IMPORTANT POINT
The respondent-assessee lost the benefit of exemption under Section 11 of Income Tax Act, 1961 by falling within the mischief of Section 13(3)(a) read with Section 13(1)(c)(ii) of the Income Tax Act for Assessment years 1989-90 and 1990-91.

Headnote:Income Tax Act, 1961-Section 2(15)-Charitable Institution-Section 11-Exemption of Income-Section 13-When exemption lost-Respondent institution whether validly recognised as an institution established for charitable purpose? (Yes)-Whether Assessing Officer and Commissioner of appeals took correct view that assessee lost its benefit under Section 11 by reason of Section 13(3)(a) r/w 13(1)(c) (11)? (Yes)-Result-Appeal allowed-View of Tribunal and High Court reversed.
       Held : Applying this dominant purpose test to the objects of the respondent-assessee it appears to us that there is no escape from the conclusion that it is validly recognized as an institution established for charitable purpose. (Para 19)
       These being the pre-dominant objectives, we agree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under Section 11 by treating it as an institution established for charitable purpose within the meaning of Section 2(15) of the Act. (Para 20)
       The next question which needs our attention is, whether the tribunal was right in its conclusion that the assessee did not lose the benefit of the exemption under Section 11. (Para 21)
       Two issues, therefore, arise for our consideration:
        (A) Was the sum of Rs. 70 lacs lent to Bharat S. Shah without adequate interest of security and;
        (B) Whether Bharat S. Shah can be said to be the founder of the institution within the meaning of sub-section (a) or manager within the meaning of sub-section (cc) of Section 13(3) of the Act. (Para 23)
       Held on Issue (A) : We, therefore, are of the view that the tribunal s conclusions on this issue are perverse and need to be interfered with. We affirm the conclusions arrived at by the assessing officer and the appellate authority to the effect that Rs.70 lakhs were lent to Bharat S. Shah for substantial periods during the previous years pertaining to the relevant assessment years, without interest and without adequate security. (Para 37)
       Held on Issue (B) : We are hence of the view that the expression "founder of the institution" used in Section 13(1)(a) means that the person concerned should be the originator of the institution, or at least one of the persons responsible for the coming into existence of the institution. In our judgment, contribution of money is not an inexorable test of a person being a "founder" though, it might happen often that person who originates an institution may often also fund it. In the case of the assessee, we are of the view that Bharat Shah, along with several others, founded the company as all of them were subscribers of its Memorandum of Association. It is by their acts that the company got incorporated under the provisions of the Companies Act and was thus born. May be that Bharat Shah did not contribute any money, apart from the guarantee given as the company is one limited by guarantee. That hardly makes any difference to the situation and Bharat Shah would very much answer the description "founder of an institution" used in Section 13(3)(a) of the Act. That there may be others also is irrelevant and immaterial for the purpose of this appeal. In fact, a reading of Section 13 (3) and the contrast between clauses (a) and (b) brings home the distinction made by the Act between the founder of the institution and the person who has made substantial contribution to the institution. We are, therefore, unable to accept the contention of the learned counsel for the assessee that Bharat Shah was not a founder of the institution. (Paras 49 and 50)
       Held consequently : In the result, we disagree with the view taken by the High Court and the Tribunal and affirm the view taken by the Assessing Officer and the Appellate Commissioner of Income Tax (Appeals). We hold that Bharat Shah was a founder of the assessee institution; that during the previous years relevant to the assessment years 1989-90 and 1990-91, a substantial amount of money to the extent of Rs.70 lakhs was lent to Bharat Shah without adequate security or interest. Consequently, the assessee would lose the benefit under Section 11 of the Act by falling within the mischief of Section 13(3)(a) read with 13(1)(c) (ii) of the Income Tax Act, 1961. In the result, we set aside the impugned judgments of the High Court under appeal as also the orders of the Income Tax Appellate Tribunal for the concerned assessment years and affirm the view taken by the Assessing Officer and Commissioner of Income Tax (Appeals). The appeals are allowed to the aforesaid extent, but without any order as to costs. (Paras 51, 52 and 53)

JUDGMENT

Srikrishna, J.-These appeals arise out of the judgments of the High Court of Bombay dismissing the appeals filed by the Revenue under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the Act ). Civil Appeal No.8211/2001 pertains to assessment year 1989-90 while Civil Appeal No.8212/2001 pertains to the assessment year 1990-91. Since the issues, fact and law are common, both the appeals are disposed of by this common judgment.

2. The respondent-assessee is incorporated as a Company limited by guarantee under the Companies Act, 1956 and is a non-profit service organization. For the assessment years 1989-90 and 1990-91 returns were filed by the assessee along with audited Income and Expenditure Accounts and Balance Sheets for the relevant previous years. The assessee claimed the benefit of Section 11 of the Act on the ground that it was an institution established wholly for charitable purposes within the meaning of Section 2 (15) of the Act and had been registered as such under Section 13 of the Act. The Assessing Officer (hereinafter referred to as the AO ) denied the benefit of Section 11 on two grounds. First, he held that the respondent-assessee was a Diamond bourse and as such its objects were not charitable purpose within the meaning of Section 2(15) of the Act. Secondly, he took the view that, even if so, the assessee had breached the conditions under Section 13 and as such was liable to be denied the benefit of Section 11. The assessee carried the matter in appeals to the Commissioner of Income Tax (appeals) who confirmed the orders of the A.O. Further appeals were carried to the Income Tax Appellate Tribunal. The Tribunal came to the conclusion that the objects for which the respondent-assessee was established were charitable purpose within the meaning of Section 2(15) of the Act and that there was no breach of the provisions of Section 13. In this view of the matter, the tribunal allowed the appeals of the assessee for both assessment years and reversed the orders of the two authorities below. Being aggrieved thereby, the Department carried appeals to the High Court under Section 260(A) and these appeals have been dismissed.

3. Shri R.P. Bhat, learned senior counsel for the revenue, urges two grounds in support of the appeal:

(1) The assessee was not entitled to benefit of Section 11 of the Act.

(2) Even if the assessee was to be treated as an institution entitled to the benefit of Section 11 of the Act, the assessee lost that exemption by lending Rs.70 lakhs during the previous year relevant to the assessment year 1989-90 and 1990-91 to Bharat Shah, the founder of the institution. The exemption was lost by reason of Section 13(2)(a) read with Section 13(3)(a) of the Act.

4. Section 11(1)(a) of the Act provides that income derived from property under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, shall not be included in the total income of the previous year of the person receiving the income.

5. Section 12 provides that any voluntary contributions received by an institution established for charitable purposes shall, for the purposes of Section 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of Sections 11 and 13 shall apply accordingly.

6. Section 12A provides for registration of the trust or institution in the appropriate form.

7. Section 12AA deals with the procedure for such registration.

8. Section 13 enumerates the contingences under which the exemption available under Section 11 is lost.

Section 13(1)(c)(ii) is relevant and reads as under:-

"Section 13(1) - Nothing contained in Section 11 [or Section 12] shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-

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2002 Supreme(SC) 1233

IMPORTANT POINTThe respondent-assessee lost the benefit of exemption under Section 11 of Income Tax Act, 1961 by falling within the mischief of Section 13(3)(a) read with Section 13(1)(c)(ii) of the Income Tax Act for Assessment years 1989-90 and 1990-91.

Cases Referred (1)

IMPORTANT POINT
The respondent-assessee lost the benefit of exemption under Section 11 of Income Tax Act, 1961 by falling within the mischief of Section 13(3)(a) read with Section 13(1)(c)(ii) of the Income Tax Act for Assessment years 1989-90 and 1990-91.