TMI Blog2019 (2) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... 961 Act as its expenditure towards the objects of the trust has already exceeded its income from property held for charitable purposes. As provided by Hon‟ble Bombay High Court in the case of Institute of Banking Personnel Selection(IBPS)(supra), the assessee will be entitled for carry forward of excess of expenditure incurred towards objects of the trust in excess of income from property held for charitable purposes , as is allowable as provided under first limb of provisions of Section 11(1)(a). Both Revenue appeal as well assessee's CO stood dismissed. - I.T.A. No.6544/Mum/2017, CO. No.354/Mum/2018 - - - Dated:- 13-2-2019 - Shri Mahavir Singh, Judicial Member And Shri Ramit Kochar, Accountant Member For the Assessee : Shri. Shankar K Jalgar For the Revenue : Shri. O.P Meena, DR ORDER PER RAMIT KOCHAR, ACCOUNTANT MEMBER: This appeal, filed by Revenue, being ITA No. 6544/Mum/2017 and Cross Objections(CO) bearing CO no. 354/Mum/2018 arising out of appeal in ITA No. 6544/Mum/2017 filed by the Assessee, are both directed against the appellate order dated 28.08.2017 in appeal no. CIT(A)-I/IT/E-II/13/2015-16 passed by learned Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93,620 as against the actual deficit of ₹ 8,05,52,838 claimed by the assessee. 2. Ground No. 2 - reg. - No Opportunity of being heard: 2.1 The learned CIT(A) erred in not providing the assessee an opportunity of being heard before making the re-computation of deficit to be carried forward. 3. The Respondent craves leave to add, amend or alter the grounds of cross-objection either before or at the time of hearing of the appeal. 4. The solitary issue raised by Revenue in their appeal is with respect to part relief granted by learned CIT(A) while adjudicating first appeal of the assessee by allowing carry forward of deficit being excess of expenditure over income to the tune of ₹ 5,23,93,620/- to subsequent years , as against deficit of ₹ 8,05,52,838/- claimed by the assessee in return of income filed with Revenue to be carried forward to subsequent years which earlier was disallowed by AO in entirety , vide assessment order dated 17.03.2015 framed by the AO u/s 143(3). The brief facts of the case are that the assessee is a trust registered as a Charitable Organization with DIT(E), Mumbai u/s. 12A vide Registration no. 2362 and the trust is also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intention of legislature to allow carry forward of any loss or deficit under section 11 of I.T. Act. 3. If the income of the trust is computed on Commercial principles, then the same shall be treated as Income from Other Sources. As per the provisions of Section 74A of the Income Tax Act, loss under the head Income from Other Sources can be set off only in respect of income from owning and maintaining race horses. 4. There is no provision which allows determination of loss/ deficit while computing taxable income u/s. 11. This is so because Section 11 prescribes certain conditions for claiming exemption. If 85% or more of the income is applied to objects of the trust during the year, the entire income is to be assessed as exempt. The assessee has a choice to spend a portion of the current income in the succeeding year which it could not spend as per procedure laid down in Section 11(2). 5. The express wording of Section 11 indicates that in order to satisfy the requirements of section 11(2)(b) the investment must necessarily come out of the current years income. An investment made in the past obviously cannot satisfy this requirement. As per the ratio decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f DIT (Exemption) v. Girdhanial Shewnarain Tantia Trust [1993] 199 ITR 215 has held that heads of income under section 14 have no relevance and question of allowing statutory deductions will not arise. The 'income' contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Since the income from property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded, there is no scope of computing the income from property by applying the provisions of section 14 of the Act. Accordingly Hon'ble Calcutta High Court held that the question of allowing any statutory deductions as contemplated by the different provisions of the Act dealing with different heads of income in computing the income accumulated did not arise. This decision also does not support the contention of the assessee that excess expenditure incurred in earlier year will be set off against the current year's income, in the absence of any provision similar to set off of losses. 6. Hon'ble 1TAT Delhi in the case of Pushpawati Singhania Research Institute for Liver, Ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 17.03.2015 passed u/s 143(3) filed first appeal before Ld. CIT(A) who partly allowed the appeal of the assessee vide appellate order dated 28.08.2017 , wherein the assessee was allowed by learned CIT(A) to carry forward an amount of loss/deficit being excess of expenditure over income to the tune of ₹ 5,23,93,620/- as against deficit of ₹ 8,05,52,838/- claimed by the assessee in return of income filed with Revenue which stood earlier disallowed by the AO in its entirety vide assessment order dated 17.03.2015 passed u/s 143(3) of the 1961 Act. The Ld. CIT(A) vide appellate order dated 28.08.2017 allowed part relief by holding as under:- 7. I have considered the facts of the case and the submissions of the appellant and also discussed the case with the AR of the appellant. On perusal of the facts, I find that the case of appellant is squarely covered in its favour by the judgement of the Hon'ble Bombay High Court in the case of Institute of Banking Personal 264 ITR 110 wherein the Hon. Jurisdictional High Court has observed as under - ........... 