Case Law Details
Nizamia Hyderabad Womens Association Trust Vs ITO (ITAT Hyderabad)
The Income Tax Appellate Tribunal (ITAT), Hyderabad, allowed the appeal of a charitable trust for statistical purposes and held that excess application of income incurred in earlier years can be adjusted against the income of a subsequent year, provided the claim is supported by the trust’s books of account and records. The Tribunal remanded the matter to the Assessing Officer (AO) only for factual verification of the claim.
The assessee, a trust registered under Section 12A of the Income-tax Act and engaged in running educational institutions, filed its return for Assessment Year 2017-18 declaring nil income. During assessment proceedings, the AO noticed that the trust had claimed adjustment of excess application/excess capital expenditure of ₹1,69,14,522 relating to earlier years.
The AO observed that although the expenditure had been incurred towards acquisition of land in earlier financial years, the trust had neither specifically claimed the expenditure in the returns of those years nor made any claim for carrying it forward. On this basis, the AO denied the adjustment and brought the amount to tax. The Commissioner of Income Tax (Appeals) affirmed the AO’s view, holding that the absence of a claim in the earlier returns disentitled the trust from seeking adjustment in the relevant assessment year.
Before the Tribunal, the assessee submitted that, prior to the amendment introduced by the Finance Act, 2021, the legal position permitted charitable trusts to carry forward excess application of income and adjust it against income of subsequent years. It argued that Section 11 did not require a specific carry-forward claim in the return of income and that the actual expenditure incurred for charitable purposes was never disputed by the Revenue. The trust also relied on its books of account, Form No. 10, financial records, and judicial precedents in support of its claim.
The Tribunal identified the core issue as whether excess application of income incurred in earlier years could be adjusted against the income of a subsequent year. Referring to decisions of the Bombay High Court, Gujarat High Court and other judicial precedents, it observed that income of a charitable trust is to be computed on commercial principles.
It noted that where expenditure incurred for charitable purposes exceeds the income of a particular year, such excess application may be adjusted against the income of a subsequent year and treated as application of income in that year. The Tribunal further observed that there is no statutory requirement under Section 11 mandating that a separate carry-forward claim must be made in the return of income for the earlier years.
The Tribunal found that the Revenue had not disputed the actual incurring of capital expenditure for charitable purposes. It held that the authorities below had denied the claim solely because the trust had not specifically claimed excess application in the returns of the earlier years. According to the Tribunal, such an entitlement does not arise from a statutory carry-forward mechanism similar to Sections 72 to 74 of the Act but flows from the interpretation of Section 11 itself. Therefore, once the excess application is ascertainable from the books of account and relates to charitable expenditure, the claim cannot be rejected merely because a separate carry-forward claim was not made in earlier returns.
The Tribunal also observed that Explanation 5 to Section 11(1), inserted by the Finance Act, 2021 restricting carry forward of excess application, operates prospectively and is not applicable to Assessment Year 2017-18. Since the exact quantum of excess application and its availability for adjustment could not be conclusively verified from the existing record, the Tribunal restored the matter to the AO for the limited purpose of factual verification. If the claim is found to be correct, the AO was directed to allow the adjustment of the excess application of income against the income of the year under consideration. As the principal issue had been decided, the Tribunal left the additional ground relating to accumulation under Section 11(2) open without adjudication. The appeal was accordingly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal filed by the assessee trust is directed against the order passed by the Commissioner of Income Tax (Appeals), NFAC, dated 20/08/2025, which in turn arises from the order passed by the AO under Section 143(3) of the Income-tax Act, 1961 (for short, “Act”), dated 11/12/209 for Assessment Year (AY) 2017-18. The assessee trust has assailed the impugned order on the following grounds of appeal before us:
“1. The Order of the learned CIT(Appeals), NFAC is contrary to the facts of the case and the Provisions of Law.
2. The learned CIT(Appeals), NFAC is not justified in Sustaining the disallowance the amount of Rs.1,69,14,522/- being the surplus capital expenditure in the years 2014-15 and 2015-16 (as a set of against a current income).
3. The learned CIT(Appeals), NFAC is not justified in holding that the surplus was not claimed in the Returns pertaining to the Assessment years 2015-16 and 2016-17. He should have seen the Returns, and the Annual Accounts filed by the Appellant clearly show the surplus capital expenditure incurred in those years.
