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Goshree Islands Development Authority v. Cit
Factual and Procedural Background
This appeal by the assessee challenges the order of the Commissioner of Income Tax (Appeals)-II, Kochi dated 31.12.2008 concerning the assessment year 2005-06. The assessee is a charitable institution established by the Government of Kerala under section 53A of the Town Planning Act, with the primary objective of integrated development of certain areas outside the Corporation of Cochin. Initially, the assessee was registered under section 12AA of the Income Tax Act, but the registration was cancelled by the Commissioner. On appeal, this Tribunal restored the registration by order dated 30.1.2008. The core dispute concerns whether the repayment of loans by depositing sale proceeds of land into an escrow account constitutes an application of income eligible for deduction under section 11(5) of the Income Tax Act.
Legal Issues Presented
- Whether the deposit of sale proceeds of land into an escrow account on 31.3.2005 amounts to application of income for charitable purposes under section 11(5) of the Income Tax Act?
- Whether the timing of the bank's debit of the escrow account (2.4.2005) affects the claim of application of income within the relevant financial year?
Arguments of the Parties
Appellant's Arguments
- The assessee is a registered charitable trust under section 12AA following the Tribunal's order.
- The loan was borrowed from a consortium of banks led by Union Bank of India for land development assigned by the Government of Kerala.
- The sale proceeds of the land were deposited in an escrow account on 31.3.2005 as per loan conditions, which should be treated as repayment of loan and thus application of income for charitable purposes.
- Clause 12(k) of the Memorandum of Understanding permits pre-payment of the loan, supporting the contention that deposit on 31.3.2005 qualifies as application of income in that financial year.
- The bank's debit on 2.4.2005 should not negate the fact that the deposit was made in the relevant financial year.
- Reliance was placed on the Calcutta High Court judgment in CIT vs. Hindustan Welfare Trust, 206 ITR 138, to support the position that such deposits constitute application of income.
- Alternatively, the income should be computed on commercial principles allowing expenses for carrying out the trust's objects to be deducted, taxing only net income.
Respondent's Arguments
- The assessee was a registered trust by virtue of the Tribunal's order dated 30.1.2008.
- According to the Memorandum of Understanding, loan repayment was to commence only from 1.4.2005.
- The bank debited the escrow account on 2.4.2005; therefore, payment does not fall within the financial year 2005-06 under consideration.
- Accordingly, the repayment cannot be allowed as application of income for the year under consideration.
- The lower authorities correctly disallowed the assessee's claim for exemption under section 11 of the Income Tax Act.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT vs. Hindustan Welfare Trust, 206 ITR 138 (Calcutta High Court) | Held that investment by a charitable trust in fixed deposits out of sale proceeds of assets amounts to acquiring another capital asset, constituting application of income. | The court applied this principle to conclude that depositing sale proceeds in the escrow account on 31.3.2005 amounted to application of income for charitable purposes, despite the bank debiting the account on 2.4.2005. |
Court's Reasoning and Analysis
The court acknowledged that the assessee was a registered trust under section 12AA during the year in question. It was undisputed that the sale proceeds of land were deposited in the escrow account on 31.3.2005, while the bank debited the account only on 2.4.2005. The critical question was whether the deposit on 31.3.2005 constituted application of income for charitable purposes under section 11(5) of the Income Tax Act.
The court examined the Calcutta High Court's judgment in CIT vs. Hindustan Welfare Trust, which recognized that such deposits represent application of income by acquiring a capital asset. Applying this principle, the court found that the deposit complied with the loan terms and conditions, and the timing of the bank's debit was at the bank's discretion and did not affect the assessee's act of applying income.
Since the assessee had the discretion to pre-pay the loan and had deposited the amount on 31.3.2005, the court held that this deposit amounted to application of income in the relevant financial year, entitling the assessee to claim exemption under section 11.
Holding and Implications
The appeal of the assessee is allowed.
The court set aside the orders of the lower authorities and directed the assessing officer to grant exemption under section 11 of the Income Tax Act in respect of the sale proceeds of the land deposited in the escrow account on 31.3.2005. The decision directly benefits the assessee by allowing the claimed deduction for the relevant assessment year. No new precedent beyond the application of the cited case was established.
Per N.R.S.Ganesan, JM This appeal by the assessee is directed against the order of the CIT(A)-II, Kochi dated 31.12.2008 and pertains to the assessment year 2005-06.
