Charitable institution can set off excess income against future income from trust, Tribunal rules

The Tribunal allowed the carry forward of the excess application of income by a charitable institution to be set off against future income from property held under trust. The decision overturned the rulings of the AO and CIT(A), emphasizing that the income of charitable trusts should be computed on commercial principles, allowing for adjustments of excess expenditure against income in subsequent years. The Tribunal held that any excess application of income in a year can be considered as application in future years, directing the AO to permit the carry forward for the year in question.

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Issues Involved:
1. Denial of carry forward of the deficit being the excess application of income.
2. Application of income of charitable trusts based on commercial principles.

Detailed Analysis:

Issue 1: Denial of Carry Forward of the Deficit Being the Excess Application of Income

The primary issue in this case is whether the assessee, a public religious cum charitable institution, can carry forward the excess application of income amounting to Rs. 7,44,328 to be set off against the income from property held under trust in future years. The Assessing Officer (AO) did not permit this carry forward, citing the absence of a specific provision in the Income Tax Act for such a carry forward by charitable trusts.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's decision. The CIT(A) relied on the judgment of the Hon'ble High Court of Delhi in CIT v. Indian National Trust (305 ITR 149) and the ITAT, Mumbai Bench decision in Trustees of Sri Satya Sai Trust (33 ITD 320), concluding that there was no provision under the Act to carry forward the excess application of income by charitable trusts to subsequent years.

Issue 2: Application of Income of Charitable Trusts Based on Commercial Principles

The assessee further appealed to the Tribunal, arguing that the income of charitable trusts should be computed on commercial principles. The assessee cited several judicial decisions supporting the view that excess application over income should be regarded as application against income of later years.

The Tribunal examined various judicial pronouncements, including the Hon'ble High Court of Bombay in CIT v. Institute of Banking (264 ITR 111) and decisions of the co-ordinate benches of the ITAT, Bangalore. The Tribunal noted that these precedents support the principle that the income of charitable trusts should be computed on commercial principles, allowing for the adjustment of excess expenditure incurred in earlier years against the income of subsequent years.

The Tribunal emphasized that Section 11(1)(a) of the Income Tax Act does not limit the application of income to the year in which it arises. It merely requires the application of income from property held under trust. Therefore, any excess application of income during a year can be regarded as an application of income in future years and can be adjusted accordingly.

The Tribunal also considered the decision of the Hon'ble High Court of Delhi in Indian National Theater, which held that accumulation of income should be only out of the current year's income. However, the Tribunal preferred to follow the consistent view of the co-ordinate benches of the Bangalore Tribunal and the Hon'ble High Court of Bombay, which allow for the carry forward of excess application of income.

Conclusion:

The Tribunal directed the AO to allow the carry forward of the excess application of Rs. 7,44,328 for the year under consideration to be adjusted against the income from property held under trust in subsequent years. Consequently, the assessee's appeal was allowed.

Order Pronounced:

The order was pronounced in the open court on 24th September 2015, allowing the appeal of the assessee for the Assessment Year 2007-08.

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