2005 (7) TMI 75 - HC - Income Tax

Assessee a public charitable trust - Whether Tribunal is right in holding that the assessee is entitled to the benefit of section 11 in respect of the amount of Rs. 1, 65, 201 advanced as loan to certain section of the public which according to the Income-tax Officer the assessee had written off since it found that the chances of recovery were remote? - It is apparent that the trust had incurred expenditure towards advancement of loan to persons belonging to the weaker sections of society for the purpose of its charitable objects. The said amount was written off in the year under consideration as the chances of recovery were found to be remote and were transferred to the expenditure account and adjusted against the income of the year under consideration. Accordingly the Tribunal has rightly held that the income was applied in the year under consideration when the right of recovering loan was waived and the amount was adjusted against the income of that year - Tribunal was right in holding that the assessee is entitled to the benefit of section 11

Summary

Issues:
Interpretation of section 11 of the Income-tax Act, 1961 regarding the treatment of a written-off loan amount by a public charitable trust as expenditure in the assessment year 1985-86.

Detailed Analysis:

The High Court of Gujarat was tasked with determining whether a public charitable trust was entitled to the benefit of section 11 of the Income-tax Act, 1961, in relation to a loan amount of Rs. 1,65,201 written off as expenditure in the assessment year 1985-86. The trust had advanced this amount as loans to members of the weaker sections of the public under a self-housing scheme. The Assessing Officer disallowed the amount as an item of expenditure, leading to a series of appeals culminating in the Tribunal allowing the appeal in favor of the assessee. The Tribunal held that the trust had applied its income when it waived its right to recover the loan amount, relying on precedents and legal interpretations. The Revenue challenged this decision before the High Court.

The court noted that the trust, being a public charitable trust, was entitled to the benefits of section 11 of the Act. The trust had advanced the amount as housing loans to the weaker sections of the public as part of its charitable objectives. The court analyzed the meaning of the term "applied" in the context of section 11(1)(a) of the Act, emphasizing that the income should be spent for charitable or religious purposes of the trust. It referred to previous court decisions and the Central Board of Direct Taxes Circular to support the interpretation that adjusting expenses against income in subsequent years still qualifies as applying income for charitable purposes.

The court further cited judgments from the Rajasthan High Court and its own decisions to establish that the adjustment of expenses against income in subsequent years aligns with the provisions of section 11 of the Act. It emphasized that income derived from trust property must be determined on commercial principles, and such adjustments should be considered as applying income for charitable purposes. The court also referenced a Supreme Court case to reinforce the principle that genuine entries in the trust's books of account should be accepted unless proven otherwise by the Revenue.

Applying these principles to the case at hand, the court concluded that the trust had indeed applied its income by writing off the loan amount in the year under consideration. The Tribunal's decision to grant the benefit of section 11 to the assessee was upheld, ruling in favor of the assessee and against the Revenue. The reference was answered in the affirmative, and the order of the Tribunal was upheld, with no costs awarded in the matter.

In summary, the High Court's judgment clarified the interpretation of section 11 of the Income-tax Act, affirming that adjusting expenses against income in subsequent years qualifies as applying income for charitable purposes, thereby entitling a public charitable trust to the benefits under the Act.