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(ii) Whether loans advanced by an education trust to students for higher studies would be treated as application of income for charitable purposes?

'Justification of application of income by way of donation and by way of refund of loan Board has decided that repayment of the loan originally taken to fulfill one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money- lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfillment of the objectives of the trust, granting of loans, even interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust if will be treated as income of that year. ' The above position has also been confirmed by various courts in the series of Judicial pronouncements. Some of these are as under -

(a) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust; and

(b) Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

Consequently the CBDT issued a circular No. 100 [F. No. 195/7/72- IT(A-I)], dated 24-1- 1973. The relevant part of the circular is reproduced below -

"The Board has decided that repayment of the loan originally taken to fulfill one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfillment of the objectives the trust, granting of loans, even if interest-bearing, will amount to the 'implication of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year. The circular clarifies that repayment of loan taken to fulfill one of the objects of the trust will amount to an application of income for charitable and religious purposes. However it does not become clear from the circular that whether repayment of loan repayment of loan is to be allowed as application in cases where the assessee has claimed capital expenditure out of such loan as application of income without showing the same as receipt / income.

(i) where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust; and

(ii) whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

2. Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest bearing loans for higher studies, it will amount to carrying on of money lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans even interest bearing will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.