5. Now coming to question No, 3, the point which arises for consideration is: whether excess of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htra Industrial Development Corporation (MIDC) (ITA No. 2652 of 2011) after relying on the decision of CIT v/s. Institute of Banking (264 ITR 110) (Bombay High Court) had dismissed the appeal filed by the department on the issue of carry forward deficit. However, the department has filed SLP before the Apex Court (SPL (Civil) 9891 of 2014) and the matter is pending before the Hon'ble Supreme Court. It is, therefore, clear that as it stands, the issue is covered in favour of the assessee by the Hon'ble Jurisdictional High Court. 7.2 Having held so, I am of the opinion that although the deficit of the year is to be carried forward to the subsequent year in view of the judgment of the Hon'ble Bombay High Court referred to above, the computation of the deficit made by the assessee is not correct. I find that the gross income of the assessee as per the computation is ₹ 18,77,28,122/- and the expenditure on the objects and application of income is ₹ 24,01,21,742/-. Therefore, the real deficit works out to ₹ 5,23,93,620/- and not ₹ 8,05,52,838/- as claimed by the assessee. The assessee has arrived at this figure of deficit after taking into conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue was whether percentage of accumulation should be computed with respect to the gross income of ₹ 2,57,376/- or the net income of ₹ 87,016/-. The Hon ble Supreme Court held that accumulation had to be computed with respect to gross income. There was no issue before the Hon ble Supreme Court as to whether accumulation had to be allowed or not even if the entire income had been applied and nothing had been left during the year. 5.1 The learned AR for the assessee has argued that accumulation u/s 11(1)(a) was absolute and unfettered irrespective of the fact whether some income was left for application or not. Reliance has been placed on the judgment of Hon'ble Supreme Court in case of additional CIT Vs. ALN Rao Charitable Trust (Supra) and on the judgment of Hon'ble High Court of Bombay in case of CIT Vs. Trustees of Bhat Family Research Foundation (Supra). We have carefully perused the said judgments but do not found any ruling to the effect that accumulation u/s 11 (1) (a) has to be allowed even if the entire income has already been applied during the year. In case of additional CIT Vs. ALN Rao Charitable Trust (Supra) the issue was whether conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccumulation u/s 11(1)(a) has to be allowed to the assessee even if there was no income left for accumulation and entire income had already been applied. 5.3 As regards, the decisions of Tribunal in assessee's own case, we find, that in Assessment year 2005-06, the Tribunal in ITA no 1588/Mum/2000 in assessee's own case allowed the claim of the application with respect to gross income even when there was no income left for application, following the decision of special bench of Tribunal in case of Bai Sonabai Hirji Trust Vs. ITO (85 TTJ 907). The Tribunal had not discussed the issue as to whether accumulation can be allowed even if there is no income left. However, on perusal of decision of special bench of Tribunal (Supra) we find, that the issue in the case was not whether the accumulation can be allowed even if the entire income has already been applied, The issue was whether the percentage of accumulation had to be computed with respect to the gross income or net income. Thus the Tribunal in the assessee's own case in assessment year 2005-06 has allowed the claim of the assessee without any discussion on the issue and under the impression that the issue had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble ITAT in para 13 of the order have held as follows: 13. The issue in dispute is whether the assessee is entitled to first accumulate or set apart 25 per cent of the total income of the trust and then claim a carry forward of the excess amount, incurred on application for purposes of the trust, over and above the remaining income i.e. 75 per cent of the total income for its set off against the income of the trust in succeeding year. The carving of the funds to the extent of 25 per cent of the total income is hypothetical situation and it was not envisaged by the legislature. The Hon'ble Bombay High Court in the case of Institute of Banking (supra) have examined the situation where the assessee has incurred or applied the expenditure more than the total income of the trust in a particular year and claimed carry forward of the excess expenditure to succeeding year for its set off against the income of the trust and their Lordships have held that the income derived from the trust property has also got to be computed on commercial principles and if the commercial principles are applied then the adjustments of expenses incurred by the trust for charitable and religious purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,81,409/- to the subsequent year ignoring that the deficit so claimed has arisen due to excess expenditure incurred by the assessee Trust. 