Society cannot Claim Exemption in respect of Investment in Fixed Asset using Loan Amount: ITAT Bengaluru [Read Order]

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In M/s. Peoples Education Society v. DCIT(E), the ITAT, Bengaluru held that the assessee-society is not entitled to claim the exemption in respect of investment in fixed assets using loan amount under section 11 of the Income Tax Act.

The assessee-society, in the instant case, had availed a loan to the tune of Rs.28,59,60,638/- and subsequently, the same was increased to Rs.47,14,68,794/-. Admittedly, there was an increase in the loan amount to the extent of Rs.18,55,08,156/- during the year under consideration. The assessee explained that it invested the surplus funds in Fixed Deposits and when funds are required, instead of preclosing the Fixed Deposits, it availed loans against Fixed Deposits for the purpose of utilization towards revenue and capital expenditure.  AO noticed that the assessee during the year under consideration had also invested in two immovable properties during the financial year under consideration, which was purchased for a sum of Rs.2,58,67,200/- and Rs.3,67,00,000/-. He, therefore, disallowed the amount of Rs.10,62,94,245/- on account of the loans borrowed for the purpose of capital expenditure.

On appeal, the CIT(A) relied on the judgment of Hon’ble jurisdictional High Court in the matter of CIT v. Janmabhoomi Press Trust and held that it is an application of income for charitable purposes.

Before the Tribunal, the Department contended that the present case is not on the application of income, but is a case of acquiring the assets from the loan amount. It was also contended that the assessee is only entitled to the benefit if there is a repayment of debt availed for the purposes of construction of building taken by the assessee for the purposes of augmenting its income.

Allowing the departmental appeal, the bench noted that Section 11 only contemplates the application of income and if the said income is applied for the aims and objectives of the trust, then the trust is entitled to exemption under the provision. “The said analogy cannot be extended to the acquisition of assets from the borrowed funds. If we hold so, then we would be equating the borrowed fund with the income of the trust. Under the law, it is the application of income and not of the fund that is required to be seen for the purpose of granting the exemption. In fact, the assessee would be entitled to exemption in view of the judgment of Hon’ble jurisdictional High Court in the matter of Janmabhoomi Press Trust (supra), as and when the loan is repaid to the financial institutions. In view thereof, if the claim of the assessee that the borrowed funds were utilized for the objects of the trust, is entertained and accepted at this stage, it would tantamount to double benefit which cannot be the intention of the statute. In view thereof, we find that the CIT (A) erred in allowing the claim for the acquisition of capital assets from the borrowed fund.

Read the full text of the Order below.

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