2022 (4) TMI 319 - AT - Income Tax

Exemption u/s 11 - Assessee has failed to explain the amount of investment made out of set apart funds in the income tax return as well as in the audit report and in Form 10 - HELD THAT - Admittedly, the appellant assessee society has filed Form 10 during the course of assessment proceedings Page 9, CIT(A) order . It is seen that the amount of accumulated funds for the year under appeal itself were invested in the modes specified u/s. 11(5) of the Act as evident from the Balance Sheet which were on record with both Ld. AO and Hon'ble CIT(A) and further CIT(A) itself stated that ₹ 1.70 cr has been invested in various banks. It is well settled that income derived from trust property has to be determined on commercial principles where adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year may be regarded as application of income of the trust for charitable and religious purposes in the subsequent year. Such an adjustment made having regard to the benevolent provisions contained in s. 11 of the Act will have to be excluded from the income of the trust u/s 11(1)(a) Contention of the Ld. AR that expenditure incurred in the earlier year can be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year, would amount to such income being applied for charitable or religious purposes is as per law. Thus, the excess expenditure incurred by the Assessee society in earlier assessment years amounting to ₹ 58,78,070/- Pg 6 of CIT(A) order could be allowed to be set off against income of subsequent years by invoking s. 11 of Income Tax Act. CIT (Appeal) has failed to appreciate the facts of the case and the contentions raised by the appellant before him regarding determination of income on commercial principles by invoking provisions of section 11 of the act in the case of trust and charitable institutions. The addition sustained in mechanical manner merely on conjectures and surmises without consideration of law is not is illegal and unjustified. Proposition of law has been decided in favour of the assessee in the case of CIT(E) vs. Subros Educational Society 2018 (4) TMI 1622 - SC ORDER where it was held that any excess expenditure incurred by the trust/charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking s. 11 of the act. - Appeal of assessee allowed.

Summary

Issues:
1. Appeal against order passed by Ld. Commissioner of Income Tax (Appeals)-4, Ludhiana for Assessment Year 2015-16.
2. Addition made by Ld. AO due to failure of the Assessee to utilize 85% of total receipts.
3. Rejection of appeal by Ld. CIT(A) based on non-disclosure of investment amount in Audit Report.
4. Legal basis for investment made by Assessee society as per specified mode u/s. 11(5) of the Income Tax Act.
5. Application of income derived from trust property on commercial principles.
6. Claim of excess expenditure incurred by trust in earlier years to be set off against income of subsequent years.
7. Failure of Ld. CIT (Appeal) to appreciate contentions regarding determination of income on commercial principles.
8. Deletion of addition by Appellate Tribunal based on Supreme Court judgment in "CIT(E) vs. Subros Educational Society".

Analysis:
1. The appeal was filed against the order passed by Ld. Commissioner of Income Tax (Appeals)-4, Ludhiana for Assessment Year 2015-16. The Assessee raised grounds challenging the legality and basis of orders passed by Assessing Officer and Ld. Commissioner of Income Tax (Appeal), contending that additions were made without legal basis and explanations were provided in the audit report and Form 10 regarding investments made as per specified mode u/s. 11(5) of the Income Tax Act.

2. The Ld. AO made an addition due to the Assessee's failure to utilize 85% of total receipts, resulting in an addition of ?71,17,956. The Ld. CIT(A) upheld this addition, citing non-disclosure of investment amount in the Audit Report as a reason for rejection of the appeal. The Assessee contended that the investment details were filed during assessment proceedings and met the requirements specified under the Act.

3. The Appellate Tribunal noted that the Assessee had filed Form 10 during assessment proceedings, indicating investment of accumulated funds in specified modes u/s. 11(5) of the Act. The Tribunal also considered the application of income derived from trust property on commercial principles, allowing for the adjustment of excess expenditure incurred in earlier years against income of subsequent years as per s. 11 of the Act.

4. The Tribunal found that the Ld. CIT (Appeal) failed to appreciate the contentions raised by the appellant regarding determination of income on commercial principles and the application of s. 11 of the Act for trust and charitable institutions. The Tribunal, based on the Supreme Court judgment in "CIT(E) vs. Subros Educational Society," deleted the addition made by the Ld. AO, accepting the Assessee's claim of excess expenditure incurred in earlier years to be set off against income of subsequent years.

5. The Appellate Tribunal allowed the appeal filed by the Assessee, deleting the addition of ?71,17,956. The decision was made in accordance with the legal principles governing the application of income derived from trust property and the set off of excess expenditure against subsequent year's income, as established by the Supreme Court judgment.