2023 (2) TMI 192 - AT - Income Tax

Tribunal allows steel manufacturer's deduction claim for donations converted from loans under Sec.80G

M/s. Sri Ranganathar – Industries Pvt. Ltd. Versus The Dy. Commissioner of Income Tax, Central Circle-1, Coimbatore

The Tribunal ruled in favor of the assessee, a steel castings manufacturer, allowing the deduction claimed under Sec.80G for donations paid to M/s. Sri ... Deduction u/s 80G - Trust, is registered u/s.12AA of the Act & u/s.80G - assessee has paid donation partly through bank for the relevant assessment year and partly converted loans given to Trust in earlier financial year as donations for the impugned assessment years - AO treated donations converted out of loans given in earlier financial years as donations in kind and denied deduction - HELD THAT:- We ourselves do not subscribe to the reasons given by the AO to treat donations given out of conversion of loan given in earlier financial years as donations in kind to deny the benefit of deduction u/s.80G of the Act, for simple reason that donations paid in cash and donations paid in kind are entirely different. Donations paid in kind is something which is paid in the form of some goods and articles, whereas, donations paid in cash means any payment by cash or by cheque or by any electronic mode of transfer of funds. In this case, there is no dispute with regard to the fact that the assessee had given loans to Trust in earlier financial years through proper banking channel and further, said loans have been converted into donations during the impugned assessment years. Therefore,donations paid by the assessee by conversion of loans into donations comes under the nature of donations paid in cash and thus, the assessee is entitled for deduction u/s.80G of the Act. This view is fortified by the decision of the ITAT Allahabad Bench in the case of M/s.General Capital and Holding Co. Pvt. Ltd [2018 (2) TMI 1091 - ITAT AHMEDABAD] where the Tribunal after considering relevant facts held that conversion of loans given in earlier financial years into donations are eligible for the benefit of deduction u/s.80G. In this view of the matter and considering the facts and circumstances of the cases, we are of the considered view that the assessee is entitled for deduction u/s.80G of the Act, towards donations paid to Trust, including amount paid during the previous year and also amount paid out of loans given in earlier financial years. Therefore, we direct the AO to allow deduction u/s.80G of the Act, as claimed by the assessee for all assessment years. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts representing erstwhile loans given to a charitable trust and subsequently 'converted' by the donor into donations during the relevant previous year qualify as 'donations paid in cash' for the purpose of deduction under section 80G. 2. Whether donations 'in kind' are eligible for deduction under section 80G, and whether conversion of loans into donations amounts to a donation in kind. 3. The relevance of the 'substance over form' doctrine where the donor had originally advanced funds as loans by banking channel and the donee trust subsequently issued acknowledgment/receipts and possessed registration under section 12AA and section 80G. 4. The applicability and treatment of precedents addressing (a) the requirement of payment during the relevant previous year and (b) the distinction between cash donations and donations in kind. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether conversion of earlier loans into donations constitutes 'donations paid in cash' under section 80G Legal framework: Section 80G allows deduction for donations made to approved institutions; the statutory language requires payment in the relevant previous year and the courts have emphasized that deduction is available for donations in cash (including payment by cheque or electronic transfer) and not for donations in kind. Precedent treatment: An earlier tribunal decision was relied upon by the assessee holding that conversion of previously advanced amounts (transferred by banking channels) into donations qualifies for section 80G relief; higher court decisions emphasize the cash-payment requirement but do not preclude electronic/banking transfers. Interpretation and reasoning: The Court distinguishes donations in cash from donations in kind by reference to the mode and substance of payment. Where the donor had advanced funds to the trust through banking channels (thereby creating a loan asset in its books) and, in the relevant previous year, the donor forgave that loan and obtained an acknowledgment/receipt from the registered trust, the economic effect is an actual transfer of monetary value during the relevant previous year. Such conversion is, in substance, payment of money (by banking channel) rather than transfer of goods or other non-monetary assets. The Court emphasizes that the statutory objective of requiring payment in the relevant previous year is to ensure actual transfer of monetary benefit within that year; a prior loan converted into a donation during the year satisfies this purpose when the underlying funds were originally moved by banking channels and the debtor-creditor right is surrendered in the relevant year. Ratio vs. Obiter: The holding that conversion of previously advanced monetary loans (moved through banking channels) into donations constitutes 'donations paid in