2019 (7) TMI 2073 - AT - Income Tax

Assessee can carry forward deficit from excess application under s.11(1)(a) where over 85% income applied to charity

ITAT MUMBAI held that the assessee is entitled to carry forward the deficit arising from excess application of funds under s.11(1)(a) where over 85% of ... Carry forward of deficit arising out of excess expenditure/application of fund in the current year - 'application' of income u/s 11(1)(a) - assessee has applied more than 85% of its income/funds towards charitable purpose - HELD THAT:- As could be seen, this issue was initially decided in Institution of Banking Personnel Selection Services [2003 (7) TMI 52 - BOMBAY HIGH COURT] Subsequently, identical view was also expressed in Gem and Jewellery Exports Promotion Council [2011 (2) TMI 1511 - BOMBAY HIGH COURT] Following the aforesaid decision issue is decided in favour of assessee allowing assessee’s claim of carry forward of deficit. Appeal of the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether an excess application/expenditure in a year resulting in a deficit under section 11(1)(a) can be carried forward and set off against income of subsequent years under the Income-tax Act, 1961. 2. Whether allowing carry forward and set-off of such deficit results in impermissible double benefit when the amount was earlier allowed as 'application' of income or corpus donation under sections 11/12/13. 3. Whether the absence of an express statutory provision for carry forward/set-off in sections 11, 12 and 13 precludes judicial recognition of such carry forward. 4. Whether pending or disposed proceedings in higher courts (including Special Leave Petitions and batch decisions) affect the correctness of allowing carry forward. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Carry forward and set-off of deficit under section 11(1)(a) Legal framework: Section 11(1)(a) governs accumulation/application of income for charitable purposes and prescribes the permissible accumulation limit (including the 85% rule referenced in the facts). There is no express provision in sections 11-13 analogous to section 72 (business loss carry forward and set-off). Precedent Treatment: The Tribunal relied upon the view of the jurisdictional High Court that permitted carry forward of deficit arising from excess application of income; subsequent Tribunal benches have followed those High Court decisions. The same principle has been applied in multiple decisions of benches of the Tribunal and endorsed in related High Court rulings. Interpretation and reasoning: The Court examined the facts (the trust applied more than 85% of income to charitable purposes producing a deficit in accumulation) and the consistent line of judicial decisions permitting carry forward. The Tribunal reasoned that the judicially evolved position that such deficits can be carried forward has been repeatedly adopted by appellate fora and is supported by higher court treatment outlined below. The absence of a literal provision was considered but addressed through the weight of authoritative precedent. Ratio vs. Obiter: The Tribunal's acceptance of carry forward as permissible (following High Court authority) is treated as ratio for purposes of the appeals decided; the discussion about statutory silence is explanatory but the operative holding is that carry forward is permissible in law. Conclusions: Carry forward and set-off of the deficit under section 11(1)(a) is permissible; the Revenue's grounds rejecting such carry forward are without merit and are dismissed. Issue 2 - Allegation of double benefit (application allowed earlier, then set-off later) Legal framework: Principles against double deduction and the scheme of sections 11-13 informing tax treatment of charitable trusts; general anti-avoidance consideration that an assessee should not derive two tax benefits in respect of the same outlay. Precedent Treatment: Prior High Court and Tribunal decisions addressing carry forward have confronted and rejected the double benefit argument in the circumstances adjudicated, holding that permitting carry forward does not amount to impermissible double deduction where legal tests for application/accumulation and subsequent set-off are met. Interpretation and reasoning: The Tribunal reviewed the Assessing Officer's stance that allowing carry forward after earlier recognising the application would duplicate the tax benefit. The Tribunal, following higher authority, concluded that recognising an excess application in one year and allowing deficit adjustment in subsequent year is not a double allowance prohibited by the Act when read with judicial interpretations; the carry forward operates to reflect year-to-year variability in application/accumulation in a manner consistent with the object of section 11. Ratio vs. Obiter: The holding rejecting the double benefit contention is ratio for these appeals, grounded on precedents; observations about perceived policy concerns are obiter and subordinate to the controlling judicial precedents. Conclusions: Double benefit contention fails in light of authoritative decisions permitting carry forward; the Tribunal sustained the allowance of carry forward notwithstanding the Assessing Officer's double-benefit objection. Issue 3 - Absence of express statutory provision for carry forward Legal framework: Statutory interpretation principles - whether absence of express provision precludes judicial creation/recognition of a procedural or substantive right, balanced against purposive construction of provisions governing charitable trusts. Precedent Treatment: Jurisdictional High Court decisions have interpreted the statute to permit carry forward despite lack of express provision; subsequent Tribunal decisions have followed these interpretations. Higher court activity (see Issue 4) confirms acceptance of that interpretation. Interpretation and reasoning: The Tribunal acknowledged the lack of an express provision but relied on judicial construction of sections 11-13 by higher fora which has permitted carry forward. The Tribunal treated the judicial construction as authoritative and binding for the present appeals, rather than insisting on a strict textualist bar to carry forward. Ratio vs. Obiter: The conclusion that the absence of express provision does not bar carry forward is part of the operative ratio as applied in these appeals, because it is grounded in binding precedent rather than gratuitous commentary. Conclusions: Statutory silence on carry forward does not preclude its allowance where judicial precedent has interpreted sections 11-13 to permit carry forward and set-off of deficits arising from excess application. Issue 4 - Effect of higher court proceedings (SLPs, batch decisions) on correctness of allowing carry forward Legal framework: Doctrine of stare decisis; effect of Supreme Court rulings and the status of High Court precedents when related SLPs or batch matters are pending or disposed. Precedent Treatment: The Tribunal considered higher court activity and found that the Supreme Court, in batch disposal of related matters and in miscellaneous application(s), has approved the High Court position permitting carry forward. The specific contention that an SLP was pending and therefore the High Court position disfavoured was rejected on factual/legal review of Supreme Court orders. Interpretation and reasoning: The Tribunal examined the status of SLPs and found that batch matters were decided by the Supreme Court upholding the High Court view and that a miscellaneous application by the Department was dismissed, indicating the Supreme Court found no merit in contesting the carry forward principle. Accordingly, the Tribunal considered the High Court decisions binding and the Supreme Court treatment as settling the controversy in favour of the assessee. Ratio vs. Obiter: The reliance on Supreme Court dispositions to conclude the issue is settled is ratio for dismissing the Revenue's challenge; references to procedural posture of various appeals are factual explanations ancillary to the binding effect of higher court rulings. Conclusions: Higher court treatment confirms the correctness of allowing carry forward; pending/earlier SLPs do not undermine the precedential basis for the Tribunal's decision and the Revenue's reliance on such proceedings is misplaced. Overall Disposition The Tribunal applied the consistent line of High Court and Supreme Court authority permitting carry forward and set-off of deficits arising from excess application under section 11(1)(a), rejected the double-benefit and statutory silence arguments, and dismissed the Revenue appeals; the holding that carry forward is permissible is the operative ratio in these consolidated appeals.