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2005 DIGILAW 470 (GUJ)

COMMISSIONER OF INCOME TAX v. SACRED HEART CHURCH

2005-07-13

D.A.MEHTA, H.N.DEVANI

body2005
H. N. DEVANI, J. ( 1 ) THE Income-tax Appellate Tribunal, Ahmedabad Bench "a", has referred the following question for the opinion of this Court under Section 256 (1) of the Income-tax Act, 1961 (the Act), at the instance of the Revenue :"swhether, the Appellate Tribunal is right in law and on facts in holding that the assessee is entitled to the benefit of section 11 in respect of the amount of Rs. 1,65,201/- advanced as loan to certain section of the public, which according to the Income-tax Officer the assessee had written off since it found that the chances of recovery were remote?" ( 2 ) THE Assessment Year is 1985-86 and the relevant accounting period is the year ended on 31st December, 1984. The assessee, a Public Charitable Trust, filed its return of income declaring deficit of Rs. 1,40,760/- on 2nd March, 1987. On perusal of the statement of income and expenditure the Assessing Officer found that the assessee had deducted an amount of Rs. 1,65,201/- against the current years income and accordingly, had arrived at the said deficit. As per the assessee the said amount had been advanced as loan to members of the weaker sections of the public in the earlier years, under a self housing scheme formulated by the assessee Trust. In the year under consideration it was found that the chances of recovery of the said loan amount were remote, hence, the said amount was transferred to the expenditure account with the following narration: SLoans under self housing Scheme of residence for poor and weaker section given as a transfer from Balance-Sheet. "the assessee claimed that the said amount had been applied towards the objects of the assessee Trust. The Assessing Officer held that the said amount had not been utilized for the purposes of the objects or against the current years income. The Assessing Officer also found that the auditors report indicated that the said amount had been written off; that, since the assessee was not carrying on any business, there was no question of setting off the said amount against the income of the current year. Accordingly, he disallowed the amount of Rs. 1,65,201/- as an item of expenditure. " ( 3 ) THE assessee carried the matter in appeal before the Dy. Accordingly, he disallowed the amount of Rs. 1,65,201/- as an item of expenditure. " ( 3 ) THE assessee carried the matter in appeal before the Dy. Commissioner of Income-tax, who by his order dated 2nd March, 1989 dismissed the appeal and confirmed the order of the Assessing Officer. ( 4 ) THE assessee preferred a Second Appeal before the tribunal. The Tribunal by its order dated 29th April, 1992 allowed the appeal in relation to the amount of Rs. 1,65,201/- advanced as loans to members of the weaker sections of the public. "the Tribunal held that the loan had been given from the income of the assessee and that instead of making an outright gift, the assessee had first disbursed the amount as loan and in the subsequent years waived its right to recover the amount. That, the assessee must be said to have applied the income when it gave up its rights to recover the loan. The Tribunal placed reliance upon the decision of the Rajasthan High Court in the case of Commissioner of Income-tax Vs. Maharana of Mewar Charitable Foundation, [1987] 164 ITR 439 (Raj.) and held that the assessee was entitled to the benefit of Section 11 in respect of the amount of Rs. 1,65,201/ -. " ( 5 ) MR. TANVISH U. Bhatt, learned Standing Counsel appearing on behalf of the applicant - Revenue, reiterated the reasons that weighed with the Assessing Officer as well as the Dy. Commissioner of Income-tax. ( 6 ) THOUGH served, there is no appearance on behalf of the respondent assessee. ( 7 ) IT is not in dispute that the assessee, a Public Charitable Trust, is entitled to the benefits of Section 11 of the Act. The amount in question was advanced by the assessee as housing loan to members of the weaker sections of the public under a scheme framed by the Trust in pursuance of its objects, in the earlier years. However, it was found that the chances of recovering the said amount were remote, hence, the same was written off and claimed as expenditure in the year under consideration. As can be seen from the orders of the Dy. However, it was found that the chances of recovering the said amount were remote, hence, the same was written off and claimed as expenditure in the year under consideration. As can be seen from the orders of the Dy. Commissioner of Income-tax (Appeals) and the Tribunal it was the case of the assessee that the Trust had applied its income towards loan under the self housing scheme for residences for the poor and weaker sections of the public and that such amount was considered as aid to the loanees and claimed as an expenditure. That, the said expenditure was an allowable deduction as the said amount was "applied" within the meaning of Section 11 (1) (a) of the Act and that the said expenditure had been incurred in the fulfillment of the objects of the Trust. It was the case of the assessee that the fact that the expenditure had been incurred in the fulfillment of the objects of the Trust was not denied by the Assessing Officer. "it was the case of the assessee that the meaning of the word "applied" is that the income should be applied or spent for the charitable or religious objects of the Trust and that the Section did not limit the application of the income for charitable or religious purposes only to the year in which the income had arisen, and that the word "applied" must be given its natural meaning. It was submitted that even if the expenses had been incurred in the earlier year and the said expenses were adjusted against the income of the subsequent year, the income could be said to be applied for charitable and religious purposes in the year in which the same has been adjusted. In support of its contention the assessee had relied upon the CBDT Circular No. 100 dated 24th January, 1973. On behalf of the assessee