Exemption Under Section 11: Treatment of Foreign Research Sub-Grants

ORDER

S. Rifaur Rahman, Accountant Member.- The assessee has filed five appeals against the combined orders of ld. Commissioner of Income-tax (Appeals)-40, Delhi (hereinafter referred to ‘Ld. CIT (A)’) all dated 27.03.2017 for Assessment Years 2010-11 to 2014-15.

2 Since the issues are common and the appeals are connected, hence the same are heard together and being disposed off by this common order. We take up the AY 2010-11 as lead case to adjudicate the issues under consideration.

3. Brief facts of the case are, assessee filed its return of income for assessment year 2010-11 on 14.09.2010. The return was processed u/s.143(1) of the Incometax Act, 1961 (for short ‘the Act’) on 09.04.2011. The case was selected for scrutiny and accordingly notices u/s.143(2) and 143(1) of the Act were issued and served on the assessee. In response ld. AR of the assessee appeared from time to time and submitted relevant information as called for.

4. Assessee is registered u/s.12A of the Act vide order dated 14.12.1999. The assessee namely Hriday (Health Related Information Dissemination Amongst Youth), is a voluntary organization of public health professionals, social scientists and lawyers engaged in advocacy and research aiming to promote health awareness and inform health activism among youth in India. The program focuses on enhancing health awareness among school students ages 10 to 13 years. The schools have also become portals of health education for the neighborhood communities.

5. During assessment proceedings, the Assessing Officer observed that assessee has given a sum of Rs.55,73,410/- in the year under consideration to the University of Texas, USA. The assessee was asked to explain above transaction and was asked to explain why provisions of section 11(1)(c) of the Act is not attracted. In response, Ld AR of the assessee submitted a reply on 08.03.2013. After examining the documents submitted by the assessee, it gave the details of the grant being received from National Health Institute, USA and remitted back to the University of Texas, USA as sub-grant for a project-Advancing Cessation of Tobacco in Vulnerable India Tobacco Consuming Youth”. Further a show cause notice is issued to the assessee as to why the payment of a sum of Rs.55,73,410/- towards sub-grant to University of Texas, USA with its principal place of business at Houston, Texas, USA be not disallowed vis-a-vis the applicability of section 11(1)(c) of the Act. In response assessee submitted as under: –

“1.2 During the course of last hearing we have been asked to show cause why the payment of a sum of Rs. 55,73,410/- towards sub grant to University of Texas with its principal place of business at Houston, Tax as, USA be not disallowed vis-a-vis the applicability of section 11(1)(c) of the Income Tax Act, 1961.

A plain reading of section 11(1)(c) of the Income Tax Act, 1961 is produced hereunder:

Income (derived] from property held under trust-

(i) created on or after the 15 day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1^st day of April, 1952, to the extent to which such income is applied to such purposes outside India:

Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.

1.3 “Hriday, the assessee society and the University of Texas applied for Fogarty’s International and Tobacco Health Reach and capacity Building Programme for Project “ACTIVITY” (Advancing Cessation of Tobacco in Vulnerable India Tobacco Consuming youth), a community based group randomized trial to test the efficacy of an intervention aimed to reduce and prevent tobacco use and to promote cession of tobacco use among youth (1019 years) residing in low SES Communities in Delhi.

1.4 Under the grant the investigators from the University of Texas in collaboration with the Indian investigators were responsible for the development of the research design, modeling of the behavioural intervention and ensuring scientific integrity of the study. This time Hriday was the principal applicant and thus, sub grant was sent to University of Texas to serve as the principal investigator and investigators on this grand and help in reviewing formative research, in developing community-based intervention model. This work was to assess welfare of adolescences and people living in slums in Delhi India.”

1.5 It is further submitted that the assessee society is a FCRA approved society vided approval letter date 30* September, 2002, wherein it has been granted the registration under the Foreign Contribution Regulation Act, 1976 vide registration no. 231660284 for educational and social activities.

1.6 This is further stated that the assessee society has been granted special permission by the Reserve Bank of India vide letter dated 19 March; 2008, wherein a no objection to the assessee society was specially issued in connection with the distribution of a part of the funds received a grants from National Institute of Health, USA to the University of Texas, US and other countries to support research and other programmes related to the activities of Hriday. In partial modification of their letter as issued by RBI as mentioned above it was further clearly specified that the RBI does not have any objection in the societies proposed distributing the sum of an amount equallant to US 4,00,000 in 5 year from the grant received from National Institute of Health, USA to the US partner institution in these 5 year to support research and other programmes related to activities of Hriday.

1.7 Further, a copy of the agreement as entered into between Hriday and the University of Texas, Health Science Centre, Huston dated November 4, 2008 is enclosed herewith for your goodself kind verification and records wherein, the terms and conditions on which the part of the grant as received from NIH, USA would be transferred to University of Texas Health Science Centre is mentioned. The Approved budget based on which the funds are to be transferred is also attached as attachment B as part of the agreement as mentioned above”.

