Charitable Trust Permissibility of Setting Off of Excess Expenditure in Earlier Year Against Income of Subsequent Year

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The Tax Publishers Permissibility of Setting Off of Excess Expenditure in Earlier Year Against Income of Subsequent Year Pawan Prakash A controversy was going on for years that whether excess expenditure incurred in earlier year can be set off against income in subsequent year. The Supreme Court in the case of CIT(E) v. Subros Educational Society (2018) 303 CTR (SC) 1 has settled the controversy in favour of the assessees. The learned Author discusses the issue in detail. 1. Introduction section 11(1)(a) provides that the income derived by a trust meant wholly for charitable or religious purposes is not chargeable to tax provided it applies more than 85% of its income towards its objects. Where the income applied is less than 85% then unless the trust accumulates the difference between 85% and the actual application for specified purposes, (85% less actually expended) it will be chargeable to tax. Also, in certain instances such as non-receipt of income or for any other reason if the amount could not be applied towards the objects of the trust to the extent of 85% then also it may be spared from tax consequences subject to certain procedural formalities. [Clause (2) of Explanation to Section 11(1)]. 2. Expenditure incurred in earlier year against income earned in subsequent year The Gujarat High Court in CIT v. Shri Plot Swetambar Murti Pujak Jain Mandal (1995) 211 ITR 293 (Guj), observed that income derived from trust property has to be determined on commercial principles and if the same are applied for determining the income, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in 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 such adjustment has been made having regard to the benevolent provisions contained in Section 11 and will have to be excluded from the income of trust under Section 11(1)(a). Thus, the assessee is entitled to carry forward expenses for set off in the subsequent year. Also see, Govindu Naicker Estate v. Asstt. Director of IT (1999) 105 Taxman 719 (Mad), Asstt. CIT v. Dawat E. Hadiyah (2015) 43 ITR (Trib) 476 (Mum 'SMC'-Trib), Dy. CIT v. Panchajanya Vidya Peetha Welfare Trust & Vice-Versa 2018 TaxPub(DT) 390 (Bang-Trib), ITO v. Bombay Natural History Society 2018 TaxPub(DT) 2857 (Mum-Trib). SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Permissibility of Setting Off of Excess Expenditure in Earlier Year Against Income of Subsequent Year

Pawan Prakash

A controversy was going on for years that whether excess expenditure incurred in earlier year can be set off against income in subsequent year. The Supreme Court in the case of CIT(E) v. Subros Educational Society (2018) 303 CTR (SC) 1 has settled the controversy in favour of the assessees. The learned Author discusses the issue in detail.

1. Introduction

section 11(1)(a) provides that the income derived by a trust meant wholly for charitable or religious purposes is not chargeable to tax provided it applies more than 85% of its income towards its objects.

Where the income applied is less than 85% then unless the trust accumulates the difference between 85% and the actual application for specified purposes, (85% less actually expended) it will be chargeable to tax.

Also, in certain instances such as non-receipt of income or for any other reason if the amount could not be applied towards the objects of the trust to the extent of 85% then also it may be spared from tax consequences subject to certain procedural formalities. [Clause (2) of Explanation to Section 11(1)].

2. Expenditure incurred in earlier year against income earned in subsequent year

The Gujarat High Court in CIT v. Shri Plot Swetambar Murti Pujak Jain Mandal (1995) 211 ITR 293 (Guj), observed that income derived from trust property has to be determined on commercial principles and if the same are applied for determining the income, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in 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 such adjustment has been made having regard to the benevolent provisions contained in Section 11 and will have to be excluded from the income of trust under Section 11(1)(a). Thus, the assessee is entitled to carry forward expenses for set off in the subsequent year. Also see, Govindu Naicker Estate v. Asstt. Director of IT (1999) 105 Taxman 719 (Mad), Asstt. CIT v. Dawat E. Hadiyah (2015) 43 ITR (Trib) 476 (Mum 'SMC'-Trib), Dy. CIT v. Panchajanya Vidya Peetha Welfare Trust & Vice-Versa 2018 TaxPub(DT) 390 (Bang-Trib), ITO v. Bombay Natural History Society 2018 TaxPub(DT) 2857 (Mum-Trib).