2019 (2) TMI 1133 - AT - Income Tax

Exemption u/s 11 - exemption owing to accumulation of income to the tune of 15% of its income as is provided under second limb of Section 11(1)(a) - benefit of carry forward of these losses/deficit being excess of expenditure over income to subsequent years to be set off against surplus arising in subsequent years - Held that - Respectfully following the aforesaid decision of Hon ble Supreme Court in the case of ACIT v. A.L.N.Rao Charitable Trust 1995 (10) TMI 2 - SUPREME COURT Hon ble Bombay High Court decision in the case of Institute of Banking Personnel Selection(IBPS) 2003 (7) TMI 52 - BOMBAY HIGH COURT and Dawat Institute of Dawoodi Bohra Community 2013 (4) TMI 897 - ITAT MUMBAI and ITO(E) v. Lakshmi and Usha Mittal (Formerly known as The LNM Foundation) 2012 (10) TMI 1196 - ITAT MUMBAI we hold that under factual matrix of the case before us the assessee trust shall not be allowed exemption owing to accumulation of income to the tune of 15% of its income as is provided under second limb of Section 11(1)(a) of the 1961 Act as its expenditure towards the objects of the trust has already exceeded its income from property held for charitable purposes. As provided by Hon ble Bombay High Court in the case of Institute of Banking Personnel Selection(IBPS)(supra) the assessee will be entitled for carry forward of excess of expenditure incurred towards objects of the trust in excess of income from property held for charitable purposes as is allowable as provided under first limb of provisions of Section 11(1)(a). Both Revenue appeal as well assessee s CO stood dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in allowing the carry forward of deficit of earlier years and allowing set off against the income of succeeding years.
2. Whether the CIT(A) erred in allowing the claim of the assessee for carry forward of the deficit without an express provision in the IT Act, 1961.
3. Whether the CIT(A) erred in allowing the claim of the assessee for carry forward of the deficit by relying on the judgment of the Bombay High Court in the case of Institute of Banking Personnel Selection, despite the Department not accepting the decision on merit.
4. Whether the CIT(A) erred in recomputing the amount of deficit at ?5,23,93,620 as against ?8,05,52,838 claimed by the assessee.
5. Whether the CIT(A) erred in not providing the assessee an opportunity of being heard before recomputing the deficit.

Detailed Analysis:

1. Carry Forward of Deficit:
The Revenue challenged the CIT(A)'s decision to allow the carry forward of the deficit amounting to ?5,23,93,620 to subsequent years. The AO had initially disallowed the carry forward of the deficit, arguing that there was no provision in the IT Act, 1961, that permitted such a claim. The AO contended that Section 11, which deals with income from property held for charitable or religious purposes, does not mention 'deficit' or 'loss'. The AO further argued that since the income was not taxed under Section 11, there could be no case for carrying forward losses, similar to the provisions under Sections 10A(6) and 10AA(8).

2. Absence of Express Provision:
The Revenue argued that the CIT(A) ignored the absence of an express provision in the IT Act, 1961, permitting the allowance of such a claim. The AO highlighted that unlike business losses, which can be carried forward under Section 72, there is no enabling provision for trusts to carry forward deficits. The AO also noted that the Hon'ble Calcutta High Court in the case of Ramchandra Poddar Charitable Trust held that Section 11 does not permit accumulation of a larger amount than prescribed.

3. Reliance on Jurisdictional High Court Decision:
The CIT(A) relied on the judgment of the Bombay High Court in the case of Institute of Banking Personnel Selection (IBPS), which allowed the carry forward of excess expenditure over income to subsequent years. The Revenue argued that the Department had not accepted this decision on merit and had filed Special Leave Petitions (SLPs) in similar cases, including MIDC, which were pending before the Hon'ble Supreme Court.

4. Re-computation of Deficit:
The assessee contested the CIT(A)'s recomputation of the deficit at ?5,23,93,620 as against ?8,05,52,838 claimed by the assessee. The CIT(A) held that the gross income of the assessee was ?18,77,28,122 and the expenditure on the objects and application of income was ?24,01,21,742, resulting in a real deficit of ?5,23,93,620. The CIT(A) noted that the assessee's claim included a 15% accumulation of income allowed under Section 11(1)(a), which was not permissible when the entire income had been spent.

5. Opportunity of Being Heard:
The assessee argued that the CIT(A) erred in not providing an opportunity of being heard before recomputing the deficit to be carried forward. The CIT(A) based the recomputation on the fact that there was no provision in the Act allowing accumulation at the rate of 15% when the entire income had been spent.

Tribunal's Decision:
The tribunal upheld the CIT(A)'s decision to allow the carry forward of the deficit of ?5,23,93,620, relying on the Bombay High Court's judgment in the case of IBPS, which held that excess expenditure in earlier years could be adjusted against the income of subsequent years. The tribunal noted that the AO's arguments were not in line with the commercial principles of accounting, which allow for such adjustments.

Regarding the recomputation of the deficit, the tribunal agreed with the CIT(A) that the 15% accumulation was not permissible when the entire income had been spent. The tribunal also dismissed the assessee's contention about the lack of opportunity for being heard, as the recomputation was based on the established legal position.

In conclusion, the tribunal dismissed the appeal filed by the Revenue and the cross-objections filed by the assessee, affirming the CIT(A)'s order in its entirety. The tribunal emphasized the binding nature of the jurisdictional High Court's decision and the lack of any contrary provision in the IT Act, 1961.