The Hindu Business Line : A hand as fruitful as the land that feeds us

IN KING Henry VIII, you can hear Lovell extol, "That churchman bears a bounteous mind indeed, a hand as fruitful as the land that feeds us." Which is what, I guess, the poor and the needy would have said when Sacred Heart Church gave them housing loans.

Financially weak the borrowers were, and their repayments didn't flow in well. As a result, the church could not recover fully the amount it had advanced. Bad loans should have caused substantial money worry for the religious institution, but a second concern arose when the taxman did not allow the church to claim deduction for the amount of bad debts written off.

Loans for the needy

The assessment year in question rolls back by two decades, to 1985-86, and the relevant accounting period is the year ended December 31, 1984. "The assessee, a Public Charitable Trust, filed its return of income declaring deficit of Rs 1,40,760 on March 2, 1987. On perusal of the statement of income and expenditure, the assessing officer (AO) found that the assessee had deducted an amount of Rs 1,65,201 against the current year's income and accordingly had arrived at the said deficit," narrates the text of the High Court's verdict in Commissioner of Income Tax vs Sacred Heart Church, decided on July 13.

The church informed the taxman that it had advanced the amount as loan to members of the weaker sections of the public in the earlier years, under a self-housing scheme formulated by the Trust. "In the year under consideration it was found that the chances of recovery of the said loan amount were remote, hence, the said amount was transferred to the expenditure account with the following narration: `Loans under self housing scheme of residence for poor and weaker section given as a transfer from balance-sheet'."

The church claimed that the amount had been applied towards the objects of the Trust. But the AO was of the view that Rs 1.65 lakh had not been utilised `for the purposes of the objects or against the current year's income'. He also noted that the auditor's report indicated the said amount as written off; "since the assessee was not carrying on any business, there was no question of setting off the said amount against the income of the current year," said the AO, and disallowed the amount as an item of expenditure.

When the church took up the matter before the Deputy Commissioner of Income-tax, who dismissed the appeal in 1989 and confirmed the AO's order. The church preferred a second appeal before the Tribunal.

Trial at the Tribunal

The Tribunal said that the loan had been given from the income of the church, and that instead of making an outright gift, the church had first disbursed the amount as loan and in the subsequent years waived its right to recover the amount. The ruling of the Tribunal was that the church must be said to have applied the income when it gave up its rights to recover the loan.

To decide thus, the Tribunal placed reliance on the decision of the Rajasthan High Court in Commissioner of Income-tax vs Maharana of Mewar Charitable Foundation. In that case, it had been held that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under Section 11(1)(a) of the Act.

Aggrieved at losing the case at the Tribunal level, the Department took up the issue to the High Court of Gujarat at Ahmedabad. Thus, the question before Justices D. A. Mehta and H. N. Devani was: "Whether, the Appellate Tribunal is right in law and on facts 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?"

Section 11 of the Income-Tax Act falls under Chapter III on `Incomes which do not form part of total income', as you can check on http://incometaxindia.gov.in. The section is titled `Income from property held for charitable or religious purposes'. It excludes from total income "income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India... "

`Applied' explained

It is not in dispute that the church is entitled to the benefits of Section 11 of the Act, observed the court, and went into the word that lay at the core of the dispute, `applied'. According to the church, the meaning of `applied' is that the income should be applied or spent for the charitable or religious objects of the Trust.

Also, the church's stand was that the Section did not limit the application of the income for charitable or religious purposes only to the year in which the income had arisen. The word applied must be given its natural meaning, said the church, and submitted that even if the expenses had been incurred in the earlier year and the said expenses were adjusted against the income of the subsequent year, the income could be said to be applied for charitable and religious purposes in the year in which the same has been adjusted.

The church drew support from a CBDT Circular (No 100 dated January 24, 1973) and also the decision of the Andhra Pradesh High Court in Trustees of H.E.H. the Nizam's Charitable Trust case. "Income derived from the trust property has to be determined on commercial principles," said the court, citing a precedent, and pointed out a parallel in the Thanthi Trust case decided by the apex court.

It is apparent that the Trust had incurred expenditure towards advancement of loan to persons belonging to the weaker sections of the society for the purpose of its charitable objects, observed the High Court. "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," ruled the court deciding in favour the church.

The taxman's views may not be as wide as a church-door that the Bard speaks of in Romeo and Juliet. `But `tis enough, `twill serve,' one may say of justice, in the end, especially in a case where none represented the church at the court.

Amen.

Tailpiece

"I always wonder why tax isn't called... "

"What?"

"Takes!"

Detaxification@TheHindu.co.in

D. Murali

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