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 company limited by guarantee, lent Rs. 70 lakhs to a founder without interest or adequate security during relevant years; this conduct falls within the mischief of s.13(3)(a) read with s.13(1)(c)(ii), causing loss of exemption under s.11. The Court interpreted "founder" in ordinary parlance to include subscribers who caused the company's incorporation, rejecting the assessee's contention to the contrary.

---

---

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.

---