The Director Of Income Tax (Exemption v. M/S. Goenka & Associates Education Trust

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.293 OF 2011 The Director of Income Tax (Exemption) ..Appellantversus M/s. Goenka & Associates Education Trust ..Respondent-------- Mr. A.R.Malhotra for the Appellant. Ms. Aarti Vissanji for the Respondent. ............. CORAM : J.P. DEVADHAR & M.S.SANKLECHA, JJ. DATE : 21[st] January,2013 P.C. : In this appeal by the revenue for the assessment year 2001-02, the following question of law has been proposed for our consideration. “Whether on the facts and circumstances of the case and in law, the ITAT was right in directing the AO to deduct the sum of Rs.53,16,777/- beingtheclaimofinterest expenditure debited to the Profit & loss Account on accrual basis while computing the income of the assessee trust, ignoring the fact that for grant of exemption u/s. 11 what is relevant is that the assessee should actually spend the amount for charitable purpose and not simply making provision of the same?” 2The Assessing Officer by an order dated 31.12.2003 disallowed an amount of Rs.53.16 lacs being the amount debited to the income and expenditure account in respect of the interest payable during the year, though, not actually paid. This was disallowed even though the respondent followed the mercantile system of accounting on the ground that the deduction would be available only when the amount is actually paid and not on the basis of debit made in the income and expenditure account. 3In first appeal, the Commissioner of Income Tax (Appeals) (the CIT(A)) by an order dated 09.08.2004 upheld the order of the Assessing Officer dated 31.12.2003 on the above account. 4In second appeal, the Tribunal by its order dated 21.08.2007 allowed the respondent-assessee's appeal. The Tribunal held that the respondent-assessee is a charitable trust maintaining its account under the mercantile system of accounting. Under the aforesaid mercantile system of accounting, liability/expenditure has to be recognized on their accrual irrespective of the fact that the actual payment may be made later. The Tribunal reached a finding of fact that the expenditure attributable to the deposits received by it in the course of carrying on its charitable activities is an expenditure which is allowable. 5Mr. Malhotra, Counsel for the revenue submits that in view of explanation to Section 11(1) of the Income Tax Act, 1961 an income can be said to be have been used for charitable purposes if the same on receipt is utilised to meet the object of the trust. A provision made on accrual basis in the accounts of the assessee cannot be considered as application of income in determining the total income of the assessee, because, under the provisions of Section 11(1) (a) income from property held under trust for charitable is exempt to the extent it is applied for such purposes. Since, interest expenditure is not an expenditure actually incurred for charitable purposes, the interest expenditure of Rs. 53.16 lacs cannot be allowed on accrual basis as the same is not utilised to meet the objects of the Trust. 6 The finding of fact recorded by the Tribunal is that interest bearing deposits received from the students were used for charitable purposes and therefore, the interest liability that arises, in the present case though not discharged was liable to be deducted, as the assessee was following the mercantile system of accounting. Since, the decision of the Tribunal is based on the above finding of fact, we see no reason to entertain the appeal. 7Accordingly, the appeal is dismissed with no order as to costs. (M.S. SANKLECHA, J.) (J.P.DEVADHAR, J.)