4. On the facts and in the circumstances of the case, and in law, the Ld.CIT(A), Mumbai erred in not appreciating that there is no provision in the Act to carry forward the deficit where the expenditure which cases the deficit exceeds the income. 5. On the facts and in the circumstances of the case, and in law, the Ld.CIT(A), Mumbai erred in appreciating the fact that the provisions of sec. 11 contemplate such income to be from the current year which is to be applied on the objects of the trust and the earlier years accumulation or otherwise cannot be expanded on the objects of the trust resulting into deficit. Such deficit cannot be allowed to be carried forward to the subsequent years as the same being against the principle and law laid down under the Act. 6. The appellant prays that the order of the Commissioner of Income-tax (Appeals)-XXX, Mumbai be set-aside and that of the Assessing Officer be restored. 7. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary, 7.6 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Institute of Banking (supra), in which it has been held that excess expenditure in earlier year can be adjusted against income in the subsequent year and such adjustment has to be treated as application of income in the subsequent year. Thus the assesses would be entitled for carrying forward of deficit to subsequent year, which would be treated as application of income in that year. However, in computing the deficit, addition @ 15% of the gross receipt cannot be allowed as such accumulation is permissible only when the expenditure is less than the income which is not so in this case. Therefore, the deficit available for carry forward to the subsequent year will be only ₹ 75,58,503/-. This view is also supported by the decision of the Tribunal in the case of the L.N.M. Foundation in ITA No. 4422/M/05 It is, therefore held that the assesses would be entitled for carry forward of deficit of ₹ 75,58,503/- which would be treated as application of income in the subsequent year. We hold, accordingly. 7.7. In view of the aforesaid reasons, and in view of the decision of the Hon. ITAT in the case of Lakshmi and Usha Mittal Foundation and in the case of Dawat Institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set Ld. Counsel for the assessee submitted that the first issue before the Bench which is in-fact agitated by Revenue in its appeal viz. claim of deficit/loss being excess of expenditure over income to be allowed to be carried forward to subsequent years to be set off against income/surplus of subsequent year is to be allowed to the assesseetrust in view of the decision of Hon‟ble Bombay High Court in the case of Institute of Banking Personnel Selection(IBPS) (2003) 264 ITR 110(Bom. HC) , wherein Hon‟ble Bombay High Court has decided the issue in favour of the tax-payer. It was submitted that tribunal in assesse‟s own case for AY 2010-11 in ITA no. 5442/Mum/2015 in DCIT(E) v. The Executive Board of the Methodist Church in India vide order dated 24.10.2017 has decided this issue of allowability of excess of expenditure over income being deficit/losses to be carried forward to subsequent year to be set off against surplus/income of subsequent years in favour of the assessee. With Respect to second issue before the Bench which is infact agitated by assessee in its CO is with respect to allowability of accumulation of 15% of income of the assessee within provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever also claimed ₹ 2,81,59,218/- being 15% of income towards accumulation of income within provisions of Section 11(1)(a) of the 1961 Act to be carried forward for setting off against income/surplus of subsequent years, despite the fact that its expenditure on the objects of the trust was already higher than income for the impugned assessment year and there was deficit/losses left in the hands of the assessee with no surplus left for accumulation . The AO has rejected its entire claim for carry forward to the tune of ₹ 8,05,52,838/- , both u/s 11(1)(a) towards accumulation of income being 15% of total income to the tune of ₹ 2,81,59,218/- and also carry forward of excess of expenditure over income to the tune of ₹ 5,23,93,620/- as was claimed by the assessee. The learned CIT(A) however allowed the claim of carry forward of ₹ 5,23,93,620/- towards excess of expenditure over income to be carried forward to subsequent years to be set off against surplus/income of subsequent years , keeping in view decision of Hon‟ble Bombay High Court in the case of Institute of Banking Personnel Selection(IBPS) (supra). Revenue is aggrieved by the decision of le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 v. 