Trust can carry forward excess exp. of earlier year to be adjusted against income of subsequent year

Expenditure incurred for religious and charitable purposes by assessee-trust in an earlier year could be adjusted against income of succeeding year while computing taxable income of succeeding year. Full text of the judgement is provided here under:-

[2018] 98 taxmann.com 307 (Bangalore - Trib.)

IN THE ITAT BANGALORE BENCH 'A'

Income-tax Officer, Ward-1, Mysore

v.

Namma Sangha*

N.V. VASUDEVAN, JUDICIAL MEMBER
AND A.K. GARODIA, ACCOUNTANT MEMBER

IT APPEAL NO. 1562 (BANG.) OF 2018
[ASSESSMENT YEAR 2012-13]

SEPTEMBER  24, 2018 

Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of income form property held under (Application of income) - Assessment year 2012 -13 - Whether expenditure incurred for religious and charitable purposes by assessee-trust in an earlier year could be adjusted against income of succeeding year while computing taxable income of succeeding year - Held, yes [Para 7] [In favour of assessee]

FACTS

■		The assessee was a trust registered under section 12A. For the assessment year 2012-13, the assessee filed a return of income claiming set-off of brought forward expenses of Rs. 1.78 crores and carry forward of current year expenditure of Rs. 1.30 crores incurred in excess of its income for setting off against income of the succeeding years and claimed it as application of income in the succeeding years.
■		According to the Assessing Officer, there was no provision in the Act for carry forward of excess expenditure of earlier year to be adjusted against income of the subsequent year and, therefore, he denied the claim of the assessee.
■		On appeal, the Commissioner (Appeals) allowed the claim of the assessee but he worked out the actual quantum of carry forward that had to be allowed at Rs. 1.80 crores.
■		On appeal:

HELD

■		Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. In CIT v. Institute of Banking Personnel Selection [2003] 264 ITR 110/131 Taxman 386 (Bom.) it was held that in case of charitable trust whose income is exempt under section 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under section 11 in past years. In Govindu Naicker Estate v. Asstt. DIT[2001] 248 ITR 368/[1999] 105 Taxman 719 (Mad.), the Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that section 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year.
■		The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set-off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set-off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. [Para 7]
■		In the light of the aforesaid judicial pronouncements on the issue, there is no merit in this appeal by the revenue. Accordingly, the same is dismissed. [Para 8]

CASE REVIEW

CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.), CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj.), CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 (Bom.), Govindu Naicker Estate v. Asstt. DIT[2001] 248 ITR 368/[1999] 105 Taxman 719 (Mad.) and CIT v. Society of Sisters of the ST. Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.) (para 7) followed.

CASES REFERRED TO

CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.) (para 7), CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj.) (para 7), CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 (Bom.) (para 7), Govindu Naicker Estate v. Asstt. DIT [2001] 248 ITR 368/[1999] 105 Taxman 719 (Mad.) (para 7) and CIT v. Society of Sisters of the ST. Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.) (para 7).

Siddappaji R.N., Addl. CIT (DR) (ITAT) for the Appellant.

ORDER

N.V. Vasudevan, Judicial Member - This is an appeal by the Revenue against the order dated 13.10.2017 of the CIT(Appeals), Mysore relating to assessment year 2012-13.

2. The only issue that arises for consideration in this appeal which is projected by the Revenue in grounds of appeal, is as to whether the CIT(Appeals) was justified in holding that assessee, a trust, is entitled to claim set off of brought forward expenses of Rs. 1,78,15,835 and carry forward of current year expenditure of Rs. 1,30,33,485/- incurred in excess of its income for setting off against income of the succeeding years and claim it as application of income in the succeeding years?

3. The assessee is a trust registered u/s. 12A of the Act. For the A.Y. 2012-13, the assessee filed a return of income claiming set off of brought forward expenses of Rs. 1,78,15,835 and carry forward of current year expenditure of Rs. 1,30,33,485/- incurred in excess of its income for setting off against income of the succeeding years and claim it as application of income in the succeeding years. According to the AO, there was no provision in the Act for carry forward of excess expenditure of earlier year to be adjusted against income of the subsequent year and he therefore denied the claim of the Assessee.

4. On appeal by the assessee, the CIT(A) allowed the claim of the Assessee, but he worked out the actual quantum of carry forward that has to be allowed at Rs. 1, 80, 96, 580/-. The following were the relevant findings of the CIT(A) in this regard:—

"3. …………………………… The third ground of appeal pertains to the appellant's claim both for bringing forward the amount of excess of expenditure over application made in the earlier years besides the appellant's claim for the excess of expenditure of the current year to be carried over. This issue is covered in favour of the appellant vide the decision of the Honorable jurisdictional ITAT, Bangalore rendered in ITA No. 124/Bang/2014, dt. 20/10/2015 in the case of Karnataka Food and Civil Supplies v. Dept. of Income-tax. Therefore, after due consideration of the facts of the appellant as per law, the 3rd ground of appeal is allowed."

5. Aggrieved by the order of CIT(A), the revenue has preferred the present appeal before the Tribunal, raising the following grounds:—

(2) On carry forward of excess expenditure/application/deficit/ loss:—

(a)		The CIT (A) has erred in directing the assessing officer to allow set-off of excess expenditure/application pertaining to current asst. year and earlier years against the income of the future asst. year without appreciating the fact that as per the scheme of taxation of charitable or religious trust/institution as codified u/s. 11, 12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust.
(b)		The CIT (A) has failed to appreciate the fact that the normal computation of income under respective heads as envisaged u/s 15 to 59 are not applicable to the computation of income in respect of charitable trust/institution for the purpose of claiming exemption under sec. 11, 12 and 13 and, therefore, the provisions relating to set-off of loss from one source against the income from another source, set-off of loss from one head against income from another head and carry forward and set-off of loss against the income of subsequent years as envisaged u/s 70 to 79 are also not applicable to the charitable trusts/institutions.
(c)		The CIT (A) has failed to discuss the issue in detail bringing out the facts and applying the relevant provisions of the Act, but came to a conclusion that excess expenditure/excess application shall be allowed to be carried forward and set-off against the income of the future assessment years and, thereby, rendering the order perverse.

6. The learned DR reiterated the stand of the AO that there is no provision in the Act to allow carry forward of excess application of income for set off as application of income in subsequent years. The ld. counsel for the Assessee relied on the order of the CIT(A) and several decisions referred to in the order of the CIT(A) wherein the Tribunal accepted the claim of the Assessee on identical issue on identical facts.

7. We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj.)CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj.). In CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 (Bom.) it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under s. 11 in past years. In Govindu Naicker Estate v. Asstt. DIT [2001] 248 ITR 368/[1999] 105 Taxman 719 (Mad.), the Hon'ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The Hon'ble Madras High Court in coming to the aforesaid conclusion placed reliance the decision in the case of CIT v. Society of the Sisters of the ST. Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.).

8. In the light of the aforesaid judicial pronouncements on the issue, we are of the view that there is no merit in this appeal by the revenue. Accordingly, the same is dismissed.

9. In the result, appeal by the Revenue is dismissed.

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