DIRECTOR OF INCOME TAX (EXEMPTION) Vs. SPAN FOUNDATION

JUDGEMENT

(1.) 2002 -03 and 2003 -04. Common issues have been raised in respect of both the years. The assessee is a charitable trust. It purchased certain land. Thereafter, it constructed a building out of borrowed funds as well as out of the corpus. The building was rented out. According to the Revenue since the building was rented out to concerns in which some of the trustees were directors, it implied that the income derived out of the renting out of the building was not applied towards charitable purposes but that the renting out of the property was for such interested persons. On behalf of the assessee it has throughout been contended that the income derived from the renting out of the building was used in repaying the loans with the ultimate object of applying the income, after the loans had been fully repaid, towards charitable objects. It was, therefore, contended that the application of the money received as rentals by the trust for the purposes of repayment of the loans was also for charitable purpose. The AO and the CIT(A) held in favour of the Revenue and denied the exemption under ss. 11 and 12 of the IT Act, 1961 (hereinafter referred to as the 'said Act'). Both the authorities also held that the provisions of s. 13(1)(c) r/w s. 13(3) of the said Act had been violated and, therefore, the exemption could not be given to the assessee trust.

(2.) THE Tribunal, after considering the submissions made by the parties, came to the conclusion that the assessee trust was entitled to the exemption under ss. 11 and 12 of the said Act. The Tribunal also came to the conclusion that the provisions of s. 13 were not attracted.

(3.) THE Tribunal noted that the case of the assessee was that it wanted to let out the building and derive rent therefrom and use the rents for the charitable purposes set out in the trust deed. As noted above, the assessee had borrowed funds for the purposes of constructing the building. The rent that was derived from the said building was utilized by the assessee trust to repay the borrowed funds. It was contended on behalf of the assessee that the repayment of the loan, in these circumstances, has to be regarded as application of income for charitable purposes. The Tribunal accepted this plea of the assessee. The Tribunal noted that if the argument of the Revenue was to be accepted, then it would amount to concluding that the assessee could not utilise the rental incomes received by it from the lease of the property for charitable purposes. The Tribunal noted that as and when the loans are discharged and the assessee becomes free to utilise the rental income, it would apply the same for charitable purposes set out in the trust deed and that it is at that juncture that the AO could insist that the application of the income be for the purposes mentioned in the trust deed. The Tribunal concluded that the repayment of the funds borrowed for construction of the building was to be treated as application of income for charitable purposes and held that the assessee was entitled to the benefits under ss. 11 and 12 of the said Act.