6. After considering the above submissions Assessing Officer rejected the same and invoked the provisions of section 11(1)(c) of the Act and observed that the grant of USD 2,62,000 each year till next five years was awarded by the letter dated 28.06.2008. The grant was given to ‘Hriday’ as clearly stated in the award letter and no other organization was mentioned in it. During the AY 2010-11, the grant of Rs.1,89,66,042/- was received from National Institute of Health, USA. During the year, no sub-grant was given to any of the co-investigators but only to school of Public Health, University of Texas, USA of Rs.55,73,410/-. He observed that why no other co-investigator paid any part of sub-grant if that was to be distributed among all the participants of the project. He observed that the above action reflects favoring a particular institution and transferring of funds outside India and claiming the same as application of income. He further observed that the University of Texas, USA is a foreign university, not being registered u/s.12A or FCRA, 1976. Therefore, transfer of funds to the extent of Rs.55,73,410/- attracts the provisions of section 11(1)(c) of the Act. He observed that assessee has submitted a copy of approval of RBI for remitting funds to a foreign entity. He rejected the same by observing that it is not relevant, for which approval of CBDT is needed to exempt the income u/s. 11(1)(c) of the Act applied outside India from the total income for the year. The Assessing Officer further observed that University of Texas, USA receiving the funds from FCRA accounts of the assessee is a foreign entity and also a substantial contributor to the assessee society. Therefore, the sub grant was remitted to a person who is a substantial contributor to the trust which attracts the provisions of section 13(1)(c) r.w.s. 13(3) of the Act. Therefore, remittance of funds of the society outside India is not allowed as application of income to the assessee. The expenses have to be incurred in India for welfare purposes to be allowed as application of income during the year. According to the Assessing Officer, the transfer of funds to University of Texas, USA and on the other hand receiving funds from University of Texas, USA cannot be considered as actual expenditure rather circulation of money. This cannot be considered as application of income. He wondered why such the grant should be routed through the assessee and accordingly he rejected the other submissions made by the assessee and proceeded to treat the expenditure incurred outside India which attracts provisions of section 13(1)(c) r.w.s. 13(3) of the Act. Accordingly, he disallowed the amount remitted to University of Texas, USA. Accordingly, he also denied the benefit u/s.11 and 12 of the Act for the year under consideration and accordingly, he reworked taxable income of the assessee and he brought to tax the excess of income over expenditure of Rs.15,14,579/- and sub grant given to the University of Texas, USA of Rs.55,73,410/- to tax.

7. Aggrieved with the above order, assessee preferred an appeal before the ld.CIT(A)-40, Delhi. It is a combined order for AY 2010-11 to 2014-15 after considering detailed submissions of the assessee which is reproduced at page 4 to 13 of the impugned order. After considering the detailed submissions of the assessee, ld. CIT(A) sustained addition proposed by the Assessing Officer with the following observations:

“5.1.6 In the case of the assessee the amount has been applied outside India. It does not matter that the expenditure was inadvertently misclassified as sub-grant. In view of the fact that the expenditure was incurred outside India and in view of the judgement of the Hon’ble Delhi High Court in the case of Director of Income-tax (Exemption) v. National Association of Software & Services Companies (supra) and decision of the Hon ble ITAT Delhi in the case of India Brand Equity Foundation v. Assistant Commissioner of Income-tax (Exemption), Trust Ward-II, New Delhi (supra), the disallowance of expenditure applied outside India is upheld.

5.1.7 It has also been held that if an organization incurs expenditure outside India in contravention of section 11(1)(c), then the entire exemption will not be lost. Income to the extent not applied in India will not be eligible for exemption [CWT v. Trustees of the Nizam’s Religious Endowment Trust (1997) 108 ITR 229 (AP) ]. Hence, exemption under section 11(1)(c) cannot be denied on the ground that funds of the organization have been applied outside India. In terms of section 11(1)(c) which has been allowed outside India is not allowed as application.

5.1.8 Ground of appeal No.1 for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15 are dismissed to the extent of denial of application of income of the trust outside India. As regards denial of exemption under section 11 on account of violation in terms of section 11(1)(c), exemption under section cannot be denied under this section and only the portion of income to the extent not applied in India will not be eligible for exemption. The Assessing Officer is directed accordingly.”

8. Aggrieved with the above order, assessee is in appeal before us raising following grounds of appeal :-

“1. That the order of the Learned CIT (Appeal) is bad in law and against the statutory provisions.

2. That the Learned CIT Appeal has erred in confirming the additions of Rs. 55,73,410/- made by the Assessing officer on account of payment/Remittance made to the University of Texas, USA as not an application of income u/s 11(1) (C) of the Income Tax Act, of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’).”

9. Assessee has also filed additional grounds of appeal, which are as under:-

“1. That the authorities below has erred both in law and on facts in bringing the sum of Rs. 55,73,410/- as income of the appellant by failing to appreciate that aforesaid sum did not represent income of the appellant in view of the doctrine of diversion of income by overriding title.

2. That without prejudice computation of income to the order of assessment dated 21.3.2013 u/s 143(3) of the Act is otherwise too illegal, erroneous and arbitrary.”

