Case: Director of Income Tax Vs. M/s Bharat Diamond Bourse

arrived at by the assessing officer and the appellate authority to the effect that Rs. 70 lakhs were lent to Bharat S. Shah for substantial periods during the previous years pertaining to the relevant assessment years, without interest and without adequate security. ISSUE ‘B’ 40. The next question to be addressed is: Even assuming Rs. 70 lakhs was lent to Bharat Shah, is he a person who falls within the meaning of Section 13(3)(a) or 13(3)(cc) of the Act? 41. Section 13(3)(a) speaks of the author of the trust or the "founder of the institution". The respondent is not a trust registered under the law applicable to be trusts. That it is an institution cannot be gainsaid. It is a corporate body registered under the provisions of the Companies Act, 1956 as a company limited by guarantee. Bharat Shah was one of the subscribers to its memorandum of association and was also the secretary of the Managing Committee of the Company. 42. The Articles of Association of the assessee do not envisage any special powers in the secretary so as to make him a "manager" of the Company within the meaning of Section 2(24) of the Companies Act.43. Learned counsel for the assessee urges that merely because the Bharat Shah was a signatory of ; the Memorandum of Association by which the company was incorporated, it cannot be contended that he is a "founder" of the institution. According to the learned counsel, a founder must be someone who has substantially contributed financially or by physical efforts to set up an institution or must be a leading person who plays an important role in the functioning of the institution; he must be an originator of the institution. Sub-section (3)(A) of Section 13 speaks of the ‘author of the trust’ and ‘founder of the institution’. The words used therein take colour from each other, in the submission of the learned counsel. 44. Counsel relied on the meaning of the word "Founder" and "Foundation" in Black’s Dictionary of Law, as found in 4th Edition: 45. "Founder" - "a person who endows an eleemosynary corporation or institution, or supplies the funds for its establishment." 46. "Foundation" - "the founding or building of a college or hospital. The incorporation or endowment of a college or hospital is the foundation; and he who endows it with land or other property is the founder." 47. He also relied on the meaning of the expression in "Corpus Juris Secundum" Volume XXXVII, page 37, which is: 48. "Founder’s shares in English company law, shares issued to the founders of, or vendors to, a public company as a part of the consideration for the business, or concession, etc., taken over, and not forming a part of, the ordinary capital." 49. The meaning of expression "Founder" highlighted by the learned counsel is with reference only to an institution of eleemosynary. Eleemosynary is a charitable object intended to provide for relief from distress to humans based on Christian values. In the case of the assessee, it is not recognized as a ‘charity’ because of the element of eleemosynary; it is recognized as a ‘charity’ because of the extended meaning ascribed to the concept of charity under the Act as its predominant object is an "object of general public value". The test to ascertain the founder of an institution for eleemosynary need not be valid to ascertain the founder of an institution of other kinds. 50. In our view, the term "founder of the Institution" used in Section 13 (1) means no more nor less than what it says. The expression "founder" means what is understood in ordinary parlance - the originator or the person responsible for the establishment of the institution. The Concise Oxford Dictionary, New Seventh Edition, Page 388, defines the expression "founder" as "one who founds an institution" and the verb "found" to mean "lay base of; be original builder, begin building of, set up, establish, originate, initiate, construct, base." The Collins Cobuild English Dictionary, New Edition, Page 670 gives meaning of the term "Founder" as "The founder of the institution, organisation, or building is the person who got it started or caused it to be built often by providing necessary money" and the verb "found" means "when an institution, company, or organization is founded by someone or by a group of people, they get it started, often by providing the necessary money."51. We are hence of the view that the expression "founder of the institution" used in Section 13 (1) (a) means that the person concerned should be the originator of the institution, or at least one of the persons responsible for the coming into existence of the institution. In our judgment, contribution of money is not an inexorable test of a person being a "founder" though, it might happen often that person who originates an institution may often also fund it.52. In the case of the assessee, we are of the view that Bharat Shah, along with several others, founded the company as all of them were subscribers of its Memorandum of Association. It is by their