2020 (3) TMI 621 - AT - Income Tax

Assessment of trust - Exemption u/s 11 - Carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years - HELD THAT - The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 1983 (8) TMI 44 - KARNATAKA HIGH COURT - Decided against revenue

Summary

Issues:
Whether a trust is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years?

Analysis:
The case involved appeals by the Revenue against two orders relating to assessment years 2014-15 & 2009-10, questioning the justification of the CIT(A) in allowing a trust to carry forward excess expenditure for setting off against income of succeeding years. The trust, involved in forming self-help groups and financing them, claimed carry forward of excess application of income for setting off against application of income in subsequent years. The AO denied this claim stating no provision allowed such carry forward. However, the CIT(A) directed the AO to allow the claim, leading to the Revenue's appeal.

The key contention revolved around whether the trust could set off excess expenditure incurred in earlier years against income of later years. The Revenue argued there was no provision for such carry forward, while the Assessee relied on the CIT(A)'s order and relevant legal precedents to support their claim. The Tribunal analyzed Section 11(1)(a) and various judicial decisions to determine the applicability of setting off excess expenditure against income of later years for charitable trusts. The Tribunal highlighted that the application for charitable purposes under Section 11(1)(a) occurs when income is adjusted to meet charitable expenses, regardless of the year in which the expenses were incurred. Citing legal precedents like CIT Vs. Maharana of Mewar Charitable Foundation, the Tribunal emphasized that setting off excess expenditure against income of subsequent years constitutes application of income for charitable purposes.

The Tribunal further referenced cases like CIT Vs. Institute of Banking Personnel Selection and Govindu Naicker Estate VS. ADIT to support the position that expenditure incurred on religious or charitable purposes in earlier years can be adjusted against income of subsequent years. It emphasized that as long as the expenditure is on charitable purposes, adjusting it against income of later years does not amount to loss set off against profit, especially for religious or charitable trusts. The Tribunal concluded that the trust's objective can only be achieved by incurring expenditure, which should be from income, and such adjusted expenditure must be for religious or charitable purposes. Relying on legal precedents like CIT Vs. Society of Sisters of ST. Anne, the Tribunal dismissed the Revenue's appeals, affirming the trust's entitlement to set off excess expenditure against income of succeeding years for charitable purposes.