A CRITIQUE OF APSRTC VS ITO

FINAL DRAFT SUBMITTED IN FULFILMENT OF THE COURSE TITLED

CONSTITUTION II FOR OBTAINING THE DEGREE B.B.A.LL.B(HONS.) DURING
THE ACADEMIC YEAR 2019-20.

SUBMITTED TO: - SUBMITTED BY: -

Dr. Anirudh Prasad Sahil Suman
Faculty of Constitution Roll: 1849
6TH Semester

CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA – 800001

FEBRUARY 2020
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DECLARATION

I, Sahil Suman, student of Chanakya National Law University, hereby declare that the project
work entitled “A critique of apsrtc vs ito” submitted to the Chanakya National Law University,
Patna is a record of an original work done by me under the guidance of Dr. Anirudh Prasad,
teacher in subject, Chanakya National Law University, Patna.

THANK YOU,

NAME: SAHIL SUMAN

COURSE: B.B.A., LL.B. (Hons.)

ROLL NO: 1849

SEMESTER – 6TH

SESSION- 2017-2022
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ACKNOWLEDGEMENTS

I would especially like to thank my guide, mentor, Dr. Anirudh Prasad without whose constant
support and guidance this project would have been a distant reality.

This work is an outcome of an unparalleled infrastructural support that I have received from
Chanakya National Law University, Patna.
I owe my deepest gratitude to the library staff of the college.

It would never have been possible to complete this study without an untiring support from my
family, specially my parents.

This study bears testimony to the active encouragement and guidance of a host of friends and well-
wishers.

THANK YOU,

NAME: SAHIL SUMAN

COURSE: B.B.A., LL.B. (Hons.)

ROLL NO: 1849

SEMESTER – 6th

SESSION- 2017-2022
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TABLE OF CONTENT

1. INTRODUCTION

2. FACTS AND JUDGEMENT OF THE CASE

3. PROVISION RELATED TO THIS CASE

4. CONCLUSION AND SUGGESTION

5. BIBLIOGRAPHY
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INTRODUCTION

Andhra Pradesh State Road Transport Corporation (herein after referred to as “APSRTC” or
“Corporation”) is a leading road transport corporation in Andhra Pradesh, India. It was
established by Government of Andhra Pradesh on 11th January 1958 in pursuance of the Road
Transport Corporations Act, 1950. It provides road transport facilities for inter as well as intra
state travel. On an average, APSRTC transports about 14 million passengers every day, equaling
the number of passengers ferried by Indian Railways. It is the world's largest public transport
organizations by bus fleet offering a wide transportation services in the Southern states of India.
APSRTC operates across the states of Andhra Pradesh, Tamil Nadu, Karnataka, Pondicherry,
Maharashtra, Orissa, Chhattisgarh and Goa. Currently, the Corporation is operating with 21,439
buses from 210 depots and cover 767 Bus stations. These buses cover 75.51 lakh Kilometres and
almost 14.5 million people every day. These buses connect 24,336 villages to all major town and
cities in AP.

APSRTC is organized into four tiers comprising of Head Office at Hyderabad, Zones at seven
locations, 23 Regions and 210 Depots. Each depot is attached to one zone and all zones report to
the Head Office. Each zone has a workshop to cater to the maintenance needs to depots and a
store to cater to the requirements of material requirements of these workshops and depots.
Organizationally, the corporation is headed by the Chairman and supported by Vice – Chairman
and Managing Director. Each of the zones is headed by an Executive Director. In addition, there
are 23 regional offices that cater to the administrative requirements of the depots. Each of the
regions is headed by a Regional Manager. APSRTC also have one Body building workshop and
one printing press to support its operations.
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AIMS AND OBJECTIVES

1. To study and analyse the details of the case.

2. To study effectiveness of present law and statute in apsrtc vs ito.

HYPOTHESIS

Researcher assumes that the incorporated corporation has personality of its own.

