1990 (6) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of capital loss in computing income for charitable purposes.
2. Interpretation of "income" under Section 11(1) of the Income-tax Act, 1961.
3. Applicability of Section 74 regarding adjustment of capital loss.

Issue-wise Detailed Analysis:

1. Treatment of capital loss in computing income for charitable purposes:
The Commissioner of Income-tax found that the Income-tax Officer should not have allowed the loss of Rs. 91,476 and should not have adjusted this amount against interest income. The Commissioner considered this a patent mistake prejudicial to the interests of Revenue. He directed the Income-tax Officer to modify the assessment order by disallowing the capital loss of Rs. 91,476 and treating it as a long-term capital loss, which cannot be adjusted against interest income. The assessee argued that the loss on the sale of shares was incurred in the administration of the funds and should be treated as an outgoing for computing the surplus available for application to charitable purposes. The Tribunal upheld the assessee's argument, stating that the actual available funds should be determined by understanding the word "income" in its commercial sense, which includes capital loss.

2. Interpretation of "income" under Section 11(1) of the Income-tax Act, 1961:
The assessee contended that the term "income" under Section 11(1) should be understood in its commercial sense, as supported by two Madras High Court decisions (CIT v. Rao Bahadur Calavala Cunnan Chetty Charities and CIT v. Estate of V.L. Ethiraj) and CBDT Circular No. 5-P (LXX-6) of 1968. The Tribunal agreed, noting that the income to be considered for charitable purposes should be the book income, without importing the concept of "total income" as defined under Section 2(45) of the Income-tax Act. The Tribunal emphasized that the aim should be to find out the actual amount available in the hands of the trust for charitable purposes, which includes considering capital losses.

3. Applicability of Section 74 regarding adjustment of capital loss:
The departmental representative argued that under Section 74 of the Income-tax Act, capital loss can only be adjusted from income under the head "capital gains" and not from income under any other head, such as interest income. The Tribunal, however, focused on the practical understanding of "income" in its commercial sense for the purposes of Section 11(1). It held that while determining the income of the assessee trust, the actual available funds should be considered, which includes adjusting for capital losses. The Tribunal found the Commissioner's direction to disallow the capital loss from interest income incorrect and restored the original assessment order of the Income-tax Officer.

Conclusion:
The Tribunal allowed the appeal, setting aside the Commissioner's order and restoring the original order of the Income-tax Officer. The Tribunal emphasized understanding "income" in its commercial sense for determining the funds available for charitable purposes, which includes considering capital losses.