Repayment of Loan visavis Application of Income Repayment of Loan visavis Application of Income

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The Tax Publishers Repayment of Loan vis-a-vis Application of Income CA. Nisha Bhandari Under the provisions of Section 11(1)(a), income from property held under trust for religious or charitable purposes is exempt to the extent it is applied for such purposes in India. The issue as to whether repayment of debt would be considered as application of Income in case of a trust, is a subject matter of the discussion of the present write up. The learned author analyses the issue in light of the various judicial pronouncements in this regard. 1. No exemption to charitable trust in absence of application of income Simply because the assessee is registered under Section 12AA of the Act do not entitle it to claim its entire income as exempt under Section 11 of the Act but for getting the exemption the assessee is required to further satisfy condition of applying 85% of its income for charitable activities. In absence of the same only the amount which is utilised by the assessee for doing charitable activities can only be allowed as deduction to the assessee. There may be a variety of expenditure or mode for application of income by a charitable trust or institution. 2. Repayment of debt incurred for purposes of trust CBDTs clarification The Circular No. 100, dt. 24-1-1973 has clarified the issue of treatment as application of income or otherwise, the repayment of debt incurred for the purpose of trust or loan advanced by an educational trust to students for higher studies. The relevant part thereof is as under :- '1. Section 11 requires 100 per cent of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section Two questions have been considered regarding the application of income. (a) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purpose of the trust; (b) Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes. 2. The (Board) has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even if interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.' SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Repayment of Loan vis-a-vis Application of Income

CA. Nisha Bhandari

Under the provisions of Section 11(1)(a), income from property held under trust for religious or charitable purposes is exempt to the extent it is applied for such purposes in India. The issue as to whether repayment of debt would be considered as application of Income in case of a trust, is a subject matter of the discussion of the present write up. The learned author analyses the issue in light of the various judicial pronouncements in this regard.

1. No exemption to charitable trust in absence of application of income

Simply because the assessee is registered under Section 12AA of the Act do not entitle it to claim its entire income as exempt under Section 11 of the Act but for getting the exemption the assessee is required to further satisfy condition of applying 85% of its income for charitable activities. In absence of the same only the amount which is utilised by the assessee for doing charitable activities can only be allowed as deduction to the assessee. There may be a variety of expenditure or mode for application of income by a charitable trust or institution.

2. Repayment of debt incurred for purposes of trust CBDTs clarification

The Circular No. 100, dt. 24-1-1973 has clarified the issue of treatment as application of income or otherwise, the repayment of debt incurred for the purpose of trust or loan advanced by an educational trust to students for higher studies. The relevant part thereof is as under :-

'1. Section 11 requires 100 per cent of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section Two questions have been considered regarding the application of income.

(a) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purpose of the trust;

(b) Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

2. The (Board) has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even if interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.'