$ 1 & 2 * IN HIGH COURT OF DELHI AT NEW DELHI Date of Decision: October 30, 2014 + ITA 427/2014 & 428/2014 DIRECTOR OFINCOME TAX (E) ..... Appellant Through Mr.Kamal Sawhney, Sr. Standing Counsel versus INDO FRENCH CENTRE ..... Respondent Through Ms.Shashi M.Kapila, Advocate with Mr.Sushil Kumar, Advocate CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J. (ORAL) These two appeals by Revenue impugn common order dated 31.12.2013 passed by Income Tax Appellate Tribunal ( Tribunal for short) pertaining to Indo French Centre for Promotion of Advanced Research. appeals relate to assessment years 2008-09 and 2009-10. 2. Two contentions have been raised on behalf of Revenue in these appeals. Firstly, there was violation of Section 13(1)(d) read with Section 11(5) of Income Tax Act, 1961 ( Act for short) as funds of ITA Nos.427 & 428/2014 Page 1 of 9 respondent Centre were deposited with French financial services group, namely, Cr dit Industriel et Commercial, Paris, France and interest of Rs. 11,37,438/- and Rs.9,37,722/- (upon conversion) was earned in assessment year 2008-09 and 2009-10, respectively. second issue relates to application of proviso to Section 164(2) of Act because of violation of provisions of Section 13(1)(d) of Act and accordingly respondent- Centre should be taxed on maximum marginal rate. 3. In order to appreciate contentions, certain facts relating to formation of Centre and source of funds is required to be elucidated:- (a) Indo French Centre for Promotion of Advanced Research was formed in India, jointly by Government of India and Government of France based on principle of reciprocity and parity. said Centre was registered as Society under Societies Registration Act, 1860 on 16.04.1986 and has been recognized as Scientific and Industrial Research Organization by Department of Scientific and Industrial Research (DSIR). (b) As per bilateral agreement between Governments of India and France, decisions of respondent-Centre are subject to scrutiny of both Governments. ITA Nos.427 & 428/2014 Page 2 of 9 (c) Government of India had assured exemption from payment of taxes to then proposed Centre by their letter dated 08.06.1985. Thereafter, there was exchange of correspondence and it was mutually decided by two Governments that said Centre would be exempt from payment of income tax. No custom duties would be payable by said Centre under Indian Laws for import of scientific equipment. (d) Government of France had agreed to make contribution to said Centre in following manner and mode:- 1.1 Direct contribution to be transferred and placed at disposal of centre according to approved budget. 1.2 Equipment etc. as may be given, from time to time, by French side. 1.3 Expenses in France to be borne by France side on visits of Indian scientists to France. 1.4 Air Fare for French scientists visiting India. 1.5 Any other expenses which French side agree to bear." (e) This was accepted by Government of India. Pursuant to aforesaid agreement, Reserve Bank of India had permitted/ allowed opening of foreign currency account by respondent Centre in France with French Bank in Paris. Reserve Bank of India by letters dated ITA Nos.427 & 428/2014 Page 3 of 9 04.07.1988 and 05.09.1988 granted following permissions:- i. Grants received from French Govt. may be credited to account freely. ii. Interest on balance may be credited to account freely. iii. Debit in respect of bank charges and repatriation to India may be made freely. iv. Debits for expenses in connection with conducting of research programs in French Laboratories and joint workshops, seminars abroad may be made freely. v. All other transactions will require prior approval of Reserve Bank of India. 1.5 As per arrangement grants in aid from Govt. of France is to be deposited in bank account in France and after meeting expenses incurred in France, balance grant in aid is freely remittable to India. " 4. Keeping in view aforesaid factual position, Tribunal in impugned order has held that assessee Society had not parked any of their funds in Cr dit Industriel et Commercial, Paris, France either as investment or as deposit. Grants from Government of France, which were parked in said account, as controversy had arisen because of amendments in Act, on whether income of respondent Centre would become taxable or not. respondent Centre was earlier exempt under Section 35(1)(ii) of Act for all years prior to 01.04.2003. Albeit, ITA Nos.427 & 428/2014 Page 4 of 9 after said provision was withdrawn and become inapplicable, grant by French Government could not be utilized as per mandate of French authorities, for insistence and enunciation that Centre should remain non-taxable entity/institution. 