Trust allowed to carry forward deficits for charitable purposes, Tribunal affirms decision

The Income Tax Officer Versus. Academy of Liberal Education,

The Income Tax Officer Versus. Academy of Liberal Education, - TMI Issues: Whether a trust is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years.

Analysis:

Issue 1: Claim for carry forward of deficit of current year and unabsorbed deficit of earlier assessment years.

The assessee, a trust registered under section 12A of the Act, filed a return of income for A.Y. 2011-12 showing application of income exceeding its receipts. Additionally, the trust had a carry forward unabsorbed deficit from A.Ys. 2005-06 to 2010-11. The main contention was whether the trust could carry forward the deficit of the current year and unabsorbed deficit of earlier years for setting off against income in subsequent years. The Assessing Officer (AO) initially rejected the claim, citing a pending appeal by the department before the High Court on a similar issue. However, the CIT(A) allowed the claim based on previous decisions in favor of other trusts, emphasizing that the set-off of excess expenditure incurred against income of later years constitutes application of income for charitable purposes. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Income Tax Act does not limit income application to the year it arises, allowing for adjustment of expenses from earlier years against income of subsequent years. The Tribunal cited various legal precedents supporting this interpretation, highlighting that expenditure for charitable purposes can be adjusted against income of subsequent years, ensuring that income applied for charitable purposes is not taxable.

Conclusion:
The Tribunal dismissed the Revenue's appeal, emphasizing that the pendency of an appeal before the High Court does not negate the applicability of existing legal principles allowing trusts to carry forward deficits for charitable purposes. The decision underscores that the objective of charitable trusts is to incur expenditure for charitable purposes, and as long as such expenditure is properly accounted for and adjusted against income in subsequent years, it qualifies as income applied for charitable purposes. The judgment reaffirms the principle that expenditure on religious or charitable purposes, even if incurred in earlier years, can be set off against income of subsequent years, aligning with the benevolent provisions of the Income Tax Act for charitable entities.