2002 (12) TMI 8 - SC - Income Tax

Rs 70 lakh loan by non-profit to founder without interest or security nullifies exemption under s.11; breaches s.13(3)(a) and s.13(1)(c)(ii)

SC held that the Tribunal's acceptance of the assessee's oral account was perverse and affirmed the AO and appellate authority. The assessee, a non-profit ... Entitlement of the assessee to the benefit of section 11- non-profit service organization incorporated as a company limited by guarantee - 'charitable purposes' within the meaning of section 2(15) - expenses incurred by the MMTC - Status of Bharat Shah as Founder - term 'founder of the institution' used in section 13(3)(a) - adequate security or interest and without a written agreement - HELD THAT:- The Tribunal seems to have accepted the facile explanation given by the assessee, perhaps manufactured post facto the assessment order, without critical appraisal. We are surprised that the entire agreement between Bharat Shah and the assessee was supposed to be an oral agreement, which was supposed to have been terminated orally with Bharat Shah being orally called upon to return the money with interest of 12 per cent., which he is said to have refused. In our view, this story does not ring true and could not have been accepted by any reasonable person, instructed in law. It is wholly unnatural, because one does not expect hard-nosed businessmen to part with an amount of Rs. 70 lakhs without even recording an agreement under which it is paid, nor without agreeing upon the precise terms of the lease. The story rings false from beginning to end, and yet, the Tribunal accepted it by saying, 'as regards the bona fides of the transaction, in our opinion, there is nothing to suspect the same.' The Tribunal says, 'there is a transparency about the entire transaction which nullifies any attempt to make out the transaction as something unusual and out of the ordinary.' That diamonds are not transparent, that they dazzle with a brilliance that blinds the eye, seems to have escaped the notice of the Tribunal, It undiscerningly accepted the glib explanation of the assessee, though teeming with improbabilities and strenuous on credulity. 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. In our view, the term 'founder of the institution' used in section 13(3)(a) means no more nor less than what it says. The expression 'founder' means what is understood in ordinary parlance -the originator or the person responsible for the establishment of the institution. The Concise Oxford Dictionary, new seventh edition, page 388, defines the expression 'founder' as 'one who founds an institution' and the verb 'found' to mean 'lay base of; be original builder, begin building of, set up, establish, orginate, initiate, construct, base.' The Collins Cobuild English Dictionary, new edition, page 670, gives the meaning of the term 'founder' as 'The founder of the institution, organisation, or building is the person who got it started or caused it to be built Often by providing necessary money' and the verb 'found' means 'when an institution, company, or organisation is founded by someone or by a group of people, they get it started, Often by providing the necessary money.' 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 to 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 learned counsel for the assessee that Bharat Shah was not a founder of the institution. 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 section 13(1)(c)(ii) of the Income-tax Act, 1961. Issues: (i) Whether the respondent institution (Bharat Diamond Bourse) is entitled to exemption under section 11 of the Income-tax Act, 1961 as an institution established for charitable purposes; (ii) Whether the advance of Rs. 70 lakhs to Bharat S. Shah results in loss of exemption under section 11 by operation of section 13(2)(a) read with section 13(3)(a) and section 13(1)(c)(ii).Issue (i): Whether the predominant objects of the institution qualify as charitable purposes within the meaning of section 2(15) and thus entitle it to registration and exemption under section 11.Analysis: Application of the dominant purpose test to the stated objects of the institution, including establishment of common facilities to promote diamond exports, liaison to promote sales abroad, development of an international trading centre, and ancillary commercial activities; consideration of precedent affording charity recognition where the dominant purpose is public utility even if incidental non-charitable objects exist; assessment of factual findings regarding registration and the nature and effect of ancillary income.Conclusion: The institution's predominant objects are charitable as objects of general public utility and the institution is entitled to registration and exemption under section 11; this issue is decided in favour of the assessee.Issue (ii): Whether the payment of Rs. 70 lakhs to Bharat S. Shah was a loan without adequate security or interest and whether Bharat S. Shah falls within the category of persons in section 13(3)(a) (founder of the institution), thereby attracting section 13(1)(c)(ii) to deny exemption.Analysis: Evaluation of documentary material, committee resolutions and contemporaneous correspondence concerning the payment; appraisal of the absence of a builder/lessor identified, lack of written lease terms, and subsequent conduct including arbitration award and repayment with interest; application of section 13(2)(a) regarding lending to prohibited persons without adequate security or interest; interpretation of 'founder of the institution' to include subscribers to the memorandum who originated or were responsible for establishment.Conclusion: The Rs. 70 lakhs was lent to Bharat S. Shah for substantial periods without adequate security or interest, and Bharat S. Shah qualifies as a founder of the institution within section 13(3)(a); consequently the exemption under section 11 is lost by operation of section 13(1)(c)(ii). This issue is decided in favour of the Revenue.Final Conclusion: The appellate conclusions in favour of the assessee are overturned to the extent that the exemption under section 11 is denied for the relevant assessment years by reason of the lending to a founder without adequate security or interest; the assessments and appellate orders holding otherwise are set aside and the Assessing Officer's and Commissioner(Appeals)'s view is affirmed.Ratio Decidendi: Where an institution's dominant object is of public utility the institution may qualify as charitable under section 2(15), but application of section 13 disqualifies exemption where income or property is lent, during the relevant previous year, to a person who is a founder or similar prohibited person without adequate security or interest; a subscriber/originator to the memorandum may be a 'founder' for this purpose.