CIT-I CHANDIGARH vs. M/S PUNJAB MANDI BOARD CHANDIGARH

This appeal has been preferred by the revenue under section 260A of the Income Tax Act, 1961, (in short, “the Act”) against the order dated 31.12.2008, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh, Bench 'B', (in short, “the Tribunal”) in ITA No.802/CHANDI/2008, for the assessment year 2005-06, claiming following substantial question of law:- “Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in allowing the set off of the excess expenditure incurred by the assessee in Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh the earlier years against the income for the current year even though there is no specific provision in the Income Tax Act to allow the same?” However, the appeal was admitted on 8.8.2009 for determining the following substantial question of law:- “Whether income of the assessee from the fee levied and recovered under the provisions of Punjab Agricultural Produce Markets Act, 1961 qualifies for exemption under Section 11 of the Income Tax Act, 1961?”

Briefly, the relevant facts necessary for adjudication of the controversy involved, as narrated in the appeal, may be noticed. The assessee is an agricultural Marketing Board and its main object is to consolidate and amend the law relating to better regulation of purchase, sale, storage and processing of agricultural produce and the establishment of markets for agricultural produce in the State of Punjab. It filed its income tax return for the assessment year 2005-06 on 29.10.2005 declaring nil income. The case was selected for scrutiny. The assessee claimed exemption under Section 11 of the Act and attached Form No.10 B alongwith return of income. It also furnished computation of income reflecting the working out of the income applied for charitable purposes. It received loan of ` 30,08,67,329/- during the year which was used for repair of link roads. In its income and expenditure account, the assessee showed the aforesaid amount of loan on income side but showed the expenses of `1,12,90,64,003/- to be spent on rural link road which includes expenses of ` 30,08,67,329/-. The assessee included ` 24,62,768/- as income tax deducted at source during the year. The Assessing Officer Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh observed that the assessee had not claimed the benefit of exemption in regard to income related to tax deduction at source and had not even revised its return of Income in this context. In this way, the claim of the assessee relating to tax deduction at source was rejected. Further, the assessee had incurred excess expenditure in earlier years. In the assessment year 2004-05, the assessee had incurred expenditure of ` 208,70,39,060/- against income of ` 163,83,36,523/- which means an excess expenditure of ` 44,87,02,537/-. The Assessing officer observed that the claim of set off was neither present in the original return of income nor the assessee had revised its return of income. The said claim was also rejected by the Assessing Officer and finally after calculation the taxable income came to ` 1,79,61,763/-. Aggrieved by the order dated 20.12.2007 passed by the Assessing Officer, Annexure A.1, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 8.7.2008, Annexure A.2, the appeal was allowed. Not satisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 31.12.2008, Annexure A.3, the appeal was dismissed. Hence the instant appeal by the revenue.

Learned counsel for the appellant-revenue submitted that Chandigarh Diocese Society, (2009) 318 ITR 96 (P&H), the assessee Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh was not entitled to any relief as has been allowed by the CIT(A) and the Tribunal. It was urged that no Form 10 had been furnished by the assessee depicting accumulation or setting apart of income as required under Section 11(2) of the Act and therefore, the CIT(A) and the Tribunal were in error in allowing the relief to the assessee.

On the other hand, learned counsel for the assessee submitted that the Board had issued a circular No.100 dated 24.1.1973 wherein it was provided that re-payment of a debt incurred for charitable purposes by a charitable trust and loans advanced by Education trust would amount to application of income for charitable purposes. It was argued that interpreting the aforesaid circular, the Rajasthan High Court in CIT v. Maharana of Mewar Charitable Foundation, (1987) 164 ITR 439 held that where the charitable trust incurs any expenditure in excess in earlier years, the same can be adjusted against income of subsequent year and adjustment was to be treated as application of income in such subsequent year for charitable purposes and the assessee can claim exemption under Section 11 of the Act. The said decision was followed by the Gujarat High Court in CIT v.Shri Plot Swetamber Murti Pujak Jain Mandal,(1995) 211 ITR 293. 5. After hearing learned counsel for the parties, we do not find any merit in the appeal.

It would be expedient to refer to the circular dated 24.1.1973 which reads thus:- “Income-tax Circulars Circular No.100, dated 24th January, 1973. To Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh All Commissioners of Income-tax. Sir, Subject:Repayment of debt incurred for purposes by a charitable trust and loans advanced by educational trusts -Application of income. Section 11 of the Income Tax Act requires 100% 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 2. Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes?

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 loans 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 if 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. Yours faithfully, . T.P.Jhunjunwala Secretary,Central Board of Direct Taxes Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh [F. No. 195/1/72-IT(A-I)]”

According to the aforesaid circular, it had been decided by the Board that repayment of loan originally taken to fulfil one of the objects of the trust will amount to application of the income for charitable and religious purposes. Equally, where the position is converse and expenditure has been incurred in earlier years and has been repaid out of the income in the current year, applying the same analogy, the same would be covered under the aforesaid circular. The Gujarat High Court in Shri Plot Swetamber Murti Pujak Jain Mandal's case (supra) interpreting the aforesaid circular, followed the decision of the Rajasthan High Court in Maharana of Mewar Charitable Foundation's case (supra) and held as under:- “6. 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 Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh 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 [1987] 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 Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh 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 Chanty Trust Fund [1986] 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 Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh 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.”

Adverting to the judgment relied upon by learned counsel for the revenue, suffice it to say that in Goetze (India) Limited's case (supra), the issue before the Apex Court was whether the deduction claimed after the filing of the return was permissible and it was held that the Assessing authority had no power to entertain claim made otherwise than by way of revised return. It was observed that the same did not, however, impinge on the power of the Appellate Tribunal under Section 254 of the Act. Similarly, in Simla Chandigarh Diocese Society's case (supra), revised Form No.10 was not furnished within time but had been filed before completion of assessment. No such issue arises for consideration in the present facts and circumstances of the case. Consequently, both the judgments have no applicability and do not advance the case of the revenue.

In view of the above, the CIT(A) and the Tribunal had rightly decided the issue in favour of the assessee. The substantial Singh Gurbax 2013.11.29 14:57 integrity of this document High Court Chandigarh question of law is, thus, answered accordingly, against the revenue and in favour of the assessee. Consequently, finding no merit in the appeal, the same is hereby dismissed. Ajay Kumar Mittal) Judge November 14, 2013 (Mehinder Singh Sullar) 'gs'