4. The learned CIT(Appeals), NFAC should have seen that the Income Tax records relating to the earlier years sufficiently display the surplus expenditure and therefore CIT(Appeals), NFAC is incorrect in holding that there is no claim in the earlier years. The CIT(Appeals), NFAC should have appreciated that the Appellant has set off the amounts available as per Income Tax Returns as a set of and that no specific claim need be made in the Returns.
5. The learned CIT(Appeals), NFAC should have seen that the set off of the surplus expenditure in one year against income of a subsequent year is permissible in view of the several judicial pronouncements by several courts, including that Supreme Court in the Case of CIT vs Subros Educational Society.
For these and other grounds that may be urged at the time of hearing, it is fit prayed that the assessment is set aside or modified as may be deemed fit.”
Also, the assessee trust has raised an additional ground of appeal, which reads as under:
“Without prejudice to the main grounds of appeal, the learned Assessing Officer and the learned CIT(A), NFAC erred in law and on facts in not considering and allowing accumulation of Rs.1,70,00,000/- under section 11(2) of the Act through Form No.10. The authorities below failed to appreciate CBDT Circular No.7/2018 dated 20.12.2018 and CBDT Circular No. 30/2019 dated 17.12.2019 granting relaxation in respect of delayed filing of Form No.10 for AY 2017-18 and, therefore, the claim for accumulation could not have been denied merely on account of procedural or technical defects when the substantive requirements of section 11(2) stood satisfied.” As the additional ground of appeal raised by the assessee trust involves a pure question of law arising from the facts already available on record, which will not require looking any further beyond the facts borne on record and goes to the root of the assessment framed in its case, the same is admitted for adjudication in view of the ratio laid down by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC).
2. Succinctly stated, the assessee is a trust registered under section 12A of the Income-tax Act, 1961 and is engaged in running educational institutions. The assessee trust had filed its return of income for AY 2017-18 on 28/10/2017, declaring Nil income. As is discernible from the assessment order, the assessee trust had filed “Form 10” on 31/10/2018 with an accumulation of funds of Rs. 35 lacs and claimed exemption under Section 10(23C)(iiiad) of the Act. Subsequently, the assessee trust filed a revised return of income on 31/03/2019, declaring Nil income and withdrawing the claim of accumulation of funds. Thereafter, the case of the assessee trust was selected for scrutiny assessment under Section 143(2) of the Act.
3. During the course of the assessment proceedings, the AO observed that the assessee trust had claimed an adjustment of excess application/excess capital expenditure amounting to Rs.1,69,14,522/- pertaining to earlier years. On a perusal of the record, the AO observed that the assessee trust had incurred expenditure towards the acquisition of land during FY 2013-14 and FY 2014-15. The AO was of the view that since the aforesaid expenditure was not specifically claimed in the returns of the relevant preceding years and no claim of carry forward was therein made, the assessee trust was not entitled to seek adjustment of the same against the income of the year under consideration. Accordingly, the AO, vide his order passed under Section 143(3) of the Act, dated 11/12/2019, being guided by his aforesaid conviction, declined the claim of the assessee trust for adjustment of excess application/excess capital expenditure of Rs. 1,69,14,522/-pertaining to the earlier years and brought the same to tax.
4. Aggrieved, the assessee trust assailed the assessment order before the CIT(A). However, the CIT(A) observed that as the assessee trust had not claimed such excess application of income in its returns of the earlier years, it could not seek adjustment in the year under consideration, and affirmed the action of the AO.
5. The assessee trust, being aggrieved with the CIT(A) order, has carried the matter in appeal before us.
6. We have heard the Ld. Authorised Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by the Ld. AR to drive home his contentions.
