Delhi High Court
Director Of Income Tax (E) vs Indo French Centre on 30 October, 2014
$~1 & 2
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: October 30, 2014
+ ITA 427/2014 & 428/2014
DIRECTOR OFINCOME TAX (E)
..... Appellant
Through Mr.Kamal Sawhney, Sr. Standing
Counsel
versus
INDO FRENCH CENTRE
..... Respondent
Through Ms.Shashi M.Kapila, Advocate with
Mr.Sushil Kumar, Advocate
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
These two appeals by the Revenue impugn a common order dated
31.12.2013 passed by the Income Tax Appellate Tribunal ('Tribunal' for
short) pertaining to Indo French Centre for Promotion of Advanced
Research. The appeals relate to assessment years 2008-09 and 2009-10.
2. Two contentions have been raised on behalf of the Revenue in these
appeals. Firstly, there was violation of Section 13(1)(d) read with Section
11(5) of the Income Tax Act, 1961 ('Act' for short) as funds of the
respondent Centre were deposited with a French financial services group,
namely, Crédit Industriel et Commercial, Paris, France and interest of Rs.
11,37,438/- and Rs.9,37,722/- (upon conversion) was earned in the
assessment year 2008-09 and 2009-10, respectively. The second issue relates
to application of proviso to Section 164(2) of the Act because of violation of
provisions of Section 13(1)(d) of the Act and accordingly the respondent-
Centre should be taxed on the maximum marginal rate.
3. In order to appreciate the contentions, certain facts relating to
formation of the Centre and the source of funds is required to be elucidated:-
(a) Indo French Centre for Promotion of Advanced Research was
formed in India, jointly by the Government of India and Government of
France based on the principle of reciprocity and parity. The said Centre was
registered as a Society under the Societies Registration Act, 1860 on
16.04.1986 and has been recognized as a Scientific and Industrial Research
Organization by the Department of Scientific and Industrial Research
(DSIR).
(b) As per the bilateral agreement between the Governments of India
and France, the decisions of the respondent-Centre are subject to scrutiny of
both Governments.
(c) The Government of India had assured exemption from payment of
taxes to the then proposed Centre by their letter dated 08.06.1985.
Thereafter, there was exchange of correspondence and it was mutually
decided by the two Governments that the said Centre would be exempt from
payment of income tax. No custom duties would be payable by the said
Centre under the Indian Laws for import of scientific equipment.
(d) The Government of France had agreed to make contribution to the
said Centre in the following manner and mode:-
"1.1 Direct contribution to be transferred and placed at the
disposal of the centre according to the approved budget.
1.2 Equipment etc. as may be given, from time to time, by
the French side.
1.3 Expenses in France to be borne by the France side on
visits of Indian scientists to France.
1.4 Air Fare for French scientists visiting India.
1.5 Any other expenses which the French side agree to
bear."
(e) This was accepted by the Government of India. Pursuant to the
aforesaid agreement, the Reserve Bank of India had permitted/ allowed
opening of a foreign currency account by the respondent Centre in France
with a French Bank in Paris. The Reserve Bank of India by letters dated
04.07.1988 and 05.09.1988 granted the following permissions:-
"i. Grants received from the French Govt. may be credited
to the account freely.
ii. Interest on balance may be credited to the account freely.
iii. Debit in respect of bank charges and repatriation to
India may be made freely.
iv. Debits for the expenses in connection with conducting of
research programs in French Laboratories and joint
workshops, seminars abroad may be made freely.
v. All other transactions will require the prior approval of
Reserve Bank of India.
1.5 As per the arrangement the grants in aid from the Govt.
of France is to be deposited in the bank account in France
and after meeting the expenses incurred in France, balance
grant in aid is freely remittable to India. "
4. Keeping in view the aforesaid factual position, the Tribunal in the
impugned order has held that the assessee Society had not parked any of
their funds in Crédit Industriel et Commercial, Paris, France either as an
investment or as deposit. Grants from the Government of France, which
were parked in the said account, as controversy had arisen because of
amendments in the Act, on whether the income of the respondent Centre
would become taxable or not. The respondent Centre was earlier exempt
under Section 35(1)(ii) of the Act for all years prior to 01.04.2003. Albeit,
after the said provision was withdrawn and become inapplicable, the grant
by the French Government could not be utilized as per the mandate of the
French authorities, for insistence and enunciation that the Centre should
remain a non-taxable entity/institution.