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. It is also observed that in a decision passed recently by ITAT-Mumbai wherein one of us ( Accountant Member) was part of the Division Bench has allowed the tax-payer carry forward of the excess of expenditure over income being deficit/loss to subsequent years to be adjusted against surplus/income of subsequent years in the case of ITO v. Kaivalya Education Foundation in ITA No. 5575/Mum/2017 vide orders dated 08th February 2019, by holding as under: 6. We have considered rival contentions and perused the material on record including cited case laws. We have observed that the assessee is a Charitable Trust which is registered with the Director of Income Tax (Exemption), Mumbai u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind 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 v. 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. Further , we have also observed that Hon ble Bombay High Court in ITA no.1087 of 2014 vide judgment dated 16.12.2016 in DIT (Exemptions) v. M/s. Aditya Vikram Memorial Trust has decided the issue by relying on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Bombay High Court was, as under: (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in allowing the claim of the assessee for carry forward of the said deficit, ignoring the fact that there was no express provision in the Act permitting allowance of such claim? The Hon ble Bombay High Court decided the issue by holding as under:- 4. Regarding question no.(ii):- (a) Mr. Kotangale, the learned counsel for the Revenue very fairly states that the issue arise herein stands concluded by the decision of this Court in CIT v/s. Institute of Banking 264 ITR 110 and the order of this Court in Director of Income Tax (Exemption) v/s. M/s. Gem Jewellery Exports Promotion Council (Income Tax Appeal No.610 of 2011) decided on 15th February, 2011. (b) In view of the above submission, question no.(ii) as proposed also does not give rise to any substantial question of law. Thus not entertained. Further , we have also observed that Hon ble Bombay High Court in the case of DIT (Exemption) v. Mumbai Education Trust in ITA no. 11 of 2014 vide judgment dated 03.05.2016 wherein Revenue raised following substantial qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 264 ITR 110 (Bom) ignoring the ratio of Hon'ble Supreme Court judgment in the case of Escorts Ltd. V/s. Union of India (199 ITR 43) wherein Hon'ble Supreme Court has held that double deduction cannot be presumed if the same is not specifically provided by law, in addition to normal deduction? (b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in confirming the order of the CIT(A) to allow to carry forward of deficit of earlier years relying on the decision of this Court in the case of CIT v/s. Institute of Banking Personnel Services reported in 264 ITR 110 (Bom) while the revenue did not file SLP against the case of CIT v/s. Institute of Banking Personnel Services reported in 264 ITR110 (Bom) due to low tax effect? stand on the same footing as are being canvassed before us in the instant case. Thus, there is no error on the part of the CIT(A) in following the decision of the Hon'ble Bombay High Court in the case of Institute of Banking Personnel Selection (supra) as well as the decision of the Tribunal dated 10.09.2013 (supra) in assessee s own case and allowing the stand of the assessee. The other argument taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal is allowed. 4. We have gone through the decision of Hon ble jurisdictional High Court in CIT vs. Institute of Banking Personnel Selection (IBPS), wherein on identical ground, the Hon ble Bombay High Court held as under: 5. 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 yeas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was dismissed by Hon ble Apex Court vide orders dated 09.09.2011 in SLP(Civil) CC 13512/2011. The AO has referred to in his assessment orders in the instant case before us that SLP is filed by the Revenue against Hon ble Bombay High Court judgment but as is observed , the said SLP also stood dismissed by Hon ble Apex Court. Thus we have observed that the Hon ble Courts/Tribunal had taken consistent stand that in case of Charitable Trust excess expenditure over income is to be allowed to be carried forward for setting off against income of subsequent years . We do not find any reason to deviate from the consistent stand taken by the Hon ble Courts/ Tribunal and Respectfully following aforesaid decision(s) as enumerated in preceding para s of this order, we allow the carry forward of excess expenditure over income of ₹ 2,33,03,449/- to be carried forward to subsequent years . Thus, we confirm/affirm decision of learned CIT(A) and dismiss the appeal of the Revenue. We order accordingly. We have also observed that the AO has relied upon the decision of Hon‟ble Bombay High Court in the case of DIT(E) v. MIDC in ITA no. 2652/Mum/2011 wherein the Hon‟ble Bombay Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute of Banking Personnel, 264 ITR 110. Respectfully following the judgment of Hon ble jurisdictional High Court, the AO is directed to allow the carry forward of deficit in the subsequent years. iii. This ground of appeal is allowed. 