2016 (6) TMI 133 - HC - Income Tax

Charitable trusts can set off deficits from previous years against current surplus, High Court rules

The High Court held that Section 11 (1) (a) of the Income Tax Act does not prohibit the set off of deficit from the previous financial year against the ... Exemption u/s 11(1)(a) - deficit adjusted against the surplus - Held that:- CBDT circular dated 24.01.1973 enables a trust, which had taken a loan for incurring expenditure for charitable and religious purposes, to repay the said loan from out of its income in the subsequent year; and such repayment of loan is to be treated as application of income for charitable and religious purposes under Section 11 (1) (a) of the Act. Money for charitable and religious purposes, beyond the income of a trust, can be applied, for charitable and religious purposes, either by taking a loan or utilizing a part of the corpus of the Trust. As the CBDT circular dated 24.01.1973 enables repayment of a loan for the previous year utilizing the income of the subsequent year, and for such utilization to be treated as application of income under Section 11 (1) (a) of the Act, there is no reason why excess application of money, for charitable and religious purposes, (deficit) of the earlier year should not be set off against the income for the subsequent year. In the absence of any specific prohibition in the Section 11 (1) (a) of the Act in this regard, and in the light of the CBDT circular dated 24.01.1973 we find no error in the order of the Tribunal, much less a substantial question of law, necessitating interference in this appeal. Issues:1. Interpretation of Section 11 (1) (a) of the Income Tax Act, 1961 regarding set off of deficit from the previous financial year against surplus of the current financial year for charitable trusts.Analysis:The case involved an appeal under Section 260-A of the Income Tax Act against an order by the ITAT, Hyderabad for the assessment year 2005-06. The respondent, engaged in Scientific Research in Biomedical Science, declared 'NIL' income after claiming exemption under Section 10 (21) of the Act. However, the assessing officer brought the surplus amount to tax after observing that the assessee had not filed Form-10 and had transferred an amount exceeding 15% of gross receipts to the capital fund.The Commissioner, on appeal, considered the deficit from the previous financial year and directed the assessing officer to verify the claim. The Tribunal, relying on judgments from the Madras and Gujarat High Courts, upheld the Commissioner's order, allowing the set off of deficit against the surplus for the current year for charitable trusts.In the final analysis, the High Court held that Section 11 (1) (a) of the Act does not prohibit the set off of deficit from the previous financial year against the surplus of the current financial year for charitable trusts. The CBDT circular dated 24.01.1973 allows trusts to repay loans taken for charitable purposes from subsequent year's income, which qualifies as application of income for charitable purposes. The Court found no error in the Tribunal's order, dismissing the appeal and upholding the set off of deficit against surplus for charitable trusts.Therefore, the High Court dismissed the appeal, stating that there was no substantial question of law necessitating interference. Miscellaneous petitions pending were also dismissed, and no order as to costs was issued.