2015 (12) TMI 607 - AT - Income Tax

Entitlement to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years for a trust - Held that - The income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. - Decided against revneue

Summary

Issues: Whether a trust is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years.

Analysis:

Issue 1: Claim for carry forward of deficit of current year and unabsorbed deficit of earlier assessment years.

The assessee, a trust registered under section 12A of the Act, filed a return of income for A.Y. 2011-12 showing application of income exceeding its receipts. Additionally, the trust had a carry forward unabsorbed deficit from A.Ys. 2005-06 to 2010-11. The main contention was whether the trust could carry forward the deficit of the current year and unabsorbed deficit of earlier years for setting off against income in subsequent years. The Assessing Officer (AO) initially rejected the claim, citing a pending appeal by the department before the High Court on a similar issue. However, the CIT(A) allowed the claim based on previous decisions in favor of other trusts, emphasizing that the set-off of excess expenditure incurred against income of later years constitutes application of income for charitable purposes. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Income Tax Act does not limit income application to the year it arises, allowing for adjustment of expenses from earlier years against income of subsequent years. The Tribunal cited various legal precedents supporting this interpretation, highlighting that expenditure for charitable purposes can be adjusted against income of subsequent years, ensuring that income applied for charitable purposes is not taxable.

Conclusion:
The Tribunal dismissed the Revenue's appeal, emphasizing that the pendency of an appeal before the High Court does not negate the applicability of existing legal principles allowing trusts to carry forward deficits for charitable purposes. The decision underscores that the objective of charitable trusts is to incur expenditure for charitable purposes, and as long as such expenditure is properly accounted for and adjusted against income in subsequent years, it qualifies as income applied for charitable purposes. The judgment reaffirms the principle that expenditure on religious or charitable purposes, even if incurred in earlier years, can be set off against income of subsequent years, aligning with the benevolent provisions of the Income Tax Act for charitable entities.