acts that the company got incorporated under the provisions of the Companies Act and was thus born. May be that Bharat Shah did not contribute any money, apart from the guarantee given as the company is one limited by guarantee. That hardly makes any difference to the situation and Bharat Shah would very much answer the description "founder of institution" used in Section 13 (3) (a) of the Act. That there may be others also is irrelevant and immaterial for the purpose of this appeal. In fact, a reading of Section 13 (3) and the contrast between clauses (a) and (b) brings home the distinction made by the Act between the founder of the institution and the person who has made substantial contribution to the institution. We are, therefore, unable to accept the contention of the learned counsel for the assessee that Bharat Shah was not a founder of the institution.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]17. The revenue authorities have concurrently held that, taking an overall view, the dominant objects of the assessee are charitable as the dominant object is one of general public utility and, therefore, the assessee is entitled to be registered as an institution established for charitable purpose within the meaning of Section 2(15) of theagree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under Section 11 by treating it as in institution establishment for charitable purpose within the meaning of Section 2(15) of the Act.In the previous years relevant to the assessment yearthe assessee had advanced an amount of Rs. 70 lakhs to one Bharat Shah without interest and security and even without entering into a written agreement with the said Bharat Shah. The said Bharat Shah was one of the signatories to the Memorandum of Association of the Assessing Company and also the Honorary Secretary of the Institution. For the reason, the assessing officer was of the view that Bharat Shah was a person belonging to the prohibited category within the meaning of Section 13(3)(a) and 13(3)(cc) and since income or property of the institution had been lent to such a person for any time during the previous years relevant to Assessment Years1, without adequate security and adequate interest, the legal fiction in(2) of Section 13 would come into play and the income or property of the institution shall, for the purpose of Clause (d) of(1) of Section 13, be deemed to have been applied for the benefit of the prohibited category of persons under(3). Consequently, the benefit of exemption under Section 11 was lost by reasons of Sectionappears to us this is one of those exceptional cases where the correct conclusion recorded by the assessing officer, and affirmed by the appellate authority, had been reversed by the tribunal on account of perverse reasoning, as we shall presently see. It is difficult to believe that the Assessee, a limited company, could take a corporate decision of handing over a large sum to the extend of Rs. 70 lakhs to anyone without proper documentation. Mr. Dastur placed before us some such documents in an effort to persuade us that everything was above board. We shall scanthe terms were not even recorded in an agreement. It strainscredulousness that seasoned businessmen parted with a large sum of Rs. 70 lakhs to Bharat Shah without any agreement under the which the amount was being paid and without settling the terms of the lease. This in itself should have been sufficient for the Assessing Officer to take a different view as to the real nature of the transaction.34. As on the date on which the money was paid to Bharat Shah, it was neither intended as deposit for lease of premises, nor was it intended as deposit to be paid to the builder. There is no evidence that any premises were procured or agreed to be procured in the name of the Bourse from any builder. Thename is not known till today. If at all there was any substance in the story that Bharat Shah was merely negotiating on behalf of the assessee for procurement of suitable premises, the lease for the premises, the ownership of the premises or the lease rights would be in favour of the respondent assessee with the builder as lessor or seller. The assessing officer was, therefore, justified in concluding that the amount of Rs. 70 lacs, when it was paid to Bharat Shah, was clearly intended for his buying the premises in Diamond Plaza building which in turn, may have been made available by way of ato the respondent. If this be so, then the payment to Bharat Shah could hardly be a deposit. The stand of the respondent is completely belied by Bharatstatement made pursuant to the summons under Section 131 of thematerial on record, in our view, clearly suggests that the amount paid to Bharat Shah did not carry the stamp of a deposit but was merely intended to enable him to purchase a property in his own name, though there might have been a tacit understanding that he would make it available as and when purchased, by way of a lease, the terms of which were indefinite. To that extent, therefore, the conclusion of the assessing