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Facts
The assessee, a charitable trust, availed a loan of ₹10 crores for constructing school and hostel buildings. In the assessment year 2016-17, the trust repaid ₹2 crores of this loan and claimed it as an application of income. The Assessing Officer disallowed this claim, citing the possibility of double deduction.
Held
The Tribunal held that the repayment of the loan for charitable purposes is an application of income, especially since the loan was shown as income in the year of borrowing and the amendment disallowing such claims is prospective. The Tribunal found no infirmity in the CIT(A)'s order.
Key Issues
Whether the repayment of a loan taken for charitable purposes, which was treated as income in the year of borrowing, can be considered an application of income for exemption under Section 11 of the Income Tax Act.
Sections Cited
11, 12A
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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER
This appeal filed by the revenue is against the order passed by the ld. Addl./JCIT(A)-6, Kolkata in DIN No. ITBA/APL/S/250/2023-24/1059928968(1) dated 19/01/2024 for the assessment year 2016-17.
The revenue has raised the following grounds: “
1. The order of Ld.CIT(A) is opposed to facts and circumstances of the case;
2. The Ld.CIT(A) has erred in allowing the repayment of loan as application during the current financial year without examining whether the capital expenditure has already been allowed as application in earlier assessment years;
The Ld.CIT(A) has erred in holding that the assessee trust is eligible to claim repayment of loan as application of income without appreciating the fact that the assessee had not proved that the expenditure on construction of hostel building for which the funds were borrowed, had not been claimed as application in earlier years, and in such a scenario, allowing the repayment of loan in the current financial year would lead to double deduction which is not permissible under the Income Tax Act, 1961; 4. The Ld.CIT(A) has erred in law in not obtaining a Remand Report from the Assessing officer in respect of submission made regarding the utilization of loan funds for construction of hostel building when such a submission was not made during the course of Assessment Proceedings and the same is in contravention of the provisions of Rule 46A of the I.T.Rules, 1962; 5. The appellant craves leave to add, alter or amend all or any of the grounds of Appeal
before or at the time of the hearing of the appeal;
6. The order of the Ld.CIT(A), NFAC may be set-aside and the order of the Assessing Officer may be confirmed.”
3. The only effective issue raised by the revenue is that the learned CIT(A) erred in allowing the repayment of loan as application of income under section 11 of the Act.
The facts in brief are that the assessee is a charitable trust registered under section12A of Act with the objective of imparting education. The assessee during the year under consideration shown income of Rs. 47,93,70,728/- against which claimed application on account of revenue expenses for Rs. 44,50,71,587/- and capital expenditure of Rs. 10,25,68,436/- only. The capital expenditure included an amount of Rs. 2 crores being repayment of loan. As per the assessee trust, it has availed bank loan of Rs. 10 crores in F.Y. 2006-07 which was utilized for the construction of school and hostel building. Out of such loan, an amount of Rs. 2 crore was repaid during the year (i.e. F.Y. 2015-16) and accordingly claimed as an application of income in accordance with CBDT circular no. 100 of 1973 dated 24-01-1973 and in view of various judicial pronouncements.
However, the AO found that the assessee trust was asked to substantiate whether borrowed funds was shown as receipt and utilized for building construction which was claimed as application in earlier years. But the assessee failed to make a reply to the specific query. Thus, the AO held that if the assessee is allowed the repayment loan as application of income independently in the year under consideration and expenditure incurred or assets acquire out of borrowed fund also claimed as application in earlier year then same will amount double deduction. Accordingly, the AO disallowed the claim of application for Rs. 2 crores on account of repayment of loan.
The aggrieved assessee preferred an appeal before the learned CIT(A). The assessee before the learned CIT(A) reiterated that the repayment of a loan taken for the construction of academic and hostel buildings should be considered an application of income. The assessee repeated its contention raised that since the loan was originally utilized for charitable purposes, its repayment should also be treated as such in accordance law provided under Circular No. 100 dated 24/01/1973 issued by the Central Board of Direct Taxes (CBDT). The assessee further argues that CBDT circulars are binding, and any reinterpretation contradicting them is legally unsustainable. The assessee supports its position with various judicial precedents.
The learned CIT(A) allowed the appeal of the assessee by holding that the repayment of the loan should be considered an application of income. The learned CIT(A) found that the appellant had originally taken the loan in AY 2006-07 for the construction of academic and hostel buildings to fulfill its charitable objectives and had treated the loan as a receipt/income in that year. The learned CIT(A) further found that the CBDT Circular No. 100 relied by the assessee does not have any clarity regarding treating the repayment of loan as application in cases where capital expenditure out of such borrowing claimed as application. However, later on the board clarified that the repayment of loan shall be treated as application subject to the condition that the borrowing was shown as income in year of receipt i.e. A.Y. 2006-07 therefore repayment of same in the year under consideration shall be allowed as application.
Being aggrieved by the order of the learned CIT(A) revenue is in appeal before us.
The learned DR before us vehemently supported the order of the AO by reiterating the findings contained therein.