10. At the time of hearing,, the ld. AR of the assessee submitted that the issue under consideration is common for the all the assessment years under consideration and assessee has received grants from National Institute of Health (NIH) and the details of grant received over the years and some grant remitted to University of Texas, USA are given in the following chart and also disbursment made by the Assessing Officer.

11. He submitted that under the scheme of grant the investigators from the University of Texas in collaboration with the Indian investigators were responsible for development of the research design, modelling of the behavioral intervention and ensuring scientific integrity of the study. “HRIDAY” was the principal applicant and thus sub grant was sent to University of Texas to serve as the principal investigator and investigators on this grant and help in reviewing formative research, in developing community based intervention model. This work was to assess welfare of adolescences and people living in slums in Delhi, India. The team of investigators in India and in USA has been doing etiologic and intervention-related research on Non Communicable Diseases (NCDs) prevention among adolescents for more than 25 years. They have extensive expertise in the design, implementation, and evaluation of school-and community-based tobacco prevention programmes for youth in the USA and India. Their Indo-American collaboration began with an intervention trial funded through a Fogarty International Research Collaboration Award: HRIDAY-CATCH (Child and Adolescent Trial for Cardiovascular Health), with 30 schools in Delhi, India, to evaluate the efficacy of a school-based intervention for cardiovascular health. This collaborative team of investigators has been successful in competing for Fogarty’s International Tobacco Health Research and Capacity Building Program, which funds research collaboration to build capacities in research, in partnering developing countries and for US investigators to gain experience in international health. This study was a school-based intervention aimed at preventing tobacco use among adolescents in urban Delhi and Chennai involving over 14,000 students in 32 schools. MYTRI’s robust scientific design demonstrated the effectiveness of school-based interventions in reducing tobacco use among Indian youth by reducing current tobacco use, reducing their future intentions to use tobacco and by enhancing their health advocacy skills (Perry CL, 2009). This research helped Government of India in designing National Tobacco Control Programme (NTCP) as school health interventions were shown to be effective through HRIDAY’s collaborative research with University of Texas.

12. Further, the ld. AR of the assessee submitted that the University of Texas and the assessee applied for the grant together and they have co-title on the grant. In this regard, he submitted that appellant society had applied for the grant in question in collaboration with researchers from the School of Public Health, University of Texas, USA. It is submitted that, it is well settled preposition of law that, where an income is applied, after it accrues, the same results into an application of income. However, where income is diverted at source before it accrues, it cannot be regarded as an application of income. In the case of Commissioner of Income-tax v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). Also in Raja Bejoy Singh Dudhuria v. Commissioner of Income-tax [1933] 1 ITR 135 (PC), it was held by Privy Council (per Macmillan L J.) that, where an amount had to be paid to the stepmother in pursuance of a decree creating a charge on the assessee’s resources it was not application of the assessee’s income but rather the allocation of a sum out of his revenue before it becomes income. A diversion of income by an overriding title need not necessarily be by a decree of court or by statutory or customary law, but may be under the provisions of a will, or agreement, or deed, e.g., a deed of sale or gift or partnership or sub-partnership or partition of joint family property. Thus in Commissioner of Income-tax v. Travancore Sugars & Chemicals Ltd. [1973] 88 ITR 1 (SC), the facts were that a company was formed to take over the assets of a manufacturing concern from the Government, and a percentage of the annual profit was to be paid to the Government subject to a maximum of Rs. 40,000 in addition to the cash consideration. The Supreme Court held that the amount was deductible from the income of the assessee as an overriding charge and also as a revenue expenditure. In Commissioner of Income-tax v. Nariman B. Bharucha & Sons (Bombay), a partnership deed between a father and two sons provided that in case of death of the father the sons can continue the partnership firm but subject to giving a share to the mother. It was held that this was a charge on the partnership income and hence the amount paid to the mother was deductible as an overriding title. It is submitted that, the principle which can be culled out from the above rulings is that where an assessee received an amount of money but it is for the benefit of some other persons under some antecedent obligation then it is a case of diversion of income by superior title and not application of income. In fact, Hon’ble Supreme Court in the case of Provat Kumar Mitter v. Commissioner of Income-tax [1961] 41 ITR 624 (SC), held that, fundamental principle is that an application of income is an allocation of one’s own income after it accrues or has arisen, although such application may be under a contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches the assessee, and it is received by him only for the benefit of the person who is entitled to the income under an overriding charge or title. In fact, in Moti Lal Chhadami Lal Jain v. Commissioner of Income-tax (SC), it was held that, what has to be seen is the nature of obligation by reason of which the income becomes payable to a person other than the one receiving it. Where the obligation flows out of an antecedent and independent title it effectively slices away a part of the corpus of the right to receive the entire income and thus it would be a case of diversion. Hence as pointed out by the Supreme Court in Commissioner of Income-tax v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC), where there is an obligation to apply an income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee, it is a case of diversion of the income. Applying the aforesaid to the facts of the instant case, it will be seen that, receipts from the grant never reached the appellant as income but were collections for and on behalf of the University of Texas. It is submitted that, a careful perusal of the facts of the appellant society would show that investigation of the research was to be done in conjunction with University of Texas. Thus, once it is not in dispute that accrual of income i.e. the grant receipts arose as a result of partnership with University of Texas, in the humble submission of the appellant, the income arose to both University of Texas and the appellant society as has been assumed by the Assessing Officer. It is submitted that, it is not a case where there is application of income after accrual of income but is a case where the corpus of the right to receive the entire income belong to the group of the two applicants in their individual capacity and not solely to the appellant. It is thus submitted that, the appellant was merely conduit and, as such, no income could have been brought to tax in the hands of the appellant. In fact, Hon’ble Apex Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income-tax (SC), has held that, “The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.” Applying the same to the facts, it will be seen that, since the application of grant was made in conjunction of University of Texas, it cannot be held that, any income accrued to the appellant. It was also held that, “there exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.” It is therefore submitted that, what is the relevant is receipt or accrual of income and, if the terms of a contract are construed having regard to the settled judicial interpretation, it will be seen that, no income accrued to the appellant. The above submissions are further well-supported by the following judicial decisions, where in the context of transfer of assets, income was held to be diverted by an overriding title:

