Artificial Juridical Person Under Income Tax in India

The Income Tax Act, 1961, defines a "person" broadly, encompassing not just individuals but also various entities capable of holding property, entering into contracts, and being taxed. One such entity is the Artificial Juridical Person (AJP). This article delves into the concept of AJP under Indian Income Tax law, its definition, characteristics, taxability, and relevant legal precedents.

Understanding the Definition of "Person" Under the Income Tax Act

Section 2(31) of the Income Tax Act, 1961, defines "person" to include the following:

• An Individual: A natural human being.
• A Hindu Undivided Family (HUF): A family consisting of persons lineally descended from a common ancestor.
• A Company: An entity registered under the Companies Act, 2013, or any previous company law.
• A Firm: A partnership firm registered under the Indian Partnership Act, 1932.
• An Association of Persons (AOP) or a Body of Individuals (BOI): Groups of individuals or entities associated for a common purpose.
• A Local Authority: Municipalities, panchayats, and other government bodies responsible for local governance.
• Every Artificial Juridical Person: This is the focus of our discussion.

The inclusion of "every artificial juridical person" significantly expands the scope of the Income Tax Act, ensuring that entities created by law, but not falling under the other specified categories, are also subject to taxation.

Defining the Artificial Juridical Person (AJP)

An Artificial Juridical Person (AJP) is an entity created by law, possessing legal rights and obligations distinct from its members or the individuals associated with it. It is a legal fiction, recognized by law as having the capacity to sue and be sued, own property, enter into contracts, and perform other legal acts in its own name.

Unlike natural persons (individuals), AJPs are created by human intellect and legal processes. They exist only in the eyes of the law and operate through authorized representatives.

Key Characteristics of an Artificial Juridical Person

1. Creation by Law: An AJP is brought into existence by a statute, legal document, or established legal principles. It does not exist naturally.
2. Separate Legal Entity: An AJP has a legal existence separate and distinct from its members or constituents. It can own property, enter into contracts, and incur debts in its own name.
3. Perpetual Succession: An AJP generally enjoys perpetual succession, meaning its existence is not affected by the death, retirement, or insolvency of its members. It continues to exist until dissolved according to law.
4. Capacity to Sue and Be Sued: An AJP can sue and be sued in its own name. This is a fundamental characteristic of its separate legal personality.
5. Right to Own Property: An AJP can acquire, hold, and dispose of property in its own name.
6. Acts Through Representatives: Since an AJP is an artificial entity, it acts through human agents or representatives who are authorized to act on its behalf.
7. Taxable Entity: As explicitly included in Section 2(31) of the Income Tax Act, an AJP is a taxable entity and is liable to pay income tax on its income.

Examples of Artificial Juridical Persons in India

Several entities fall under the category of Artificial Juridical Person under Indian law. Some prominent examples include:

• Universities: Universities established under central or state legislation are considered AJPs. They have the power to conduct examinations, grant degrees, and own property.
• Religious Endowments (Deities): In Hindu law, a deity (idol) in a temple is considered a juristic person and can own property and receive income. The management of the deity's property is usually vested in a trustee or a board of trustees.
• Statutory Corporations: Corporations created by a special act of Parliament or a state legislature, such as the Life Insurance Corporation of India (LIC) or the Food Corporation of India (FCI), are AJPs.
• Bar Council: Bar Council is created under Advocates Act, 1961, is also considered as AJP.
• Cooperative Societies: Registered cooperative societies are considered as AJP.
• Municipalities and Local Bodies: These are sometimes considered AJP depending upon the legislation under which they are created and the powers conferred upon them.

Taxability of Artificial Juridical Persons Under the Income Tax Act

As a "person" under Section 2(31), an AJP is subject to income tax on its total income. The specific tax rates and applicable provisions depend on the nature of the AJP and the type of income it earns.

