2020 (12) TMI 447 - AT - Income Tax

Exemption u/s 11 - Denial of carry forward of the deficit of excess of expenditure over income - Application of income - assessee is a Section 25 company under the Companies Act 1956 duly registered with Registrar of Companies, Maharashtra AND also registered u/s.12A in the status of public charitable trust - Whether the assessee is entitled for exemption u/s.11(1)(a) for the 15% of gross income towards accumulation as a standard deduction? - deficit being excess of expenditure over income need to be worked out after reducing the said standard deduction? - HELD THAT - We find that the Co-ordinate Bench of Surat Tribunal in its recent judgment in the case of Udhna Academy Education Trust 2020 (12) TMI 411 - ITAT SURAT for A.Y.2011-12 had observed that the decision relied by the ld. CIT(A) on Mumbai Tribunal order in Dawat Institute of Dawoodi Bohra Community has been recalled by Mumbai Tribunal 2013 (3) TMI 849 - ITAT MUMBAI We find that the Surat Tribunal by placing reliance on the decision of Mumbai Tribunal in the case of Lalji Velji Charitable Trust 2018 (3) TMI 1192 - ITAT MUMBAI and also Gnyan Dham Vapi Charitable Trust 2020 (10) TMI 238 - ITAT AHMEDABAD had ultimately held that there is no bar in law and there is no specific provision in the Act which says that deduction of 15% for accumulation will not be allowed in case of deficit to such 15% accumulation is allowable irrespective of whether 15% of income have been applied or not. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the assessee is entitled to exemption under Section 11(1)(a) for the 15% of gross income towards accumulation as a standard deduction.
2. Whether the deficit being excess of expenditure over income needs to be worked out after reducing the said standard deduction.
3. Whether the carry forward of the deficit of excess expenditure over income is permissible for set off in subsequent years.

Detailed Analysis:

Issue 1: Exemption under Section 11(1)(a) for 15% of Gross Income
The Tribunal examined whether the assessee is entitled to the exemption under Section 11(1)(a) of the Income Tax Act, 1961, which allows for 15% of gross income to be accumulated as a standard deduction. The assessee, a Section 25 company and a public charitable trust, had applied more for charitable purposes than its gross income. The Tribunal referred to the decision of the Co-ordinate Bench of Ahmedabad Tribunal in the case of ITO vs. Utthan Sewa Sansthan, which clarified that the general accumulation of 15% under Section 11(1)(a) is not subject to any conditions and is unfettered. The Tribunal upheld that the assessee is entitled to this exemption, supporting the view that the 15% accumulation is allowable regardless of whether the income has been fully applied or not.

Issue 2: Deficit Computation After Standard Deduction
The Tribunal addressed whether the deficit, being the excess of expenditure over income, should be calculated after reducing the 15% standard deduction. The Tribunal confirmed that the deficit should indeed be computed after allowing the 15% deduction. This position was reinforced by the decisions in the assessee's own case for previous assessment years and other similar cases, such as the Lalji Velji Charitable Trust vs. ITO, where it was held that even in the case of a deficit, the 15% accumulation is allowable.

Issue 3: Carry Forward of Deficit for Set Off in Subsequent Years
The Tribunal also examined whether the deficit (excess expenditure over income) can be carried forward for set off in subsequent years. The Tribunal referred to several judicial precedents, including the Hon’ble Gujarat High Court's decision in CIT vs. Shri Plot Shwetambar Murtipujak Jain Mandal, which established that the income applied for charitable purposes in earlier years can be adjusted against the income of subsequent years. This principle was upheld by the Tribunal, allowing the assessee to carry forward the deficit for future set off. The Tribunal directed the AO to allow the carry forward of the deficit, aligning with the benevolent provisions of Section 11.

Conclusion:
The Tribunal concluded that:
1. The assessee is entitled to the 15% exemption under Section 11(1)(a) for accumulation.
2. The deficit should be computed after allowing the 15% standard deduction.
3. The deficit can be carried forward for set off in subsequent years.

The appeal of the assessee was allowed, and the Tribunal upheld the computation of income made by the assessee, directing the AO to allow the benefits accordingly. The order was pronounced on 10/12/2020.