“i) 46 ITR 135 (SC) CIT v. West Coast Chemicals & Industries Ltd.,

Facts

On May 9, 1943, the assessee company entered into an agreement for sale of the lands, buildings, plant and machinery of a match factory belonging to it for Rs. 5,75,000 with a view to close down this business. The purchaser made default in payment, and on August 9, 1953, a fresh agreement was entered into between the parties for the sale of the properties mentioned in the first agreement and also chemicals and paper used for manufacture which had not been included in the first agreement for the sum of Rs. 7,35,000. As the memorandum of association of the assessee company allowed the assessee to manufacture and sell chemicals, and even after the sale the company carried on manufacture on behalf of the purchaser, the department sought to assess the profit derived from the sale of the chemicals and paper, viz., Rs. 1,15,259 as profits from business. The assessee contended that it was a realisation sale and this amount was not liable to tax.

Held

The fact that the business of the company was sold as a going concern and was in fact worked by the assessee on behalf of the buyer till the entire consideration was paid made no difference, as the agreement clearly indicated that the assessee was keeping the factory going, not on his own behalf but entirely on behalf of the buyer.

(ii) 237 ITR 617 (SC) Dalmia Cement Ltd. v. CIT

Facts

The assessee-company, the owner of two cement factories situated in Pakistan, by an agreement in writing dated July 24, 1962, agreed to sell and transfer to one M, its properties and assets in Pakistan represented in the two cement factories. Subsequent to the agreement, the parties entered into a supplemental agreement in November, 1962. It substituted a new clause 2 for the one in the original agreement. The new clause 2 laid down that “the profit and loss arising from the operations of the company during the period subsequent to September 30, 1962, shall, in the event of the completion of the sale transaction in accordance with the said agreement, be to the account of M. The operations of the company’s factories and business in Pakistan shall, however, continue to remain under the full and undisturbed control and direction of the company as hitherto.” The principal agreement had a time limit but the same by consent of the parties and by way of supplemental agreement was extended from time to time and the period of completion of the purchase was extended till September 30, 1964, and on that date the parties entered into a sale deed for transfer of rights by the assessee. For the assessment years 1964-65 and 1965-66, the Incometax Officer’s assessment included the profits of the two companies in the total income of the assessee-company for both the years. This was confirmed by the Tribunal and the High Court. On appeal to the Supreme Court:

Held

Reversing the decision of the High Court, that the profits stood diverted to the purchaser in terms of and in accordance with the agreement dated July 24, 1962, read with the supplemental agreement dated November 2, 1962, and the date of actual transfer of the factory in question which, in fact, had taken place on September 30, 1964, did not alter the situation. The income stood diverted by an overriding title as a matter of fact even before the accrual. There was no question of enabling the assessee to retain the profit in its own hand after the “sale agreement”. The sale transaction had taken place and by reason of the event and in terms of the provisions of the agreement, the question of tracing the profit in the hands of the assessee did not and could not arise. In any event profits of a business do not accrue from day to day but at the end of the accounting year. Profits were ascertained on September 30, 1964, when the property was transferred and as such for the year 1965-66 the question of profit accruing to the assessee did not arise. Section 60 has its application only to a case where income accrues to the transferee but the income-earning asset or source of income remains with the transferor. In this case, the very existence of the agreement to transfer dated July 24, 1962, ruled out and totally excluded the application of section 60. There appeared to be clear inconsistency between the assessment of capital gains on the transfer of the factories on the one hand and the finding of accrual of income since the computation of capital gains were effected by treating the gross amount of consideration as the sale price. The Income-tax Officer thus by implication accepted the profits as belonging to the transferee and not the transferor-otherwise, the net amount paid alone ought to have been taken as the sale price. The High Court’s judgment, therefore, not only suffered from apparent inconsistency but on a totality of the situation was inherently contradictory. The profits arising from the working of the two cement factories situated in Pakistan for the year October 1, 1962, to September 30, 1963, and for the year October 1, 1963, to September 30, 1964, were not taxable in the hands of the assessee-company.”