8. In CIT Vs. Institute of Banking Personnel, (supra), the Hon ble Bombay High Court has decided the identical issue holding 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 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 cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to be carried forward to subsequent years to be allowed to be set off against surplus of subsequent years . We donot find any infirmity in the order of learned CIT(A) to that effect on this issue before us , which appellate order of learned CIT(A) dated 28.08.2017 stood confirmed/affirmed. The appeal of the Revenue in ITA no. 6544/Mum/2017 stood dismissed. Revenue fails in its appeal. We order accordingly 10.2 So far as Cross objections filed by the assessee is concerned, the main grievance of the assessee in its CO is with respect to not allowing by learned CIT(A) of the accumulation of income to the tune of 15% of income keeping in view second limb of Section 11(1)(a) of the 1961 Act despite the fact that the assessee had infact incurred expenditure towards the objects of the trust in excess of its income and there being deficit/losses for the impugned assessment year. The main thrust of reliance of the assessee in this grievance is the order passed by tribunal in ITA no. 5322 5323 /Mum/2016 , dated 28.02.2018 in the case of Lalji Velji Charitable Trust v. ITO . We have observed that tribunal in this order in the case of Lalji Velji Charitable Trust had held that the tax-p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this position in view of statutory language of section 11(1)(a)of the Act and also circular issued No. 5-P dated 19-06-1968, wherein it is held that the assessee is entitled to exemption at the rate of 25% (now after amendment 15%) on the gross receipts and not on the total income as determined by the AO under the Act. We also find that the issue is confirmed by Hon‟ble Supreme Court in CIT Vs. Programme for Community Organisation(2001) 248 ITR 1 (SC),wherein it is held that as the assessee trust has received donation in aggregate a sum of ₹2,57,376 and it has applied throughout for its charitable purposes the amount of ₹ 1,70,369/levying a balance of ₹ 87,010/-and on this the Hon‟ble Supreme Court said as per section 11(1)(a)that the assessee trust was entitled to accumulate 25% of the gross income of ₹ 2,57,376/-and not merely 25% of the balance of ₹ 87,000/-. 6.We are of the view that even though the entire income has been applied on the object of the Trust as application of income and there is no income left to be accumulated rather there is deficit even though assessee is entitled for accumulation or setting apart under section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at least 75 per cent of its total income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below. 2. Section 11(1) provides that subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year. . . . The reference in clause (a) is invariably to Income and not to total income . The expression total income has been specifically defined in section 2(45) as the total amount of income computed in the manner laid down in this Act . It would, accordingly, be incorrect to assign to the word income , used in section 11(1)(a), the same meaning as has been specifically assigned to the expression total income vide section 2(45). 3. In the case of a business undertaking, held under trust, its income will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Hon‟ble Supreme Court in the case of CIT v Programme for Community Organisation(supra), which judgment of Hon‟ble Supreme Court is reproduced hereunder: 1. The questions that were referred to the High Court for consideration, at the instance of the revenue, read thus : 1. Whether, on the facts and in the circumstances of the case and on an interpretation of the relevant provisions of the Income-tax Act, 1961, the assessee is entitled to exemption at 25 per cent on ₹ 2,57,376 or only on ₹ 87,010 ? 2. Whether, on the facts and in the circumstances of the case, should not the Tribunal have accepted the view of the revenue expressed in the circular, the same being consistent with the relevant provisions of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, and also considering the scope of the earlier order of the Commissioner (Appeals) dated 18-11-1983 the Tribunal is right in law in holding that the Commis-sioner (Appeals) has rightly interfered with the order of the Income-tax Officer ? 2. The answers being in favour of the assessee, the revenue is in appeal by special leave. 3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n total income‟ as is computed for assessment of income-tax which is referred to in provisions of Section 2(45) of the 1961 Act. This is not the issue before us rather the issue before us is that whether in case of deficit/losses wherein expenditure incurred by the assessee towards its objects has already exceeded its income , whether further exemption by relying on provisions of second limb of Section 11(1)(a) of the 1961 Act can still be claimed. The second decision relied upon by tribunal in Lalji Velji Charitable Trust(supra) is Hon‟ble Supreme Court in the case of ACIT v. A.L.N.Rao Charitable Trust (1995) 216 ITR 697(SC). The Hon‟ble Supreme Court has in detailed manner explained the inter-play between provisions of Section 11(1)(a) and 11(2) of the 1961 Act, by holding as under: 10. Before we proceed to deal with the rival contentions centering round the true scope and ambit of section 11(1)(a) and section 11(2) as applicable to the assessment year in question, namely, 1969-70, it would be apposite to refer to these provisions at the outset. These