Whether when assessee-trust spends grants received from Government on participation at trade fair outside India, it can be construed as application of trust money for charitable purposes in India - NO: ITAT

THE issues before the Bench are - Whether when the assessee-trust spends the grants received from the Government on participation at trade fair outside India, it can be construed as application of the trust money for charitable purposes in India; Whether words used in sections can be given a grammatical interpretation which renders any other section otiose; Whether the words “in India” appearing in section 11(1)(a) qualifies only the verb “applied"; Whether income of a trust can be applied outside India, as long as its charitable purposes are limited within India and Whether a trust set up after 1-
4-1952 can apply its income outside India without obtaining exemption from CBDT. And the verdict goes in favour of Revenue.

Facts of the case

Assessee is a registered society, which was set up on 9.7.1996. The trust was set up under the seal of President of India, Ministry of Commerce & Industries. The entire corpus was provided by Govt. of India to promote India Brand Overseas. Assesee spent Rs.1,95,26,111/- in participation of Hannover Fair in Germany. AO was of the opinion that since this amount was applied outside India it attracted the mischief u/s 11(1)(a) & 11(1)(b) and was taxed accordingly. On appeal, the CIT(A) observed that the assessee had spent the amount outside India and held that only charitable institutions created before 1-4-1952 were allowed to spend on international activities, unless exempted by the CBDT. Since the assessee was created after 1-4-1952 and had sought CBDT's exemption which was not granted, AO was correct in disallowing the amount. Hence, the CIT(A) confirmed the order of the AO.

On appeal, the AR contended that the assessee had participated in the fair as an agent of the Ministry. For the purpose of participation in fair, Ministry of Commerce & Industry directed its sponsored body Engineering Export Promotion Council to transfer Rs.3 crores to the assessee trust for setting up Indian Pavilion in the fair as a partner country. It was further pleaded that grant for specific purposes had been held as tide up grants and amount of Rs.19526116/- spent in attending Hannover fair in Germany at the behest of Ministry cannot be taxed by treating it as application outside India by bringing it into the mischief of section 11(1)(a), 11(1)(b) to tax it. Hence, the disallowance should be deleted.

In the counter argument, the assessee was set up after 1.4.1952, was not empowered to carry out activities outside India. As per section 11(1)((a), it was specifically stated that application had to take place in India and the word ‘application’ meant “to put the use” or “to turn to use” or “to make use” and section 11(1)(a) further put a geographical restriction for its application in India only. It was further contended that the term ‘apply’ was more or less closer to the term ‘spent’, unless there was no doubt about the authenticity of the application. He also argued that the plea of the assessee, that it had participated in Hannover Fair at the instance of the Ministry of Commerce, cannot override the Income-tax Act and there was no bar in applying for charitable purpose outside India, if there was an approval from CBDT which was not there.

Having heard the parties, the Tribunal held that,

+ it is not in dispute that amount of Rs.1,95,26,116/- was spent for participating in Hannover Fair held in Germany and for such participation, Steering Committee under the chairmanship of Commerce Secretary was constituted and modalities of participation was decided by the Organizing Committee under the Chairmanship of Additional Secretary, Ministry of Commerce & Industry, and as stated, the entire control was with the Ministry. The roles of Indian Brand Equity Foundation and Engineering Export Promotion were decided by the Organizing Committee which was chalked out by the Ministry IBEF and they had no free control over the event. IBEF was participating as agent for the Ministry. For the purpose of participation in fair, Ministry of Commerce & Industry directed its sponsored body Engineering Export Promotion Council to transfer Rs.3 crores to the assessee trust for setting up Indian pavilion in the fair as a partner country. However, a sum of Rs.1,95,26,116/- was spent for participating in Hannover Fair held in Germany and has been treated as falling in the mischief of section 11(1) by Assessing Officer whose action has been confirmed in first appeal;

+ now, it is to be seen that the words “to the extent to the which such income is applied to such purposes in India” appearing in section 11(1)(a) of the Act only require that the charitable purposes should be confined to India on the application of the income of the trust to the execution of such purposes can be outside India, appears to us to be also opposed to the natural and grammatical meaning that can be ascribed to the words. The word “applied” is a verb used in past tense. In the provision, it is used in the transitive form because it is followed by the words “to such purposes in India”. It answers three questions which would arise in the mind of the reader: apply what? applied to what? and where? The answers would then make the meaning obvious. The answer to the first question would be: apply the income of the trust. The answer to the second question will be: applied to charitable purposes. The answer to the third question will be: applied in India. Thus even grammatically speaking it seems to us that the group of words “to such purposes in India” qualifies the preceding verb “applied”. It is a case of a verb being qualified by two prepositions which follow, viz., “to’ and ‘in’. So read, it seems clear to us that grammatically also it would be proper to understand requirement of the provision in this way, that is, that the income of the trust should be applied not only to charitable purposes, but also applied in India to such purposes. The submissions of Counsel that the words “in India” qualify only the words “such purposes” so that only the purposes are geographically confirmed to India does not appear to us to be the natural and grammatical way of construing the provision. That would break or clog the natural flow of the entire group of words “to the extent to which such income is applied to such purposes in India”. The meaning sought to be attached by Counsel to the words “in India” as qualifying only the ‘purposes’ places a strain on the natural or grammatical interpretation of the group of words. If what Counsel contends is correct, then section 11(1)(c) may become redundant and otiose. If as he says, the income of the trust can be applied even outside India so long as the charitable purposes are in India, then there is no need for a trust which tends to promote international welfare in which India is interested and which was created after 1.4.1952 to apply to the CBDT for a general or special order directing that the income to the extent to which it is applied to the promotion of international welfare outside India shall not be denied the exemption, nor would it be necessary for a charitable or religious trust created before the aforesaid date to seek such an order from CBDT in respect of its income which is applied to charitable or religious purposes outside India. In our opinion, therefore, the words “in India” appearing in section 11(1)(a) and the words “outside India” appearing in section 11(1)(c) of the Act qualify the verb “applied appearing in these provisions and not the words “such purposes.”;

+ in the light of above discussion and carefully considering the relevant provisions of law, we are of the opinion that disallowance of the amount of Rs.1,95,26,116/- incurred by the assessee on account of amounts spent outside India for participating in Hannover Fair in Germany during the year under consideration cannot be treated as application of income of the trust to the execution of such purpose. Hence, in our view, disallowance in this regard could validly be made. Our view is fortified by the decision of the jurisdictional Delhi High Court in the case of DIT vs. National Association of Software. We, therefore, hold that the amount of Rs.38,29,535/- spent by the assessee-trust in Hannover, Germany cannot be considered as application of their income of the trust in India for charitable purposes;

+ therefore, action of authorities below disallowing the claim of the assessee is justified and proper. As such, while confirming the amount of disallowance, we dismiss this ground of appeal of the assessee.