13. That the grants received are in nature of tied-up grants which led to such payments outside India and thus the grants received on behalf of University of Texas do not form part of the income of the appellant society: –

(i) ITA No. 210/2011 dated 29/10/2011 (P&H)CIT, Panchkula v. State Urban Development Society (Punjab & Haryana) (pages 10-13 of JPB)

The Tribunal held that the society is acting as a nodal agency receiving grant from Government of India and state Governments and distributes to district authorities for implementation of various Schemes of Government of Indian and supervising the execution of Schemes. It has no discretion to utilize the amount as per own requirements. It also found that in case of non-utilization at the close of the Scheme, the funds are to be refunded along with interest to the Government of India and state Governments. The grants received by the assessee do not belong to the assessee-society. The grants do not form corpus of the asseesee nor is it income of the assessee under Section 11 of the Act. Such grants are not the donations or voluntary contributions under Section 12 of the Act. Thus, the grants received by the assessee should not be considered either as income or for ascertaining the amount expanded or amount to be accumulated. Provisions of Section 11 and 12 of the Act are not applicable for grants received by the assessee under the Schemes It further held that the assessee is statutorily required to file its intention of expanding the accumulated funds in future by way of Form No. 10.”

(ii) Nirmal Agricultural Society v. ITO [1999] 71 ITD 152/[2000] 67 TTJ 127 (Hyderabad)(pages 7-9 of JPB)10.

The grants received from Bread for the World were for specific purposes. The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organization, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated.

(iii). The assessee should have actually credited that grant in the personal account of the donor, Bread for the World and any amount spent against that grant should have been debited to that separate account of the donor. That incoming and outgoing need not be reflected in the income and expenditure account of the assessee. At the end of the project, the balance, if any, available to the credit of Bread for the World, the donor, could be treated as income of the assessee, if the donor did not insist for the repayment of the balance amount.

(vi). Therefore, in the light of the examination of the facts of the case, we direct the Assessing Officer to redo the assessments in the following lines:

(1) The tied-up grants received from the donor, Bread for the World, will be taken out of the computation of income from the income-side.

(2) All the money spent under the tied-up programmes directed by the donor also will be taken out of the computation of income from the expense-side.

(3) Any non-refundable credit balance in the personal account of Bread for the World will be treated as income in the year in which such non-refundable balance was ascertained.

(4) The expenses incurred by the assessee for house construction, reclamation of land, non-formal education programme (other than covered by the tied-up grants) will be deducted as revenue expenses.”

14. That the substance of transaction has been overlooked by the learned Assessing Officer. It is submitted that the learned Assessing Officer has completely failed to understand the facts and circumstances of the case and completely overlooked the substance of transaction under question. As submitted above, it is to be noted that the appellant society never enjoyed the complete title on the grants disbursed by NIH.

15. It is also submitted that the learned Assessing Officer has brought to tax the entire receipts as income of the appellant on the basis of the form of the transaction and, has thus failed to appreciate the substance of transaction. It has been held by Apex Court in the case of Sir Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 ITR 506 (SC), that “It is well recognized in revenue cases; regard must be had to the substance rather than to the form”. The aforesaid principle has been reiterated and reaffirmed in the cases of Commissioner of Income-tax v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692 (SC) and Commissioner of Income-tax v. B.M. Kharwar [1969] 72 ITR 603 (SC). In fact, in the judgment of B.M. Kharwar, it was held that, legal relation alone can determine the taxability of the receipts arising from the transaction and if the said principle is applied to the facts of the instant case, it will be seen that the title of the grant was shared between the appellant and the University of Texas. Thus, the learned Assessing Officer has merely proceeded on the form to tax the entire receipt as the income of the appellant without appreciating that such receipts were not the income of the appellant. It is submitted that, if the real nature of the transaction is seen, it would be evident that the addition made by the learned Assessing Officer was unsustainable and untenable and, overlooking the factual substratum of the case.

16. It is also submitted that the learned Assessing Officer has brought to tax the entire receipts as income of the appellant on the basis of the form of the transaction and, has thus failed to appreciate the substance of transaction. It has been held by Apex Court in the case of Sir Kikabhai Premchand (supra) that “It is well recognized in revenue cases; regard must be had to the substance rather than to the form”. The aforesaid principle has been reiterated and reaffirmed in the cases of Motors & General Stores (P.) Ltd. (supra) and B.M. Kharwar (supra). In fact, in the judgment of B.M. Kharwar, it was held that, legal relation alone can determine the taxability of the receipts arising from the transaction and if the said principle is applied to the facts of the instant case, it will be seen that the title of the grant was shared between the appellant and the University of Texas. Thus, the learned Assessing Officer has merely proceeded on the form to tax the entire receipt as the income of the appellant without appreciating that such receipts were not the income of the appellant. It is submitted that, if the real nature of the transaction is seen, it would be evident that the addition made by the learned Assessing Officer was unsustainable and untenable and, overlooking the factual substratum of the case.