2. Shri K.R.Sudhakaran Pillai, the ld. Counsel for the assessee submitted that the assessee is a charitable institution The ld. Counsel for the assessee submitted that the assessee institution was established by the Government of Kerala u/s. 53A of the Town Planning Act. The main object of the assessee is to carry out integrated development of certain areas outside the limits of the Corporation of Cochin. Though initially the registration u/s. 12AA was granted, the Commissioner cancelled the same. However, on appeal by the assessee, this Tribunal vide order dated 30.1.2008 in I.T.A No. 361/Coch/2006 set aside the order of the Commissioner. Therefore, the ld. Counsel for
I.T.A. No.128 /Coch/2009 2 the assessee submitted that the assessee is now a registered Trust u/s. 12AA of the Act. The only issue arising for our consideration is whether the repayment of loans, by making a deposit in the Escrow Account, would amount to application of income for the purpose of claiming deduction u/s. 11(5) of the Act. The ld. Counsel for the assessee submitted that the assessee borrowed loans from Consortium of Banks lead by the Union Bank of India for the purpose of development of the land assigned by the Government of Kerala. An escrow account was opened with the Union Bank of India on 19.4.2002. As per the condition of the grant of loan, the sale proceeds of the land has to be deposited in the escrow account. The ld. Counsel for the assessee submitted that once the sale proceeds of the land was deposited in the escrow account, it would amount to repayment of loan, and has to be treated as application of income for charitable purposes. Referring to clause 12(k) of the Memorandum of Understanding, the ld. Counsel for the assessee submitted that no doubt the repayment of the loan should commence from 1.4.2005, however, clause 12(1) clearly says that pre-payment of loan. is also permitted. Therefore, when the assessee deposited the sale proceeds of the land on 31.3.2005 in the escrow account, it would amount to application of income during the year under consideration. Merely because the bank debited the account on 2.4.2005, it cannot be said that the amount was utilised only in the next financial year. According to the ld. Counsel, the deposit would be considered as application of income. The ld. Counsel for the assessee placed reliance on the judgment of the Calcutta High Court in the case of CIT vs. Hindustan Welfare Trust, 206 ITR 138. The ld. Counsel for the assessee further submitted that alternatively the income of the assessee shall be computed on commercial principles so that the expenses appearing in the books of accounts for carrying out the object of the Trust has to be allowed as expenditure and net income alone shall be chargeable to tax.
3. On the contrary, Ms. S.Vijayaprabha, the ld. Departmental Representative submitted that no doubt the assessee-Trust was a registered Trust by virtue of order by this Tribunal dated 30.1.2008. Referring to the Memorandum of Understanding, the ld. Departmental Representative submitted that the repayment of loan was to commence
I.T.A. No.128 /Coch/2009 3 only from 1.4.2005. The banker actually deducted the amount from the escrow account only on 2.4.2005. Therefore, the payment does not fall within the financial year under consideration. Therefore, it cannot be allowed as application income for the year under consideration. Hence, the lower authorities have rightly disallowed the claim of the assessee for exemption u/s. 11 of the Act.
4. We have considered the rival submissions on either side and perused the material on record. No doubt, the assessee was a registered Trust during the year under consideration u/s. 12AA of the Act by virtue of the order of this Tribunal. It is not disputed that the sale proceeds were deposited in the escrow account on 31.3.2005. The banker deducted the amount on 2.4.2005. The question arising for consideration is when the assessee deposited the amount on 31.3.2005 with escrow account, whether it would amount to application of income. We have carefully gone through the judgement of the Calcutta High Court in the case of CIT vs. Hindustan Welfare Trust (supra). The assessee before the Calcutta High Court claimed that the money deposited with the banker becomes property/new asset. The claim of the assessee was upheld by Calcutta High Court holding that investment by the assessee-Trust in fixed deposit out of sale proceeds of shares amounts to acquiring another capital asset. In the case before us, as per the terms and conditions of loan, the assessee has to deposit the sale proceeds of the land in the escrow account. Of course, the assessee has time till April, 2005 for depositing the amount with escrow account. However, the assessee admittedly deposited the amount on 31.3.2005. The banker debited the account on 2.4.2005. The assessee was also given discretion for pre-payment of the loan. In these circumstances, in our considered opinion, the deposit of sale proceeds of land in escrow account on 31.3.2005 amounted to application of income for the purpose of Trust. Once the amount is deposited in the escrow account, the assessee complied with the terms and conditions of the loan. Therefore, it is for the banker to debit the account at its discretion. Therefore, this Tribunal is of the opinion, that the deposit of sale proceeds in escrow account on 31.3.2005 amounted to application of income for the object of the Trust. Accordingly, the orders of the lower authorities are set aside and the assessing officer is directed to
I.T.A. No.128 /Coch/2009 4 grant exemption u/s. 11 of the Income Tax Act in respect of the sale proceeds of the land deposited in escrow account on 31.3.2005.
5. In the result, the appeal of the assessee stands allowed. sd/- sd/- (SANJAY ARORA) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Place: Ernakulam Dated: 16th December, 2011 Copy to:
1. Goshree Islands Development Authority, Park Avenue Bldgs., Kochi-682011.
2. The Assistant Commissioner of Income-tax, Circle-2(1), range-2, Ernakulam.
3. The Commissioner of Income-tax (Appeals)-II, Kochi.
4. The Commissioner of Income-tax, Kochi.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
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