Director Of Income Tax (Exemption) Chennai Appellant v. M/S.govindu Naicker Estate Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 27.01.2009 Coram : THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANandTHE 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 EstateChennai Respondent Tax Case (Appeal) preferred under section 260A of the IncomeTax Act, 1961, against the order of the Income Tax AppellateTribunal, Madras 'A' Bench, dated 17.9.2003 in ITA Nos.1935/Mds/95against the order of the Commissioner of Income Tax (Appeals)IIIMadras dated 26.6.1995 in I.T. Appeal NO.3/94-95 against the orderof the Deputy Commissioner of Income Tax (OSD) (Exemption) Madrasdated 21.3.1994 in G.I.R.No.4623-G, for the Assessment year 1992-93. For appellant: Mr.S.V.Subramanian For respondent :Mr.M.P.Senthil Kumar for Mr.Philip George JUDGMENT (Judgment of the Court was delivered byK.RAVIRAJA PANDIAN, J.) The revenue is on appeal against the order of the Income TaxAppellate Tribunal, Madras 'A' Bench, dated 17.9.2003 in ITANos.1935/Mds/95. "Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was rightin holding that the repayment of loan taken from thehttps://hcservices.ecourts.gov.in/hcservices/Indian Bank for construction of commercial complex was application of income for charitable purposes and,therefore, the assessee trust was eligible forexemption 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 assessmentyear is 1993-04. The original assessment under Section 143(3) ofthe Income-tax Act was completed on 21.3.1994 on a total income ofRs.5,69,830/-. The assessing officer noted that during the yearended 31.3.1993, the Trust had paid a sum of Rs.11,47,500/-,being part repayment of a loan taken from Indian Bank forconstructing a multi-storied building at No.23, Jahangir Street,Chennai -1. The loan due to the Bank amounted to Rs.69,48,855/- asat the end of the accounting year. It was the case of theassessee that the repayment of loan to the Bank amounted toapplication of income under Section 11 of the Act, even though theexpenditure was of a capital nature. However, the assessingOfficer was of the opinion that the construction of a multi-storied commercial complex was not one of the objects of the Trustand as such the expenditure incurred for the construction of thebuilding could not be treated as charitable nature, therefore, therepayment of loan could not be regarded as application of incometowards the charitable objects of the Trust and framed theassessment rejecting the claim of the assessee. Aggrieved by theorder of the assessing officer, the assessee filed an appealbefore the Commissioner of Income-tax (Appeals), who allowed theappeal on the premise that the property of the Trust was in adilapidated condition and therefore fresh construction had to beundertaken by obtaining loan. The subsequent letting out of theproperty was connected with the carrying out of the objects of theTrust and hence, the repayment of loan to Indian Bank should havebeen treated as eligible application. Aggrieved by the order ofthe Commissioner of Income-tax (Appeals), the revenue filed anappeal before the Income-tax Appellate Tribunal. The Tribunalconfirmed the finding of the Commissioner of Income-tax (Appeals).Thus, the present appeal is filed by the revenue questioning thecorrectness of the order passed by the Tribunal. 4. Learned counsel appearing for the revenue submitted thatthe construction of the capital asset cannot be regarded as anapplication of income for the purpose of carrying out the objectsof the Trust. Hence the order of the Tribunal as well as the firstappellate authority have to be set aside and that of the assessingofficer has to be restored. 4. Learned counsel appearing for the revenue submitted thatthe construction of the capital asset cannot be regarded as anapplication of income for the purpose of carrying out the objectsof the Trust. Hence the order of the Tribunal as well as the firstappellate authority have to be set aside and that of the assessingofficer has to be restored. 5. However, learned counsel appearing for the assesseesubmitted that the issue similar to the one has been considered bythis Court in the case of Commissioner of Income-tax Vs. KannikaParameswari Devasthanam and Charities, (1982) 133 ITR 779, whichhas been referred to and approved by the Karnataka High Court inthe case of Commissioner of Income-tax Vs. Janmabhumi Press Trust,https://hcservices.ecourts.gov.in/hcservices/(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 whichis to be utilised as a hostel is entitled to exemption underSection 11(1) of the Income-tax Act. 6. Heard the argument of the learned counsel on either sideand perused the materials on record. 7. Section 11 of the Income-tax Act, 1961 grants exemptionfrom the levy of income-tax in respect of the income from theproperty held for charitable or religious purposes. The Sectioncontemplates that for computation of the income it is to be seenwhether the income has been applied for charitable purposes to therequired extent. The Section requires consideration of the objectsof the Trust and also the income derived from the property held inTrust. The income from the Trust property has to be applied on theobjects of the Trust. As far as the objects of the Trust areconcerned, the application of the amount can be for revenue orcapital purpose, (vide Commissioner of Income-tax Vs. KannikaParameswari Devasthanam and Charities, (1982) 133 ITR 779). 