17. That income to be taxed is real income and not notional or hypothetical income: The appellant at this stage considers highly appropriate to respectfully submit that, Hon’ble Supreme Court in the case of Commissioner of Income-tax v. Shiv Prakash Janak Raj & Co. (P.) Ltd. (SC), has held that, the concept of real income is certainly applicable in judging whether there has been income or not and as such, in every case, such a principle must be applied with care and well recognized limits. It is submitted that, it has been held by the Apex Court in the case of Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).

18. Reliance is also placed on the following judgments:

(i) Commissioner of Income-tax v. Excel Industries Ltd. (SC)

“17. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) it was held as follows:—

“Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income’, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.”

……

27 Applying the three tests laid down by various decision of this court, namely whether the income accrued to the assessee is real or hypothetical; whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realization of the benefits by the assessee considered from a realistic and practical point of view (the assessee may not have made imports), it is quite clear that in fact no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.”

(ii) Commissioner of Income-tax v. Balbir Singh Maini (SC)

24. The matter can also be viewed from a slightly different angle. Shri Vohra is right when he has referred to Sections 45 and 48 of the Income Tax Act and has then argued that some real income must “arise” on the assumption that there is transfer of a capital asset. This income must have been received or have “accrued” under Section 48 as a result of the transfer of the capital asset.

25. This Court in E.D. Sassoon & Co. Ltd. v. CIT AIR 1954 SC 470 at 343 held:

“It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in presenti, solvendum in futuro; See W.S. Try Ltd. v. Johnson (Inspector of Taxes) [(1946) 1 AER 532 at p. 539], and Webb v. Stenton, Garnishees [11 QBD 518 at p. 522 and 527]. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.”

26. This Court, in CIT v. Excel Industries(SC) at 463-464 referred to various judgments on the expression “accrues”, and then held:

……

27. In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act.

28. In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act.

19. That general or special order u/s 11(1)(c) of the Act is required only if the objective of the expenditure contain “promotion of international welfare”

(i) ICLEI Local Government for Sustainability South Asia v. ITO (Exemption) [ITA No. 3408 (Delhi) of 2018, dated 26-8-2022] (pages 57-59 of JPB)

6.2 The Assessee also claimed that the provisions of section 11(1)(c) of the Act are not applicable to the case of the Assessee. The Assessee also submitted that the total remittance towards consulting expenses incurred by the appellant, may be regarded as spent outside India, however, the same have been ‘applied’ for the purpose in India. Further such expenses have not been incurred for any objectives of International welfare in which India has a national interest that require prior approval of CBDT, hence, such remittance do not attract provisions of section 11(1)(c) of the Act. Likewise, the reimbursement of travelling, boarding and lodging expenses is towards meetings and conferences in relation to India project and the remittance, in any case, is not for the purpose of International welfare. We observe that though the Ld. Commissioner clearly held and not denied by the Assessee that the said sum was paid for boarding and lodging and consulting services and remuneration of expenses paid outside India. As regards, the submissions that section 11(1)(c) is not applicable to it, it is to be noted that as per the said provisions a charitable organization cannot have activities outside India unless it happened to be a trust created before 01.04.1952 or it is engaged in the promotion or welfare, in which India is interested. The ld. Commissioner further held that in short, under the provisions of the Act, income applied on activities outside India is not eligible for exemption unless the following conditions are satisfied:

(a) The charitable organization happens to be a trust created before 01.04.1952 or it is engaged in the promotion of international welfare, in which India is interested.

(b) Central Board of Direct Taxes (CBDT) has by general or special order granted the exemption for carrying out such activities.

We have given thoughtful consideration to the conclusion drawn by the Ld. Commissioner qua non-applicability of the provisions of section 11(1)(c) of the Act and find that the Ld. Commissioner though referred the conditions of the said provisions, however failed to give any definite findings qua applicability of the said provisions to the case of the Assessee and with regard to the contention of the Assessee to the effects that the reimbursement of travelling, boarding and lodging expenses is towards meetings and conferences in relation to India project and the remittance, in any case, is not for the purpose of International welfare and with regards to claim of the Assessee that decision of the Hon’ble high Court in the case of NASCOM (supra) is factually dissimilar to the facts of the instant case, hence for the just decision of the case, these aspects also needs fresh examination with the relevant documents/approvals etc. which the Assessee is supposed to produce and to discharge its onus.

(ii) Commissioner of Income-tax, (Exemptions), Bangalore v. Ohio University Christ College ITR 352 (Karnataka) (pages 48-56 of JPB)

4.5.4 We also do not concur with the Assessing Officer’s view that a specific exemption is required from CBDT for making claim of application of income. This requirement has been specified only for those trusts that have as its objects, the promotion of international welfare. In the case of the assessee in the case on hand, the objects of charitable activities for imparting higher education in India, has already been approved by the Department while granting the assessee trust registration.

20. And further submitted a chart as under to indicate that the assessee has applied the net grant for the purpose of charity except in AY 2010-11.

