By TIOL News Service

NEW DELHI, NOV 01, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether a Trust formed as joint venture between Indian & Foreign government & registered under Societies Act, if earns interest on foreign grants parked with foreign banks, can it be viewed as violation to provisions of section 11(5) r/w/s 13(1)(d) by clothing it as investment. NO is the answer.

Facts of the case:

The assessee society came into existence in 1986-87 and was registered under Society Registration Act as a joint venture of Government of India and Government of France with object to promote scientific research in both the countries. The assessee society was earlier granted exemption u/s 35(1)(ii) as a scientific research institution but subsequently it was registered u/s 12AA. Assessee society's income was exempt u/s 11(1)(c) as per approval granted by the Board up to AY 2009-10 and its fresh application for renewal is pending before the Board. As per permissions accorded by the Reserve Bank of India (RBI), the assessee society has opened a bank account with Credit Industrial Commercial Paris in France with objective of receiving grant from the French Government and expenses of the society are made from this account and balance amounts are transferred to India which are utilized by the society.

The AO also made an addition of Rs.11,43,35,344/- under the head 'foreign expenditure' for lack of approval of the Board for exemption u/s 11(1)(c). The AO had further made addition of Rs.9,45,28,000/- on the ground that the assessee society has received grant from French Government in violation of FCRA. AO further made addition of Rs.8,849/- on the ground that the deposit in the French bank account violates the provisions of section 11(5) r/w/s 13(1)(d). On appeal, the CIT(A) set aside the additions made by the AO.

Tribunal held that,

++ the AO had made an addition of Rs.11,43,35,344/- on the sole ground that the assessee did not get approval of the Board for exemption u/s 11(1)(c). However, from the order issued by CBDT, the permission has been accorded to the assessee u/s 11(1)(c) and expenses to the tune of Rs.11,43,35,344/- incurred by the assessee outside India for the purpose of international welfare are ordered to be not included in the total income of the assessee society. This factual position has not been controverted by the DR, hence, there is no illegality or perversity in the findings returned by the CIT(A) on this ground. The AO then made disallowance of Rs.9,45,28,000/- on the ground that since the assessee society has received foreign contribution from Government of France within the meaning of section 2(1)(j) of FCRA without filing return qua these contributions in FC-3 to Ministry of Home Affairs as per FCRA. Undisputedly, the assessee society is registered under Societies Registration Act as a joint venture of Government of India and Government of France with an object to promote scientific research in both the countries. The DR vehemently contended that since the assessee society is not a Government society, the CIT (A) has grossly erred in deleting this addition by treating the assessee society as a Government society. However, when the assessee society is a registered society under the Societies Registration Act established as a joint venture with an object to promote scientific research of both the countries and the entire funds are contributed by Government of India and Government of France, the same is an instrumentality of the Government of India;

++ a bare perusal of the letter to the assessee's society by the Ministry of Home Affairs explaining the transactions not attracting provisions of FCRA, goes to prove that when a transaction is between Government of India and Government of any foreign country or territory, FCRA is not attracted. When undisputedly, the transaction of Rs.9,45,28,000/- is a grant given by French Government to the assessee society which is a joint venture of French Government and Government of India, the transaction of transferring the grants is a transaction between both the countries as specified in the letter. Furthermore, vide letter addressed to Secretary General, Ministry of External Relations, Government of France by the then Foreign Secretary, it is categorically made clear that, "the assessee society established for promotion of scientific research etc. will be exempt from payment of income-tax." So, in these circumstances, we find no illegality or perversity in the findings returned by CIT(A);

++ the AO then made an addition of Rs.8,849/- under the head 'interest income' u/s 13(1)(d) on the ground that deposits in the French bank violates the provisions of section 11(5) r/w/s 13(1)(d). For the sake of repetition, we are of the considered view that when the assessee society is a joint venture of Government of India and Government of France to promote scientific research in both the countries and funds are jointly contributed by both the Governments, the funds received as grant by the assessee from the French Government are deposited in the Credit Industrial Commercial Paris, French bank which are in accordance with the rules and regulations of society, interest thereon is not hit by provisions of section 11(5) r/w/s 13(1)(d) in any manner, the same being not an investment. So, we find no illegality or perversity in the findings returned by CIT(A), hence this ground is also determined against the Revenue.

(See 2017-TIOL-1521-ITAT-DEL)