1993 (11) TMI 17 - HC - Income Tax

Income from trust judged by commercial principles; all outgoings including income tax deductible before assessing surplus under section 11(1)(a)

Commissioner Of Income-Tax Versus Shri Plot Swetamber Murti Pujak Jain Mandal

HC held that income from trust property must be determined on commercial principles, allowing deduction of all outgoings (including income-tax) before ... Entitlement to carry forward expenses for set off in the subsequent year - Charitable Purpose - HELD THAT:- After reviewing the case law on the subject, it has been held that income derived from the trust property must be determined on commercial principles and in doing so, all outgoings including outgoings by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income arises. While holding that the income derived from the trust property must be determined on commercial principles, this court has noted that if such an interpretation is not placed on section 11(1)(a) of the Act, it would render the benevolent provisions found in clause (a) of section 11(1) of the Act nugatory. It is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and will have to be excluded from the income of the trust under section 11(1)(a) of the Act. We are of the opinion that, on the facts and in the circumstances of the case, the assessee is entitled to carry forward expenses for set off in the subsequent year. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues Involved:1. Entitlement of the assessee to carry forward expenses for set off in the subsequent year.Summary:Issue 1: Entitlement to Carry Forward Expenses for Set Off in Subsequent YearThe High Court of Gujarat addressed the issue of whether the assessee, a registered public trust, is entitled to carry forward expenses for set off in the subsequent year. The Income-tax Appellate Tribunal had referred this question of law for the court's opinion u/s 256(1) of the Income-tax Act, 1961.The court examined the scheme of section 11 of the Act, particularly sections 11(1)(a), 11(2), and 11(3). It noted that income derived from property held under trust for charitable or religious purposes, when applied to such purposes in India, is excluded from the total income of the trust. The court emphasized that there are no words of limitation in section 11(1)(a) requiring the income to be applied in the year it arises. The term 'applied' means to put to use, and thus, expenses incurred in an earlier year can be adjusted against the income of a subsequent year.The court referred to a Circular dated January 24, 1973, issued by the Central Board of Direct Taxes, which clarified that repayment of a loan taken for charitable purposes amounts to an application of income for such purposes. The court reasoned that if a trust can take a loan and repay it from subsequent year's income, then expenses incurred from the corpus of the trust and reimbursed from subsequent year's income should also be considered as applied for charitable purposes.The court cited the case of CIT v. Maharana of Mewar Charitable Foundation, where the Rajasthan High Court held that expenses incurred in an earlier year and adjusted against subsequent year's income should be excluded from the trust's income u/s 11(1)(a). The Gujarat High Court agreed with this view.Additionally, the court referred to CIT v. Ganga Charity Trust Fund and CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, where it was held that income derived from trust property should be determined on commercial principles. This includes allowing adjustments of expenses incurred in earlier years against subsequent year's income.Based on these considerations, the court concluded that the assessee is entitled to carry forward expenses for set off in the subsequent year. The question was answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.