21. On the other hand, ld. DR brought to our notice detailed findings of the Assessing Officer and submitted that the funds transferred outside India will not be considered as application of income for charitable purpose and she supported the findings of the Assessing Officer that the transaction falls within the provisions of section 13(1)(c) of the Act and ld. DR also filed report from the Assessing Officer in this regard which is reproduced hereinbelow:-

“The appellant before Hon’ble ITAT has submitted that the amount applied as per order of assessment is more than 85% of total receipts for assessment years 201112, 2012-13 and 2014-15. It is further submitted by the appellant that as far as assessment years 2010-11 and 2013-14 are concerned wherein application of receipts is less than 85% of receipts, the same should be treated as income is accumulated or set apart for application and applied in assessment years 2011-12, 2012-13 and 2014-15

In this regard it is submitted that for AY.2010-11 the Assessing Officer while framing assessment has allowed an amount of Rs.3,23,44,379/- as application for the year under consideration. As per submission of the appellant the amount of Rs. 11,65,484/- should be treated as income accumulated or set apart for application in assessment years 2011-12. It is important to mention here that a registered trust is required to apply at least 85% of its income for its objectives every year. Even if a trust is not able to apply 85% of its income for its objectives such income shall be deemed to be applied if the trust furnishes form 9A or 10.

In the present case the assessing officer while framing assessment treated the amount of Rs.3,23,44,379/- as application. Therefore, the balance amount of Rs.11,65,484/- after allowing 15% of accumulation of Rs.59,13,505/- is income of the appellant which is chargeable to tax.

The amount which is left after the application of receipts and 15% of accumulation is the surplus or the profit of the appellant. Only the accumulated amount i.e. 15% of total receipts can be carried forward as application of income to the next year not the surplus amount. The surplus amount remains as the profit or the income of the appellant. If the appellant wants to carry forward the surplus it must furnishes form 9A or 10

Further, the case laws relied upon by the appellant are misplaced and not identical to the case of the appellant. The case of M/s. Tirupati Trust v. CIT reported at 230 ITR 636 (SC) is a Supreme Court judgment clarifying that income from charitable trusts is exempt under Section 11(1)(a) of the Income Tax Act if applied for charity, and this application doesn’t have to be strictly in the same year the income arises, allowing flexibility for use in subsequent years, while also affirming that failure to follow procedures in Section 11(2) (for accumulation) doesn’t invalidate basic exemptions under Section 11(1)(a) for applied income.”

22. Considered the rival submissions and material placed on record, we observed that the assessee is a trust engaged with the aims and object as per the memorandum associations are as under: –

“IN THE MATTER DE ACT XXI DE 1860 BEING AN ACT FOR REGISTRAITON OF LITERACY, SOIENTIFIC AND CHARITABLE SOCIETIES

IN THE MATTER OF “HRIDAY”

MEMORANEUM OF ASSOCIATION

1. The name of the society shall be “HRIDAY”

2. The registered office of the Society shall be situated in the National Capital Territory of Delhi and at present it is at G-34, Gulmohar Enclave, New Delhi -110. 049.

3. The aims and objects of the Society shall be as follows:-

23. Further, we observed that the memorandum of association was authored and signatory are Dr. Rajendra Tandon, Dr Kolli Srinath Reddy, Dr Dorairaj Prabhakaran, Dr P S N Menon, Dr Kamal Preet Kochhar & Ms. Archana Kapoor.

23. Further, we observed that the assessee had signed up for a programme focusing on enhancing health awareness among students, with the programme being implemented at school, college, home, and community levels. The said programme was carried out with the assistance of voluntary organisations comprising public health professionals, social scientists, and lawyers, with the objective of promoting health awareness and encouraging health activism among youth in India. In order to promote the above objectives, the assessee entered into the programme and received grants from the National Institutes of Health (NIH) for the assessment years 2008-09 to 2014-15. The details thereof have already been reproduced in the submissions of the ld. AR in the earlier part of this order. Further, we observe that the voluntary organisations involved included investigators from the University of Texas (the primary investigator), in collaboration with Indian investigators, for the development of research, design, modelling of behavioural interventions, and ensuring the scientific integrity of the study. In this process, the assessee received grants from the NIH, and for the same study, certain service charges were paid to the University of Texas towards the services rendered by the them. Since the grant received by the assessee pertained to a specific project in which the University of Texas was one of the lead investigators, a part of the grant was remitted to the University of Texas, USA. Thus, the grant received by the assessee was subject to an overriding title, requiring application of the funds towards co-implementation of the project. Accordingly, the sub-grants paid to the University of Texas are required to be treated as application of the grant for the project, clearly indicating diversion of income by overriding title. During the year under consideration, the assessee received a grant of Rs.91,07,120/-, and substantial amounts were also received in assessment years 2008-09 and 2009-10. The total grant received by the assessee up to the assessment year under consideration was Rs.3,03,69,687/-. The assessee remitted sub-grants of Rs.14,69,062/- in AY 2009-10 and Rs.55,73,410/- in the impugned assessment year to the University of Texas. Therefore, only the portion of the grant received and applied in India should be considered as the actual grant received by the assessee from the NIH. The NIH sanctioned the grant for the overall project involving both Indian and international investigators rendering services relating to the purpose and objects of the specific project. Since the project was implemented through both local and international investigators, the grant received is tied up grant, the payment attributable to the international investigators is required to be adjusted accordingly. Thus, in our considered view, the grant received from the NIH should be reduced to the extent of the sub-grants paid to the University of Texas, and only the net grant should be treated as the actual grant available to the assessee for application in India.

