154 is in respect of the assessment order under section 143(3) and the explanation and material before the AO were the same in all the assessment years – the assessment years in which he allowed the exemption claimed and the assessment years in which he did not allow the exemption claimed.
In all the assessment years, he has quantified the amounts of application of income outside India by contribution to these two universities, and that is the only verification that the AO has carried out.
A plain reading of all these assessment orders would show, there was not even whisper of a discussion, about the manner in which the contributions made by the assessee trust tend to promote the international welfare in which India is interested.
In the light of the above discussions, the principles of consistency apply to the income tax proceedings and, in the light of these principles of consistency, it was not open to the AO to decline the benefit of section 11(1)(c), in respect of application of income of the trust outside India by making contributions to Cornell University USA and Harvard University USA, only for these two years, when, on the same set of facts, the benefit of section 11(1)(c) has been allowed for all other years.

Observations of the ITAT pertaining to stand of the CIT(A) that the approval granted by the CBDT is not specifically stated to be retrospective in nature, and, therefore, it cannot be given retrospective effect.

ITAT did not see any merits in this line of reasoning.
Whether the expression “retrospective effect” is specifically used in the approval or not, when it is specifically stated that “the order shall have the effect for the period covered by assessment years 2009-10 to 2016-17”, there is no escape from the position that the order applies to the period so covered from the assessment years 2009-10 to 2016-17.

Observations of the ITAT pertaining to CIT(A)’s stand that since application for approval under section 11(1)(c) is made only on 31st March 2015, it cannot apply for the assessment year 2011-12 (and 2012-13)

CIT(A)’s stand depends on the assumption that the prior application for the CBDT’s approval for application of income of the trust “outside India” is required but then this assumption is not correct as no such time limit is stipulated under section 11(1)(c).
Wherever time limits for taking approvals of the prescribed authorities are stipulated, the legislature has specifically provided for the same.
In the absence of a time limit prescribed by the statute, no matter how desirable – even if that be so, it cannot be inferred.
Thus, a time limit for making application for approval under section 11(1)(c) cannot be inferred, and, in the absence of such a time limit, it could not be said, as was impliedly held by the CIT(A), that an application for approval under section 11(1)(c) cannot be made after the end of the relevant assessment year.

Observations of the ITAT pertaining to reason of the CIT(A) for rejecting the exemption, that the exemption under section 11(1)(c) was subject to necessary verification during the assessment proceedings and that verification was not done.

The only verification required, was with respect to “the extent to which such income is applied for such purposes outside India” and that verification was not even in dispute as all the related payment details and RBI remittance approvals have already been filed before the AO, at the assessment stage, and the same have not been faulted at all.
When the AO appeared before ITAT in person, he did not even dispute that; all he wanted to verify was as to how the contributions to Cornwell University USA and Harvard University USA tend to promote the international welfare in which India is interested, but then, for the detailed reasons set out earlier in the order, that is what he cannot be permitted to do, as it falls beyond the call of his duty.
ITAT thus rejected this plea of the CIT(A) as well

Conclusions of ITAT

ITAT was of the view that the CIT(A) was in error in upholding the denial of claim of the assessee for exemption in respect of application of income of the trust outside India, by way of contributions made to Cornell University USA and Harvard University USA and amounting to Rs 197,79,27,500, for the assessment year 2011-12, and of Rs 25,37,00,000 for the assessment year 2012-13. ITAT decided this issue in favour of the assessee and thus upheld the plea of the assessee, and deleted the resultant disallowance of claim of exemption.

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