2008 (4) TMI 747 - AT - Income Tax

Summary

Issues Involved:
1. Set off of brought forward capital expenditure and operating loss.
2. Carry forward of excess capital expenditure by the Trust.
3. Exemption u/s 10(23C)(via) and diversion of funds.

Summary:

Issue 1: Set off of brought forward capital expenditure and operating loss
The department contested the CIT(A)'s decision to allow the set off of brought forward capital expenditure and operating loss, relying on the Bombay High Court's decision in CIT v. Institute of Banking (264 ITR 110). The CIT(A) directed the AO to grant set-off against the unabsorbed depreciation of the appellant society, referencing multiple judicial precedents supporting the assessee's claim. The ITAT upheld the CIT(A)'s order, emphasizing that income of a charitable trust should be computed on commercial principles, allowing adjustment of expenses incurred in earlier years against income of subsequent years.

Issue 2: Carry forward of excess capital expenditure by the Trust
The CIT(A) was criticized for not appreciating that neither sec. 11 nor any other provisions of the I.T. Act, 1961 specifically permit carry forward of excess capital expenditure incurred by the Trust. However, the CIT(A) clarified that the AO should grant a set off of unabsorbed depreciation and losses as per law, and upheld the registration u/s 12A, which the AO had no power to withdraw. The ITAT supported this view, following the Bombay High Court's ruling that excess expenditure in earlier years can be adjusted against subsequent years' income.

Issue 3: Exemption u/s 10(23C)(via) and diversion of funds
The AO denied the exemption u/s 10(23C)(via) due to alleged diversion of funds, bringing long-term capital gains to tax. The CIT(A) found no personal utilization of society's funds by its secretary and noted that the society was consistently treated as exempt in previous and subsequent years. The ITAT noted the Karnataka High Court's remand for reconsideration of payments made to certain individuals, but focused on the issue of set off, ultimately upholding the CIT(A)'s decision based on the Bombay High Court's principles.

Conclusion:
The ITAT dismissed the revenue's appeals and allowed the cross objections, affirming the CIT(A)'s direction to allow set off of brought forward capital expenditure and operating loss, and the carry forward of excess capital expenditure, in line with the Bombay High Court's decision in CIT v. Institute of Banking.