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Fratricidal litigation
December, 12th 2007
Government corporations should be less obstinate when it comes to the payment of income tax.
Tax avoidance is universally recognised as a legitimate practice. Resourceful accountants who can find the maximum loopholes in the law are admired by their colleagues and corporates. A prison wall separates it from tax evasion. Therefore, when the border between tax avoidance and tax evasion gets blurred, even the experts advise their clients to pay up. However, here is a rare story of dogged perseverance of a government corporation to avoid income tax.
Thirty years ago, the income tax authorities asked the Uttar Pradesh Forest Corporation to file its return for the year 1976-77. It challenged the notice in the Allahabad high court arguing that it was exempted from tax as it was a local authority and a charitable institution. The Allahabad high court was convinced by this argument.
However, the revenue authorities appealed to the Supreme Court. It set aside the high court ruling maintaining that the forest corporation, established for the exploitation of forest produce, was not a local authority. Regarding the contention that it was a charitable institution, the Supreme Court stated that it required investigation and left it at that. That was in 1998.
After about a decade, the corporation has returned, insisting that it is a charitable organisation, exempted from income tax. Last fortnight, the Supreme Court again rejected its argument pointing out that if it was a charitable institution, it should have registered as one before the appropriate authorities. This has not been done since its inception. The corporation had tried to get the trust status some years ago, but the commissioner had rejected its application. An appeal is now pending before the tribunal. In view of this position, the Supreme Court rejected the appeal once again. However, the court allowed it to revive its claim if it got recognition as a charitable institution.
In 1998, the Supreme Court had also asked the assessing authority to decide the charitable status of the corporation within six months. It is nearly a decade now, and the issue continues to hang fire. The delay is understandable as the corporation has to prove that the property held under trust is wholly for charitable or religious purposes [Section 11(1)(a) of the Income Tax Act]. Mere registration under the Societies Registration Act or the Companies Act is not sufficient to claim the exemption. The purpose of the trust must be examined with respect to the Income Tax Act, as held by a full bench of the Andhra Pradesh high court in the case of the Hyderabad Race Club (1985).
Moreover, the objects of the trust must be of a charitable nature. If the institution has ten objectives of which nine are charitable and the tenth is not, there is nothing to prevent it from using the property for the tenth objective. In such cases, the benefit would not be available, as held by the Delhi high court in the case of All India Hindu Mahasabha (1983).
The tenacity shown by generations of officials of the statutory corporation to stretch all loopholes to win a legal point is only one curious aspect of the case. Another is the way government corporations fight fratricidal wars with another arm of the state. After all, the money is moving from one pocket to another. Such wasteful litigation has been frowned upon by the Supreme Court several times. However, this phenomenon continues to a limited extent, avoiding the committee established to prevent such instances.
In recent times, the Supreme Court has expressed its regret that disputes between statutory bodies or different departments of the central or state governments reached the courts without being examined by the committee set up to examine the issues. Recently, in Chief Conservator of Forests vs Collector, the court remarked that such litigation was not only detrimental to public interest but also entailed avoidable wastage of public money and time. It is an indication of the lack of discipline in the ranks. There must be a spirit of co-ordination instead of confrontation, the judgement said.
In another judgment, Mahanagar Telephone Nigam Ltd vs Chairman, CBDT, the apex court lamented that the courts are already overburdened with a large number of cases, the majority involving the governments, statutory bodies and public sector undertakings. Some of them are downright frivolous, the Supreme Court said.
In UP State Electricity Board vs Sant Kabir Sahakari Mills, the court remarked that if the founding fathers of the Constitution had expected such a problem to crop up, they would have inserted some clause in the statute. The new generation, with its vast experience over six decades, ought to be a little slow to approach the courts, which are already creaking under mounting arrears.

M J Antony
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