IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 27.01.2009 Coram : THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIAN and THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.477 of 2004 Director of Income Tax (Exemption) Chennai Appellant v. M/s.Govindu Naicker Estate Chennai Respondent Tax Case (Appeal) preferred under section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras 'A' Bench, dated 17.9.2003 in ITA Nos.1935/Mds/95. For appellant : Mr.S.V.Subramanian For respondent : Mr.M.P.Senthil Kumar for Mr.Philip George JUDGMENT
(Judgment of the Court was delivered by
K.RAVIRAJA PANDIAN, J.)
The revenue is on appeal against the order of the Income Tax Appellate Tribunal, Madras ‘A’ Bench, dated 17.9.2003 in ITA Nos.1935/Mds/95.
2. The appeal was admitted on the following question of law:
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the repayment of loan taken from the Indian Bank for construction of commercial complex was application of income for charitable purposes and, therefore, the assessee trust was eligible for exemption under Section 11 of the Income-tax Act?
3. The facts of the case are as follows:
The assessee is a charitable trust. The relevant assessment year is 1993-04. The original assessment under Section 143(3) of the Income-tax Act was completed on 21.3.1994 on a total income of Rs.5,69,830/-. The assessing officer noted that during the year ended 31.3.1993, the Trust had paid a sum of Rs.11,47,500/-, being part repayment of a loan taken from Indian Bank for constructing a multi-storied building at No.23, Jahangir Street, Chennai -1. The loan due to the Bank amounted to Rs.69,48,855/- as at the end of the accounting year. It was the case of the assessee that the repayment of loan to the Bank amounted to application of income under Section 11 of the Act, even though the expenditure was of a capital nature. However, the assessing Officer was of the opinion that the construction of a multi-storied commercial complex was not one of the objects of the Trust and as such the expenditure incurred for the construction of the building could not be treated as charitable nature, therefore, the repayment of loan could not be regarded as application of income towards the charitable objects of the Trust and framed the assessment rejecting the claim of the assessee. Aggrieved by the order of the assessing officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who allowed the appeal on the premise that the property of the Trust was in a dilapidated condition and therefore fresh construction had to be undertaken by obtaining loan. The subsequent letting out of the property was connected with the carrying out of the objects of the Trust and hence, the repayment of loan to Indian Bank should have been treated as eligible application. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the revenue filed an appeal before the Income-tax Appellate Tribunal. The Tribunal confirmed the finding of the Commissioner of Income-tax (Appeals). Thus, the present appeal is filed by the revenue questioning the correctness of the order passed by the Tribunal.
4. Learned counsel appearing for the revenue submitted that the construction of the capital asset cannot be regarded as an application of income for the purpose of carrying out the objects of the Trust. Hence the order of the Tribunal as well as the first appellate authority have to be set aside and that of the assessing officer has to be restored.
5. However, learned counsel appearing for the assessee submitted that the issue similar to the one has been considered by this Court in the case of Commissioner of Income-tax Vs. Kannika Parameswari Devasthanam and Charities, (1982) 133 ITR 779, which has been referred to and approved by the Karnataka High Court in the case of Commissioner of Income-tax Vs. Janmabhumi Press Trust, (2000) 242 ITR 457. The Supreme Court has also held in the case of S.RM.M.CT.M. TIRUPPANI TRUST VS. COMMISSIONER OF INCOME-TAX, (1998) 230 ITR 636 that the amount for purchasing a building which is to be utilised as a hostel is entitled to exemption under Section 11(1) of the Income-tax Act.
6. Heard the argument of the learned counsel on either side and perused the materials on record.
7. Section 11 of the Income-tax Act, 1961 grants exemption from the levy of income-tax in respect of the income from the property held for charitable or religious purposes. The Section contemplates that for computation of the income it is to be seen whether the income has been applied for charitable purposes to the required extent. The Section requires consideration of the objects of the Trust and also the income derived from the property held in Trust. The income from the Trust property has to be applied on the objects of the Trust. As far as the objects of the Trust are concerned, the application of the amount can be for revenue or capital purpose, (vide Commissioner of Income-tax Vs. Kannika Parameswari Devasthanam and Charities, (1982) 133 ITR 779).
