2016 (1) TMI 444 - AT - Income Tax

Exemption u/s.11 and 12 - Revenue disputed only regarding deficit being based on figures after considering 15% of the gross income as exempt - Held that - 15% of the gross income or receipts have to be first deducted before computing the surplus or deficit arising to the assessee for a year. See Addl. CIT v. ALN Rao Charitable Trust 1995 (10) TMI 2 - SUPREME Court Eligibility for carry forward of such deficit - rectification of mistake - Held that - Allowing or not allowing carry forward deficit adjustment was not something which would fall within the parameters of a rectificatory proceedings u/s.154 of the Act. However in principle, the claim of the assessee that deficit from earlier years can be set-off against current year s income for working out the utilisation. In view of this, we are of the view that assessee is eligible for claiming carry forward of the deficit, and CIT (A) was justified in directing so.

Issues Involved:
1. Interpretation of section 11(1)(a) regarding excess application of income and its eligibility for carry forward and set off.
2. Whether 15% of income set apart under section 11(1)(a) can be treated as a standard deduction.
3. Eligibility for carry forward of deficit and its set off against subsequent years' income.

Detailed Analysis:

Issue 1: Interpretation of Section 11(1)(a) and Excess Application of Income
The Revenue contended that the CIT(A) erred in interpreting section 11(1)(a) by concluding that expenditure exceeding 85% of the income or the extent of accumulation permitted under section 11(1)(a) could be allowed as excess application of income/deficit/loss and carried forward to subsequent years. The CIT(A) reworked the income of the assessee trust for the relevant years, considering 15% of the receipts as exempt while computing the income. The Revenue argued that the question of allowing accumulation/set apart of income under section 11(1)(a) would arise only if the entire income was not utilized in the same year, and only the unutilized portion (up to 15%) could be accumulated.

Issue 2: Standard Deduction under Section 11(1)(a)
The CIT(A) allowed the assessee to claim 15% of the income as a standard deduction under section 11(1)(a), which the Revenue disputed. The Revenue argued that only the unutilized portion of the income could be allowed as deduction up to a maximum of 15%, and if the entire income was utilized, no income would be eligible for deduction under section 11(1)(a). Additionally, the Revenue contended that the assessee could not enjoy double benefit by claiming exemption through accumulation and by treating expenditure incurred from this accumulated income as excess application/deficit/loss.

Issue 3: Eligibility for Carry Forward of Deficit
The CIT(A) allowed the assessee to carry forward the deficit, which the Revenue challenged. The Tribunal noted that the Revenue did not dispute the depreciation allowance given by the CIT(A) but only the deficit calculation after considering 15% of the gross income as exempt. The Tribunal referenced the Hon'ble Apex Court's ruling in Addl. CIT v. ALN Rao Charitable Trust (216 ITR 697), which clarified that 15% of the gross income or receipts must be deducted before computing the surplus or deficit for the year. The Tribunal upheld the CIT(A)'s computation and allowed the carry forward of the deficit.

Conclusion:
The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s order. It concluded that 15% of the gross income should be deducted before computing the surplus or deficit, and the assessee was entitled to carry forward the deficit. The Tribunal relied on precedents, including the Hon'ble Apex Court's judgment and the decision in Rajarajeshwari Devasthana Trust v. ITO (Ex), which supported the carry forward of the deficit. The Tribunal found no merit in the Revenue's arguments and upheld the CIT(A)'s decision to allow the carry forward of the deficit and the computation method used.

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