reliance had also been placed upon the decision of the Rajasthan High Court in the case of CIT Vs. Maharana of Mewar Charitable Foundation (supra ). Reliance was also placed upon the decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax, Andhra Pradesh-I Vs. Trustees of H. E. H. The Nizams Charitable Trust, [1981] 131 ITR 497 (A. P. ). ""this Court in the case of Commissioner of Income-tax Vs. Maharana of Mewar Charitable Foundation (supra ). Reliance was also placed upon the decision of the Andhra Pradesh High Court in the case of Commissioner of Income-tax, Andhra Pradesh-I Vs. Trustees of H. E. H. The Nizams Charitable Trust, [1981] 131 ITR 497 (A. P. ). ""this Court in the case of Commissioner of Income-tax Vs. Shri Plot Swetamber Murti Pujak Jain Mandal, [1995] 211 ITR 293 (Guj.) had upon considering the scheme of Section 11 of the Act observed thus : SA bare perusal of the above-referred provisions of the Act shows that the 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 is to be excluded for the purposes of computing the income of the trust for the purpose of assessment. There are no words of limitation in this section providing that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. The word Sapplied means Sto put to use or Sto turn to useor Sto make useor Sto put to practical use. Having regard to the provisions of section 11 of the Act, it is clear that when the income of a trust is used or put to use to meet the expenses incurred for religious or charitable purposes, it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words, even if expenses for charitable and religious purposes have been incurred for the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. "the Court referred to the CBDT Circular No. 100 dated January 24, 1973 and held as follows:"according to the abovereferred circular if a trust wants to spend more money for charitable and religious purposes in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11 (1) (a) of the Act. The contention that only that part of the income of a charitable trust should be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned, cannot be accepted, as it would lead to an anomalous situation. If the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to exemption from tax under section 11 (1) (a) of the Act in view of the circular above referred to. But, if the trust instead of taking a loan incurs expenses for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement under section 11 (1) (a) of the Act if the contention advanced by the Revenue is accepted. The construction which leads to such an anomaly has got to be avoided. There is nothing in the language of section 11 (1) (a) of the Act to indicate that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year or that utilization of such income for meeting the expenditure of the earlier year, would not amount to such income being applied for charitable or religious purposes. ""the Court referred to the decision of the Rajasthan High Court in the case of Commissioner of Income-tax Vs. ""the Court referred to the decision of the Rajasthan High Court in the case of Commissioner of Income-tax Vs. Maharana of Mewar Charitable Foundation (supra) wherein the Court, after referring to several decisions on the point, had held that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under section 11 (1) (a) of the Act. This Court agreed with the view expressed by the Rajasthan High Court and held that the deficit arising out of excess of expenditure over income during the previous year relevant to the assessment year should be set off against the surplus of income over expenditure relating to the assessment year in computing the taxable income of the latter assessment year. ""the Court also referred to two decisions of this Court in the cases of (i) Commissioner of Income-tax Vs. Ganga Charity Trust Fund, [1986] 162 ITR 612 (Guj.) ; and (ii) Commissioner of Income-tax Vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, [1992] 198 ITR 598 (Guj.) and held as follows: In view of the two decisions of this court above referred to, it is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and will have to be excluded from the income of the trust under section 11 (1) (a) of the Act. ""a similar view has been taken by the Honble Supreme Court in the case of Commissioner of Income-tax Vs. Thanthi Trust, [1999] 239 ITR 502 (S. C. ). ""a similar view has been taken by the Honble Supreme Court in the case of Commissioner of Income-tax Vs. Thanthi Trust, [1999] 239 ITR 502 (S. C. ). The Honble Supreme Court observed that it was no part of the Revenues case at any point of time that the credit entries made in the assessees books of account were not genuine or true or that they were mere make- believe or bogus. In the facts of the present case also, it is not the case of the Revenue that the Assessing Officer has doubted the entries made in respect of the item of expenditure in question. " ( 8 ) APPLYING the aforesaid principles to the facts of the present case, it is apparent that the Trust had incurred expenditure towards advancement of loan to persons belonging to the weaker sections of the society for the purpose of its charitable objects. The said amount was written off in the year under consideration as the chances of recovery were found to be remote and were transferred to the expenditure account and adjusted against the income of the year under consideration. Accordingly, the Tribunal has rightly held that the income was applied in the year under consideration, when the right of recovering loan was waived and the amount was adjusted against the income of that year. ( 9 ) IN the circumstances, it cannot be said that there is any infirmity in the order of the Tribunal. The Tribunal was right in holding that the assessee is entitled to the benefit of Section 11 in respect of amount of Rs. 1,65,201/- advanced as loan to weaker sections of the public. Accordingly, the reference is answered in the affirmative i. e. in favour of the assessee and against the Revenue. ( 10 ) THE reference stands disposed of accordingly. There shall be no order as to costs. .