7. Shri. B Satyanarayana Murthy, CA, the Ld. Authorised Representative (for short, “AR”) for the assessee trust, at the threshold of hearing of the appeal, submitted that the factum of capital expenditure incurred for charitable purposes is not disputed by the Revenue. The Ld. AR submitted that prior to the amendment introduced by the Finance Act, 2021, the legal position was well settled that excess application of income of a charitable trust could be carried forward and adjusted against income of subsequent years. Elaborating further on his contention, it was submitted that there is no statutory requirement under Section 11 of the Act that such an excess application should have been specifically claimed in the return of income of the earlier year. The Ld. AR took us through “Form No. 10” r.w Rule 17(2) filed by the assessee trust on 06/11/2019, as per which it had set apart an amount of 1.70 crores (17.3 percent of the income of the assessee trust) for promoting the education and learning of women, to provide facilities for teaching women a craft or profession and to afford facilities for physical training and activities specified in the trust deed. Also, the Ld. AR took us through the orders of the authorities below. The Ld. AR had drawn our attention to a “Chart” detailing the accumulation of excess application of income for the FY. 2004-05 to FY 2016-17. The Ld. AR further took us through the revised return of income filed by the assessee trust on 30/03/2019, which revealed application of amount by the assessee trust towards charitable purpose during the subject year on Capital Account aggregating to Rs. 1,96,64,471, which comprised of, viz. (i). application towards capital expenditure in the current financial year: Rs. 27,49,949/; and (ii). excess application towards capital expenditure in the previous financial years: Rs.1,69,14,522/-. The Ld. AR has further placed on record an application filed by the assessee trust with the CIT(Exemption), Hyderabad under Section 119(2)(b) of the Act, dated 06/06/2026, wherein it had sought for condonation of the delay in filing “Form No, 10” on 31/10/2018, i.e., before passing of the assessment order under Section 143(3) of the Act, dated 11/12/2019. As is discernible from the aforesaid letter dated 06/06/2026, it is, inter alia, stated by the assessee trust that as the amount of accumulation was wrongly mentioned at the time of uploading “Form No. 10” as Rs. 35 lac instead of Rs. 1.70 crore, the same as approved by a resolution of the trustees dated 02/03/2017 was corrected by filing a revised “Form No. 10” on 06/11/2019. It is further stated in the aforesaid application that the revision was only for correcting the amount of accumulation, while the purpose of accumulation and the period of accumulation remained unchanged.
8. Per Contra, the learned Departmental Representative (for short, “DR”) relied upon the orders of the lower authorities.
9. We have given thoughtful consideration to the contentions advanced by the Ld. Authorised Representatives for both parties in the backdrop of the orders of the authorities below.
10. As observed hereinabove, the assessee trust has assailed the confirmation of an addition of Rs. 1,69,14,522 representing excess application of income incurred in earlier years and claimed as set off against its income for the year under consideration.
11. The core issue involved in the present appeal for the adjudication of which our indulgence has been sought lies in a narrow compass, i.e., whether excess application of income incurred by the assessee trust in earlier years can be adjusted against income of subsequent years. We find that various Hon’ble High Courts have consistently held that where expenditure incurred for charitable purposes exceeds the income of a particular year, such excess application can be adjusted against the income of subsequent years while computing application under Section 11 of the Act. Our view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Institute of Banking Personnel Selection (BPS) (2003) 131 Taxman 386 (Bombay). In the said case, the Hon’ble High Court, while answering the specific issue raised before them, i.e., whether excess application of income in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in subsequent year for charitable purposes, had relied upon the judgment of the High Court of Gujarat in CIT vs. Shri Plot Swetamber Murti Pujak Jain Mandal (1995) 211 ITR 293 (Guj), and observed that Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the Trust for charitable and religious purposes in the earlier years against the income earned by the Trust in the subsequent year will have to be regarded as application of income of the Trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11(1)(a) of the Act. For the sake of clarity, we deem it apposite to cull out the observations of the Hon’ble High Court, as under:
“5. Now coming to question No. 3, the point which arises for consideration is : whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilization of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a Charitable Trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income-tax Act and that the income of the Charitable Trust was not assessable under the head “profits and gains of business” under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a Charitable Trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the Trust for charitable and religious purposes in the earlier years against the income earned by the Trust in the subsequent year will have to be regarded as application of income of the Trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11(1)(a) of the Act. Our view is also supported by the Judgment of the Gujarat High Court in the case of CIT V. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293. Accordingly, we answer question No. 3 in the affirmative i.e., in favour of the assessee and against the Department.”
Also, support is drawn from the judgment of the Hon’ble High Court of Gujarat in the case of CIT vs Shri Plot Swetamber Murti Pujak Jain Mandal (1995) 211 ITR 293 (Gujarat). In the said case, the Hon’ble High Court had observed that a bare perusal of section 11 shows 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 purpose of assessment. It was observed that there are no words of limitation in section 11 of the Act, providing that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. Elaborating on its observation, the Hon’ble High Court had observed that the word ‘applied’ means ‘to put to use’ or ‘to turn to use’ or ‘to make use’ or ‘to put to practical use’. Having regard to the provisions of section 11, it was observed that when the income of a trust is 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 expenses for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. For the sake of clarity, we deem it apposite to cull out the observations of the Hon’ble High Court, as under:
“Before answering the question referred to us, it would be worthwhile to note the scheme of section 11 of the Act. The relevant provisions which need to be examined are those contained in section 11(1)(a), section 11(2) and section 11(3) of the Act. The said provisions as they stood during the relevant assessment year were as under:
“11. (1) Subject to the provisions of sections 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;….
