2018 (9) TMI 1693 - AT - Income Tax

Expenditure not related to assessee trust - Disallowance of Education & charity fund, provision for loan loss and capacity building fund - addition of expenditure incurred as nothing but an application of income and the same is not related to the business activity of micro financing - Held that - As observed that the assessee has transferred a sum of ₹ 31,07,126.97 to reserve for loan loss, ₹ 25,00,000/- to education and charitable fund and ₹ 15,00,000/- to capacity building fund. The respective balance carried forward thereafter in these funds is ₹ 58,65,198.35, ₹ 48,80,657/- and ₹ 15,00,000/-, respectively. Thus, it is observed that these amounts were not spent by the assessee during the year for carrying out the objects of the assessee trust. Hence, these are not amounts applied in the objects of the trust. Hence, the Assessing Officer as well as the CIT(A) were fully justified in not allowing the deduction for the same while computing the income of the assessee. - Decided against assessee.

Summary

Issues:
1. Assessment order under section 143(3) of the Income Tax Act, 1961 challenged.
2. Disallowance of expenses related to education & charity fund, provision for loan loss, and capacity building fund contested.
3. Applicability of provisions against future anticipated losses as expenditure debated.
4. Justification for provisions as application of income for charitable purposes examined.

Issue 1: Assessment Order Challenge
The appeal was filed against the CIT(A)-3's order for the assessment year 2009-2010 under section 143(3) of the Income Tax Act, 1961.

Issue 2: Disallowed Expenses
The Assessing Officer disallowed expenses including education & charity fund, provision for loan loss, and capacity building fund, totaling &8377; 71,07,127, from the total expenses of the assessee. The CIT(A) confirmed this action, stating that these amounts were not spent for the trust's objects, hence not applied in the trust's activities.

Issue 3: Provisions Against Future Losses
The debate centered on whether provisions against future anticipated losses can be allowed as expenditure. The CIT(A) emphasized that actual losses/expenditures must occur for expenditure to be permissible under section 11 of the Income Tax Act. The Tribunal cited judicial precedents and held that provisions for bad debts and future losses are not admissible as expenditure unless the actual loss occurs.

Issue 4: Application of Income for Charitable Purposes
The Tribunal reviewed the audited statement of accounts and found that the amounts transferred to reserve for loan loss, education and charitable fund, and capacity building fund were not spent for the trust's objects. It was concluded that these amounts were not applied in the trust's activities, justifying the disallowance upheld by the CIT(A).

In conclusion, the Tribunal dismissed the appeal, confirming the CIT(A)'s order. The decisions of various High Courts and the Supreme Court were cited to support the disallowance of the expenses in question, emphasizing the necessity for actual expenditure to qualify as application of income for charitable purposes.