Zenith Public School Vs ITO (ITAT Chennai)
The Income Tax Appellate Tribunal (ITAT) in Chennai has set aside an order from the Commissioner of Income Tax (Appeals), ruling in favor of Zenith Public School, a charitable trust. The ITAT’s decision addresses the disallowance of Rs. 10.28 lakh, which the tax authorities had treated as an invalid application of income. The tribunal clarified that interest paid on a loan used to further the trust’s objectives is a legitimate application of income and is not restricted by the Income-tax Act, 1961. This ruling distinguishes between the repayment of the loan principal and the payment of interest, highlighting that only the former is governed by specific restrictions under the Act.
The case for the assessment year 2022-23 arose when the Assessing Officer (AO) initiated a scrutiny of the trust’s return. The trust had claimed that a portion of its income was applied towards repaying a loan from its managing trustee, Mr. P. Shanmugam. This repayment included a sum of Rs. 10,16,097 as interest. The trust explained that the managing trustee had secured the loan on its behalf because banks were hesitant to lend directly to the trust. The AO, however, disallowed Rs. 10,28,208 (which included interest and late fees), citing Explanation 4 to Section 11 of the Income-tax Act. This explanation states that the repayment of a loan borrowed for the purpose of acquiring a capital asset is not a valid application of income.
