Case Law Details
Brief of the case:
• The ITAT Bangalore in the case of DCIT Vs. Karnataka Food and Civil Supplies Ltd. held that the excess expenditure incurred in earlier previous years can be set off against the income of trust for the current year as an application of income because Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable purpose only in the year in which the income has arisen.
• As such the income of earlier previous years can also be shown as applied in the current previous year to the extent of excess of expenditure incurred in earlier previous years over the incomes of those years.
Facts of the case:
• Assessee had claimed carry forward of brought forward losses of Rs.16,62,77,393/- for A. Y. 2005-06 and Rs.23,54,61,542/- for A. Y. 2006- 07 and set it off against its income for A. Y. 2010-11.Such loss were due to excess amount applied during the AY 2005-06 and 2006-07 for charitable purposes.
• AO rejected the claim of assessee on the ground that only business losses can be carried forward and set off. The order of AO was confirmed by dismissed by CIT (A) relying on the judgment of the same tribunal in the case of Academy of Liberal Education.
• Aggrieved by the same department is in appeal before ITAT.
Contention of the Assessee:
• The learned counsel for the assessee claimed that expenditure in excess of income earned during the previous year was infact an advance application of the income for the next previous year, and the same could be claimed as application of income in those next previous years.
• Reliance was placed on the decision of co-ordinate bench of this tribunal in the case of ITO v. Academy of Liberal Education [ITA No.687/Bang/2014, dt.20.02.2015].
Contention of the Revenue:
• The assessee is a registered trust u/s 12AA of the I.T Act, 1961 for which there was no question of incurring any business loss. Excess of expenditure over income resulting in a loss would arise only if income is computed under the head ‘profits and gains of business or profession’.
• At the most assessee could be allowed to set off losses of the immediately preceding assessment
year and not any earlier assessment years. Revenue placed reliance on the judgment of Hon’ble Madras High court in the case of Govindu Naicker Estate v. ADIT [248 ITR 368].
Held by ITAT Bangalore:
• ITAT placed reliance on its own decision rendered in the case of Academy of Liberal Education [ITA No.687/Bang/2014, dt.20.02.2015] wherein on the identical issue ITAT ruled in the favour of assessee.
• In that case, ITAT observed that nowhere in sec 11(1)(a) it is mentioned that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen.
• The actual application of income as required by Sec 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, the expenses incurred in earlier previous year if was in excess of the incomes, then they could be safely treated as application of income in the next years.
• In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year.
• Such adjustment had also been upheld in CIT vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj) CIT vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj). In CIT vs. Institute of Banking Personnel Selection 264 ITR 110 (Bombay) etc.
Author Bio
HI,
In essence the income of the Charitable Institutions is taxed on cash basis.What is the source for the additional expenditure?Is it out of loans? If so whether the loan repayment is claimed as an expenditure? These are some of the lingering issues which need adjudication if already not decided.