Issues Involved: 1. Entitlement of the assessee to carry forward expenses for set off in the subsequent year.
Summary:
Issue 1: Entitlement to Carry Forward Expenses for Set Off in Subsequent Year
The High Court of Gujarat addressed the issue of whether the assessee, a registered public trust, is entitled to carry forward expenses for set off in the subsequent year. The Income-tax Appellate Tribunal had referred this question of law for the court's opinion u/s 256(1) of the Income-tax Act, 1961.
The court examined the scheme of section 11 of the Act, particularly sections 11(1)(a), 11(2), and 11(3). It noted that income derived from property held under trust for charitable or religious purposes, when applied to such purposes in India, is excluded from the total income of the trust. The court emphasized that there are no words of limitation in section 11(1)(a) requiring the income to be applied in the year it arises. The term "applied" means to put to use, and thus, expenses incurred in an earlier year can be adjusted against the income of a subsequent year.
The court referred to a Circular dated January 24, 1973, issued by the Central Board of Direct Taxes, which clarified that repayment of a loan taken for charitable purposes amounts to an application of income for such purposes. The court reasoned that if a trust can take a loan and repay it from subsequent year's income, then expenses incurred from the corpus of the trust and reimbursed from subsequent year's income should also be considered as applied for charitable purposes.
The court cited the case of CIT v. Maharana of Mewar Charitable Foundation, where the Rajasthan High Court held that expenses incurred in an earlier year and adjusted against subsequent year's income should be excluded from the trust's income u/s 11(1)(a). The Gujarat High Court agreed with this view.
Additionally, the court referred to CIT v. Ganga Charity Trust Fund and CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, where it was held that income derived from trust property should be determined on commercial principles. This includes allowing adjustments of expenses incurred in earlier years against subsequent year's income.
Based on these considerations, the court concluded that the assessee is entitled to carry forward expenses for set off in the subsequent year. The question was answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.
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