1986 (7) TMI 56 - HC - Income Tax

Trust may set off prior year deficit against later year surplus as application of income under section 11(1)(a)

Commissioner Of Income-Tax Versus Maharana Of Mewar Charitable Foundation

HC held that a trust may set off a deficit from excess expenditure in one year against surplus income in a subsequent year by treating the later-year ... Excess expenditure - Charitable Purpose - Charitable Trust - Whether, the Tribunal was right in directing that the deficit arising out of excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year ? - HELD THAT:- When the income of a trust is used or put to use to meet the expenses incurred for religious or charitable purposes, it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. If the contention of Shri Arora is accepted, it would lead to an anomalous situation, namely, if the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to exemption from tax under section 1 l(1)(a) of the Act. But if the trust, instead of taking a loan, incurs expenditure for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement under section 11(1)(a) of the Act. In our opinion, a construction which leads to such an anomaly must be avoided. We are, therefore, of the opinion that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made and will have to be excluded from the income of the trust under section II (1)(a) of the Act. In the present case, it has not been found by the Appellate Assistant Commissioner that the amount of Rs. 59,770 was riot incurred by the assessee for charitable purposes but was incurred for some purposes which have nothing to do with the objects of the trust. The Tribunal also observed that it is not the case of the Department that the said expenditure of Rs. 59,770 was not incurred by the assessee for charitable purposes. In these circumstances, the Tribunal was right in holding that the sum of Rs. 59,770 adjusted against the income of the assessment year 1971-72 could be excluded from the income of the trust for the said assessment year for the purposes of assessment under section II (1)(a) of the Act. The result of the adjustment of the sum of Rs. 59,770 incurred as expenditure for charitable purposes during the assessment year 1970-71 against the income for the assessment year 1971-72 is that the said income must be treated as having been applied for charitable or religious purposes in the current year 1971-72 and deduction of the said sum of Rs. 59,770 could be claimed in respect of the income of the assessment year 1971-72. The Tribunal was right in directing that the deficit of Rs. 59,770 arising out of the excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year. The question referred is, therefore, answered in the affirmative, i.e., against the Revenue and in favour of the assessee. Issues involved: The judgment addresses the issue of whether a deficit amount arising from excess expenditure over income in a previous year can be set off against the surplus of income over expenditure in a subsequent year for the purpose of computing taxable income.Summary:The High Court of Rajasthan considered a reference made by the Income-tax Appellate Tribunal regarding the assessment year 1971-72. The Maharana of Mewar Charitable Foundation, a public charitable trust, had incurred a deficit of Rs. 59,770 in the previous year relevant to the assessment year 1970-71. The trust sought to adjust this deficit against the surplus of income over expenditure in the assessment year 1971-72. The Revenue objected to this adjustment, arguing that the expenditure incurred in the earlier year could not be set off against the income of the subsequent year. The Tribunal, however, allowed the adjustment, leading to the reference to the High Court.Contentious Points:- The Revenue contended that the expenditure incurred in the earlier year could not be adjusted against the income of the subsequent year, citing relevant case law.- The trust argued that the amount was spent for charitable purposes and should be allowed as a deduction, supported by a different legal precedent.Legal Analysis:The court examined section 11(1)(a) of the Income-tax Act, which excludes income applied for charitable purposes from total income. It was argued that the income of the trust could be considered applied for charitable purposes even if it was used to meet expenses from a previous year. The court referred to a Circular by the Central Board of Direct Taxes supporting this interpretation.Decision and Rationale:The court rejected the Revenue's contention, stating that adjusting expenses for charitable purposes from an earlier year against income in a subsequent year qualifies as applying income for charitable purposes. As there was no evidence that the expenditure was not for charitable purposes, the court upheld the Tribunal's decision to allow the adjustment. The court distinguished previous case law cited by the Revenue as not relevant to the current situation.Conclusion:The High Court ruled in favor of the assessee, allowing the deficit amount to be set off against the surplus income for the subsequent year. The decision was based on the interpretation of the Income-tax Act and the application of income for charitable purposes.