RESEARCH METHODOLOGY

This study is oriented to study and analyse the resolution of inter-state water disputes in India.
Secondary data involves the collection of data through past research studies, journals, magazines,
books, leading databases, articles and internet.
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FACTS AND JUDGEMENT OF THE CASE

The applicant (for short the corporation) is an assessee under the Income Tax Act, 1961 (for
short the Act). For the assessment years 1987-88 and 1988-89, it filed returns covering various
aspects. One of the benefits claimed by the Corporation is referable to Section 11 of the Act. It
provides for total exemption of the income earned by an assessee from the property held for
charitable or religious purposes. Some dispute arose as to whether the activities of the
Corporation are charitable in nature and whether it is entitled to the benefit under Section 11 of
the act. Ultimately, in Commissioner of Income Tax v. APSRTC, the Honble Supreme Court
held that the Corporation is entitled to the benefit under Section 11 of the Act.

The Parliament amended Section 11 of the Act through the Finance Act 1983 by inserting Sub-
section (4A). Before insertion of the said provision, the exemption from tax in relation to income
of a charitable institution or trust was unqualified. Through Sub-section (4A) of Section 11 of the
Act, two conditions are stipulated. The first is that if the assessee is a Trust, it must be only for
public religious purposes; and its business consists of printing or publication of books; or is of a
kind, notified in the Gazette by the Central Government in this behalf. The second restriction is
that if it is an institution, it must be (a) wholly for charitable purposes; and (b) its work is mainly
carried on by its beneficiaries.

In the light of this amendment, the assessing authority refused to extend the benefit of the
exemption under Section 11(4A) of the Act to the Corporation, for the assessment years in
question mainly on the ground that its work is not carried on by the beneficiaries. An order of
assessment to this effect was passed on 25.01.1995 Aggrieved by that, the Corporation preferred
an appeal before the Commissioner (Appeals). Through its order, dated 21.08.1995, the
Commissioner refused to interfere with the order of assessment, on this aspect. Thereupon, the
Corporation filed I.T.A Nos. 1715 and 1716.Hyd/1995 before the Tribunal. The Tribunal
dismissed the appeals through a common order dated 21.07.1997 The Corporation filed R.A Nos.
293 and 294.Hyd/97, with a request to frame four questions and to refer them to this Court, for
answer. After hearing the matter at length, the Tribunal passed the order, referring the following
questions:
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1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in
holding that the applicant was not entitled to deduction under Section 11 of the Income Tax Act,
1961, on the ground that the applicant corporation carried on the work of the applicant, ignoring
the fact that by statute the employees of the corporation are regarded as a class of beneficiaries of
the applicant?

2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in
holding that the salaried employees were not beneficiaries in the teeth of Section 30 of the Road
Transport Act, 1950?

3. Whether on the facts and in the circumstances of the case, the Tribunal was correct in not
considering the distinction between an organisation carrying on business and an organisation
carrying on the activities on business principles brought out by the Honble Supreme Court in the
applicants own case as reported in 159 ITR page 1, for the purposes of considering the
applicability of section 11(4A) of the Income Tax Act, 1961?

4. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal
was correct in law in holding that for the purposes of determining the taxable total income under
Section 115J of the Act, the losses deductible of the earlier years is exclusive of depreciation?

Before we undertake discussion on merits, we take note of the submission made by the learned
counsel for the parties that question No. 2 is covered by the judgment of the Honble Supreme
Court in Surana Steels Pvt. Ltd. v. Deputy Commissioner of Income Tax. Therefore, we answer
that question in favour of the Corporation and against the Revenue.

Sri. A.V Krishna Kowndinya, learned senior counsel for the Corporation submits that the view
taken by the assessing authority, Commissioner and the Tribunal, as regards the eligibility of the
Corporation to claim benefit under Section 11 of the Act cannot be sustained in law. He submits
that as an institution covered by Section 11 of the Act, the Corporation was enjoying the benefit
of exemption year after year and that there was no basis to deny that benefit by invoking Section
11(4A)(b) of the Act. He submits that the restriction placed through Clause (b) of Section 11(4A)
of the Act is very limited in nature and it would apply only when the activities of an otherwise
charitable institution are carried out by an agency or body of persons, totally unconnected with
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the beneficiaries of the institution. He submits that the Corporation is a creature under the Road
Transport Corporations Act, 1950 and ever since its inception, its activities are being carried
out by the employees of the Corporation, who are none other than the representatives or the
authorised persons of the beneficiaries i.e, the ultimate public. He contends that there was no
qualitative difference at any point of time as to the nature of activities of the Corporation
warranting any different approach. He has placed reliance upon the judgment of the Bombay
High Court in Director of Income-Tax v. Bombay Bullion Association Dharam No Kanto Trust.