24. We observed that the Assessing Officer has invoked the provisions of section 13(1)(c) of the Act with the observation that the assessee has utilized part of the grant outside India, therefore, any benefit directly or indirectly for the benefit of any person refer to sub section (3) shall be treated as violation of section 13(1)(c) of the Act. In this regard, whether the lead investigators including University of Texas having interest, therefore, the provisions of section of 13(3) of the Act being attracted in the present case or not. In order to analyze the same, we are reproducing the section 13(1)(c) and 13(3) of the Act below:

“13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—

(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof—

(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or

(ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied,

directly or indirectly for the benefit of any person referred to in sub-section (3) :

Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution :

Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970;

13(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :—

(a) the author of the trust or the founder of the institution;

(b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees;

(c) where such author, founder or person is a Hindu undivided family, a member of the family;

(cc) any trustee of the trust or manager (by whatever name called) of the institution;

(d) any relative of any such author, founder, person, member, trustee or manager as aforesaid;

(e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.”

25. From the above, it is clear that the persons referred to in section 13(1)(c) of the Act include the author of the trust or founder of the institution, any person who has made a substantial contribution to the trust—i.e., a total contribution exceeding Rs.1,00,000 during the relevant previous year or Rs.10,00,000 in aggregate—any trustee or manager of the institution, any relative of such author, founder, trustee, or manager, and any concern in which any of the aforesaid persons has a substantial interest, as specified under section 13(3) of the Act. In the present case, the assessee had remitted the subgrant to the University of Texas and they are not falling any of the related person definition described in the section 13(3) of the Act, for the simple reason that the grant has come from NIH and only NIH falls into the definition of Section 13(1)(C) of the Act. In our view, the Assessing Officer invoked the above provisions without appreciating the actual facts on record and proceeded to make disallowance to the extent of the sub-grant remitted or spent for the purpose of the project outside India. We are confining ourselves to address the disallowance made on account of alleged application of income outside India. As already held by us, the grant received by the assessee is required to be considered only to the extent of the net grant retained by the assessee for the purpose of application of the same in India. Further, we observe that the provisions of section 13(1)(c) of the Act are required to be applied in consonance with the provisions of section 13(3) of the Act. To the extent of the disallowance made by the Assessing Officer, we find that the signatories to the Memorandum of Association have not derived any benefit out of the net grant applied, in subsequent years, other investigators who are also signatories to the Memorandum of association, they are part of investigation team, it cannot be considered as having indirect benefit u/s 139(1)© of the Act without bench marking the services rendered by them. Further, none of the parties who are signatories to the Memorandum of Association have derived any direct or indirect benefit from the sub-grant remitted to the University of Texas. Accordingly, the invocation of the provisions of section 13(1)(c) read with section 13(3) of the Act is not justified in the facts of the present case. We noticed that the University of Texas is not connected to the society, hence they cannot be treated as persons mentioned u/s 13(3) of the Act.

26. With regard to applicability of the section 11/12 in the case of the assessee and the application of funds earmarked for charitable purposes, we observe that the assessee has utilised the entire receipts and applied the surplus over and above the application of funds as under: —

27. From the above chart, it is observed that in AY 2010-11 the assessee did not apply 85% of the total receipts, resulting in short application to the extent of Rs.11,65,484/-. However, in the subsequent assessment years, the assessee applied amounts in excess of the total receipts. In AY 2013-14, the assessee again failed to utilise the funds to the extent of Rs.19,80,198/-, whereas in AYs 2011-12 and 2012-13 the assessee applied amounts over and above the total receipts. Even in the subsequent assessment year 2014-15, the assessee applied funds in excess of the total receipts. From the above chart, it is clear that only in AY 2010-11 the assessee under-utilised the funds by applying less than 85% of the total receipts. Accordingly, we direct the Assessing Officer to restrict disallowance only to the extent of Rs.11,65,484/- for AY 2010-11.

28. In the result, grounds raised by the assessee are allowed.

29. With regard to appeals filed by the assessee in other assessment years are concerned, we notice that the issue under consideration is exactly similar to the issue involved in AY 2010-11. Findings in the AY 2010-11 are applicable mutandis mutatis to other assessment years under appeal. With regard to utilisation of gross receipt for the purpose of the objectives of the trust over and above 85% as per section 11/12 of the Act, we already held that in the subsequent AYs, the assessee had already applied over and above 85%. Accordingly, all the grounds raised by the assessee are allowed.

30. In the result, we therefore direct the Assessing Officer to restrict the addition to Rs.11,65,484/- in AY 2010-11. Consequently, the grounds raised by the assessee for AY 2010-11 are partly allowed, and the appeals for the other assessment years under consideration are allowed.