officer that it was a colourable transaction appears to bethe instant case, the amount was given to Bharat Shah, but he later on refused to return the amount, resulting in a dispute between the parties culminating in an arbitration award under which Bharat Shah paid back the amount with 9% interest, without even challenging the award. The appellate authority was of the view that, whatever be the arrangement, the assessee had made available the sum of Rs. 70 lacs and permitted Bharat Shah to utilize it for a substantial period and, therefore, there was breach of Section 13(1).38. In our view, the reasoning of the tribunal for reversing the concurrent findings of the assessing officer and the appellate authority, is entirely perverse. The tribunal seems to have accepted the facile explanation given by the assessee, perhaps manufactured post facto the assessment order, without critical appraisal. We are surprised that the entire agreement between Bharat Shah and the assessee was supposed to be an oral agreement, which was supposed to have been terminated orally with Bharat Shah being orally called upon to return the money with interest of 12% which he is said to have refused. In our view, this story does not ring true and could not have been accepted by any reasonable person, instructed in law. It is wholly unnatural, because one does not expectbusinessmen to part with an amount of 70 lacs without even recording an agreement under which it is paid, nor without agreeing upon the precise terms of the lease. The story rings false from beginning to end, and yet, the tribunal accepted it by saying, "As regards the bona fides of the transaction, in our opinion, there is nothing to suspect the same." The tribunal says, "there is a transparency about the entire transaction which nullifies any attempt to make out the transaction as somethingunusual and out of the ordinary." That diamonds are not transparent, that they dazzle with a brilliance that binds the eye, seems to have escaped the notice of the Tribunal. It undiscreningly accepted the glib explanation of the assessee, though teeming with improbabilities and strenuous on credulity,39. We, therefore, are of the view that theconclusion on this issue are perverse and need to be interfered with. We affirm the conclusions arrived at by the assessing officer and the appellate authority to the effect that Rs. 70 lakhs were lent to Bharat S. Shah for substantial periods during the previous years pertaining to the relevant assessment years, without interest and without adequate security.In our view, the term "founder of the Institution" used in Section 13 (1) means no more nor less than what it says. The expression "founder" means what is understood in ordinary parlancethe originator or the person responsible for the establishment of the institution. The Concise Oxford Dictionary, New Seventh Edition, Page 388, defines the expression "founder" as "one who founds an institution" and the verb "found" to mean "lay base of; be original builder, begin building of, set up, establish, originate, initiate, construct, base." The Collins Cobuild English Dictionary, New Edition, Page 670 gives meaning of the term "Founder" as "The founder of the institution, organisation, or building is the person who got it started or caused it to be built often by providing necessary money" and the verb "found" means "when an institution, company, or organization is founded by someone or by a group of people, they get it started, often by providing the necessary money."51. We are hence of the view that the expression "founder of the institution" used in Section 13 (1) (a) means that the person concerned should be the originator of the institution, or at least one of the persons responsible for the coming into existence of the institution. In our judgment, contribution of money is not an inexorable test of a person being a "founder" though, it might happen often that person who originates an institution may often also fund it.52. In the case of the assessee, we are of the view that Bharat Shah, along with several others, founded the company as all of them were subscribers of its Memorandum of Association. It is by their acts that the company got incorporated under the provisions of the Companies Act and was thus born. May be that Bharat Shah did not contribute any money, apart from the guarantee given as the company is one limited by guarantee. That hardly makes any difference to the situation and Bharat Shah would very much answer the description "founder of institution" used in Section 13 (3) (a) of the Act. That there may be others also is irrelevant and immaterial for the purpose of this appeal. In fact, a reading of Section 13 (3) and the contrast between clauses (a) and (b) brings home the distinction made by the Act between the founder of the institution and the person who has made substantial contribution to the institution. We are, therefore, unable to accept the contention of the learned counsel for the assessee that Bharat Shah was not a founder of the institution.