2018 (9) TMI 1968 - AT - Income Tax

Tribunal upholds trust's deficit carry forward, emphasizing commercial principles.

The Tribunal dismissed the Revenue's appeal and affirmed the order of the CIT(A) allowing the carry forward deficit of a trust to be set off against ... Exemption u/s 11 - corpus donations/funds receipts - as per assessee utilisation of the corpus donations/funds could not be construed as the “Income derived from property” held under trust wholly for charitable or religious purposes, hence the application of the same could not be brought within the sweep of Sec. 11(1)(a) - whether, the CIT(A) was right in law and facts of the case in allowing the carry forward of the deficit of earlier years, for being set off against the surplus of subsequent years of the assessee trust ? - HELD THAT:- This issue involved in the case before us is squarely covered by the judgment of CIT Vs. Institute of Banking [2003 (7) TMI 52 - BOMBAY HIGH COURT] while dismissing the appeal of the revenue had observed, that as the income of the trust was to be computed on commercial principles, thus adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years, against the income earned by the trust in the subsequent year, was to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year. Hon‟ble High Court had in unequivocal terms observed, that the adjustment of the expenses incurred by the trust in the earlier years, against the surplus of the subsequent year, will have to be excluded from the income of the trust under Sec. 11(1)(a). Similar view had been taken in the case of CIT(Exemption) Vs. Subros Educational Society [2018 (4) TMI 1622 - SC ORDER] dismissed the appeal of the revenue and had declined to dislodge the observations of the High Court, that the excess expenditure incurred by the charitable trust/charitable institution in an earlier assessment year were to be allowed to be set off against the income of subsequent years by invoking Sec. 11 of the Act. - Decided in favour of assessee. Issues:1. Allowance of carry forward deficit and set off against subsequent years' income.2. Interpretation of provisions under Sec. 11(1)(a) of the Income Tax Act, 1961.3. Applicability of judgments by High Court and Supreme Court on the issue.Issue 1: Allowance of carry forward deficit and set off against subsequent years' income:The appeal involved a dispute regarding the allowance of carry forward deficit of a trust against the income of subsequent years. The Revenue challenged the order of the CIT(A) which allowed the carry forward of a deficit of a significant amount and its set off against the income of the following years. The Assessing Officer (A.O) disallowed this adjustment, arguing that expenditure from earlier years cannot be met from subsequent year's income, especially when it comes to charitable or religious purposes. The A.O's stance was based on the premise that only income derived from property held under trust wholly for charitable or religious purposes could be considered as the application of income under Sec. 11(1)(a) of the Act.Issue 2: Interpretation of provisions under Sec. 11(1)(a) of the Income Tax Act, 1961:The core of the dispute revolved around the interpretation of Sec. 11(1)(a) of the Income Tax Act, 1961. The A.O contended that corpus donations received by the trust should not be deemed as income derived from property held under trust for charitable or religious purposes. This led to the disallowance of the adjustment made by the assessee regarding the deficit from earlier years against the surplus of the year under consideration. The CIT(A), however, relied on a judgment by the Hon'ble High Court of Bombay to allow the carry forward of the deficit in the succeeding year, emphasizing the need for a commercial principle-based computation of trust income.Issue 3: Applicability of judgments by High Court and Supreme Court on the issue:Both parties cited judgments by the Hon'ble High Court of Bombay and the Hon'ble Supreme Court to support their respective arguments. The Revenue highlighted that the High Court judgment was rendered in the context of a pre-amended provision, hence not directly applicable to the present case. Conversely, the Assessee's Authorized Representative argued that the High Court's decision was relevant and in line with a recent Supreme Court judgment, which allowed excess expenditure incurred by a trust in earlier years to be set off against subsequent years' income. The Tribunal, after thorough deliberation, upheld the CIT(A)'s order, emphasizing the consistency with the judicial pronouncements and the rule of judicial discipline.In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the order of the CIT(A) to allow the carry forward deficit and set off against subsequent years' income based on the interpretations of relevant provisions and judicial precedents.