provisions, as they stood at the relevant time, read as under : 11. Income from property held for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riction or the ceiling imposed on such exempted accumulated income during the previous year and also brings such further accumulated income out of the tax net if the conditions laid down by subsection (2) of section 11 are fulfilled meaning thereby the money so accumulated is set apart to be invested in the Government securities, etc., as laid down by clause (b)of sub-section (2) of section 11 apart from the procedure laid down by clause (a) of section 11(2) being followed by the assessee-trust. To highlight this point we may take an illustration. If ₹ 1 lakh are earned as the total income of the previous year by the trust from property held by it wholly for charitable and religious purposes and if ₹ 20,000 are actually applied during the previous year by the said trust to such charitable or religious purposes the income of ₹ 20,000 will get exempted from being considered for the purpose of income-tax under first part of section 11(1). So far as the remaining ₹ 80,000 are concerned, if they could not be actually applied for such religious or charitable purposes during the previous year then as per section 11(1)(a) at least 25 per cent of such total income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 10,000, whichever is higher, will also get exempted from income-tax. That exhausts the operation of section 11(1)(a). Then follows sub-section (2) which naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under sub-section (1)(a). So far as that balance of accumulated income is concerned, that also can earn exemption from income-tax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by sub-section (1)(a) of section 11 would get lifted if additional accumulated income beyond 25 per cent or ₹ 10,000 whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the procedure laid down therein. Therefore, sub-section (2) only will have to operate qua the balance of 75 per cent of the total income of the previous year or income beyond ₹ 10,000 whichever is higher, which has not got the benefit of tax exemption under sub-section (1)(a) of section 11. If the learned counsel for the revenue is right and if 100 per cent of the accumulated income of the previous year is to be invested under sub-section (2) of section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is higher, is taxable under section 11(1)(a) unless the special conditions regarding accumulation as laid down in section 11(2) are complied with. It is clear, therefore, that if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25 per cent or ₹ 10,000, whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2) while enlarging the scope of exemption removes the restriction imposed by section 11(1)(a) but it does not take away the exemption allowed by section 11(1)(a). On the express language of sections 11(1) and 11(2) as they stood on the statute book at the relevant time no other view is possible. 12. In the light of the aforesaid discussion and keeping in view the illustration which we have given earlier the combined operation of section 11(1)(a) and section 11(2) as applicable at the relevant time would yield the following result: (i) If the income derived from property hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned counsel for the revenue, therefore, has made out no case for our interference with the decision rendered by the Division Bench of the Karnataka High Court. 14. In the result, this appeal fails and is dismissed. However, in the facts and circumstances of the case, there will be no order as to costs. Thus, the aforesaid judgment of Hon‟ble Supreme Court in A.L.N Rao Charitable Trust(supra) has clearly laid down that for computing income of the trust chargeable to tax, first expenditure incurred towards the object of the trust by the tax-payer has to be reduced from income of the trust as provided in the first limb of Section 11(1)(a). Thereafter, out of the remaining unspent income after adjusting expenditure , further exemption of accumulation of income to the extent of 25% or ₹ 10000 (now 15%) which ever is higher to be computed on income‟ shall be provided by invoking second limb of Section 11(1)(a) of the 1961 Act. Say for example , income derived by tax-payer from property held under charitable purposes is ₹ 1,00,000/- and an amount of expenditure towards object of the trust was ₹ 20,000/-. The unspent amount is ₹ 80, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017, in CA No. 009813/2014 registered on 13.10.2014 in SLP(C) no. 009891/2014 in DIT v. MIDC.MIDC(supra) . None of the judgments of Hon‟ble Bombay High Court held that 15% accumulation of income as provided under second limb of Section 11(1)(a) shall be in addition to excess of expenditure over income which was allowed to be carried forward to subsequent years to be set off against income/surplus of subsequent years by invoking first limb of provisions of Section 11(1)(a) of the 1961 Act. We have also observed that learned CIT(A) while deciding this issue against assessee and in favour of Revenue had held that in case of deficit wherein expenditure incurred towards objects of the trust has exceeded its income from property held for charitable pruposes, no