On the other hand, the learned AR argues before us that CBDT Circular No. 100 dated 24/01/1973, clarifies that loan repayment undertaken to fulfill one of the trust’s objects qualifies as an application of income. The CBDT circular are binding in nature and the same cannot be controverted. In support of the argument the learned AR relied on various judicial precedents.
10.1 Additionally, the learned AR contends that section 11 of the Act requires a charitable or religious trust to apply its income for charitable purposes to qualify for exemption. Since, the loan was originally taken for infrastructure development, which is aligned with the trust’s charitable objectives, its repayment should be treated as an application of income. The learned AR emphasizes that capital assets built using borrowed funds enable the trust to carry out its activities, and there is no reason why the repayment of such a loan should be denied as an application of income. The learned AR also points out that it has not claimed any depreciation on the assets created from the loan, reinforcing its position that the repayment constitutes genuine application.
10.2 The learned AR further submitted that the amendment to section 11 of the Act through the Finance Act, 2021, which disallows the repayment of loans as an application of income, is applicable prospectively from April 1, 2022, and does not affect earlier assessment years. Accordingly, the ld. AR contended that until the Assessment Year 2022-23, there was no legal restriction preventing the treatment of loan repayment as an application of income. Relying on the decision of the Hon’ble Supreme Court in CIT Vs. Vatika Township Private Limited, reported in 367 ITR 466 the learned AR asserts that amendments imposing a new burden or liability cannot be applied retrospectively.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the trust availed a term loan of ₹10 crores in the financial year 2006-07, which was utilized for the construction of school and hostel buildings, fulfilling its charitable objectives. During the assessment year 2016-17, the trust repaid ₹2 crores of the said loan and claimed it as an application of income, relying on CBDT Circular No. 100 dated 24/01/1973.
11.1 The AO disallowed the claim of ₹2 crores on the ground that the assessee had failed to substantiate whether the borrowed funds used for building construction were not already claimed as an application of income in earlier years. The AO held that if both the repayment of the loan and the capital expenditure incurred from the borrowed funds were allowed as an application of income, it would result in double deduction, which is not permissible under the Income Tax Act. Consequently, the AO denied the assessee’s claim. However, the learned Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal of the assessee, holding that the repayment of the loan qualifies as an application of income. The ld. CIT(A) observed that: • The assessee had originally taken the loan in AY 2006-07 and had shown the borrowed amount as receipt in that year. • The repayment of the loan was in line with CBDT Circular No. 100 of 1973, which states that the repayment of loans availed for fulfilling charitable objectives shall be treated as an application of income.
11.2 We are in agreement with the submission of the learned AR considering the binding nature of CBDT Circular No. 100, which clearly states that repayment of a loan originally taken to fulfill a trust’s objectives amounts to an application of income. Circulars issued by the CBDT under Section 119 of the Act are binding on tax authorities, and any attempt to reinterpret the law contrary to these circulars is legally unsustainable.
11.3 Now coming to the AO’s concern regarding double deduction, we find the same to be misplaced in the present case. The assessee had shown the loan as income/receipt in the year of borrowing (AY 2006-07), which satisfied the conditions for allowing its repayment as an application of income in subsequent years. Since the assessee had not claimed any depreciation on the assets created from the loan, the issue of double deduction did not arise.
11.4 We further note there were multiple judicial pronouncements that have upheld the principle that repayment of a loan used for charitable purposes constitutes an application of income. Key cases cited in support of this position included the judgment of Hon’ble jurisdictional High Court of Karnataka in the case of CIT Vs. Janmabhoomi Press Trust reported in 242 ITR 457, where in it was held as under: “It is plain that when the assessee was a trust entitled to benefit under section 11, the only question to be decided was whether that income or the accumulated income thereof was applied for charitable purpose. If investments had been made in the construction of a building which in turn would augment its income, it should also be held that the application of the funds was for the purpose of the trust. Therefore, the Tribunal was right in law in holding that the repayment of the debt incurred by the assessee for construction of the building should be treated as application of the income of the assessee for charitable purposes.”
11.5 Besides the above, there were judicial pronouncement where similar principles have been laid, detailed as under: • Rajasthan High Cout - CIT Vs. Maharana of Mewar Charitable Foundation (164 ITR 439) • Madras High Court - DIT Vs. Govinda Naicker Estate (315 ITR 237) • Bombay High Court -DIT (Exemption) Vs. GKR Charities (214 Taxman 555)
11.6 These rulings consistently affirm that when a charitable trust borrows funds for legitimate charitable activities, the repayment of such borrowings should be treated as an application of income.
11.7 We further note that the amendment introduced by the Finance Act, 2021, which explicitly disallows loan repayment as an application of income provided capital expenditure against such borrowing was claimed as application. Accordingly, we concur with the assessee’s argument that this amendment applies prospectively from April 1, 2022, and does not affect earlier assessment years. Based on the above discussion, we hold that the repayment of ₹2 crores towards the loan taken for constructing educational infrastructure should be treated as an application of income. Accordingly, we do not find any infirmity in the finding of the learned CIT(A) and dismissed the appeal filed by the Revenue.
In the result, the appeal filed by the revenue is hereby dismissed.
Order pronounced in the open court on 24th February, 2025.