2008 (4) TMI 333 - AT - Income Tax

Computation of income of charitable or trust - Carry forward of deficit on account of excess expenditure - Accumulation of income u/s.11(1)(a) - Entitled to first accumulate or set apart 25 per cent of the total income of the trust and then claim a carry forward of the excess amount incurred on application for purposes of the trust over and above the remaining income i.e. 75 per cent of the total income for its set off against the income of the trust in succeeding year?. HELD THAT - The Hon ble Bombay High Court in the case of Institute of Banking 2003 (7) TMI 52 - BOMBAY HIGH COURT held that the income derived from the trust property has also got to be computed on commercial principles and if the commercial principles are applied then the adjustments of expenses incurred by the trust for charitable and religious purposes in earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in subsequent years in which the adjustments have been made having regard to the benevolent provisions contained in s. 11 of the Act. The accumulation of 25 per cent of the total income is permissible when the assessee failed to apply the total income of the trust in a particular year. If the assessee applies the entire income of the trust he is entitled to claim 100 per cent exemption and there is no question of further accumulation of 25 per cent of the total income of the assessee. If the assessee incurs more expenditure than the total income of the trust the expenditure over and above to the income can be carried forward and is allowed to be set off against the income in succeeding year. In this case he is entitled to claim the carry forward of the excess expenditure but he will not be allowed to accumulate 25 per cent of the total income first and then claim the excess expenditure for its carry forward to subsequent years. We accordingly set aside the order of the CIT(A) and restore the matter to the file of the AO with a direction to allow the carry forward of the excess expenditure incurred by the assessee to subsequent year for its set off only in terms indicated. In the result the appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:
1. Whether the assessee is entitled to a statutory deduction of 25% of the gross total income.
2. Whether the assessee can carry forward excess expenditure for set-off in subsequent years.

Detailed Analysis:

Issue 1: Statutory Deduction of 25% of Gross Total Income
The main contention in this appeal was whether the CIT(A) erred in upholding the AO's order, which denied the assessee's claim for a statutory deduction of 25% of the gross total income. The assessee argued that this deduction was a legitimate claim of accumulation of income under Section 11(1)(a) of the IT Act, 1961. The assessee, a religious and charitable trust, had a total income of Rs. 35,60,82,101 and had applied Rs. 58,09,87,048 for charitable and religious purposes. The lower authorities did not allow the 25% accumulation on the deficit.

The Tribunal analyzed the provisions of Section 11(1)(a), which allows income derived from property held under trust for charitable or religious purposes to be exempted if applied for such purposes in India. It also allows for accumulation or setting apart of income up to 25% of the income from such property. The Tribunal noted that the provision does not mention that 25% of the total income must first be set apart before applying the remaining income for the trust's purposes. The Tribunal concluded that the provision's intent is to allow exemption for income applied or accumulated up to a particular limit for the trust's purposes, not to carry forward losses for set-off in subsequent years.

Issue 2: Carry Forward of Excess Expenditure
The assessee also contended that any excess expenditure incurred for charitable purposes should be allowed to be carried forward to subsequent years for set-off against the trust's income. The Tribunal examined various judgments cited by the assessee, including the Supreme Court's decision in CIT vs. Programme For Community Organisation, which dealt with the percentage of income accumulation.

The Tribunal also reviewed the Board's Circulars and other judgments, such as CIT vs. Munisuvrat Jain and CIT vs. Institute of Banking Personnel Selection, which discussed the computation of income and the carry forward of excess expenditure. The Tribunal found that these judgments supported the principle that income derived from trust property should be computed on commercial principles, allowing for the adjustment of expenses incurred in earlier years against income in subsequent years.

However, the Tribunal clarified that the assessee's claim to first accumulate 25% of the total income and then carry forward the excess expenditure was not permissible. The Tribunal held that if the entire income is applied for the trust's purposes, the assessee is entitled to a 100% exemption, and there is no question of further accumulation. If the expenditure exceeds the total income, the excess can be carried forward for set-off in subsequent years, but not after first claiming a 25% accumulation.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to allow the carry forward of the excess expenditure incurred by the assessee for set-off in subsequent years, but only in terms indicated above. The appeal was partly allowed for statistical purposes.

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