M/S FRANCISCAN SERVICE SOCIETY,BANGALORE vs. DYT,D,I,T,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ A ” BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.316/Bang/2015 (Assessment Year : 2011-12) M/s. Franciscan Service Society, Vs. Dy. Director of Income Tax P.O. Box No.3471, Sarjapur Road, (Exemption), Koramangala, Circle 17(1), Bangalore. Bangalore-560 034 PAN AAATF 0201A Appellant Respondent.

Appellant By : Shri V. Srinivasan, C.A. Respondent By : Shri P. Dhivahar, JCIT (D.R) Date of Hearing : 25.6.2015. Date of Pronouncement : 10.07.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-14, LTU, Bangalore dt.27.10.2014 for Assessment Year 2011-12. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is a public religious cum charitable institution formed and registered under the Karnataka Societies Registration Act, 1960. The assessee is also registered under Section 12A(a) of the Income Tax Act, 1961 (in short 'the Act') vide order No.PRO/718/10A/Vol A-II/F-26 dt.20.12.1973 and is being assessed to tax since its

2 ITA No.316/Bang/2015 inception as a religious-cum-charitable institution entitled to the benefits of sections 11 and 12 of the Act. For Assessment Year 2011-12, the assessee filed its return of income on 12.3.2012 declaring NIL income. In the said return, the assessee had claimed carry forward of excess application over income for the year under consideration amounting to Rs.17,99,405 to be adjusted as application against the income of the future years. It was claimed by the assessee that the excess application of income for the year under consideration is to be regarded as application out of the income of properties held under trust that arises in future and therefore, the deficit for the year should be allowed to be carried forward. The order of assessment was completed under Section 143(3) of the Act vide order dt.16.01.2014, wherein the Assessing Officer accepted the returned income at Nil on account of excess application of income during the year. The Assessing Officer, however, did not allow the carry forward of the deficit to be treated as application of income in the subsequent assessment years and has made a note to this effect at the foot of the order of assessment. 2.2 Aggrieved by the order of assessment for Assessment Year 2011-12 dt.16.1.2014, the assessee preferred an appeal before the CIT (Appeals)-14, LTU, Bangalore on the sole issue relating to the carry forward of excess expenditure over income amounting to Rs.17,99,405. On appeal, the assessee relied upon several decisions in support of its contention that the excess application over income for the year under consideration is to be regarded as application against income of later years on account of the commercial

3 ITA No.316/Bang/2015 principles for assessment of income of charitable institutions. It was prayed that the deficit determined by the Assessing Officer ought to be carried forward. The learned CIT (Appeals), however, did not agree with the contentions of the assessee. The learned CIT (Appeals) proceeded to hold that there was no provision under the Act to carry forward the excess application of income by charitable trusts to be regarded as / for application of income in the later years. In coming to this conclusion, the learned CIT (Appeals) relied upon the judgment of the Hon'ble High Court of Delhi in the case of CIT V. Indian National Trust (305 ITR 149) and the decision of the ITAT, Mumbai Bench in the case of Trustees of Sri Satya Sai Trust (33 ITD 320). The learned CIT (Appeals), accordingly, declined to allow the carry forward of deficit claimed by the assessee and dismissed the assessee's appeal vide order dt.27.10.2014. 3. Aggrieved by the order of the CIT (Appeals)-14, LTU, Bangalore dt.27.10.2014 for Assessment Year 2011-12, the assessee has preferred this appeal before the Tribunal raising the following grounds :- “ 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case. 2. The learned CIT (Appeals) is not justified in upholding the denial of carry forward of the deficit being the excess application of income amounting to Rs.17,99,405 to be set off against the income from property held under trust in the future under the facts and in the circumstances of the appellant’s case. 3. The learned CIT (Appeals) ought to have appreciated that the carry forward of the deficit to be set off against the income form property held under trust in future is permissible and the same is not prohibited under the scheme of the Act

