2020 (2) TMI 709 - AT - Income Tax

Exemption u/s 11 - Assessment of trust - assessee trust eligible for standard deduction at the rate of 30% u/s 24 (a) of the act, out of the rental income chargeable to tax in the hands of the assessee - HELD THAT - The assessee has earned rental income of ₹ 978600/ and claimed deduction at the rate of 30% amounting to ₹ 293580/ . Assessee is a charitable trust and the computation of income is governed in the case of the assessee by the provisions of section 11, 12 and 13 of the income tax act. These provisions though provide for various types of income on by a charitable trust however, it has nothing to do with the matter of computation of total income as referred to in chapter IV of the act. This issue is squarely covered against the assessee by the decision of the coordinate bench in Nandlal Tolani Charitable vs ITO (E)-2(1), Mumbai 2019 (4) TMI 762 - ITAT MUMBAI - No merit in this ground of appeal of the assessee. Accordingly we hold that assessee trust is not eligible for standard deduction at the rate of 30% u/s 24 (a) of the act, out of the rental income chargeable to tax in the hands of the assessee. Carry forward of excess of expenditure over income for the year - claim of the assessee is that if there is a deficit during one assessment year it should be allowed to be carried forward to the next assessment year as the deficit of the earlier years is allowable as application of income in subsequent years - AO and CIT-A denied claim - HELD THAT - Hon ble Bombay High court has dismissed the appeal of the Revenue in DIT(E) v. Gem Jewellery Exports Promotion Council 2011 (9) TMI 1178 - SC ORDER on the issue of set off of deficit of earlier years against surplus of the impugned assessment year. Further Hon ble Courts/Tribunal had taken consistent stand that in case of Charitable Trust excess expenditure over income is to be allowed to be carried forward for setting off against income of subsequent years. Thus the deficit of this year is allowable to assessee for set off in subsequent years. Therefore, we allow the carry forward of excess expenditure over income to be carried forward to subsequent years . Thus, we reverse the orders of lower authorities and allow ground no 2 of the appeal.

Summary

Issues Involved:
1. Disallowance of 30% deduction on rental income from property held for charitable purposes.
2. Non-allowance of carry forward of excess expenditure over income for subsequent years.

Issue-wise Detailed Analysis:

1. Disallowance of 30% Deduction on Rental Income:

The assessee, a charitable trust, filed an appeal against the order of the CIT(A), Rohtak, which confirmed the addition made by the AO by disallowing a 30% deduction on rental income from property held for charitable purposes. The trust claimed a deduction under section 24(a) of the Income Tax Act, amounting to ?293580 from its rental income of ?978600. The AO noted that the assessee, being registered under section 12AA, is governed by the provisions of sections 11 and 12 of the Income Tax Act, which do not provide for such a deduction. The AO rejected the assessee's reliance on a coordinate bench decision and made the addition. The CIT(A) upheld this view, leading to the appeal.

The Tribunal referred to the decision in ITA No. 106/Mum/2016 (Nandlal Tolani Charitable vs. ITO (E)-2(1), Mumbai), which held that the income of a trust should be computed under normal commercial principles without resorting to the computation mechanism under respective heads of income while determining income available for application under section 11. It was observed that income exempt under Chapter III of the Act does not form part of the total income and thus does not enter the computation process under Chapter IV. The Tribunal concluded that the assessee trust is not eligible for the 30% standard deduction under section 24(a) of the Act, affirming the lower authorities' decision.

2. Non-allowance of Carry Forward of Excess Expenditure Over Income:

The second issue involved the non-allowance of carry forward of excess expenditure over income for subsequent years. The assessee argued that the deficit of ?1407083 should be allowed to be carried forward and set off against the surplus of subsequent years. Both the AO and CIT(A) dismissed this argument.

The Tribunal considered the consistent judicial stance on this issue, referencing the Hon’ble Bombay High Court's decision in DIT(E) v. Gem & Jewellery Exports Promotion Council and CIT v. Institute of Banking Personnel Selection (IBPS), which allowed the set off of deficits of earlier years against the surplus of the impugned assessment year. The Supreme Court also dismissed the Revenue's SLP against this decision. The Tribunal held that in the case of a charitable trust, excess expenditure over income should be allowed to be carried forward for setting off against income of subsequent years. Therefore, it allowed the carry forward of the excess expenditure of ?1113503 to subsequent years, reversing the lower authorities' orders on this issue.

Conclusion:

The appeal was partly allowed. The Tribunal denied the 30% standard deduction on rental income but permitted the carry forward of excess expenditure over income to be set off against the income of subsequent years. The order was pronounced in the open court on 14/01/2020.