THE DEPUTY COMMISSIONER OF INCOME TAX (EXEMPTIONS), CIRCLE -1, BANGALORE vs. SRI SHRIDEVI CHARITABLE TRUST, BANGALORE

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by revenue against order dated 16/09/2020 passed by learnt CIT (A)-14, Bangalore on following grounds of appeal: “Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing the claim of the assessee for carry forward of deficit, ignoring the fact that there is no express provisions in the Income tax Act, 1961 allowing such claim, and without appreciating the fact that this would have the effect of granting double benefit to assessee, first as accumulation of income U/s 11(1)(a) or Corpus donation U/s 11(1)(d) in earlier year/current year, or exempt income U/s 10(34), and then as application of income U/s 11(1)(a) in subsequent years which is legally not permissible.?” Brief facts of the case are as under: 2. Assessee is a charitable trust and it filed its return of income on 27/10/2017. In the said return assessee had claimed total income referred to under section 11 and 12 at Rs.46,69,64, 213/-and claimed deduction under section 11 (1) (a) of the act amounting to Rs.7,00,44,632/-and total application of Rs.66,29,93,259/-thereby seeking carry forward deficit of Rs.26,60,73,678/-for subsequent years. The Ld. AO denied the carry forward deficit to subsequent years to the extent of Rs.26,60,73,678/-.

3. Aggrieved by the order of Ld. AO, assessee preferred appeal before Ld.CIT(A). Ld.CIT while considering the issue alleged by assessee observed and held as under: Disallowance of carry forward of Deficit: “4.2 The appellant contented that the AO has erred in not allowing the deficit incurred by the appellant to be carry forward to subsequent years. The appellant relied upon the decision of the jurisdictional hAT judgment in the case of ITO vs. Shraddha Trust (ITA No. 889/Bang/2016) and decision of the CIT(A) in his own case for AY 2013-14. The appellant in his submission dated 29/08/2020 mentioned that the Assessment order was passed u/s 143(3) of the Act for the year under consideration by accepting the returned income of the appellant. Copy of the said order is also submitted. However, the AO failed to mention anything regarding carry forward of the deficit. On this issue the appellant is in this appeal. 4.2.1 The judgement of Hon'ble Karnataka High Court in the case of Pr. Commissioner of Income Tax (Exemption) vs. Manipal Academy of higher Education (2019) 111 Taxmann.com 243; 415 hR 361 (Karnataka) dated 14/08/2019 supports the contention of the appellant. The relevant part of the decision relying of the jusgment of CIT(exemption) Vs. Ohio University Christ College (2018) 99 Taxmann.com 377/408 ITR 352 (kar) and the decision of Bomabay High Court in Commissioner of Income Tax Vs. Institute of Banking (2003) 264 ITR 110 is as under:

'4. With regard to carrying forward of the losses for being set off against the income of the charitable trust for the present Assessment Year, the controversy covered by the judgment in Commissioner of Income Tax (Exemptions) and another . vs. Ohio University Christ College rendered on 17.07.2018 in ITA.No.31212016 and in which this Court held as under: ..."16. in so far as the second question proposed by the Revenue, quoted above is concerned also, we find that the Tribunal's findings in this regard do not give rise to any substantial question of law. The said findings are quoted below for ready reference: "5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of expenditure of earlier years, which has been brought forward and set off in the year under consideration. The Assessing Officer disallowed the same on the ground that there is no express provision in the Act permitting the adjustment of earlier years brought forward expenses as application of income in the current year. According to the Assessing Officer, the application of income for charitable purposes must be during the relevant previous year. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85% of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee's claim of expenditure of earlier years being brought forward and set off during the year. 5.2 On appeal, the learned CIT (Appeals) allowed the amortization of the expenditure as claimed by the assessee and deleted the disallowance made by the Assessing Officer by placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Society of the Sisters of St. Anne reported in 146 ITR 28 (1984) and CBDT Circular No. 5-P(LXX)-6 of 1968. 5.3.1 We have heard the rival contentions of both the learned Departmental Representatives for Revenue and the learned Authorised Representative for the assessee and perused and carefully considered the material on record, including the judicial pronouncements cited. The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 115th of the expenditure. The un-amortized expenditure has been brought forward and set off as application of income in subsequent years including the assessment years 2008-09 and 2009-10 which are under consideration.

5.3.2 We find that the issue before us is directly related to the issue decided by the Hon'ble Karnataka High Court in the case of Sisters of St. Anne (supra) cited by the assessee. In the said case, the Hon'ble Karnataka High Court at paras 8 to 10 thereof has held as under. - 5.3.3 Further, the CBDT Circular No.5-P (LXX)-6 of 1968 cited by the assessee makes it clear that income should be understood in its commercial sense . in the case of trusts also and therefore the commercial principle enunciated by the Hon'b/e Karnataka High Court in the above referred case of Sisters of St. Anne (supra) applies to trusts as well. In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses. Consequently, Ground No.B (1 to 6) of the Revenue's appeal for Assessment Year 2008- 09 and Ground No.0 for Assessment Year 2009-10 are dismissed."

Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word 'income' should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should not be less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).

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 had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 1 1(1a)." In view of the controversy covered by the above decisions of this Court, we are of the opinion that the substantial questions of law as suggested by the appellant do not now arise for our further consideration in the present appeal. The appeal filed by Revenue is accordingly disposed of in terms of the aforesaid judgments of this Court. No costs." Considering the binding decision of Hon'be Karnataka High Court, The ground of the assessee on carry forward of deficit is allowed. Ground 2 is allowed.”