2022 (8) TMI 588 - HC - Income Tax

Assessment of trust - benefit of the deficit for earlier years against the income of subsequent year - whether Tribunal has erred in allowing deficit resulting out of Corpus Donations without appreciating that this income has been claimed as exempt by the assessee? - HELD THAT - We are of the opinion that the CIT (Appeals) as well as the Tribunal have arrived at concurrent findings of fact by applying the decision of this Court in case of Sheth Manilal Ranchhoddas Vishram Bhavan Trust 1992 (2) TMI 51 - GUJARAT HIGH COURT and in case of Shri Plot Swetambar Murti Pujak Jain Mandal 1993 (11) TMI 17 - GUJARAT HIGH COURT wherein it is held that, there is nothing in language of Section 11(1)(a) of the Act, 1961 to indicate that the income from the trust property should have been applied for charitable or religious purposes only in the year in which such income is received and the deficit incurred by the Trust due to excess spending on the object of the trust during the particular year or excess expenditure incurred in earlier years or in the current year by the trust cannot be permitted to be set off against the income of subsequent years. It was held in case of Sheth Manilal Ranchhoddas Vishram Bhavan Trust (Supra) that, income referred to in Section 11(1)(a) of the Act, 1961 was to be computed in accordance with normal rules of the accounting. Hence, depreciation has rightly been allowed as expenditure in the facts of the case. The Tribunal, applying the aforesaid decisions of this Court, has held that the expenditure incurred in the earlier year can be set off from the income of the subsequent years and utilization of such income for meeting the expenditure of the earlier year would amount to such income being applied for charitable or religious purpose. This Court in case of Shri Plot Swetambar Murti Pujak Jain Mandal 1993 (11) TMI 17 - GUJARAT HIGH COURT has held that the income derived from Trust property has to be computed on commercial principles and consequently deficit arising out of expenditure over income for the previous year can be set off against the surplus of income over expenditure of the subsequent year. Thus we are of the opinion that there is no error in the impugned orders passed by the Tribunal giving rise to any question of law, much less any substantial question of law, proposed or otherwise.

Summary

Issues:
1. Allowance of deficit against income without considering source of expenditure
2. Allowance of deficit from corpus donations claimed as exempt
3. Allowance of deficit from accumulated unspent funds claimed as deduction

Issue 1: Allowance of deficit against income without considering source of expenditure
The appellant, a Trust engaged in charitable activities, filed a return of income for A.Y. 2014-15 claiming depreciation and capital expenditure. The Assessing Officer disallowed depreciation, leading to a net deficit. The CIT (Appeals) allowed the appeal, citing precedents that depreciation should be allowed while computing income under Section 11(1)(a) of the Income Tax Act, 1961. The Tribunal upheld this decision, stating that expenditure from earlier years can be set off against income from subsequent years, as per judicial precedents. The High Court concurred, emphasizing that the income should be computed on commercial principles, allowing the deficit to be set off against surplus income.

Issue 2: Allowance of deficit from corpus donations claimed as exempt
The appellant Trust's claim of deficit from corpus donations was challenged by the Revenue. The CIT (Appeals) and Tribunal allowed this deficit to be set off against income of subsequent years, relying on judicial precedents and the commercial computation of trust income. The High Court affirmed this decision, highlighting that excess expenditure from earlier years can be offset against income from subsequent years, as established by legal precedents.

Issue 3: Allowance of deficit from accumulated unspent funds claimed as deduction
The appellant Trust's deficit from accumulated unspent funds was contested by the Revenue. The CIT (Appeals) and Tribunal permitted this deficit to be carried forward and set off against future income, in line with judicial precedents and the commercial computation of trust income. The High Court upheld this decision, emphasizing that deficits arising from expenditure over income in previous years can be adjusted against surplus income in subsequent years, as established by legal precedents and the Supreme Court's affirmation of such practices.

In conclusion, the High Court dismissed the Tax Appeal, finding no error in the decisions of the lower authorities. The Court upheld the allowance of deficits against income, emphasizing the commercial computation of trust income and the permissibility of setting off deficits from earlier years against surplus income in subsequent years, in accordance with established legal principles and precedents.