1. Determination of Residential Status: Like other taxable entities, the residential status of an AJP needs to be determined to ascertain the scope of its taxable income in India. An AJP can be either resident or non-resident, based on its place of control and management.
2. Heads of Income: An AJP can earn income under various heads, including:
   • Income from Business or Profession: If the AJP carries on any business or profession, the profits and gains are taxable under this head.
   • Income from House Property: If the AJP owns any house property, the rental income is taxable under this head.
   • Income from Capital Gains: If the AJP transfers any capital asset, the resulting capital gains are taxable.
   • Income from Other Sources: Any income that does not fall under the above heads is taxable under this head.
3. Deductions and Exemptions: An AJP may be eligible for certain deductions and exemptions under the Income Tax Act, depending on its nature and activities. For instance, universities may be eligible for exemptions under Section 10 of the Act.
4. Filing of Income Tax Returns: AJPs are required to file their income tax returns within the prescribed due dates, similar to other taxable entities. They must maintain proper books of accounts and get them audited if their turnover exceeds the threshold limit specified under Section 44AB of the Income Tax Act.
5. Applicability of TDS (Tax Deducted at Source): AJPs are also subject to the provisions of TDS. They are required to deduct tax at source on certain payments made by them, as per the provisions of the Income Tax Act.

Landmark Judgments and Legal Precedents

Several landmark judgments have clarified the concept of Artificial Juridical Person and its taxability under Indian law. Some notable cases include:

1. Shiromani Gurdwara Prabandhak Committee, Amritsar vs. Som Nath Dass (2000): This case discussed the concept of a juristic person in the context of a religious institution. The Supreme Court held that a Guru Granth Sahib (the holy book of Sikhs) can be considered a juristic person and can own property.
2. Yogendra Nath Naskar vs. Commissioner of Income Tax (1969): This case established that a Hindu deity is a juristic person capable of holding property and being taxed. The court emphasized that the deity is not merely an idol but a legal entity representing the religious faith and sentiments of the devotees.
3. CIT v. Shri Khatu Shyam Mandir Trust [2022] 143 taxmann.com 340 (Rajasthan): The Rajasthan High Court observed that deity is regarded as a juristic person capable of holding property and its manager is merely its caretaker. High court held that income derived from the properties of temple is not exempt under Section 11.
4. Commissioner of Income-tax Vs. Thakurji Shri Radhaballabhji (1970): The Allahabad High Court reiterated the position that an idol is a juristic person and can be assessed to income tax. The court clarified the distinction between the idol and its manager, emphasizing that the income is taxable in the hands of the idol itself.

These cases highlight the judiciary's recognition of AJPs, particularly religious deities and institutions, as distinct legal entities capable of owning property and being subject to taxation.

Challenges and Considerations

While the concept of AJP is well-established under Indian law, several challenges and considerations arise in its application:

1. Determining the Scope of Activities: It can be challenging to determine the exact scope of activities that fall within the purview of an AJP, especially for entities with diverse functions.
2. Identifying the Responsible Persons: Identifying the individuals responsible for the management and compliance of an AJP can be complex, especially in cases where the management structure is not clearly defined.
3. Ensuring Transparency and Accountability: Ensuring transparency and accountability in the operations of AJPs, particularly religious institutions, is crucial to prevent tax evasion and misuse of funds.
4. Proper Bookkeeping and Audit: Strict compliance with bookkeeping and audit requirements is essential to maintain accurate financial records and ensure proper assessment of income tax liabilities.

Conclusion

The concept of Artificial Juridical Person is an important aspect of Indian Income Tax law. Its inclusion in the definition of "person" ensures that various entities created by law, possessing legal rights and obligations, are subject to taxation. Understanding the characteristics, taxability, and relevant legal precedents related to AJPs is crucial for tax compliance and effective tax administration. While challenges and considerations exist, the established legal framework provides a basis for the fair and equitable taxation of these entities. By recognizing AJPs as distinct legal entities, the Income Tax Act aims to prevent tax evasion and ensure that all income-generating entities contribute to the national exchequer. The courts have played a significant role in clarifying the scope and applicability of this concept, particularly in the context of religious institutions, reinforcing the principle that these entities are juristic persons capable of holding property and being taxed accordingly.