COMMISSIONER OF INCOME TAX Vs. POLISETTY SOMASUNDARAM CHARITIES

JUDGEMENT

(1.) THE questions referred under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner are:

(2.) THE concerned assessment years are 1972-73, 1973-74 and 1974-75. THE assessee is a public charitable institution the objects of which are the establishment of educational institutions for the advancement of knowledge and education and running and maintenance of educational institutions of any kind. THE Income-tax Officer found that the objects were within the provisions of section 2(15) of the Act but, however, held that the income of the institution is taxable as the entire funds of the institution were lent to Messrs. Polisetty Somasundaram in which the founder of the institution has substantial interest even after January 1, 1971, and that provisions of section 13(2)(h) are violated and, therefore, exemption under section 11 is not available. On appeal,the Appellate Assistant Commissioner held that the money was lent to the firm for adequate interest and the firm is financially sound and the assessee is entitled to exemption. On appeal at the instance of the Revenue, the Appellate Tribunal confirmed the order of the first appellate authority.

(3.) THE income of the trust held wholly for charitable or religious purposes is exempt from tax subject to the conditions regarding applicability of income in India and other conditions. It is not dispute that the assessee is a charitable institution eligible for exemption under section 11. THE exemption under section 11 is denied in the event of existence of diverse circumstances and contingencies chronicled in section 13. Clauses (a) and (b) of sub-section (1) provide that the exemption is not available if the income is not available for the benefit of the public and is confined to the benefit of any particular religious, community or caste and the trust carried on some business. Clause (c) of sub-section (1) seeks to deny exemption if the income is used directly or indirectly for the benefit of a person listed out in sub-section (3). THE author of the institution or the founder of the institution is one of the persons mentioned in sub-section (3). Sub-section (2) elucidates and amplifies the nature of benefit to the category of persons in sub-section (3) and clause (a) of sub-section (2) provides that the benefit should be deemed to have been conferred if any part of the income is lent to the person referred to in sub-section (3) without adequate security or interest or both. Clause (h) provides that the benefit should be deemed to have been conferred if the funds of the institution are invested in any concern in which the person referred to in sub-section (3) has substantial interest. It must be said that the provisions in section 13 have been jumbled up lacking systematic layout and arrangement of sub-sections. Section 13 cuts at the exemption visualised under section 11 and the exemption contemplated under section 11 is hedged in by the conditions catalogued in section 13 apart from the built-in conditions in sections 11. Section 13 up to sub-section (3) comprises three facets. THE initial aspect is concerned with channelling the income to the destination which militates against the concept of public charitable or religious purpose. Another circumstance is that any part of the income is diverted to the benefit the persons enumerated in sub-section (3) of which one of them is founder of the institution. THE benefit to the prohibited persons listed out in sub-section (3) is elucidated and should be deemed to have been conferred in the circumstances detailed in sub-section (2). THE two crucial provisions for the purpose of this reference are clause (a) of sub-section (2) wnich postulates the benefit in the event of lending the amount without adequate interest or security and clause (h) adverts to the benefit in the event of investment alone. THE controversy is focussed upon the connotation of the words "lend" and "invest". As these expressions are sought to be made applicable in different situations, the legitimate inference is that they bear a distinct interpretation in the context of the set up and synonymity is ruled out. In commercial parlance, lending is associated with advancing money for an agreed rate of interest returnable within a specified period or on demand. Though the expression "invest" in a broad sweep takes in lending also, it can be considered as confinde to laying out the amount in a venture or institution with a profit motive and with no promise of assured return. It is not feasible to survey the multifarious mode of investment and it is sufficient to indicate prominent modes to convey the width of the expression "invest". Investment involves laying out the amount in partnership firms, shares in joint stock companies, real estate business and such other concerns or businesses. In the process of investment, an element of risk is involved and the expectation of return or profit is not assured and the depletion of capital itself is not an abnormal feature. In the case of lending, the return by way of interest is generally assured and the element of risk is minimal. In Nawn Estates (P.) Ltd. v. CIT [1977] 106 ITR 45 (SC), in the context of considering the connotation of the expression "investment" in section 23A and whether "investments" in section 23A can be stretched to house property or capital gains apart from the holding of shares, debentures, stocks or other securities, the Supreme Court held that "investment" covers acquisition of house property or capital gains and "investment" primarily means the act of laying out moneys in the acquisition of some species of property. In CIT v. External Science of Man's Society , the Delhi High Court held that the interest income received by a charitable institution has to be excluded from the taxable income of the assessee in view of clause section (2) and clause (h) is not attracted. We are in agreement with this view.