11. (2) Where any income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied or is not deemed to have been applied to charitable or religious purposes in India during the previous year but is accumulated, or finally set apart, for application to such purposes in India, such income shall not be included in the total income of the previous year of the person in receipt of the income provided the following conditions are complied with, namely :
(3) Any income referred to in sub-section(2), which—
(a) such person specifies, by notice in writing given to the Income-tax Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart which shall in no case exceed ten years;
(b) the money so accumulated or set apart is—
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,
(i) invested in any Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf, or
(ii) deposited in any account with the Post Office Savings Bank [including deposits made under the Post Office (Time Deposits) Rules, 1970] or a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank), or
(iii) deposited in an account with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purposes of clause (viii) of sub-section (1) of section 36.
11. (3) Any income referred to in sub-section (2), which—
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or
(b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof,
shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited, or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.”
A bare perusal of the above-referred provisions of the Act shows 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 purpose of assessment. There are no words of limitation in this section providing that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. The word “applied” means “to put to use” or “to turn to use” or “to make use” or “to put to practical use”. Having regard to the provisions of section 11 of the Act, it is clear that when the income of a trust is 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 expenses for charitable and religious purposes have been incurred for 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.
At this stage, it would be profitable to refer to the Circular dated January 24, 1973, F. No. 195/1/72-1.T. (A.I), issued by the Central Board of Direct Taxes, the relevant part of which reads as under (see [1973] 88 ITR (St.) 66):
“Subject: Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts—Application of income.
Section 11 of the Income-tax Act requires 100 per cent. of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income:
(i) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust? and….
The Board has decided that 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. As regards the loans advanced for higher studies, if the only object of the trust is to give interest bearing loan for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.” (Circular No. 100, dated January 24, 1973, F. No. 195/1/72-I.T.-(Al)).
According to the above referred circular if a trust wants to spend more money for charitable and religious purposes 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 section 11(1)(a) of the Act. The contention that only that part of the income of a charitable trust should be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned, cannot be accepted, as it would lead to an anomalous situation. 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 section 11(1)(a) of the Act in view of the circular above referred to. But, if the trust instead of taking a loan incurs expenses 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 section 11(1)(a) of the Act if the contention advanced by the Revenue is accepted. The construction which leads to such an anomaly has got to be avoided. There is nothing in the language of section 11(1)(a) of the Act to indicate that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year or that 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.
In the case of CIT v. Maharana of Mewar Charitable Foundation 11987] 164 ITR 439, the Rajasthan High Court considered the question whether 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 assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year in the background of the following facts:
The Maharaja of Mewar had donated a sum of Rs. 11 lakhs to the assessee, i.e., Maharana of Mewar Charitable Foundation, which was a public charitable trust. During the previous year relevant to the assessment year 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 assessment year 1970-71. In the previous year relevant to the assessment year 1971-72, the assessee claimed adjustment of a sum of Rs. 59,770 against the surplus of income over expenditure during the assessment year 1971-72. The Income-tax Officer disallowed the claim of the assessee. The Appellate Assistant Commissioner of Income-tax allowed the said claim. The Tribunal, on appeal, affirmed the order of the Appellate Assistant Commissioner of Income-tax. On a reference, the Rajasthan High Court, after referring to several decisions on the point, has held 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 had been made and would have to be excluded from the income of the trust under section 11(1)(a) of the Act. We are in respectful agreement with the view expressed by the Rajasthan High Court and we also hold that the deficit arising out of excess of expenditure over income during the previous year relevant to the assessment year should be set off against the surplus of income over the expenditure relating to the assessment year in computing the taxable income of the latter assessment year.
