162.  Repayment of debt incurred for purposes of trust/loans advanced by educational trusts to students for higher studies – Whether amounts to application of income

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 :

1. 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 purposes of the trust ; and

2. 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 fulfill 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.

Circular : No. 100 [F. No. 195/1/72-IT(A-I)], dated 24-1-1973.


EXPLAINED IN – In CIT v. Cutchi Memon Union [1985] 155 ITR 51 (Kar.), it was held that under the provisions of section 11, only the income spent on charitable or religious purposes is excluded from the total income of a trust.  That exemption from taxation is given not because it is expenditure of the trust or any other outgoing.  It is exempted as income to the extent applied for charitable or religious purposes.  When that amount is returned by the beneficiaries of the trust, the receipt in the hands of the trust can only be its income of the years in which it is received.  It cannot have any different character. This is also the tenor of the CBDT Circular No. 100, dated January 24, 1973.

EXPLAINED IN – In CIT v. Ramchandra Poddar Charitable Trust [1987]164 ITR 666 (Cal.), the above circular was explained with the following observations:

“. . . An assessee may borrow money and spend it for charitable object.  The circular merely recognises that in such a case, application of income for repayment of a loan taken for charitable purpose will amount to application of income for charitable purpose.  The circular, however, does not permit an assessee to accumulate more than 25 per cent of its income or Rs. 10,000, whichever is higher (for the purpose of charity).  The wording of section 11 is clear and unambiguous.  The relief is limited to the amount of income of a charitable trust actually applied for charitable purpose.  Accumulation of income is permitted only to the extent and subject to the conditions laid down in that section.  An assessee can accumulate or set apart only 25 per cent of the income of the trust or Rs. 10,000, whichever is higher, in a given year.  The circular does not seek to and cannot enlarge the scope of the section.” (p. 673)

EXPLAINED IN – In ITO  v. K. Ravindranathan Nair [1992] 41 ITD 462 (Coch.-Trib.), the Tribunal took aid of this Circular of the Board of Direct Taxes though it was in the context of section 11 only for the limited purposes of the treatment to be accorded to the loans and advances when given and the recovery of the same when received.

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