8. In the case on hand, it is an admitted fact that theproperty of the assessee Trust was in a dilapidated condition andwould not earn income to carry out the objects of the Trust. Forthe purpose of carrying out the objects of the Trust, it hasbecome necessary to demolish and reconstruct the property so as toearn income by exploiting the property. It is also an admittedfact that the rental income in the property held in Trust amountedto 90 percent of the total income of the Trust. For the purpose ofputting up the construction of the property held in Trust, theTrust borrowed fund from Indian Bank. Thus, the capital asset soput up by the borrowed fund is only for the purpose of augmentingincome 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 hasadverted to the object of the charitable trust. But theauthorities proceeded on the premise that the complex has been putup by the Trust in order to perform its charitable activities,which factum has also not been disputed by the revenue. Theassessee Trust in order to perform its charitable activities,necessarily has to exploit the capital assets by findingappropriate avenues for earning revenue and for that purpose, hasto incur expenditure, which is capital in nature by raising loan.The capital asset built with a borrowed fund generates incomewhich enabled charitable Trust to perform its charitableactivities. Thus, the capital asset built with borrowed fund,under no circumstances, could be regarded to be outside the scopeof its objects. If it is within the objects of the CharitableTrust, then there is no reason as to why the borrowing made forthe construction of the building and repayment of the loan couldhttps://hcservices.ecourts.gov.in/hcservices/not be treated as an application of income. It is not the case of the assessing officer that the assessee by constructing thecommercial complex contravened the objects of the Trust. There isno provision in the Act, which disentitles the assessee Trust fromclaiming repayment of loan as application of income, especially inview of the fact that the Trust has to augment its income and forthat purpose it has put up a construction with borrowed fund. Ifraising of loan does not stand in the way of its charitableactivities, the repayment thereafter must be treated asapplication of its income. By repayment of the loan, the Trustwiped out its liability and the income earned from the propertywould be available for being utilised for charitable purposes. 9. Our view has been fortified by the view taken by theKarnataka High Court in the case of Commissioner of Income-tax Vs.Janmabhumi Press Trust, (2000) 242 ITR 703, wherein theKarnataka High Court held that the repayment of the debt incurredby the trust for construction of the building for the purpose ofaugmenting its funds should be treated as application of theincome of the assessee's trust for charitable purposes. Whileholding so, the Karnataka High Court followed its earlier judgmentin respect of the same assessee reported in (2000) 242 ITR 457. 10. In the case of Commissioner of Income-tax Vs. KannikaParameswari Devasthanam and Charities, (1982) 133 ITR 779, theDivision bench of this Court held that so long as the expenditurehad to be incurred out of the income earned by the Trust, even ifsuch expenditure is for capital purposes, on the objects of theTrust, the income would be exempt. The Division Bench further heldthat the facts would have to be investigated to find out whetherthe assessee had incurred the expenditure of capital nature topromote the objects of the Trust by applying income in thoseobjects. 11. Thus, it is clear that even though the expenditureincurred are capital in nature, if the expenditure incurred is forthe purpose of promoting the object of the Trust, the expenditureincurred would definitely be considered as an application of theincome for the purpose of the Trust. The observation of the Courtthat the mere fact that the application of the income resulted inthe maintenance of the property held under Trust for charitablepurpose would not entitle the Trust to exemption of such incomeunder Section 11 of the Income-tax Act has to be considered in thecontext in which it is stated. If the application of the incomeresulted in the maintenance of the property held under the Trustfor charitable purpose, is for the purpose of augmenting income inorder to pursue the objects of the Trust, that would amount toapplication of income for the purpose of the Trust. 12. In S.RM.M.CT.M. TIRUPPANI TRUST VS. COMMISSIONER OFINCOME-TAX, (1998) 230 ITR 636, the object of the assessee was tocarry out Thiruppani or repairs to old Hindu temples, building newhttps://hcservices.ecourts.gov.in/hcservices/ones, giving aid to or establishing hostels, educational and industrial institutions, etc., The assessee purchased building inIndia, which was utilsied as a hospital. The question arosewhether the purchase of the building could be regarded as anapplication for charitable purpose, the Supreme Court has heldthat the assessee has applied Rs.8 lakhs for charitable purposesIn India by purchasing a building, which was utilized for ahospital. Therefore, the assessee is entitled for exemption underSection 11(1). 13. in the light of the judgments referred to above and forthe foregoing reasons, we are of the view that the reasoninggiven by the Commissioner of Income-tax (Appeals), which has beenaffirmed by the Income Tax Appellate Tribunal, requires nointerference at our hands in this appeal and thus the question oflaw framed for consideration which has been extracted above isanswered in the affirmative against the revenue by dismissing theappeal. Sd/-Asst. Registrar. /true copy/ 13. in the light of the judgments referred to above and forthe foregoing reasons, we are of the view that the reasoninggiven by the Commissioner of Income-tax (Appeals), which has beenaffirmed by the Income Tax Appellate Tribunal, requires nointerference at our hands in this appeal and thus the question oflaw framed for consideration which has been extracted above isanswered in the affirmative against the revenue by dismissing theappeal. Sd/-Asst. Registrar. /true copy/ Sub Asst. Registrar. 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. 1 cc to M/s. S.V.Subramanian, Jr. Standing counsel for IncomeTax, Sr. 3728 T.C. (A) No.477 of 2004 BVN (CO)kk 25/2 https://hcservices.ecourts.gov.in/hcservices/