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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal by the Revenue against the order of ld. CIT(A), Noida dated 29.04.2013 for the assessment year 2008-09 on the following grounds :
“1. Whether in the facts and circumstances of the case, the Ld. CIT (Appeals) has erred in law in allowing the loss of Rs.2,76,14,785/- claimed by the assessee trust on a/c of capital expenditure incurred during the year, ignoring the commercial principles according to which capital expenditure does not relate to income & expenditure account at all and hence, capital loss cannot be allowed to be carried forward for set off against future income.
2. Whether in the facts and circumstances of the case, the Ld. CIT (Appeals) has erred in law in allowing the loss of Rs. 2,76,14,785/- claimed by the assessee trust relying upon the various decisions as mentioned in the appellate order whereas the said decisions relate to some other distinguishable points i.e. allowability of brought forward business losses worked out according to commercial principles and not with the carry forward of losses on a/c of capital expenditure.
Whether in the facts and circumstances of the case, the Ld. CIT (Appeals) has erred in law in allowing the loss of Rs. 2,76,14,785/- claimed by the assessee trust without rebutting the AO's finding that the loss claimed by the assessee was due to capital expenditure, as admitted and mentioned by the assessee itself in computation of income enclosed with the return.
4. That the appellant craves leave to add, modify and/or delete any ground(s) of appeal.
5. In the facts and circumstances of the case, the order of the Commissioner of Income-tax (Appeals) may be set aside and that of the A.O. restored.”
The assessee is a society and registered under the Societies Act, 1908 on 06.12.2007. The Society is registered u/s. 12AA of the Income Tax Act, 1961 also. This is the first year of the society and filed return of income on 31.07.2008 declaring loss of Rs.2,76,14,785/-. The case was processed u/s. 143(1) and later on, it was selected for scrutiny and notices u/s. 143(2) and 142(1) were issued on 22.09.2009 duly served upon the assessee. In response to the notice, the assessee submitted the details as required by the Assessing Officer. The assessee also submitted audit report u/s. 12A(b) of the Act. The assessee claimed exemption u/s. 11 of the Act on account of activities carried out in terms of memorandum of society. Necessary details were also submitted as required by the Assessing Officer. The AO noted that being the first year of its inception, the assessee trust has not done any activities with regard to the objects except addition into the capital assets. On examination of the memorandum of objects, the Assessing Officer noticed that the trust deed is only for educational purpose. The Assessing Officer further noted that all the conditions prescribed u/s. 11 and 12 of the IT Act, 1961 have been fulfilled and the percentage of receipts applied towards its objects is more than 85% and the assessee is entitled for exemption u/s. 11 of the IT Act, 1961. The Assessing Officer further on scrutiny of return and computation of income submitted by the assessee, noted that the assessee has shown a net loss of Rs.90,43,998/- after claiming deduction u/s. 11 of the Act which has been claimed to be carried forward. The computation of income filed by the assessee is reproduced hereunder :
Other sources: Intt. On FDR 9066 Corpus donation 15525100 15534166 Less: U/s. 11(1)((d) 6528000 Less: Application of funds: Rev. Exp 55580 Capital Exp. Land 17286000 Building 10052706 Electricity Fittings 162566 Furniture 50606 Submersible Pump 16393 27568271 27568271 27614785 (-) 27614785 Net Loss to be C/F to A/Y : 09-10 (-) 27614785 Tax due to be C/F to A/Y : 09-10 Nil
3. From the above computation of income submitted by the assessee, the Assessing Officer was not agreed and he disallowed the claim of loss to be carried forward in the next year of Rs.2,76,14,485/- by observing as under :
“If as per the commercial accounting principles net income is a loss, the same may be allowed to be carried forward in accordance with the provisions contained in the Income Tax Act. In the instant case loss can be worked out as per normal accounting system only, which as per the profit and loss account is Rs.46514/-. The assessee has worked out higher loss by claiming deduction of various expenses of capital nature from the net income. Therefore, the computation as furnished by the assessee is incorrect and deserves to be rejected. Computation as per normal accounting principles does not lead to computation of any loss due to expenditure of capital nature and deduction claimed u/s. 11 as there is no such deduction allowable as per I.T. Act.
Hence, after discussion and careful consideration of all material available on record, assessment is completed at total loss of Rs.46514/-”
Aggrieved by the above order, the assessee appealed before the first appellate authority and the first appellate authority being satisfied with the submissions of the assessee and relying upon various case laws referred by assessee, allowed the appeal. Aggrieved by the order of ld. CIT(A), the Revenue is in appeal before the Tribunal.
