2025 (3) TMI 1124 - HC - Income Tax

Charitable trust's share purchase in non-profit subsidiary ruled as charitable activity, not taxable investment under Section 11(5)

Delhi HC held that a charitable trust's purchase of shares in BARC, a Section 25 company and 100% subsidiary, did not constitute 'investment' under ... Exemption u/s 11 - transactions of purchasing shares and investment by the way of Share Application Money in BARC,a 100% subsidiary of the Assessee - HELD THAT:- BARC, being a company registered u/s 25 of the Companies Act, is legally prohibited from distributing any dividends or profits to its shareholders. Additionally, in the event of liquidation, Memorandum of Association of BARC mandates that any surplus must be transferred to another company registered u/s 25 of the Companies Act with similar objectives, thereby negating any possibility of personal gain or profit for the Assessee from its deployment of funds. Therefore this Court finds merit in the Assessee’s submission that the deployment of funds by the Assessee in BARC, by way of purchase of its shares, was – prima facie – not for earning any income or profit, but solely to meet the Assessee’s objectives, as mandated by Government policy, following the TRAI Recommendations. Whether the deployment of funds by the Assessee in the shares of BARC constitutes an ‘investment’ within the meaning of Section 11 (5) read with Section 13 (1) (d)? - Scope and meaning of the term 'investment' - Essential feature of an investment is – the intention to earn a return, profit, or income from the money laid out. The term ‘investment’ in both common parlance and legal sense implies an expenditure with the objective of generating a financial return or profit. We note that in Sir Sobha Singh Public Charitable Trust [2001 (2) TMI 78 - DELHI HIGH COURT] had discussed the scope of the term ‘investment’ and highlighted that the ‘intention to earn income’ is central to the concept of investment. As in Dr. Vikhe Patil Foundation [2013 (12) TMI 1157 - BOMBAY HIGH COURT] had addressed the issue as to whether a transaction involving the purchase of shares in cooperative banks by a charitable trust constituted an ‘investment’ u/s 11 (5) held that the investment in shares of cooperative banks was a precondition of raising of loans and it was therefore not an investment as normally understood. From the foregoing discussion, we are of the view that the essence of ‘investment’ lies in the intention and the capacity of the expenditure to yield income, profit, or return. The consistent judicial view is that mere deployment of funds does not amount to an investment unless it is aimed at earning income or return. It is evident that the Assessee had invested funds in the shares of BARC, a not-for-profit company, which is legally prohibited from distributing any dividends or profits. Even on liquidation, the surplus of BARC would be transferred to another charitable entity and not to its shareholders. Thus, no financial return or gain was possible from the Assessee’s deployment of funds in BARC. As a sequitur to the aforesaid, we are of the opinion that the application of funds by the Assessee in BARC does not qualify as ‘investment’ u/s 11 (5) r.w.s. 13 (1) (d) of the Act, inasmuch as the said deployment was not intended to yield income, profit, or return, but was made pursuant to a statutory and regulatory obligation to further the Assessee’s charitable objectives. Since we have held that there was no violation of Section 11 (5) read with Section 13 (1) (d) committed by the Assessee herein; consequently, the decision of the CIT (A), upheld by the learned ITAT, to allow the exemption to the Assessee u/s 11 and 12 of the Act, is also affirmed. Decided against revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the transactions of purchasing shares and investment by way of Share Application Money made by the Assessee fall within the meaning of Section 11(5)(vii) of the Income Tax Act, 1961.Whether the Assessee is entitled to exemption under Sections 11 and 12 of the Income Tax Act, 1961, despite the alleged violation of Section 13(1)(d) of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Compliance with Section 11(5) of the ActRelevant legal framework and precedents: Section 11(5) specifies the forms and modes of investment for income derived from property held under trust for charitable purposes. Section 13(1)(d) restricts exemption for income from investments made otherwise than in the prescribed modes.Court's interpretation and reasoning: The Court examined whether the deployment of funds in BARC was an investment aimed at generating income or profit. The Court emphasized that the term 'investment' implies an intention to earn a return, profit, or income.Key evidence and findings: The Court noted that BARC is a not-for-profit entity, legally prohibited from distributing dividends or profits. The Assessee's deployment of funds was not for earning income but to fulfill its charitable objectives as mandated by government policy and TRAI recommendations.Application of law to facts: The Court found that the Assessee's deployment of funds in BARC did not constitute an 'investment' as it was not intended to yield income or profit. The funds were deployed to meet regulatory obligations and further the Assessee's objectives.Treatment of competing arguments: The Revenue argued that the transactions constituted investments violating Section 13(1)(d). The Assessee contended that the deployment was an application of income, not an investment. The Court sided with the Assessee, emphasizing the regulatory context and lack of income generation intent.Conclusions: The Court concluded that the Assessee's deployment of funds in BARC did not violate Section 11(5) read with Section 13(1)(d) of the Act.Issue 2: Entitlement to Exemption under Sections 11 and 12Relevant legal framework and precedents: Sections 11 and 12 provide exemptions for income from property held for charitable purposes, subject to compliance with prescribed investment modes under Section 11(5).Court's interpretation and reasoning: The Court assessed whether the Assessee's actions were consistent with its charitable objectives and regulatory obligations.Key evidence and findings: The Court highlighted that the Assessee's deployment of funds was mandated by government policy and TRAI recommendations, with no intention of income generation.Application of law to facts: The Court found that the Assessee's actions were in line with its charitable objectives and regulatory obligations, thus qualifying for exemption under Sections 11 and 12.Treatment of competing arguments: The Revenue contended that the exemption should be denied due to the alleged investment violation. The Assessee argued that the deployment was not an investment and was in compliance with regulatory directives. The Court favored the Assessee's position.Conclusions: The Court affirmed the Assessee's entitlement to exemption under Sections 11 and 12, as there was no violation of Section 13(1)(d).3. SIGNIFICANT HOLDINGSCore principles established:The term 'investment' under Section 11(5) implies an intention to earn income, profit, or return.Deployment of funds in compliance with regulatory obligations and without income generation intent does not constitute an 'investment' under Section 11(5).Exemption under Sections 11 and 12 is available when funds are deployed to meet charitable objectives and regulatory obligations, even if not in prescribed investment modes.Final determinations on each issue:The Court held that the Assessee's deployment of funds in BARC did not violate Section 11(5) or Section 13(1)(d) of the Act, affirming the Assessee's entitlement to exemption under Sections 11 and 12.