4 ITA No.316/Bang/2015 and therefore, the denial of the claim made by the appellant is unjustified and the same is liabel to be vacated. 4. For the above and other grounds that maybe urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.” 4. The Grounds raised at S.Nos.1 and 4 are general in nature and not being urged before us, are dismissed as infructuous. 5.1 Grounds S.No.2 and 3 are in respect of the only effective issue to be decided in this appeal. The learned Authorised Representative for the assessee submitted that the learned CIT (Appeals) is not justified in denying the claim of the assessee on the ground that there is no provision for carry forward of the deficit to be regarded as application of income in the subsequent assessment years. It was submitted that the income of charitable trusts are to be computed on commercial principles only and in this regard the learned Authorised Representative drew our attention to several decisions of the Hon'ble High Courts in support of the aforesaid proposition relating to carry forward of the excess application, which could be considered as application of income in subsequent years. The learned Authorised Representative submitted that the view taken by the learned CIT (Appeals) that carry forward of excess expenditure incurred is not permissible in the absence of a specific provision for the same is not correct and in this regard referred to the observations of the Hon'ble High Court of Bombay in the case of CIT V Institute of Banking (264 ITR 111) and the decision of the co-ordinate bench of this Tribunal in the

5 ITA No.316/Bang/2015 case of Baldwin Methodist Education Society in ITA No.523/Bang/2014 dt.31.3.2015 in support of the proposition put forth by him. 5.2 Per contra, the learned Departmental Representative supported the orders of the authorities below. He submitted that the Hon'ble High Court of Delhi in the case of Indian National Theater Trust (supra) has held that accumulation of income should be only out of the current year’s income. The learned Authorised Representative submitted that in view of the above, the impugned orders passed by the learned CIT (Appeals) is justified and no interference is called for thereon. 5.3.1 We have heard the rival contentions of both parties and perused and carefully considered the material on record; including judicial pronouncements, cited and placed reliance upon. We find that the case of Institute of Banking (supra), the Hon'ble High Court of Bombay 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 of the subsequent year and whether such adjustment should be treated as application of income in 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 utilization 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 AO 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 s. 11 to s. 13 of the IT Act and that the income of the charitable trust was not assessable under the head "Profits and gains of business" under s. 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 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

6 ITA No.316/Bang/2015 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 s. 11 of the Act and that such adjustment will have to be excluded from the income of the trust under s. 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 (1994) 119 CTR (Guj) 144 : (1995) 211 ITR 293 (Guj). Accordingly, we answer question No. 3 in the affirmative i.e., in favour of the assessee and against the Department.” 5.3.2 The co-ordinate bench of this Tribunal in the case of Baldwin Methodist Educational Society (supra), has 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) 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

7 ITA No.316/Bang/2015 set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, 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.”

5.3.3 It is clear from the relevant portions of the aforesaid decisions of the Hon'ble High Court of Bombay (supra) and the co-ordinate bench of the ITAT, Bangalore (supra) extracted above that the income of charitable trusts is required to be computed on commercial principles. The concept of application of the income for the year in which the income has arisen is not found in Section 11(1)(a) of the Act. No limitation to the above effect is found in the language of the section. It merely requires application of the income that has arisen from the property held under trust. In this view of the matter, the principles relating to set off of losses, etc. is not of any relevance and therefore any excess application of income during the year can be regarded as application of the income of future years and can be adjusted. Therefore, in our view, the claim of the assessee for

8 ITA No.316/Bang/2015 carry forward of excess application is in accordance with the judicial precedents on the issue and the same is allowable. 5.3.4 In the case of Indian National Theater (supra) relied on by the learned Departmental Representative. The Hon'ble High Court of Delhi has held that to satisfy the requirements of section 11(2)(b) of the Act, the investment must necessarily come out of current year’s income and the investment made in the past obviously cannot satisfy the requirements for the current year. The above decision of the Hon'ble Delhi High Court has considered the provisions of section 11(2) of the Act and has taken the view that the accumulation under Section 11(2) of the Act can be only out of current income. We, however, find that the co-ordinate benches of the Bangalore Tribunal have consistently followed the view of the Hon'ble Bombay High Court (supra) in which the application has been regarded as adjustable against the income of the future years. We are, therefore, inclined to follow the view taken by the co-ordinate benches of this Tribunal, inter alia, in the case of Baldwin Methodist Educational Society (supra), based on the view/decisions of the Hon'ble Bombay High Court in the case of Institute of Banking (supra) and the Hon'ble Gujarat High Court in the case of CIT V Shri Plot Swetamber Murti Pujak Jain Mandal reported in 211 ITR 293. In this view of the matter, the Assessing Officer is directed to allow carry forward of the excess application of Rs.17,99,405 for the year to be adjusted from income from property held under trust of the subsequent years. It is ordered accordingly. Consequently, Grounds 2 and 3 of assessee's appeal are allowed.

9 ITA No.316/Bang/2015 6. In the result, the assessee's appeal for Assessment Year 2011-12 is allowed. Order pronounced in the open court on 10th July, 2015.

Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore