Assessment and taxation of trust is always a matter of interesting issues. The taxation and assessment differs as the concept of “application” of income needs to be imported while making an assessment.

 

Its only if the application of income is there, the trust would be eligible for deduction u/s 11 (subject to the condition that the trust is registered u/s 12AA or 12A).

 

Whether if there is an excess application in earlier years i..e., there is a deficit in earlier years then whether subsequent years income can be adjusted against such excess application is one question that can emerge during the course of assessment? Department obvious reply would be a big “No.

 

However, there is an interesting case in favour of the assessee trust by Mumbai bench of ITAT as well as Rajasthan HC & MP HC wherein it is held that excess application of income in earlier year can be considered as application out of the income of the current year, for purposes of s. 11 subject to verification and determination of deficit. There were various other observations on other issues by Mumbai ITAT, the same can also be referred hereunder:

The same are produced hereunder for easy reference of all.

1. GEM & JEWELLERY EXPORT PROMOTION COUNCIL vs. INCOME TAX OFFICER

ITAT, BOMBAY ‘A’ BENCH

1. A. Bakshi, J.M. & J. K. Verma, A.M.

IT Appeal No. 1572/Bom/1989; Asst. yr. 1985-86

3rd October, 1997

(1997) 16 CCH 0311 MumTrib

(1999) 68 ITD 0095

Legislation Referred to

S 11

Case pertains to

Assessment year 1985-86

Decision in favour of:

Revenue

Exemption under s. 11—Application of income—Excess application of income in earlier year can be considered as application out of the income of the current year, for purposes of s. 11 subject to verification and determination of deficit—Volkart Foundation vs. Third ITO (IT Appeal No. 4204 (Bom) of 1973-74), CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj) followed

Short overview:

Excess application of income in earlier year can be considered as application out of the income of the current year, for purposes of s. 11.

In favour of:

Assessee

Exemption under s. 11—Accumulation of income under s. 11(1)(a)—Income available for accumulation under s. 11(1)(a) is the income as computed on commercial principles, as also taking into account of provisions of the Act and not the gross receipt—However, the entire non-code expenditure could not be attributed to the earning of the income—Matter remanded for invoking out the expenditure to be deducted out of gross income

it ts hald :

It is the income computed on commercial principles which is available for purposes of accumulation under s. 11(1)(a). The contention that in the case of Trust, gross receipts is the income of the Trust, in the light of the above decisions, we find is not well founded. Accordingly, the income available for accumulation under s. 11(1)(a) is the income as computed on commercial principles, as also taking into account the provisions of the IT Act, 1961. However, the contention on behalf of the assessee, that the entire non-code expenditure cannot be attributed to the earning of the income of the assessee is acceptable. The contention of the assessee that only a small portion of the expenditure is attributable to the earning of income shall have to be determined by the Revenue authorities, after giving an opportunity of being heard to the assessee. For that purpose, the issue is set aside and remitted to the AO for working out the expenditure to be deducted out of the gross income, for the purpose of determining the income and then working out the 25 per cent of the same for accumulation.—CIT vs. Ganga Charity Trust Fund (1986) 162 ITR 612 (Guj), CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad), CIT vs. Estate of V.L. Ethiraj (by Official Trustee) (1982) 136 ITR 12 (Mad), CIT vs. Janaki Ammal Ayya Nadar Trust (1985) 153 ITR 159 (Mad), CIT vs. Trustee of H.E.H. The Nizam’s Supplemental Religious Endowment Trust (1981) 127 ITR 378 (AP), CIT vs. Society of the Sisters of St. Anne (1984) 146 ITR 28 (Ker) relied on.

Short overview :

Income available for accumulation under s. 11(1)(a) is the income as computed on commercial principles, as also taking into account of provisions of the Act and not the gross receipt.

In favour of:

Revenue

Exemption under s. 11—Scope—Assessee having applied the income for charitable purpose in India, the mere fact that the expenditure had been incurred out of India, did not disqualify the expenditure from exemption under s. 11(1)(a)—Sec. 11 only restrict the application of income for charitable purposes in India and not the application of income within the territory of India

it is hald :

A bare reading of the sub-s. 11(1)(a) does not leave one in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the Trade Delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the Delegation was to increase the possibilities of exports out of India. Since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a).

Short overview :

Assessee having applied the income for charitable purpose in India, the mere fact that the expenditure had been incurred out of India, did not disqualify the expenditure from exemption under s. 11(1)(a).

In favour of:

Assessee

Exemption under s. 11—Application of income—Assessee advancing amounts to an institute, which was treated as assessee’s branch, by way of fixed assets, current assets, etc.—Said institute later on approved by the Government and granted separate identity—Approval also granted by the Government permitting assessee to write off the amounts—Such write off cannot be treated as application of income—Expenditure not claimed by the assessee to be application of income of any stage would not after its character as such for the mere fact that the amount had been written off on the directions of the Government

it is hald:

The exemption under s. 11(1)(a) is permissible in respect of the income which is applied for charitable or religious purposes in India. The assessee has not, at any stage, claimed the expenditure in regard to Indian Diamond Institute to be the application of its income for charitable purposes. The mere fact that the amount has been written off on the directions of the Government, does not alter the character of the expenditure. The expenditure, at the very outset, does not qualify for exemption under s. 11(1)(a).

Short overview :

Expenditure not claimed by the assessee to be application of income of any stage would not after its character as such for the mere fact that the amount had been written off on the directions of the Government

In favour of:

Revenue

Counsel appeared:

S.E. Dastur & P.J. Pardiwala, for the Appellant : D.J. Tralshawala, for the Respondent

ORDER

MANZOOR AHMED BAKHSHI, J.M. :

ORDER

The appeal of the assessee, for asst. yr. 1985-86, is directed against the order dt. 10th Jan., 1989 of CIT (A)-XIII, Mumbai. Rival contentions have been heard and records perused.

2. The relevant facts briefly stated are that the assessee is a company recognised as a charitable institution for the purposes of ss. 11 and 12 of IT Act, 1961. For asst. yr. 1985-86, for which the previous year ended on 31st of March 1985, the assessee had filed the return of income on 7th Oct., 1985, disclosing deficit of Rs. 4,22,490. On 14th Aug., 1986, the assessee filed a revised return, disclosing a deficit of Rs. 3,16,340. The AO completed the assessment by computing the taxable surplus at Rs. 10,96,370. The assessee appealed to the CIT (A), but without any success. Therefore, the present appeal.
3. The first ground of appeal reads as under:

“1. The income of the Council be considered as fully exempt on the ground of mutuality, on the ground that the surplus accruing as a result of mutual activity is not taxable, more particularly, in view of s. 44A of the IT Act.”

4. This ground is dismissed as not pressed.
5. The second ground of appeal reads as under:

“2. Grants-in-aid received from the Government of India be considered as not taxable.”

6. This ground of appeal has also not been pressed, without prejudice to assessee’s right to contest similar ground in any subsequent year. This ground of appeal is also dismissed as not pressed.
7. Ground No. 3 reads as under:

“Deficit of earlier years be allowed to be carried forward and set off against total income of the current year.”

8. The assessee had claimed adjustment of excess application in earlier years out of the income of the year under appeal. The AO disallowed the claim of the assessee on the ground that firstly the deficit was not worked out in earlier years and secondly, the computation of surplus/deficit was subject-matter of appeals.
9. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Volkart Foundation vs. Third ITO (IT Appeal No. 4204 (Bom) of 1973-74), asst. yr. 1972-73, in support of the contention that the assessee was entitled to adjust out of the current year’s income, the surplus application of earlier years. Reliance was also placed on the decision of the Rajasthan High Court in the case of CIT vs. Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 (Raj) : (1986) 29 Taxman 476 (Raj).
10. The learned Departmental Representative, on the other hand, contended that the AO has pointed out that there was no deficit in earlier years and, therefore, the assessee is not entitled to any relief.
11. In our considered view, the dispute on facts as to whether there is actually any deficit in earlier years; or not, is a matter which can be determined with reference to records. The AO may verify the claim of the assessee “that there is actually a deficit in earlier years.” After arriving at the deficit, the question still remains as to whether the assessee is entitled to set off of the deficit out of the income of the year under appeal. The setting off of deficit out of the income has wrongly been equated by the Revenue authorities with the setting off of carried forward loss of earlier years. The issue involved in this appeal is some what different. The assessee, in fact, is not claiming setting off of carried forward losses. The claim of the assessee is that the excess application of income in earlier years should be considered as application out of the income of the current year, for purposes of s. 11 of the Act. In our view, the assessee deserves to succeed. If the assessee applied borrowed funds for the objects of the trust, the repayment of such borrowed funds is considered to be application of income for the purposes of the trust. The issue, in any case, is covered by the decision of the Bombay Bench of the Tribunal in the case of Volkart Foundation (supra), and the decision of the Rajasthan High Court in the case of Maharana of Mewar Charitable Foundation (supra). We respectfully following the forementioned decisions of the Tribunal and that of the Rajasthan High Court, allow the claim of the assessee subject to verification and determination of the deficit by the AO.
12. The next ground of appeal is relating to computation of deduction under s. 11(1)(a). Sec. 11(1)(a) allows accumulation of income for application to the extent of 25 per cent of the income. The dispute between the assessee and the Revenue is relating to the computation of income for purposes of accumulation. The assessee claims that the gross receipts of the Trust forms income of the Trust for purposes of s. 11(1)(a). The claim of the Revenue is that the income has got to be computed after setting off of the non-code expenditure. The assessee calculated the 25 per cent of income for purposes of accumulation as under:

Gross Receipts	:	Rs. 30,05,200
Grant-in-aid	:	Rs. 35,52,000
Total		Rs. 65,57,200
25 per cent for accumulation	:	Rs. 16,39,300

13. The AO calculated the amount available for accumulation as under:

Gross Receipts including
Grant-in-aid	:	Rs. 65,57,200
Less: Non-code
Expenditure	:	Rs. 18,46,012

14. The CIT (A) has confirmed the view of the AO.
15. The claim of the assessee is that the gross receipts is the income of the Trust and, therefore, the 25 per cent of the accumulation is to be calculated with reference to the gross receipts. It has been pointed out that in earlier years also the assessee has followed the same system and there was no dispute on this issue with the Revenue.
16. In the alternative, it has been contended that the entire non-code expenditure was not to be taken into account in computing the income of the Trust. Referring to the details of the non-code expenditure, the learned counsel contended that most of the expenditure has been incurred in connection with the application of income and not in connection with earning of the income. According to the learned counsel, at the most the expenditure that has been incurred for earning the income alone would be deductible in computing the income of the Trust for purposes of accumulation.
17. The learned Departmental Representative, on the other hand, contended that the assessee is entitled to accumulation to the extent of 25 per cent of the income and the income cannot be equated with gross receipts. According to the learned Departmental Representative, the income first has got to be determined in accordance with the provisions of the Act and the commercial principles and the accumulation would be permissible to the extent of 25 per cent of the resultant income.
18. We have given our careful consideration to the rival contentions. As already pointed out, there are two areas of dispute. One is as to whether the gross receipts are to be taken as the income of the Trust or the income as computed in accordance with commercial principles. The second area of dispute is as to whether the entire non-code expenditure is attributable to the earning of income or part of it is attributable to the application of income of the Trust.
19. With regard to the first dispute, i.e., whether the gross receipts forms the base as income for accumulation or the net income after taking into account the necessary expenditure for earning the income, there are several decisions throwing light on this issue.
20. In the case of CIT vs. Ganga Charity Trust Fund (1986) 162 ITR 612 (Guj) : 29 Taxman 413, their Lordships of the Gujarat High Court have held that income derived from Trust property must be determined on commercial principles and in doing so, all outgoings including outgoings by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise.
21. In the case of CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485 (Mad), their Lordships of the Madras High Court have held that the income to be considered for purposes of s. 11(1)(a) is to be arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the Trust. It was further held that the application of income for charitable purposes will have to be excluded for the purposes of determination of the income available for accumulation. Their Lordships further held that the income from the properties held under Trust will have to be arrived at in the normal commercial manner.
22. In the case of CIT vs. Estate of V.L. Ethiraj (by Official Trustee) (1982) 136 ITR 12 (Mad), their Lordships of the Madras High Court have held that the income from properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by s. 14.
23. In the case of CIT vs. Janaki Ammal Ayya Nadar Trust (1985) 153 ITR 159 (Mad) : 23 Taxman 416, their Lordships of the Madras High Court have held that the income-tax paid should be taken into account for the determination of the commercial profits and available surplus in the hands of the Trust for application.
24. In the case of CIT vs. Trustee of H.E.H. The Nizam’s Supplemental Religious Endowment Trust (1981) 127 ITR 378 (AP), it was held by the Andhra Pradesh High Court that “it is not the total income as would be assessed by the ITO that is relevant for the purpose of investing the funds of the Trust or assessing the income of the Trust. The mode of determination by the ITO as per the provisions of the IT Act is specifically restricted to the income over and above the income as shown in the accounts of the business undertaking held by a Trust. It follows that with regard to the income of the Trust as such it is the accounts of the Trust alone that have to be taken into consideration for purposes of s. 11(1)(a) of the IT Act, 1961.”
25. The Karnataka High Court in the case of CIT vs. Society of the Sisters of St. Anne (1984) 146 ITR 28 (Ker) : 16 Taxman 400, held that the amount of depreciation debited to the accounts of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes.
26. It is clear from the decisions cited above, that it is the income computed on commercial principles which is available for purposes of accumulation under s. 11(1)(a). The contention that in the case of Trust, gross receipts is the income of the Trust, in the light of the above decisions, we find is not well founded. We accordingly hold that the income available for accumulation under s. 11(1)(a) is the income as computed on commercial principles, as also taking into account the provisions of the IT Act, 1961.
27. We, however, agree with the contention on behalf of the assessee, that the entire non-code expenditure cannot be attributed to the earning of the income of the assessee. The contention of the assessee that only a small portion of the expenditure is attributable to the earning of income shall have to be determined by the Revenue authorities, after giving an opportunity of being heard to the assessee. For that purpose, the issue is set aside and remitted to the AO for working out the expenditure to be deducted out of the gross income, for the purpose of determining the income and then working out the 25 per cent of the same for accumulation.
28. The next ground of appeal is relating to the disallowance of expenses amounting to Rs. 4,16,013 incurred by the assessee outside India.
29. The relevant facts relating to this issue are that the Council had sent a Trade Delegation abroad, in respect of which an expenditure amounting to Rs. 4,86,975 had been spent outside India. The delegates had contributed a sum of Rs. 72,962 and the balance of Rs. 4,16,013 was incurred by the Council. The AO refused to consider the expenditure of Rs. 4,16,013 as an expenditure in connection with the application of income, as according to the Revenue, the application of income under s. 11 must be in India and any expenditure incurred outside India does not qualify for deduction under s. 11.
30. Before us, it was contended that s. 11 provides for exemption where the application of income of a Trust is for the purposes in India. It was further contended that the requirement under s. 11(1)(a) is not that the expenditure should be incurred in India, but on the other hand, the condition for exemption is that for the charitable or religious purpose for which the income is applied should be in India. It was further contended that in this case the public utility purpose that was sought to be achieved by sending a Trade Delegation was for the Indian traders and, therefore, the application of income was for purposes in India. The mere fact that the expenditure has been incurred abroad, according to the learned counsel, does not disqualify the Trust from claiming that the expenditure has been incurred for the purposes in India. Citing an example, the learned counsel pointed out that where a Library function in India purchases books for it from abroad and makes the payment for such purchases, the purpose for which the expenditure has been incurred would be in India, though the expenditure has been incurred outside India. Citing another example, the learned counsel pointed out that where a charitable hospital purchases equipment from abroad for the purpose of use in the hospital, it cannot be said that the amount spent for purchase of machinery from abroad would not qualify for exemption under s. 11(1)(a). According to the learned counsel, the expenditure incurred by the assessee is for purposes in India and, therefore, the Revenue was not justified in denying the benefit under s. 11(1)(a) of the said expenditure.
31. The learned Departmental Representative relied upon the orders of the Revenue authorities.
32. In our considered view, the assessee deserves to succeed. It may be useful to reproduce s. 11(1)(a).

“11(1)(a) Income derived from property held under Trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property.”

33. A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the Trade Delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the Delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a).
34. The next ground of appeal is relating to the writing off of Rs. 6,04,639. The relevant facts relating to this deduction are that, in the year 1979, an institute by the name Indian Diamond Institute was formed, which had been treated as Branch of the assessee Council. A sum of Rs. 6,32,467 had been advanced to the Indian Diamond Institute by the assessee, by way of fixed assets, current assets, etc. As on 31st of March 1982, the said advance stood at Rs. 6,04,637. The assessee had reflected this amount as an investment in the Balance Sheet. From 1st of April, 1982, the Indian Diamond Institute had obtained a separate identity and was looked after by a Government Body. The assessee sought approval of the Government of India, Ministry of Commerce, which was granted vide letter dt. 12th July, 1985. The assessee has written off the said amount in the previous year ending March 1985. The AO disallowed the claim. The CIT (A) has confirmed the disallowance.
35. The learned counsel for the assessee contended that assessee was governed by the decision of the Government in regard to write off of advance given to the Indian Diamond Institute. The learned counsel pointed out that though the Government of India, Ministry of Commerce have granted approval to write off this amount on 12th July, 1985, it has been specifically mentioned in the approval that the said amount shall be written off in the year 1984-85 and accordingly the Council had no option but to write off the said assets in the year under appeal.
36. In our considered view, the decision of the Revenue authorities, in this regard, does not call for any interference. The exemption under s. 11(1)(a) is permissible in respect of the income which is applied for charitable or religious purposes in India. The assessee has not, at any stage, claimed the expenditure in regard to Indian Diamond Institute to be the application of its income for charitable purposes. The mere fact that the amount has been written off on the directions of the Government, does not alter the character of the expenditure. In our view, the expenditure, at the very outset, does not qualify for exemption under s. 11(1)(a) and, therefore, we need not consider the objection of the Revenue authorities that in any case the set off was wrongly made in the year under appeal, as the approval of the Government of India was given only on 12th of July 1985, which falls in asst. yr. 1986-87. The disallowance of the claim to the extent of Rs. 6,04,639 is uphelearned
37. Ground No. 7 is relating to the levy of interest amounting to Rs. 6,339. The assessee had claimed a sum of Rs. 6,339 paid as penal interest for short deduction of taxes from the salaried employees as application of income. This has been rejected by the AO on the ground that the expenditure is not for purposes of the objects of the Trust. We do not see any infirmity in the orders of the Revenue authorities in this regard. The assessee is entitled to exemption in respect of the income applied for charitable or religious purposes in India. The penal interest imposed for short deduction of salaries does not qualify for exemption, as it does not amount to application of income for charitable purposes.
38. The last ground of appeal is relating to levy of interest under s. 139(8) and s. 217. It was prayed that only consequential relief may be directed to be granted to the assessee. Since the assessee is entitled to consequential relief, the AO is directed to give the same.
39. In the result, appeal of the assessee is partly allowe

 

2. COMMISSIONER OF INCOME TAX vs. MAHARANA OF MEWAR CHARITABLE FOUNDATION

HIGH COURT OF RAJASTHAN

S.C. Agrawal & S.S. Byas, JJ.

IT Ref. No. 15 of 1977

22nd July, 1986

(1986) 54 CCH 0460 RajHC

(1987) 60 CTR 0040 : (1987) 164 ITR 0439 : (1986) 29 TAXMAN 0476

Legislation Referred to

Section 11(1)

Case pertains to

Asst. Year 1971-72

Decision in favour of:

Assessee

Charitable trust—Exemption under s. 11(1)(a)—Application of income—Excess expenditure incurred by trust in earlier years—Adjustment of such expenses against the income earned in subsequent year would amount to application of income for charitable purposes in the subsequent year in which such adjustment is made—Repayment of loan taken for the purpose of charitable expenditure is entitled to deduction under s. 11(1)(a) and on the same analogy the adjustment of earlier year’s expenses against subsequent year’s income should be allowed deduction

it is hald:

There is nothing in the language of s. 11(1)(a) which lends support to the contention that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilisation of such income for meeting the expenditure of earlier year would not amount to such income being applied for charitable or religious purposes. The words used in s. 11(1)(a) must be given their natural meaning. When the income of trust is used or put to use to meet the expenses incurred for the religious or charitable purposes it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words, if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. If the contention is accepted, it would lead to an anomalous situation, namely, if the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year the said repayment would be entitled to exemption from tax under s. 11(1)(a), as clarified in CBDT circular No. 101 dated 24th Jan., 1973 but if the trust, instead of taking a loan, incurs the expenditure for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement under s. 11(1)(a). A construction which leads to such an anomaly must be avoided.

(Paras 2, 7 & 9)

Short overview  :

Where excess expenditure is incurred by trust in a year, set off of such excess against subsequent year’s income is application for purposes of s. 11(1)(a).

Counsel appeared:

B.R. Arora, for the Revenue : L.R. Mehta, for the Assessee

S.C. AGRAWAL, J.

This reference has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as “the Tribunal”), under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”), at the instance of the Revenue. The reference relates to the asst. yr. 1971-72 and the question which has been referred by the Tribunal for the opinion of this Court is as under :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of excess of expenditure over income during the previous year relevant to the asst. yr. 1970-71 should be set off against the surplus of income over expenditure relating to the asst. yr. 1971-72 in computing the taxable income of the latter assessment year ?”

2. The facts briefly stated as set out in the statement of the case are that the Maharana of Mewar Charitable Foundation (hereinafter referred to as “the assessee”) is a public charitable trust, constituted by the Maharaja of Mewar through a deed executed on 20th Oct., 1969. The Maharaja of Mewar had donated a sum of Rs. 11 lakhs to the assessee which formed the corpus of the trust. During the previous year relevant to the asst. yr. 1970-71, the assessee spent a sum of Rs. 95,863 towards the aims and objects of the trust and the income of the assessee during the said year was only Rs. 36,093 and thus a sum of Rs. 59,770 was spent in excess of the income during the period relevant to the asst. yr. 1970-71. In the previous year relevant to the asst. yr. 1971-72, the assessee claimed adjustment of the sum of Rs. 59,770 against the surplus of income over expenditure during the asst. yr. 1971-72. The ITO, Udaipur, disallowed the claim of the assessee. The AAC, Udaipur, allowed the said claim of the assessee for the deduction of the amount of Rs. 59,770 out of the income of the asst. yr. 1971-72. The Tribunal, on appeal, affirmed the order of the AAC, whereupon the CIT moved the Tribunal for referring the question of law arising out of the order passed by the Tribunal and the question mentioned above has been referred by the Tribunal for the opinion of this Court.
3. Shri Arora, learned counsel for the Revenue has urged that the deficit of Rs. 59,770 arising on account of the excess of expenditure over income in the previous year relevant to the asst. yr. 1970-71 could not be adjusted against the income for the asst. yr. 1971-72 and that the assessee could only claim exemption in respect of expenditure incurred for charitable purposes during the previous year relevant to the asst. yr. 1971- 72. Since the expenditure of Rs. 59,770 had been incurred by the assessee during the previous year relevant to the asst. yr. 1970- 71, the said expenditure could not be claimed as deduction from the income for the asst. yr. 1971-72. In support of the aforesaid contention, Shri Arora has placed reliance on the decision of the Calcutta High Court in CIT vs. Samnugger Jute Factory Co. Ltd. (1953) 24 ITR 265 (Cal) and the decision of the Mysore High Court in Siddaramanna Charities Trust vs. CIT (1974) 96 ITR 275 (Mys) : TC23R.1233.
4. Shri Mehta, learned counsel for the assessee, has, on the other hand, supported the order passed by the Tribunal and has submitted that the claim of the assessee with regard to the deduction of Rs. 59,770 has been rightly allowed by the AAC and the Tribunal since the said sum of Rs. 59,770 has been found to have been incurred by the assessee for charitable purposes and was thus applied for charitable purposes. Shri Mehta has placed reliance on the decision of the Andhra Pradesh High Court in CIT vs. Trustees of H.E.H. the Nizam’s Charitable Trust (1981) 131 ITR 497 (AP) : TC23R.1202.
5. The relevant provision which needs to be examined is that contained in s. 11(1)(a) of the Act. The said provision, as it stood during the relevant assessment year, provided as under :

“11. (1) Subject to the provisions of ss. 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India;…”

6. A perusal of the aforesaid provision would show that the income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India is to be excluded for the purposes of computing the income of the trust for the purposes of assessment. There are no words of limitation in this section explaining that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen.
7. Shri Arora has urged that the aforesaid provisions, as it stood at the relevant time, provided that only that income would be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned and any expenditure incurred for religious and charitable purposes in the earlier year could not be adjusted against the income of the succeeding year.
8. We are unable to accept the aforesaid contention of Shri Arora. In our view, there is nothing in the language of s. 11(1)(a) which lends support to the contention of Shri Arora that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilisation of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes. In our opinion, the words used in s. 11(1)(a) must be given their natural meaning. The word “applied” as defined in Chambers’ Dictionary means “to put to use” or “to turn to use”. According to the Oxford Dictionary, the word “applied” means “to make use” or “to put to practical use”. When the income of a trust in used or put to use to meet the expenses incurred for religious or charitable purposes, it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted.
9. In this context, it may be mentioned that the CBDT has issued a Circular dt. 24th Jan., 1973, wherein the CBDT has considered the question as to whether, where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the CBDT has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular, if the trust wants to spend more money on charitable and religious purposes, then, in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under s. 11(1)(a) of the Act.
10. 10. If the contention of Shri Arora is accepted, it would lead to an anomalous situation, namely, if the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to exemption from tax under s. 11(1)(a) of the Act. But if the trust, instead of taking a loan, incurs expenditure for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement under s. 11(1)(a) of the Act. In our opinion, a construction which leads to such an anomaly must be avoided.
11. We are, therefore, of the opinion that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made and will have to be excluded from the income of the trust under s. 11(1)(a) of the Act.
12. In the present case, it has not been found by the AAC that the amount of Rs. 59,770 was not incurred by the assessee for charitable purposes but was incurred for some purposes which have nothing to do with the objects of the trust. The Tribunal also observed that it is not the case of the Department that the said expenditure of Rs. 59,770 was not incurred by the assessee for charitable purposes. In these circumstances, the Tribunal was right in holding that the sum of Rs. 59,770 adjusted against the income of the asst. yr. 1971-72 could be excluded from the income of the trust for the said assessment year for the purposes of assessment under s. 11(1)(a) of the Act.
13. In CIT vs. Samnugger Jute Factory Co. Ltd. (supra), the question was with regard to the interpretation of s. 15B(1) of the Indian IT Act, 1922. In that case, exemption was being claimed by the assessee in respect of the contribution made to the Gandhi National Memorial Fund. The said contribution consisted partly of payment made from the income of the asst. yr. 1948-49 and partly out of the income for the asst. yr. 1949-50. Exemption was allowed only in respect of payment made out of the income for the asst. yr. 1949-50 and not for the payment made out of the income of the earlier asst. yr. 1948-49. The Calcutta High Court held that the words “any sums” in s. 15B(1) of the Indian IT Act, 1922, must be sums assessable in their nature, being parts of the assessable income of the relative accounting year and sums brought into the assessment and about to be brought to charge. Exemption under s. 15B could not be granted in respect of contribution to the Gandhi National Memorial Fund, if the sum representing the contribution is not a part of the income assessable for the year at all. In our opinion, the said decision is of no relevance to the question in controversy in the present case.
14. The Siddaramanna Charities Trust’s case (supra), the assessee was a charitable trust. It made a donation of a sum of Rs. 25,000 on the first day of the commencement of the accounting year and the assessee claimed that a sum of Rs. 25,000 could not be included in the total income of the previous year by virtue of s. 11(1)(a) of the Act. The said claim of the assessee was disallowed by the Tribunal as well as the IT Authorities below on the ground that the said sum of Rs. 25,000 is from the funds of the assessee and not from the income of the relevant accounting year as on the first day of the accounting year there were no profits available from which the funds could be donated. The Mysore High Court agreed with the said view and held that the benefit of s. 11(1)(a) was available provided the trust earned profits in the previous year relevant to the assessment year and the profit and loss account showed that the donation of Rs. 25,000 formed part of the profits for the year in which the payment was made. The said decision lends no assistance to the contention of Shri Arora. According to this decision, in order to avail of the benefit of s. 11(1)(a) of the Act, it is necessary that the expenditure for charitable and religious purposes must be incurred out of the income of the trust. In the present case also, the expenditure incurred for charitable and religious purposes is being claimed out of the income of the trust in the asst. yr. 1971-72.
15. Shri Arora has also relied upon the following passage in Chopra’s Income-tax Law & Practice, third edition, dealing with the words “applied or accumulated”.

“Applied or accumulated.—The income derived from property held under trust wholly for charitable or religious purposes enjoys exemption under cl. (a) of sub-s. (1) under two circumstances, namely, when the same is applied or when the same is accumulated for the purposes described. Further, the exemption will be available under this clause only in that previous year in which the aforesaid income is either applied to such purposes or is accumulated for application to such purposes.”

16. In our opinion, the said passage also does not help Shri Arora because, as indicated above, in the present case, the result of the adjustment of the sum of Rs. 59,770 incurred as expenditure for charitable purposes during the asst. yr. 1970-71 against the income for the asst. yr. 1971-72 is that the said income must be treated as having been applied for charitable or religious purposes in the current year 1971-72 and deduction of the said sum of Rs. 59,770 could be claimed in respect of the income of the asst. yr. 1971-72.
17. The aforesaid discussion leads to the conclusion that the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of the excess of expenditure over income during the previous year relevant to the asst. yr. 1970-71 should be set off against the surplus of income over expenditure relating to the asst. yr. 1971-72 in computing the taxable income of the latter assessment year.
18. The question referred is, therefore, answered in the affirmative, i.e., against the Revenue and in favour of the assessee.

There will be no order as to costs.

 

3. COMMISSIONER OF INCOME TAX vs. SHRI GUJRATI SAMAJ (REGD)

HIGH COURT OF MADHYA PRADESH : INDORE BENCH

Shantanu Kemkar & S.C. Sharma, JJ.

IT Appeal Nos. 21 to 23 of 2011

8th July, 2011

(2011) 79 CCH 0497 MPHC

(2013) 257 CTR 0397 : (2011) 64 DTR 0076 : (2012) 349 ITR 0559

Legislation Referred to

Income-tax Act, 1961, ss. 11(1)(a) & 32(1)(ii)

Case pertains to

Assessment years 2004-05 to 2006-07

Decision in favour of:

In favour of : Assessee

Charitable trust—Computation of income—Allowability of depreciation—If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of the trust—Assessee charitable trust is entitled to depreciation—

CIT vs. Raipur Pallottine Society (1989) 80 CTR (MP) 127 : (1989) 180 ITR 579 (MP) followed

4. (Paras 6 & 7)

Short overview :

Assessee charitable trust is entitled for claim of depreciation on the assets owned by it.

Depreciation—Allowability—Property held under trust—Assessee charitable trust is entitled for claim of depreciation on the assets owned by it

Short overview :

Assessee charitable trust is entitled for claim of depreciation on the assets owned by it.

Charitable trust—Application of income—Excess expenditure incurred in earlier year—Under s. 11(1)(a), the expenditure incurred in the earlier year can be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would amount to such income being applied for charitable or religious purposes—Assessee’s claim to carry forward deficit in the application of funds justified

it is hald :

In view of s. 11(1)(a) it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes. Having regard to s. 11(1)(a) when the income of the trust is used or put to use to meet the charitable or religious