further accumulation of 15% of income as is provided in second limb of provisions of Section 11(1)(a) can be allowed . The learned CIT(A) while deciding the issue in favour of Revenue has relied upon following orders of the tribunal: a) Dawat Institute of Dawoodi Bohra Community in ITA No. 4309/Mum/2005 , order dated 30.04.2013 (2008) 116 TTJ 673 (Mum-trib.) b) ITO(E) v. Lakshmi and Usha Mittal( Formerly known as L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that first of all 25 per cent of the total income is to be accumulated or set apart for application to the purposes of the trust in India in succeeding year and then the remaining income is to be applied for such purposes and in case the application of income is more than the remaining income, i.e., 75 per cent of the total income the deficit would be carried forward for its set off in succeeding year against the income of the trust. If this interpretation is to be accepted it would result into an exemption more than the income derived from the property held by the trust and this cannot be the intention of the Legislature. These provisions are brought to the statute to encourage the trust to apply its income derived from property for the religious or charitable purposes of the trust in the same year and if not possible they can accumulate or set apart the income but it is restricted to 25 per cent of the total income for its application for the religious and charitable purposes of the trust. If entire income is applied for the purpose of the trust and nothing is left out, nothing can be accumulated or set apart for its application for the purposes of the trust in succeeding year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11. In the case of Munisuvrat Jain (supra) the issue arose with regard to the allowability of depreciation under section 32 of the Act and Their Lordships of the Bombay High Court have held that in such type of cases, section 32 of the Act providing for depreciation for computation of income derived from business or profession in respect of assets specified therein which are used for business or profession is not applicable. Nevertheless, the income of the trust must be computed under section 11 of the Act after providing for allowance of normal depreciation and deduction thereof from the gross income of the Trust. Similar view was again expressed by the Hon'ble Bombay High Court in the case of Institute of Banking Personnel Selection (supra). One more issue has been raised before the jurisdictional High Court with regard to the carry forward of the excess of the expenditure for its set off against the surplus of the subsequent years. The Hon'ble High Court has examined this issue in the light of the revenue's argument that the expenditure incurred in earlier years cannot be met out of the income of the subsequent years and that utilization of such income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n claims a carry forward of the excess amount, incurred on application for purposes of the trust, over and above the remaining income, i.e., 75 per cent of the total income for its set off against the income of the trust in succeeding year. The carving of the funds to the extent of 25 per cent of the total income is hypothetical situation and it was not envisaged by the Legislature. The Hon'ble Bombay High Court in the case of Institute of Banking (supra) have examined the situation where the assessee has incurred or applied the expenditure more than the total income of the trust in a particular year and claimed carry forward of the excess expenditure to succeeding year for its set off against the income of the trust and Their Lordships have held that the income derived from the trust property has also got to be computed on commercial principles and if the commercial principles are applied then the adjustments of expenses incurred by the trust for charitable and religious purposes in 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 subsequent years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-04) has decided the same issue vide para No.3 of its order as under: We have heard both the parties, peruse the records and considered the matter carefully. The issue whether deficit in the income and expenditure in case of charitable institutions can be carried forward to subsequent year and adjusted towards application of income has been decided by the Jurisdictional high Court in the case of Institute of Banking (supra), in which it has been held that excess expenditure in earlier year can be adjusted against income in the subsequent year and such adjustment has to be treated as application of income in the subsequent year. Thus the assessee would be entitled for carrying forward of deficit to subsequent year, which would be treated as application of income in that year. However, in computing the deficit, addition @ 15% of the gross receipt cannot be allowed as such accumulation is permissible only when the expenditure is less than the income which is not so in this case. Therefore, the deficit available for carry forward to the subsequent year will be only ₹ 75,58,503/-. This view is also supported by the decision of the Tribunal in the case of the L.N. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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