2019 (7) TMI 1767 - AT - Income Tax

Assessment of trust - Brought forward of excess application and carry forward of excess application of income of current year to subsequent years - HELD THAT - Excess application of a charitable fund in a particular year is allowed to be carried forwarded to subsequent year for set off against any shortfall in spending in that year under the provisions of fact - expenses incurred by the trust in earlier years against the income earned by the trust in subsequent year will have to be regarded as application of income of trust. Identical issue has been considered by Hon ble Karnataka High Court in case of CIT (E) vs Ohio University Christ College 2018 (11) TMI 1055 - KARNATAKA HIGH COURT wherein allowed claim of assessee - Decided against revenue.

Summary

Issues Involved:
1. Carry forward of excess application/deficit of earlier year for application in subsequent (future) year.
2. Applicability of normal computation of income under sections 15 to 59 for charitable trusts/institutions.
3. Set-off of loss from one source against income from another source and carry forward of loss as per sections 70 to 79.
4. Validity of CIT (A)'s detailed discussion and application of relevant provisions of the Act.

Issue-wise Detailed Analysis:

1. Carry forward of excess application/deficit of earlier year for application in subsequent (future) year:
The primary contention raised by the revenue is that the CIT (A) erred in directing the assessing officer to allow the set-off of excess expenditure/application pertaining to the current assessment year and earlier years against the income of future assessment years. The revenue argued that the scheme of taxation for charitable or religious trusts/institutions under sections 11, 12, and 13 of the Act does not provide for computing loss from property held under trust due to excess application of income/funds. The CIT (A) allowed the carry forward of excess application, which was contested by the revenue as perverse.

2. Applicability of normal computation of income under sections 15 to 59 for charitable trusts/institutions:
The revenue contended that the computation of income under sections 15 to 59 is not applicable to charitable trusts/institutions for the purpose of claiming exemption under sections 11, 12, and 13. Consequently, the provisions relating to the set-off of loss from one source against income from another source, set-off of loss from one head against income from another head, and carry forward and set-off of loss against the income of subsequent years as envisaged under sections 70 to 79 are also not applicable to charitable trusts/institutions.

3. Set-off of loss from one source against income from another source and carry forward of loss as per sections 70 to 79:
The revenue argued that the CIT (A) failed to appreciate that the provisions under sections 70 to 79, which allow the set-off of loss from one source against income from another source and the carry forward of loss, are not applicable to charitable trusts/institutions. The CIT (A) allowed the set-off of excess expenditure/application of income, which was disallowed by the assessing officer on the grounds that there is no express provision in the Act permitting such adjustment.

4. Validity of CIT (A)'s detailed discussion and application of relevant provisions of the Act:
The revenue contended that the CIT (A) failed to discuss the issue in detail, bringing out the facts and applying the relevant provisions of the Act. Instead, the CIT (A) concluded that excess expenditure/excess application shall be allowed to be carried forward and set-off against the income of future assessment years, rendering the order perverse.

Tribunal's Findings:
The Tribunal, after hearing both sides and perusing the records, upheld the CIT (A)'s decision. The Tribunal observed that the Karnataka High Court in CIT (E) vs Ohio University Christ College and CIT v. Society of the Sisters of St. Anne had considered similar issues and allowed the set-off of brought forward excess application of income/loss of income for earlier years. The Tribunal noted that the income of a charitable trust should be computed on commercial principles, allowing the adjustment of expenses incurred in earlier years against the income earned in subsequent years. This view was also supported by the Bombay High Court in CIT Vs Institute of Banking Personnel Selection (IBPS).

The Tribunal concurred with the CIT (A)'s decision to cancel the disallowance made by the assessing officer and allow the amortization of expenses. Consequently, the revenue's appeal was dismissed, and the CIT (A)'s order was upheld.

Conclusion:
The appeal filed by the revenue was dismissed, and the CIT (A)'s order allowing the set-off of excess application/deficit of earlier years against the income of subsequent years was upheld. The Tribunal found no infirmity in the CIT (A)'s decision and followed the precedents set by the Karnataka High Court and the Bombay High Court.