Charitable trust: Exemption u/s.11 of Incometax Act, 1961: Trust can be allowed to carry forward deficit of current year and to set off against income of subsequent years: Adjustment of deficit of current year against income of subsequent year would amount to application of income of trust for charitable purposes in subsequent year within meaning of section 11(1)(a).

“Whether adjustment of deficit (excess of expenditure over income) of current year against the income of subsequent year would amount to application of income of the trust for charitable purposes in the subsequent year within the meaning of section 11(1)(a) of the Act?

The Delhi High Court referred to the following observations of the Bombay High Court in the case of CIT v. Institute of Banking Personnel Selection (IBPS); 264 ITR 110 (Bom.):

“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 charitable trust, their income was assessable under selfcontained 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’ u/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 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 the section 11 of the Act and that such adjustment will have to be excluded from the income of the trust u/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 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.”

The Delhi High Court held as under:

“It is clear from the above that as many as five High Courts have interpreted the provision in an identical and similar manner. Learned counsel for the Revenue could not show any judgment where any other High Court has taken contrary view. Since we are in agreement with the view taken by the aforesaid High Courts, we answer these questions in favour of the assessee and against the Revenue.”