5. In such circumstances, respondent Centre approached Government of India, Ministry of Finance, Department of Revenue, for grant of exemption from taxation under Act. Pursuant to request made, Central Board of Direct Taxes has issued order dated 12.10.2010, which reads:- In exercise of powers conferred by proviso to clause (c) of sub-section (1) of section 11 of Income Tax Act, 1961 (43 of 1961), Central Board of Direct Taxes hereby directs that income derived from property held under trust known as Indo-French Centre for Promotion of Advanced Research, New Delhi shall not be included in total income of persons in receipt of such income to extent to which such income is applied in accordance with objects of Indo-French Centre for promotion of Advanced Research, New Delhi. This order shall have effect for period covered by Assessment Years 2005-06 to 2009-10. claim as above of applicant regarding extent to ITA Nos.427 & 428/2014 Page 5 of 9 which such income is applied to such purposes outside India will be subject to verification during course of assessment proceedings as per Income Tax Act, 1961. (emphasis supplied) 6. order by CBDT, highest authority under Act, in plain and simple English states that income derived from property held under trust shall not be included in total income of respondent Centre to extent such income is applied in accordance with objects of Centre. Thus order affirms and accepts that objects were charitable and in categorical and positive terms, order grants exemption from entire income held under trust applied in accordance with objects of Centre, without any other stipulation, except in last paragraph. said paragraph states that even income applied outside India could be exempt but would be verified during course of assessment proceedings, as per Act. exemption is for period covered by assessment years 2005- 06 to 2009-10. Thus, two assessment years in question are covered. 7. True and full legal effect and tax exemption consequence to said order must be and should be given. In other words, CBDT in view of peculiar facts of this case, by special order, which is not applicable to any other assessee, has held that income derived from property held under ITA Nos.427 & 428/2014 Page 6 of 9 trust would not be included in total income of person concerned i.e. respondent Centre, provided it is applied in accordance with objects of Centre. This income, even when applied abroad, has to be excluded, subject to verification stipulations mentioned in last paragraph. Once we give proper effect and recognition to order dated 12.10.2010, entire income derived from property held under trust would be exempt. It is not averred that income derived from property held under trust was not applied in accordance with objects of Centre. Application of income is different, from accrual. Thus, interest earned applied for purpose/objects of Centre will not form part of total income. Therefore, in respect of said income, there would be no violation of Section 11(5) read with Section 13(1)(d) of Act. 8. It cannot be argued and stated by Revenue that CBDT was not aware of factual position that respondent Centre is joint collaboration between Government of India and Government of France and as per joint agreement, grants/aid of French Government for benefit of Centre were kept in French Bank Account. RBI had also granted permission. These facts, it must be held, were ascertained and known before exemption was granted by order dated 12.10.2010. It is ITA Nos.427 & 428/2014 Page 7 of 9 normal and natural that some interest may accrue on amount deposited. This would endure to benefit of Centre as additional funds would be available. It is not case of wrongly parking and misuse. very fact that said order mentions about application of income for such purposes outside India clearly shows that CBDT was fully conscious and aware. entire income must be used and applied in terms of charitable objects. 9. In view of aforesaid position, which is peculiar to facts of present case as specific exemption stands granted, we do not see any reason to interfere with order of Tribunal on first aspect. 10. second submission will also falter in view of above findings. We notice that as per findings of Assessing Officer, respondent Centre had excess of expenditure over income in Profit and Loss Account for assessment year 2008-09. In other words, Centre had suffered loss. However, Assessing Officer held that interest in foreign bank account would be taxable at maximum marginal rate. Because of said finding, benefit of carry forward to assessment year 2009-10 was denied. In any case, once we hold that exemption granted by order of CBDT dated 12.10.2010 would apply, Section 164(2) of ITA Nos.427 & 428/2014 Page 8 of 9 Act would not be applicable. appeals are accordingly dismissed. SANJIV KHANNA, J V. KAMESWAR RAO, J OCTOBER 30, 2014/km ITA Nos.427 & 428/2014 Page 9 of 9 Director of Income-tax (E) v. Indo French Centre