Sri. S.R Ashok, learned senior counsel for the Income Tax Department, on the other hand,
submits that the amendment through insertion of Sub-section (4A) was made by the Parliament,
with an avowed object of curtailing the misuse of the facility created under Section 11 of the Act.
He contends that after reviewing the situation pertaining to the exemption granted in favour of
public trusts and institutions, Parliament decided to restrict the benefit only to agencies covered
by Sub-section (4A). He contends that whether one goes by the undisputed facts or the general
purport of the activity of the Corporation, the view taken by the Tribunal cannot be found fault
with.

In Clallan County v. United States of America, (2) it was held by the Supreme Court of America
that a State cannot tax the property of a corporation organised by the Federal government to
produce material for war purposes, the property of which is conveyed to it by, or bought with the
money of, the United States, and used solely for the purposes of its creation. Holmes J. who
delivered the opinion of the Court emphasised the fact that in the case before the Court not only
the agent was created, but all the agent's property was acquired and used for the sole purpose of
producing a weapon for the war. "This is not like the case of a corporation," added the learned
Judge, "having its own purposes as well as those of the United States, and interested in profit on
its own account. The incorporation and formal erection of a new personality was only for the
convenience of the United States, to carry out its ends, and so, it is unnecessary to consider
whether the fact that the United States owned all the stock and furnished all the property to the
corporation, taken by itself, would be enough to bring the case within the policy of the rule that
exempts property of the United States."
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As is too well-known, that Section 11 occurs in Chapter-III of the Act, which deals with the list
of incomes, which do not form part of total income. The determination of total income is one of
the important steps in the process of levying income tax and that has to be done by taking into
account Section 5 of the Act. In the process of determination of total income, incomes of certain
descriptions are excluded from the purview. Section 11 of the Act, insofar as it is relevant for the
purpose of this case reads: 11(1) Subject to the provisions of sections 60 to 63, the following
income shall not be included in the total income of the previous year of the person in receipt of
the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to
the extent to which such income is applied to such purposes in India; and, where any such
income is accumulated or set apart for application to such purposes in India, to the extent to
which the income so accumulated or set apart is not in excess of twenty-five per cent of the
income from such property.

For the financial year 1983-84, Parliament sought to do away with the entire benefits referable to
sub-sections (1), (2), (3) and (3A) of Section 11 of the Act, in relation to income of the trusts or
institutions, if it is in the form of profits and gains of the business. However, in the ultimate
analysis, such a far-reaching proposal was dropped and sub-section (4A) was inserted, which
reads:

(4A) Sub-section ()1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in
relation to any income, being profits and gains of business, unless-

(a) the business is carried on by a trust wholly for public religious purposes and the business
consists of printing and publication of books or publication of books or its of a kind notified by
the Central Government in this behalf in the Official Gazette; or

(b) the business is carried on by an institution wholly for charitable purposes and the work in
connection with the business is mainly carried on by the beneficiaries of the institution.

From a perusal of this, it becomes clear that the provision is intended to narrow the scope of the
applicability of Section 11 of the Act. In the light of Sub-section (4A), the benefit under Section
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11 of the Act can be claimed, by a trust, only when (i) it is for public religious purpose; (ii) its
business consists of printing and publication of books; and (iii) it figures in the list notified by
the Central Government in the official Gazzette. On the other hand, if it is an institution, it must
satisfy two tests viz., (i) it is wholly for charitable purposes; and (b) the work in connection with
the business of the institution is mainly carried on by its beneficiaries.

That the corporation is an institution, and it derives income from the property held under trust for
charitable purposes, stood finally decided with the judgment of the Honble Supreme Court in
APSRTCs case (1 supra). Even in the assessment under examination, the Income Tax Officer
himself was satisfied that the Corporation answered the description of institution, being run for
charitable purposes. The basis, on which he denied the benefit of exemption is that it does not
satisfy the test under Sub-section 4A(b) of Section 11 of the Act. This view was affirmed by the
appellate Commissioner as well as the Tribunal. All of them proceeded on the assumption that
the Corporation is being run by the paid employees and not the beneficiaries; and thereby, it
cannot claim the benefit under Section 11 of the Act.

