2008 (12) TMI 374 - HC - Income Tax

Charitable purpose - Exemption- Application of Fund - The assessee claimed exemption of the amount advanced to a trader for purchase of cement for construction of pilgrim centre on the ground that it had been spent for charitable purpose. The claim was rejected by the Assessing Officer as well as the Commissioner (Appeals). The Tribunal allowed the claim based on the affidavit filed by the trustee that the funds advanced would be utilized for the purchase of cement later. Held that- there was no immediate requirement of cement as no concrete proposal was there for construction of the pilgrimage centre. Thus it was in the form of deposit or investment not qualifying for deduction thus upheld the order of Commissioner (Appeals).

Summary

Issues:
- Exemption on expenditure incurred by the assessee for advance made to a cement trader for construction purposes for the trust.
- Eligibility for exemption under section 11(1) of the Income-tax Act, 1961.
- Actual application of funds for charitable purposes.
- Interpretation of the provisions of the Act regarding the advance made to the cement trader.

Analysis:

The judgment delivered by the High Court of Kerala addressed the common question raised in two appeals by the Department for the assessment years 1993-94 and 1994-95. The key issue was whether the Tribunal was justified in granting exemption on the expenditure incurred by the assessee through an advance made to a cement trader for purchasing cement for construction purposes for the trust. The assessee, a charitable institution registered under section 12A of the Income-tax Act, claimed to have spent amounts towards charitable purposes as per section 11(1)(a) of the Act. However, it was found that these amounts were merely advanced to the cement trader for the construction of a pilgrim center at Sabarimala. The Department contended that there was a lack of evidence regarding the actual utilization of the funds advanced for charitable purposes. The court emphasized that eligibility for exemption under section 11(1) is contingent upon the actual application of funds for charitable purposes and adherence to the procedures outlined in section 11(2) of the Act.

The court noted that the Tribunal had allowed the claim based solely on an affidavit filed by the trustee, indicating that the funds advanced would be utilized for purchasing cement later. However, the court found this insufficient as there was no concrete evidence regarding the terms or timeline for the purchase of cement. Although the trader acknowledged receiving the advance for supplying cement, there was no indication of any approval or permission for construction within a reasonable timeframe. The court concluded that the advance appeared to be a diversion of trust funds, especially since there was no immediate requirement for cement due to the absence of a concrete proposal for the construction of the pilgrim center. The court highlighted that even after several years, the assessee failed to demonstrate the actual utilization of the funds advanced. Consequently, the court reversed the Tribunal's decision, emphasizing that the advance did not qualify for deduction under section 13(1)(d) of the Act.

In conclusion, the court disallowed the exemption claimed by the assessee, stressing the importance of actual utilization of funds for charitable purposes to qualify for exemptions under the Income-tax Act. The judgment underscored the necessity for concrete evidence of expenditure and adherence to statutory procedures to ensure compliance with the provisions of the Act.