The ld. DR relied on the order of the Assessing officer and submitted that this is the first year of the Society and it has not undertaken any charitable activity. It has only made capital expenditure towards obtaining land, construction of building and other capital expenditure which are not for charitable purpose. Only the net loss suffered by the assessee as calculated under the commercial accounting principles, can be carried forward to be set off against the subsequent years’ surplus. The society is claiming loss which is notional loss and without doing any charitable activity as set out in the memorandum of objects it cannot be set off.
6. On the other hand, the ld. AR relied on the order of the ld. CIT(A) and submitted that this is the first year of assessee trust. Therefore, the first step of the society is to incur expenditure for acquiring land, constructing building etc. and then to start charitable activities as per aims and objects of the society. Without such infrastructure, no charitable activities are supposed to be carried out by the assessee. Therefore, it cannot be said that the expenditure incurred by the assessee was not for the charitable purpose. He relied on the following judgments :
(i). Addl. CIT vs. City Educational & Social Welfare Society (ITA No. 5627/Del/10 dated 26.08.11.)
(ii). ACIT vs. City Educational & Social Welfare Society (ITA No. 4119/Del./13 dated 20.03.2015) (iii). Addl.CIT vs. Subharti KKB Charitable Trust (ITA No. 1553/Del./11 dated 11.05.2012).
(iv). DIT vs. Raghuvanshi Charitable Turst, 197 Taxman 170(Del.)
(v). ACIT vs. Devendra Kumar Garg Charitable Trust (ITA No. 4118/Del./13 dated 29.03.2015)
(vi). Devendra Kumar Garg Charitable Trust & Ors. Vs. ACIT (ITA Nos. 3030, 3032, 3031 & 3028/Del./15 dated 27.07.2015)
(vii). City Educational & Social Welfare Society & Ors. Vs. Addl. CIT (ITA No. 4056 & 4326/Del./14 dated 10.08.2015).
(viii). M.J. Charitable Trust vs. Addl.CIT (ITA No.5549/Del./2014 dated 29.02.2016).
After hearing both the parties and perusing the materials available on record and the orders of the authorities below and case laws cited by the assessee, we find that the issue under consideration is squarely covered by the decision of coordinate Bench in the case of M/s. ACIT vs. Devendra Kumar Garg Charitable Trust in ITA No. 4118/Del./2013 dated 29.03.2015 (copy placed at paper book page 23) wherein the Tribunal has held as under :
“6. We have heard rival submissions and perused the material on record. The solitary issue that arises for our consideration is whether the CIT(A) is justified in allowing the benefit of carried forward of loss. The Assessing Officer held that the loss suffered was on account of capital expenditure and as such same cannot be allowed to be carried forward to subsequent years. This issue according to us is no longer res Integra. The Delhi Bench of the Tribunal in the case of Addl. CIT Vs. M/s City Educational & Social Welfare Society (supra) had held that the assessee is entitled to carry forward the losses against the subsequent year's surplus. The relevant findings of the coordinate Bench order reads as follows:-
"5....... The CIT(A) has made a reference in those assessment years to section 11(4) of the Income-tax Act. In the case of CIT Vs. Institute of Banking reported In 264 ITR page 110 an argument was raised before the Hon'ble Mumbai High Court by the revenue that in the case of a charitable trust, their income was assessable under self contained code mentioned in section 11 to 13 of Income-tax Act and that the income of the charitable trust was not assessable under the head "profit and gains of business" u/s 28 in which the provision for carry forward of losses was relevant. According to the revenue, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against the income of subsequent years. This argument was rejected by the Bombay High Court and it has been held 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 religious purpose in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of the income of the trust for charitable and religious purpose. The learned CIT(A) has followed this decision apart from others referred above......”
In result, the appeal of the revenue is dismissed."
7. In view of the above order of the Tribunal, we hold the CIT(A) is justified in allowing the claim of the assessee to carry forward the losses of the current year against surplus of the subsequent year. It is ordered accordingly.”
The above findings of the Tribunal go to support the case of the assessee. We further find substance in the contention of the assessee that for carrying out the charitable activities, the trust is required to have infrastructure like land, construction of building etc. Therefore, the expenditure on such infrastructure cannot be said to have made for the purpose other than charitable activities. Therefore, the assessee has rightly calculated the loss to be set off from the surplus of subsequent years. We, therefore, do not find any error in the order of the ld. CIT(A). Accordingly, the appeal of the Revenue, being devoid of merits, is liable to be dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 22.12.2016.