One of the best methods of understanding the purport of a provision of law, which is in the form
of amendment, is to take note of the law which existed before it, and to identify the purpose,
which the law making authority intended to achieve, through the amendment. Learned senior
counsel has made available to this Court, the Budget Speech of the Finance Minister for the
financial year 1983-84. He summarized his speech ccovering this aspect as under:

I have since considered the matter carefully. It see no justification for permitting investment of
trust funds in business concerns, including shares of companies in the private sector. I
accordingly propose to provide that all trust funds should be invested in specified modes, such
as, Government securities, units of the Unit Trust of India, deposits with scheduled banks,
approved financial corporations, etc. Investment in immovable properties will, however,
continue to be allowed. I am giving notice to all charitable and religious trusts to divest their
shareholdings and other investment in business concerns by 30th November, 1983. However,
trusts will be allowed to keep shares in companies, which formed part of the original corpus as
on June 1, 1973, and bonus shares received up to that date. Some trusts carry on business on
commercial lines and derive income therefrom. There is no reason why such business income
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should not be brought to tax. I, therefore, propose that business income of all charitable and
religious trusts including those which have hitherto been exempted by notification will be
brought to tax with effect from assessment year 1984-85. Trusts having business income will
also be required to conform to the new investment pattern if they wish to seek tax exemption in
respect of their other income.

From this, it is clear that the emphasis or the objective was to ensure that the profits earned
through business of the charitable and religious trusts are invested in a particular manner.
Nowhere in the speech, it is mentioned that the State intends to withdraw the facility of
exemption granted in favour of charitable trusts and institutions, altogether. The proposal under
the Finance Bill was to substitute Sub-section (4) of Section 11 of the Act, which is to the
following effect:

(4) Nothing contained in sub-section (1) or sub-section (2) or sub-section (3) or sub-section
(3A) shall apply in relation to any income being profits and gains of business.

This provision, if enacted, would have resulted in devastating effect, in the context of extending
the benefit under Section 11 of the Act. Ultimately, what emerged was Sub-section (4A) of
Section 11 of the Act.

There is no statement of objective in relation to Sub-section (4A) of Section 11 of the Act,

obviously because it emerged during the course of discussion. However, one thing which
becomes clear is that the Parliament intended to narrow the scope of Section 11 of the Act in its
application to Trusts on the one hand, and institutions on the other hand. That the corporation
does not answer the description of a Trust and it is an institution covered by Section 11 of the
Act, is beyond any pale of doubt. It is equally clear that the activities carried out by it are purely
charitable in nature. The only controversy is as to whether its business is mainly carried out by
the beneficiaries. This in turn involves examination of two aspects. The first is as to who are the
beneficiaries of the corporation, and the second is as to who mainly carry on the business of the
corporation. Even on the first aspect, the matter is settled with the judgment of the Honble
Supreme Court and it is only the public at large, that is beneficiary of the corporation.
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PROVISION RELATED TO THIS CASE

SEC 11 OF INCOME TAX ACT 1961

Any income derived from the property held under trust for charitable or religious purposes shall
not form part of the total income subject to the provisions contained in section 60 to 63 for
clubbing of income. The income which shall not form part of the total income of the trust
includes following:

• Any income derived from the property held under trust for charitable or religious purposes
provided such income is utilised for charitable or religious purposes in India. However if such
income is not utilised for these purposes but accumulated or set apart for the purpose of its
application for these purposes then also such income shall not form part of the total income.
Maximum of 15% of the total income derived from such property is allowed to be accumulated
or set apart.

• Any income derived from property held partially under trust (incorporated before
commencement of Income-tax Act) provided such income is utilised for charitable or religious
purposes in India. However if such income is not utilised for these purposes but accumulated or
set apart for the purpose of its application for these purposes then also such income shall not
form part of the total income. Maximum of 15% of the total income derived from such property
is allowed to be accumulated or set apart.

