2010 (7) TMI 158 - HC - Income Tax

Adjustment of prior-year expenses against later income treated as application of income; excluded under s.11(1)(a)

The HC held that when a charitable trust adjusts expenses incurred in an earlier year against income earned in a subsequent year, that adjustment ... Charitable Trust - Carry forward and set off the deficit / losses – application of income - section 11, section 13 – Held that: - the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made and will have to be excluded from the income of the trust u/s 11(1)(a) of the Act Issues Involved:1. Whether the Income Tax Appellate Tribunal was correct in law in allowing the assessee to carry forward the deficit of the current year and set it off against the income of subsequent years.2. Whether the determination of income under Sections 11 to 13 is a separate code and does not contain provisions for carrying forward and setting off losses as in Chapter VI of the Act.3. Whether the adjustment of the deficit (excess of expenditure over income) of the current year against the income of the subsequent year would amount to the application of income of the Trust for charitable purposes in the subsequent year within the meaning of Section 11(1)(a) of the Act.Detailed Analysis:Issue 1: Carry Forward of DeficitThe primary issue addressed was whether the Income Tax Appellate Tribunal was correct in allowing the assessee to carry forward the deficit of the current year and set it off against the income of subsequent years. The Tribunal's decision was based on the judgment of the Gujarat High Court in *Commissioner of Income Tax vs. Shri Plot Swetamber Murti Pujak Jain Mandal* [211 ITR 293], which held that the adjustment of expenses incurred by the trust for charitable purposes in the earlier year against the income earned in the subsequent year would amount to applying the income for charitable purposes in the subsequent year. This interpretation was supported by other High Courts, including the Bombay High Court in *Commissioner of Income Tax vs. Institute of Banking* [264 ITR 110], which stated that income derived from trust property must be computed on commercial principles, allowing for such adjustments.Issue 2: Separate Code for Determination of IncomeThe Revenue argued that the determination of income under Sections 11 to 13 of the Income Tax Act forms a separate code and does not include provisions for carrying forward and setting off losses as provided in Chapter VI. The Revenue's counsel emphasized that Section 11 deals specifically with income from property held for charitable or religious purposes and stipulates conditions under which such income is not included in the total income of the previous year. They argued that the provisions of Sections 70 to 74, which deal with the set-off and carry-forward of losses, apply only to income computed under different heads as per Section 14, and not to income excluded under Section 11.Issue 3: Application of Income for Charitable PurposesThe third issue was whether the adjustment of the deficit of the current year against the income of the subsequent year would amount to the application of income for charitable purposes in the subsequent year within the meaning of Section 11(1)(a). The Tribunal, relying on the Gujarat High Court's judgment, concluded that such an adjustment does indeed amount to the application of income for charitable purposes. This interpretation was further supported by the Bombay High Court, which held that such adjustments must be regarded as the application of income for charitable purposes in the subsequent year, aligning with the benevolent provisions of Section 11.Conclusion:The High Court dismissed the appeals, agreeing with the Tribunal and the judgments of multiple High Courts that the adjustment of the deficit of the current year against the income of subsequent years is permissible and amounts to the application of income for charitable purposes. The Court noted that no contrary judgments were presented by the Revenue and affirmed the Tribunal's decision in favor of the assessee. The appeals were dismissed, and the questions of law were answered in favor of the assessee.Final Judgment:The appeals were dismissed, and the questions of law were answered in favor of the assessee, confirming that the adjustment of the deficit (excess of expenditure over income) of the current year against the income of subsequent years is permissible under the Income Tax Act.