ITO, MANGALORE vs. DR. U. KRISHNA MUNIYAL MEMORIAL TRUST, MANIPAL

Per Vijay Pal Rao, Judicial Member

“Set-off of excess expenditure/application/deficit/loss :- a) The CIT(A) has erred in directing the assessing officer to allow set-off of unabsorbed expenses of Rs.1,15,42,645/- of earlier years and allow the current deficit of Rs.1,18,24,928/- without appreciating the fact that as per the scheme of taxation of charitable or religious trust/institution as codified u/s. 11, 12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust. On the issue of depreciation 1. The CIT(A) has erred in ignoring the fact that the assessee has claimed depreciation on the assets the cost of acquisition of which was already claimed by the assessee and allowed by the department as application of income u/s 11(1) in the respective year(s) of acquisition/purchase of such assets.”

CO 104/Bang/2015 Page 3 of 13 4. The assessee is a charitable trust and registered u/s. 12A of the I.T. Act. The AO noticed that the current deficit of Rs.1,18,24,928 as per the return has been claimed as carry forward to AY 2012-13 and the assessee has also claimed brought forward unabsorbed expenses of earlier years of Rs.1,15,42,645. The AO was of the view that the Income-tax Act does not specify that the assessee trust is entitled to the benefit of either carry forward of excess expenditure over the income or to set off such deficit. Accordingly, the AO disallowed the claim of the assessee.

(i) ACIT v. Medical Relief Society of South Kanara, to 1243/Bang/2007 dated 25.4.2008 and ITA No.416/Bang/2008 dated 26.6.2008 for AYs 2002-03 to 2006-07. (ii) ACIT v. Dr. TMA Pai Foundation in ITA No.486 to 491/Bang/2009, order dated 16.2.2010 for AYs 2001-02 to 2006-07.

CO 104/Bang/2015 Page 4 of 13 (iii) ACIT v. Academy of General Education in to 485/Bang/2009, order dated 16.2.2010 for AYs 2002-03 to 2006-07.

“5. Having regard to the rival contentions and the material on record, we find that similar issue had arisen before the Tribunal in the case of Baldwin Methodist Educational Society in for assessment year 2009-10 and ‘C’bench of this Tribunal to which both of us are signatories, had considered the issue at length and at para.5 of the order had held as under: “We also find that ‘A’ bench of this Tribunal in the case of Academy of Liberal Education in ITA No.687/Bang/2014 dated 20/2/2015, to which one of us i.e. the Accountant Member is the signatory, has considered this issue and in para.8 of its order, held as under: “ 8. We are of the view that pendency of an appeal before the Hon'ble High Court of Karnataka cannot be the basis not to follow the decision on the issue already rendered in identical cases. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a)

CO 104/Bang/2015 Page 5 of 13 takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. 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. The above is the position of law as held in the case of 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 (Bom), it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under s. 11 in past years. In Govindu Naicker Estate vs. ADIT 248 ITR 368 (Mad), the Hon’ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, CO 104/Bang/2015 Page 6 of 13 and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 146 ITR 28 (Kar).” We find that the order of the CIT(A) is in consonance with the judicial precedents reproduced above. Therefore, we see no reason to interfere with the order of the CIT(A). The revenue’s appeal is, accordingly, dismissed”

6. Further, we also find that the Hon’ble Bombay High Court in the case of CIT vs. Institute of Banking (2003) 264 ITR 110 has held as under: “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

CO 104/Bang/2015 Page 7 of 13 of the subsequent year and whether such adjustment should be treated as application of income in the 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 utilisation 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 the 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 vs. 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.” Respectfully following the judgment of the Hon’ble Bombay High

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Court, we direct the AO to allow the assessee to carry forward the deficit of the income arising on account of excess application of income during the relevant financial year to the subsequent assessment years.”

CO 104/Bang/2015 Page 9 of 13 v. Sri Adichunchanagiri Shikshana Trust, 141 ITD 575 has held in para 12 as under:-

“13. We have heard the rival submissions and perused the materials on record. The Tribunal in the assessee's own case for the assessment year 2006-07 at paragraph 7 of its order has decided the issue in favour of the assessee. The relevant finding of the Tribunal reads as follows : "7. We have heard both the parties. We have in the earlier para referred to the findings of the hon'ble Bombay High Court in the case of Institute of Ban king [2003] 264 ITR 110 (Bom). We have also gone through the decision of the jurisdictional High Court. The hon'ble jurisdictional High Court held that the amount of depreciation debited to the account of charitable institutions is to be deducted to arrive at an available income from charitable or religious purposes. Following the decision of the jurisdictional High Court, we therefore, hold that the depreciation is to be deducted to arrive at an income available to charitable and religious purposes."