• Any income which is derived from a property held under the trust created on or after April 1,
1952, only for charitable purpose and is tending to promote international welfare in which India
is interested. However such income is exempted to the extent to which such income is applied
for welfare purposes outside India. However, in case of a charitable or religious trust which is
established before April 1, 1952, exemption is available if the income is applied to such welfare
purposes outside India.
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• Further any income in form of voluntary contributions which are made with the specific
direction that these contributions shall form part of corpus of a trust or institution shall not form
part of the total income.

While computing 15% of the total income for the purpose of computing the extent to which
exemption shall be allowed in first two cases voluntary contributions referred under section 12, if
any, shall also form part of the total income

Capital Gains:

When a capital asset which was held under trust wholly for a charitable or religious purpose is
transferred and whole or a part of the net consideration is being utilized to acquire any other
capital assets to be held for the same purpose, then the capital gain arising from the transfer of
such an asset shall deemed to have been applied to charitable or religious purposes to the
following extent-

1. When the whole of net consideration is utilized in acquiring the new capital asset, the whole of
such capital gain.

2. Where only part of net consideration is utilized for acquiring the new capital asset,then only
such capital gain shall be exempted which will be equals to the amount by which the cost of new
asset exceeds the cost of the transferred asset.

For example: If cost of the asset transferred was Rs. 20 lakhs and the amount of capital gains is
Rs. 10 lakhs. The new asset is acquired for Rs. 25 lakhs then the amount of capital gain which
will be exempt shall be computed as:

Capital Gain to be exempt = Cost of new asset – cost of transferred asset

I.e. Rs. 25 lakhs – Rs. 20 lakhs = Rs. 5 Lakhs

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CONCLUSION AND SUGGESTION

The contribution of internal funds as a source of mobllizatlon capital in APSRTC is
insignificant. As such, the Corporation's capacity to generate internal funds is very weak. %
External sources of finance are more popular with APSRTC than the internal sources. The
preference for external sources of finance was not because of any well laid out financial
principles but for non-availability of internal funds due to heavy losses.
External sources in. APSRTC constituted share capital and b~rrowed funds. The Road Transport
Corporatlon avails loans extensively not only from scheduled commercial banks but also from
financial institutions. The loans availed by the Road ~rans~ort Corporation were so huge that the
Corporation did not possess adequate cash generating capacity either to repay the loan or to
honour the interest burden regularly. Consequently, the financial structure of the Corporatlon
was disorderly organlzed and their financing methods and practices were imprudent from the
point of view of long-term solvency. The analysis of debt-equity mix revealed that the APSRTC
had used debt excessively in relation to equity, The negative debt-equity ratio was present In all
the years of the study period. It clearly implies that the Road Transport Corporation in Andhra
Pradesh completely relied on borrowed funds. The debt-equity mix of the corporation was
absolutely imbalanced since the debt used was very heavy in relation to equity, The excessive
use of debt capital in the Corporation was unjustified. The existing debt-equity mix if continued
without any correlation may further deepen the prevailing financial crisis in the State Road
Transport Corporation in Andhra Pradesh.
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BIBLIOGRAPHY

The researcher has consulted following sources to complete the proposal:

Primary sources:

Constitution of India, 1950

Inter-state water disputes act, 1956

Secondary sources:

Secondary sources include books, articles, magazines, journals, websites etc.

o BOOKS:
1. Author: M.P. JAIN, Indian constitutional law, Published by Lexis Nexis, Edition – 8th ,
(2017)
2. Author: Dr. J.N. PANDEY, Constitutional law of India, Published by Central Law
Agency, Edition – 56th , (2019)
3. Author: V.N. SHUKLA, Constitution of India, Published by Eastern Book Co., Edition
– 8th , (2016)

WEBSITES:
o https://www.clearias.com/inter-state-river-water-disputes-india/
o https://economictimes.indiatimes.com/news/politics-and-nation/lok-sabha-passes-inter-
state-river-water-disputes-amendment-bill/articleshow/70468914.cms
o https://www.indiatoday.in/india/story/interstate-river-water-disputes-bill-2019-1575531-2019-07-
31
o https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1578194