2025 (3) TMI 1172 - HC - Income Tax

Delhi HC allows tax exemption for charitable trust's equity investments made under statutory obligation

Delhi HC upheld ITAT's decision allowing exemption u/s 11 and 12 to the assessee. AO had denied exemption claiming violation of Section 13(1)(d) through ... Exemption u/s 11 and 12 denied - transactions of purchasing shares and investment by way of Share Application Money - AO concluded that the Assessee had violated Section 13 (1) (d) by making an investment in equity shares - income of the Assessee was assessed which was held as taxable at Maximum Marginal Rate in accordance with provisions of Section 164(2) - ITAT allowed assessee claim. HELD THAT:- The present appeal was heard along with Indian Broadcasting Foundation [2025 (3) TMI 1124 - DELHI HIGH COURT] filed by the Revenue against the same Assessee in respect of AY 2014-15, assailing a similar order passed by the learned ITAT. These appeals were admitted on the same questions of law by this Court. By way of judgment [2025 (3) TMI 1124 - DELHI HIGH COURT] we have answered the question of law in favour of the Assessee and against the Revenue, and held that the application of funds by the Assessee in BARC does not qualify as ‘investment’ under Section 11 (5) read with Section 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. We are of the opinion that the order of the learned ITAT does not suffer from any infirmity or error and, is, therefore upheld. Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:(1) Whether the transactions of purchasing shares and investment by way of Share Application Money fall within the permissible modes of investment under Section 11(5)(vii) of the Income Tax Act, 1961.(2) Whether the ITAT was correct in upholding the CIT(A)'s decision to allow exemption under Sections 11 and 12 of the Act to the Assessee.ISSUE-WISE DETAILED ANALYSISIssue 1: Permissibility of Investments under Section 11(5)(vii)- Relevant Legal Framework and Precedents: The pertinent legal provisions are Section 11(5), which prescribes the modes of investment for entities claiming exemption under Sections 11 and 12, and Section 13(1)(d), which restricts investments that do not conform to these prescribed modes.- Court's Interpretation and Reasoning: The Court interpreted the term 'investment' under Section 11(5) as implying a voluntary act intended to generate income or profit. The Court noted that the Assessee's deployment of funds in BARC was not voluntary but was mandated by government policy and regulatory directives.- Key Evidence and Findings: The Court found that the Assessee was required to retain a 60% shareholding in BARC as per government policy, and that BARC's Memorandum of Association prohibits the distribution of dividends or income to members.- Application of Law to Facts: The Court applied the legal framework to the facts, concluding that the deployment of funds was an application of income to achieve the Assessee's objectives, rather than an investment intended to generate income.- Treatment of Competing Arguments: The Revenue argued that the transactions constituted investments violating Section 13(1)(d). The Assessee countered that the funds were deployed to fulfill regulatory obligations, not to generate profit, and thus should not be considered investments.- Conclusions: The Court concluded that the transactions did not qualify as investments under Section 11(5) and did not violate Section 13(1)(d).Issue 2: Exemption under Sections 11 and 12- Relevant Legal Framework and Precedents: Sections 11 and 12 provide exemptions for income derived from property held under trust for charitable or religious purposes, subject to compliance with prescribed conditions.- Court's Interpretation and Reasoning: The Court upheld the ITAT's finding that the Assessee's deployment of funds 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.- Key Evidence and Findings: The Court relied on the ITAT's findings that both the Assessee and BARC are not-for-profit entities, and that the deployment of funds was solely to meet the Assessee's charitable objectives.- Application of Law to Facts: The Court applied the legal framework to the facts, affirming that the Assessee was entitled to exemption under Sections 11 and 12, as the deployment of funds did not constitute an investment.- Treatment of Competing Arguments: The Revenue contended that the exemption should not be allowed due to the alleged violation of Section 13(1)(d). The Assessee argued that even if a violation was presumed, no income was earned from the deployment, and thus no tax liability arose.- Conclusions: The Court concluded that the Assessee was entitled to exemption under Sections 11 and 12, and that the ITAT's decision was correct.SIGNIFICANT HOLDINGS- Core Principles Established: The Court established that the deployment of funds in compliance with regulatory obligations does not constitute an investment under Section 11(5) if it is not intended to generate income or profit.- Final Determinations on Each Issue: The Court determined that the transactions in question did not violate Section 13(1)(d) and upheld the ITAT's decision to allow the Assessee's exemption under Sections 11 and 12.- Verbatim Quotes of Crucial Legal Reasoning: 'The application of funds by the Assessee in BARC does not qualify as 'investment' under Section 11(5) read with Section 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.'The Court dismissed the Revenue's appeal, affirming the ITAT's decision and maintaining the Assessee's entitlement to exemptions under Sections 11 and 12 of the Income Tax Act.