CO 104/Bang/2015 Page 10 of 13 we do not find any error or illegality in the order of the CIT(Appeals), qua decision.

CO 104/Bang/2015

14. In the cross objections, the assessee has raised the following grounds:-

“Set- off of excess application in the subsequent years: Section 11(1) of the LT Act clearly spells that at least 85% of the income of a Charitable Trust or institution has to be applied for charitable purposes in India, to avail full exemption, subject to other conditions under sections 11,12 & 13 of the Act. At least 85% of the income received during the year has to be applied for the purposes of charitable trust or institution but there is no ban under the Act to make the applications in advance from other sources in anticipation of incomes to be received in the subsequent years. It will arise in the following circumstances: (i) Application out of unutilized funds available on account of income received towards corpus of the trust/institution (ii) Application out of accumulated income (i.e 15% of the income allowed to be accumulated under the Act) (iii) Application out of borrowed funds. Now let us examine the above situations. Both income received towards corpus and 15% accumulated income are exempt from tax under the Act. Application of these incomes as a stop-gap-arrangement for the purposes of trust or institution in advance that means making application without revenue income on hand if not allowed as application us 11(1) (that means

CO 104/Bang/2015 Page 11 of 13 excess application not allowed to be set-off against incomes of subsequent years) ultimately results in taxing of exempted incomes which is contrary to the intents of the legislature. Similarly application out of borrowed funds results in "excess application" since borrowed funds are not treated as 'income' under accounting parlance. However amount borrowed will be repaid in future years thereby application of trusts income for the purpose of trust is made. Hence either excess application made in the year of borrowal or application by way of repayment of loan should be allowed as application u/s11(l) in the interest of justice and intents of legislature. Naturally loan repayments unabsorbed out of current year's revenue funds should be allowed to be set- off against future revenue income. The above views are supported by pronouncements of different High Courts/Tribunals in the following cases: (1) Allahabad High Court in CIT vs Audh Educational Society 203 Taxman 166 (All HC 2011) (2) Madras High Court in CIT Vs Matriseva Trust 242 ITR 20 (3) Tribunal decisions mentioned by appellate authority (Mad) As appreciated by learned assessing authority provisions of sec.72 of IT Act is not applicable in the present case but provisions of sec 11,12 & 13 of the Act permits the trust to make the application in advance as discussed in the preceeding paragraph which may please be appreciated. In view of these facts allowance of excess application to be absorbed in the subsequent years is justified and in accordance with the intents of legislature.

Depreciation on Fixed Assets:- With effect from A.V 2015-16, sec 11(l) specifically restricts allowance of depreciation as application. Hence it is the intent of law to allow depreciation as application u/s.11(l) till A.Y. 2014-

CO 104/Bang/2015 Page 12 of 13 15. In addition, pronouncements in the following cases may have to be considered. (i) C.T vs Seth Mamtal Ranckkoddan vs Pram Bhavan Trust 105 CTR 303 (ii) CIT vs DR.TMA Pai Foundation in dated 16.02.2010 by ITAT

15. It is clear from the grounds raised by the assessee in the CO that all these grounds are in support of the order of the CIT(Appeals) and no fresh issue has been raised in the CO. Accordingly, in view of our finding o the appeal of the revenue, the CO filed by the assessee becomes infructuous. We make it clear that during the course of arguments, the ld. AR of the assessee has argued the issue regarding the advance paid for purchase of building material which was disallowed by the AO being not amounting to capital expenditure, which was confirmed by the CIT(Appeals). However, we find that the assessee has not raised any ground or such issue in the CO, therefore the argument advanced by the assessee on this issue do not support the grounds raised by the assessee at the time of filing of the CO. We find that subsequently the assessee has filed a different set of grounds on 11.5.2016 without seeking any permission from the Tribunal. Therefore, filing of such different set of grounds from the grounds filed originally at the time of filing of the CO, cannot be considered in the absence of any petition seeking the permission to substitute the grounds.

CO 104/Bang/2015 Page 13 of 13 16. In the result, the CO by the assessee is dismissed.

Pronounced in the open court on this 27th day of July, 2016.