8. In the case on hand, it is an admitted fact that the property of the assessee Trust was in a dilapidated condition and would not earn income to carry out the objects of the Trust. For the purpose of carrying out the objects of the Trust, it has become necessary to demolish and reconstruct the property so as to earn income by exploiting the property. It is also an admitted fact that the rental income in the property held in Trust amounted to 90 percent of the total income of the Trust. For the purpose of putting up the construction of the property held in Trust, the Trust borrowed fund from Indian Bank. Thus, the capital asset so put up by the borrowed fund is only for the purpose of augmenting income in order to carry out the object of the Trust as envisaged. It is clear from the order of the Commissioner of Income-tax (Appeals) that neither the assessing officer nor the assessee has adverted to the object of the charitable trust. But the authorities proceeded on the premise that the complex has been put up by the Trust in order to perform its charitable activities, which factum has also not been disputed by the revenue. The assessee Trust in order to perform its charitable activities, necessarily has to exploit the capital assets by finding appropriate avenues for earning revenue and for that purpose, has to incur expenditure, which is capital in nature by raising loan. The capital asset built with a borrowed fund generates income which enabled charitable Trust to perform its charitable activities. Thus, the capital asset built with borrowed fund, under no circumstances, could be regarded to be outside the scope of its objects. If it is within the objects of the Charitable Trust, then there is no reason as to why the borrowing made for the construction of the building and repayment of the loan could not be treated as an application of income. It is not the case of the assessing officer that the assessee by constructing the commercial complex contravened the objects of the Trust. There is no provision in the Act, which disentitles the assessee Trust from claiming repayment of loan as application of income, especially in view of the fact that the Trust has to augment its income and for that purpose it has put up a construction with borrowed fund. If raising of loan does not stand in the way of its charitable activities, the repayment thereafter must be treated as application of its income. By repayment of the loan, the Trust wiped its liability and the income earned from the property would be available for being utilised for charitable purposes.
9. Our view has been fortified by the view taken by the Karnataka High Court in the case of Commissioner of Income-tax Vs. Janmabhumi Press Trust, (2000) 242 ITR 703, wherein the Karnataka High Court held that the repayment of the debt incurred by the trust for construction of the building for the purpose of augmenting its funds should be treated as application of the income of the assessee’s trust for charitable purposes. While holding so, the Karnataka High Court followed its earlier judgment in respect of the same assessee reported in (2000) 242 ITR 457.
10. In the case of Commissioner of Income-tax Vs. Kannika Parameswari Devasthanam and Charities, (1982) 133 ITR 779, the Division bench of this Court held that so long as the expenditure had to be incurred out of the income earned by the Trust, even if such expenditure is for capital purposes, on the objects of the Trust, the income would be exempt. The Division Bench further held that the facts would have to be investigated to find out whether the assessee had incurred the expenditure of capital nature to promote the objects of the Trust by applying income in those objects.
11. Thus, it is clear that even though the expenditure incurred are capital in nature, if the expenditure incurred is for the purpose of promoting the object of the Trust, the expenditure incurred would definitely be considered as an application of the income for the purpose of the Trust. The observation of the Court that the mere fact that the application of the income resulted in the maintenance of the property held under Trust for charitable purpose would not entitle the Trust to exemption of such income under Section 11 of the Income-tax Act has to be considered in the context in which it is stated. If the application of the income resulted in the maintenance of the property held under the Trust for charitable purpose, is for the purpose of augmenting income in order to pursue the objects of the Trust, that would amount to application of income for the purpose of the Trust.
12. In S.RM.M.CT.M. TIRUPPANI TRUST VS. COMMISSIONER OF INCOME-TAX, (1998) 230 ITR 636, the object of the assessee was to carry out Thiruppani or repairs to old Hindu temples, building new ones, giving aid to or establishing hostels, educational and industrial institutions, etc., The assessee purchased building in India, which was utilsied as a hospital. The question arose whether the purchase of the building could be regarded as an
K.RAVIRAJA PANDIAN, J.
and
P.P.S.JANARTHANA RAJA, J.
usk
application for charitable purpose, the Supreme Court has held that the assessee has applied Rs.8 lakhs for charitable purposes In India by purchasing a building, which was utilized for a hospital. Therefore, the assessee is entitled for exemption under Section 11(1).
13. in the light of the judgments referred to above and for the foregoing reasons, we are of the view that the reasoning given by the Commissioner of Income-tax (Appeals), which has been affirmed by the Income Tax Appellate Tribunal, requires no interference at our hands in this appeal and thus the question of law framed for consideration which has been extracted above is answered in the affirmative against the revenue by dismissing the appeal.
(K.R.P.,J.) (P.P.S.J.,J.)
27.01.2009
Index:Yes
Internet:Yes
To
1.The Assistant Registrar
Income-tax Appellate Tribunal
Rajaji Bhavan, Besant Nagar,
Chennai-90.
2. The Secretary,
Central Board of Direct Taxes,
New Delhi.
3. The Commissioner of Income Tax
(Appeals III), Chennai 34.
4. The Deputy Commissioner of Income-tax
(OSD), Exemptions, Chennai 34. T.C. (A) No.477 of 2004