Charitable Trust Exemption Repayment of loan

 Madras HC : No. 477 of 2004

Decision dtd.  27 01  2009

Gist of decision:

It is an admitted fact that the property of the assessee-trust was in a dilapidated condition and would not earn income to carry out the objects of the trust. For the purpose of carrying out the objects of the trust, it has become necessary to demolish and reconstruct the property so as to earn income by exploiting the property. It is also an admitted fact that the rental income in the property held in trust amounted to 90 per cent of the total income of the trust. For the purpose of putting up the construction of the property held in trust, the trust borrowed fund from the bank. Thus, the capital asset so put up by the borrowed fund is only for the purpose of augmenting income in order to carry out the object of the trust as envisaged. The assessee-trust in order to perform its charitable activities, necessarily has to exploit the capital assets by finding appropriate avenues for earning revenue and for that purpose, has to incur expenditure, which is capital in nature by raising loan. The capital asset built with a borrowed fund generates income which enabled the charitable trust to perform its charitable activities. Thus, the capital asset built with borrowed fund, under no circumstances, could be regarded to be outside the scope of its objects. If it is within the objects of the charitable trust, then there is no reason as to why the borrowing made for the construction of the building and repayment of the loan could not be treated as an application of income. It is not the case of the AO that the assessee by constructing the commercial complex contravened the objects of the trust. There is no provision in the Act, which disentitles the assessee-trust from claiming repayment of loan as application of income, especially in view of the fact that the trust has to augment its income and for that purpose it has put up a construction with borrowed fund. If raising of loan does not stand in the way of its charitable activities, the repayment thereafter must be treated as application of its income. By repayment of the loan, the trust wiped its liability and the income earned from the property would be available for being utilised for charitable purposes.