Viewing the question from a different angle also, we are of the opinion that the claim made by the assessee was well-founded. In the case of CIT v. Ganga Charity Trust Fund11986] 162 ITR 612, this court considered the question as to whether deduction of income-tax liability must be taken as an outgoing before the surplus could be ascertained in order to give meaning to the expression “income”. The court also considered the question as to whether for the purpose of determining the income or surplus available to the trust for the purpose of application of its income towards charitable or religious objects, the surplus realised or available on commercial principles should be taken into consideration or not. After reviewing the case law on the subject, it has been held that income derived from the 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 arises. While holding that the income derived from the trust property must be determined on commercial principles, this court has noted that if such an interpretation is not placed on section 11(1)(a) of the Act, it would render the benevolent provisions found in clause (a) of section 11(1) of the Act nugatory.
In the case of C/T v. Sheth Manila) Ranchhoddas Vishram Bhavan
Trust J19921 198 ITR 598, this court considered the question as to whether having regard to the scheme of the Act “income” referred to in section 11(1)(a) of the Act is to be computed not in accordance with the provisions of the Act, but in accordance with the normal rules of accountancy under which the depreciation has to be allowed while computing such income under section 11(1)(a) of the Act. In the said case, the assessee which was a registered public trust, had income mainly from immovable property. In the returns of income filed for the assessment years 1971-72 and 1972-73, the assessee claimed depreciation and calculated its income accordingly. The Income-tax Officer rejected the claim of the assessee taking the view that the income from house property was required to be calculated according to sections 22 to 27 of the Act. In appeal, the Appellate Assistant Commissioner held otherwise. The Tribunal dismissed the appeal of the Revenue. On a reference, this court has held that computation under different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge and the income from the properties held under the trust has to be arrived at in the normal commercial manner without classification under the various heads as set out in section 14 of the Act.
In view of the two decisions of this court above referred to, it is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and will have to be excluded from the income of the trust under section 11(1)(a) of the Act.
In view of the above discussion, we are of the opinion that, on the facts and in the circumstances of the case, the assessee is entitled to carry forward expenses for set off in the subsequent year. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.”
12. Ostensibly, the authorities below have not disputed the actual incurring of capital expenditure by the assessee trust in the earlier years. Rather, the sole reason for the denial of the claim is that the assessee trust had not specifically claimed the excess application of income incurred in its returns of the preceding years. In our considered view, the view taken by both the authorities below cannot be sustained. We say so, for the reason that the adjustment of excess application of income in the preceding years does not arise from any statutory carry forward mechanism akin to Section 72 to Section 74 of the Act, but the said entitlement flows from the interpretation of Section 11 itself. We are of the firm conviction that once the excess application of income in the preceding years is ascertainable from the books of accounts and records of an assessee trust and the expenditure is admittedly incurred for charitable purposes, the claim cannot be denied merely because a separate carry forward claim was not made in the return of income of the said earlier years. At this stage, we deem it apposite to observe that the amendment made available on the statute by inserting “Explanation 5” to Section 11(1) of the Act vide the Finance Act, 2021, which restricts the carry forward of excess application of income of the year preceding the previous year is prospective in nature and will not be applicable to the case of the assessee trust before us for AY 2017-18.
13. We thus, in terms of our aforesaid deliberations, and respectfully following the aforesaid judicial pronouncements, hold a firm conviction that the assessee trust is principally entitled to adjustment of the excess application of income in the earlier years amounting to Rs.1,69,14,522/-against its income for the year under consideration. Having said so, we are of the view that as the claim of the assessee trust regarding excess application of income in the earlier years amounting to Rs.1,69,14,522/-cannot be conclusively gathered beyond doubt from the record before us, therefore, we set aside the matter to the file of the AO only for the limited purpose of carrying out the factual verification of the claim of the assessee trust regarding the excess application of income in the earlier years amounting to Rs.1,69,14,522/-, as well as its availability for adjustment against its income for the year under consideration. Accordingly, the order passed by the CIT(A) is set aside, and the matter is restored to the file of the AO for the aforesaid limited purpose of carrying out necessary verification. In case the claim of the assessee trust is found in order, then the AO shall allow the adjustment of the excess application of income in the earlier years against its income for the year under consideration.
14. As we have based on our aforesaid observations principally accepted the assessee’s claim and set aside the matter to the file of the AO for the limited purpose of carrying out certain factual verifications, we refrain from adverting to and adjudicating the “additional ground of appeal” raised by the assessee appellant before us, which, having been rendered as academic, is left open.
15. In the result, the appeal filed by the assessee trust is allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced in the open court on 19th June, 2026.
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