5. In such circumstances, the respondent Centre approached the
Government of India, the Ministry of Finance, the Department of Revenue,
for grant of exemption from taxation under the Act. Pursuant to the request
made, the Central Board of Direct Taxes has issued order dated 12.10.2010,
which reads:-
"In exercise of the powers conferred by proviso to clause
(c) of sub-section (1) of section 11 of the Income Tax Act,
1961 (43 of 1961), the Central Board of Direct Taxes
hereby directs that the income derived from property held
under the trust known as "Indo-French Centre for the
Promotion of Advanced Research, New Delhi" shall not be
included in the total income of the persons in receipt of
such income to the extent to which such income is applied
in accordance with the objects of the Indo-French Centre
for the promotion of Advanced Research, New Delhi.
This order shall have effect for the period covered by
Assessment Years 2005-06 to 2009-10.
The claim as above of the applicant regarding the extent to
which such income is applied to such purposes outside
India will be subject to verification during the course of
assessment proceedings as per the Income Tax Act, 1961."
(emphasis supplied)
6. The order by the CBDT, the highest authority under the Act, in plain
and simple English states that income derived from property held under trust
shall not be included in the total income of the respondent Centre to the
extent such income is applied in accordance with the objects of the Centre.
Thus the order affirms and accepts that the objects were charitable and in
categorical and positive terms, the order grants exemption from entire
income held under trust applied in accordance with the objects of the Centre,
without any other stipulation, except in the last paragraph. The said
paragraph states that even the income applied outside India could be exempt
but would be verified during the course of assessment proceedings, as per
the Act. The exemption is for the period covered by assessment years 2005-
06 to 2009-10. Thus, the two assessment years in question are covered.
7. True and full legal effect and tax exemption consequence to the said
order must be and should be given. In other words, the CBDT in view of the
peculiar facts of this case, by a special order, which is not applicable to any
other assessee, has held that the income derived from a property held under
trust would not be included in the total income of the person concerned i.e.
the respondent Centre, provided it is applied in accordance with the objects
of the Centre. This income, even when applied abroad, has to be excluded,
subject to the verification stipulations mentioned in the last paragraph. Once
we give proper effect and recognition to the order dated 12.10.2010, the
entire income derived from property held under trust would be exempt. It is
not averred that the income derived from the property held under trust was
not applied in accordance with the objects of the Centre. Application of
income is different, from accrual. Thus, the interest earned applied for the
purpose/objects of the Centre will not form a part of the total income.
Therefore, in respect of the said income, there would be no violation of
Section 11(5) read with Section 13(1)(d) of the Act.
8. It cannot be argued and stated by the Revenue that the CBDT was not
aware of the factual position that the respondent Centre is a joint
collaboration between the Government of India and Government of France
and as per the joint agreement, grants/aid of the French Government for the
benefit of the Centre were kept in a French Bank Account. RBI had also
granted permission. These facts, it must be held, were ascertained and
known before the exemption was granted by order dated 12.10.2010. It is
normal and natural that some interest may accrue on the amount deposited.
This would endure to the benefit of the Centre as additional funds would be
available. It is not a case of wrongly parking and misuse. The very fact that
the said order mentions about application of income for such purposes
outside India clearly shows that the CBDT was fully conscious and aware.
The entire income must be used and applied in terms of the charitable
objects.
9. In view of the aforesaid position, which is peculiar to the facts of the
present case as a specific exemption stands granted, we do not see any
reason to interfere with the order of the Tribunal on the first aspect.
10. The second submission will also falter in view of the above findings.
We notice that as per the findings of the Assessing Officer, the respondent
Centre had excess of expenditure over income in the Profit and Loss
Account for the assessment year 2008-09. In other words, the Centre had
suffered a loss. However, the Assessing Officer held that the interest in the
foreign bank account would be taxable at the maximum marginal rate.
Because of the said finding, benefit of carry forward to the assessment year
2009-10 was denied. In any case, once we hold that the exemption granted
by the order of the CBDT dated 12.10.2010 would apply, Section 164(2) of
the Act would not be applicable.
The appeals are accordingly dismissed.
SANJIV KHANNA, J
V. KAMESWAR RAO, J
OCTOBER 30, 2014/km
