Indian Kanoon - Search engine for Indian Law

"9. 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 per cent, 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 the 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 the 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 asses- See 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 there after 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."

11. Against the assessment order dated 04.3.2013, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 23.1.2015 has dismissed the appeal of the assessee.

12. Aggrieved with the aforesaid order of the Ld. CIT(A), assessee is in appeal before the Tribunal.

13. During the hearing, Ld. Counsel of the assessee has stated that in the present case the assesse purchased and constructed the property after taking term loan from the bank and made the agreement with the Mother Pride Education Persona P Ltd. in respect of rental income. There is no case of any transfer of funds to the members of the society. He further stated that the rental income from the property is in the charitable objects of the Trust as mentioned in the Clause z aa) of the Memorandum of Association. He relied upon the order of the Hon'ble Jurisdictional High Court in the case of Director of Income Tax (Exemption) vs. Span Foundation (2009) 17 DTR 283 (Del) and Hon'ble Uttarakhand High Court decision in the case of CIT vs. Jyoti Prabha Soceity (2009) 310 ITR 162. He further stated that the source from which the money is received is lease and license fee but its application is for the purposes of charitable activities covered u/s. 2(15) of the Act. in respect of interest expenses of Rs. 33,94,280/- it has been paid on term loan taken to acquire/ construction of assets of the society. He further stated that assessee has also made the repayment and depreciation of Rs. 33,94,280/- are the application of income for charitable purposes. He relied upon the order of the Hon'ble Madras High Court in the case of DIT(E) vs. GovinduNaicker Estate (2009) 315 ITR 237 (Madras). It was the further contention that expenditure incurred on blood donation camps, free books distribution and Eye check up Camp are purely charitable in nature and therefore, to be considered of application of income. Therefore, he finally stated that this is not the case of the AO that the assessee has made any business of sale or purchase of property. There is no allegation that activities are not charitable in nature. In view of the above, he requested that addition in dispute may be deleted.

14. On the contrary, Ld. DR opposed the aforesaid contention of the Ld. Counsel of the assessee and relied upon the orders of the authorities below and requested that the same may be upheld.

15. I have heard both the parties and perused the relevant records available with me, especially the orders passed by the revenue authorities and the case laws cited by the Ld. Counsel of the Assessee. During the year under consideration the assessee had an agreement with M/s Mothers Pride Education Persona Limited to establish a pre- school learning center/ nursery school. As per the agreement with the assessee and the said company, premise will be made available free of charge during the subsistence of the agreement. In consideration of the above assessee is entitled to 20% of the entire collection which includes registration charges, admission charges, annual charges, quarterly charges, monthly fees, hobby classes and charges of all the activities conducted in the school except transport and refundable security. AO during the assessment proceedings consider the amount received from Mothers Pride Persona Limited of Rs. 97,90,257/- as Income under the head house property and allowed statutory deduction (@30%} of Rs. 29,37,077/- and interest on borrowed capital of Rs. 33,94,280/- under section 24 of the Income Tax Act. Further addition of Rs. 17,503/- on account of interest income was also made by him. Total addition of Rs. 34,54,602/- was made to the returned income of the assessee. The assessee is not engaged in charitable activities and thus income is assessable under the head income from house property. The AO has passed the order and has treated the income received from the Mothers Pride Education Persona P Ltd as income under the head house property. However, while computing the total assessed income added the interest income of Rs. 17,503/- , without giving any justification for the same. In the present case, assessee purchased and constructed the property after taking term loan from the bank and made the agreement with the Mothers Pride Education Persona P Ltd in respect of rental income. There is no case of any transfer of funds to the members of the society. Further, rental income from the property is in the charitable objects of the trust as mentioned in the clause (z aa) of the Memorandum of Association. Further a perusal of income & expenditure shows that application made by the assessee is towards the charitable activities and as per the objects of the society. The issue is squarely covered in favour of assessee by the judgment of Jurisdictional High Court in the case of DIRECTOR OF INCOME TAX (EXEMPTION) Versus SPAN FOUNDATION [(2009) 17 DTR 283 (Del), (2009) 178 TAXMAN 436 (Del)] wherein Assessee trust having constructed a building out of borrowed funds, application of rent derived from the said building to repay the borrowed funds has to be treated as application of income for charitable purposes and the assessee is entitled to benefits of ss. 11 and 12. Further Hon'ble Uttarakhand High Court in the case of COMMISSIONER OF INCOME-TAX Versus JYOTI PRABHA SOCIETY [2009] 310 ITR 162 (Uttarakhand) held as under;

term loan taken to acquire/construction of assets of the society. Further, assessee has also made the repayment of loan and depreciation of Rs. 36,51,891/- are the application of income for charitable purposes. In this regard, reliance is placed on the judgement of the Madras High Court in the case of DIT{E) vs Govindu Naicker Estate [2009] 315 ITR 237 (Madras) wherein it has been held as under:

"9. 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 per cent, 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 the 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 the 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 asses- See 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 there after must be treated as application of its income. By repayment of the loan, the trust wiped its liability and the income' earned from me property would be available for being utilised for charitable purposes."