cash' for section 80G is ratio decidendi for the appeals adjudicated. Conclusion: Conversion of loans given earlier (where the original funds were transferred by banking channel and the trust issued proper receipts upon conversion) qualifies as donation paid in cash and is eligible for deduction under section 80G for the relevant previous year. Issue 2 - Whether conversion of loans into donations amounts to donations in kind and thus falls outside section 80G Legal framework: Donations 'in kind' are those consisting of goods or other non-monetary items; section 80G relief has been held in precedents to be confined to cash donations (broadly including cheque/electronic transfers) and not to donations in kind. Precedent treatment: Decisions cited by the revenue and earlier authorities state the principle that donations in kind are not deductible. Those authorities were applied by lower authorities to treat conversion of loans as donations in kind. Interpretation and reasoning: The Court rejects the characterization of loan-conversion as a donation in kind where the underlying transaction is monetary (loan advanced/returned by banking channel) and the creditor's right is waived by the donor during the relevant year. The Court clarifies that donations in kind refer to tangible goods/articles; conversion of a monetary receivable into a gratuitous waiver is not a transfer of goods but a relinquishment of a monetary claim, and thus of the nature of a cash donation for tax purposes. Ratio vs. Obiter: The conclusion that loan conversion is not a donation in kind but a cash donation (given the facts specified) forms part of the operative ratio concerning eligibility under section 80G. Conclusion: Treating conversion of loans into donations as donations in kind is incorrect where the advances and conversion operate through banking channels and the trust issues proper receipts; such conversions are eligible as cash donations under section 80G. Issue 3 - Application of 'substance over form' and effect of acknowledgments/registrations Legal framework: Tax entitlements turn on substantive economic realities; statutory conditions (payment in relevant previous year, approval/registration of donee and issuance of receipt) must be satisfied in substance. Precedent treatment: A tribunal precedent accepting loan-to-donation conversion as meeting section 80G requirements was relied upon by the assessee; higher court pronouncements requiring cash payment and timing were acknowledged. Interpretation and reasoning: The Court applies substance over form: the substance - actual monetary flow to the trust by banking channel and subsequent relinquishment of creditor rights evidenced by receipt and registration - satisfies the statutory condition of payment in the relevant previous year. The Court notes that lower authorities misapplied precedent by focusing on the label 'conversion' and treating it as non-cash; when the substantive features show monetary transfer and waiver within the relevant year, form should not defeat relief. Ratio vs. Obiter: The application of substance over form to uphold section 80G deduction in these factual circumstances is part of the binding reasoning of the decision. Conclusion: Where the trust is duly registered and issues acknowledgment, and where the original advances were made by banking channel and the creditor right is waived in the relevant previous year, the doctrine of substance over form supports allowing the section 80G deduction. Issue 4 - Reconciliation with precedents requiring payment during the relevant previous year and limiting relief to cash donations Legal framework: Precedents require donations to be paid in the relevant previous year and recognize deduction only for cash donations (including banking transfers), not donations in kind. Precedent treatment: The Court reviews higher court decisions relied on by revenue and finds their ratio to be consistent with the assessee's case when applied correctly: those decisions emphasize cash payment and the timing requirement, both of which were satisfied on the facts (payment via banking channel and conversion/waiver effected in the relevant previous year). Interpretation and reasoning: The Court holds that the lower authorities misunderstood and misapplied precedent by converting its principle into an absolute bar against loan conversions. Properly construed, the precedents mandate cash payment in the relevant year; they do not deny relief where monetary transfer has occurred and the donor's creditor right is waived with appropriate receipts and registration. Ratio vs. Obiter: The reconciliation and distinguishing of earlier decisions form part of the Court's dispositive reasoning in allowing the claimed deductions. Conclusion: The authorities relied upon by the revenue do not preclude allowance of section 80G deduction where the donation is in substance a cash payment effected or formalized in the relevant previous year; accordingly, the deductions claimed must be allowed. Final Disposition (linked to conclusions above) Given the factual matrix (loans originally advanced by banking channel, subsequent conversion/waiver in the relevant previous year, acknowledgment/receipts from a registered trust), the Court allows the section 80G deductions for the amounts converted from loans as well as amounts actually paid during the previous year, directing the assessing authority to grant the claimed relief.