[Published in 406 ITR (Journ.) p.57 (Part-3)]

Transcription

1 Set-off of a trust s expenditure in later years [The issue whether excess expenditure incurred by a trust / charitable institution in earlier assessment year could be set off against its income of subsequent years, stands settled by the Supreme Court] 1 [Published in 406 ITR (Journ.) p.57 (Part-3)] By S.K.Tyagi The Supreme Court has finally settled the issue regarding the adjustment of excess expenditure of one year against the income of subsequent years in the case of charitable institutions. The aforesaid issue has been settled in the case of CIT Vs Subros Educational Society [2018] 166 DTR 257 (SC). It has been held in the aforesaid judgement that any excess expenditure incurred by a trust / charitable institution in earlier assessment year could be allowed to be set off against the income of subsequent years by invoking section 11 of the Income-Tax Act, 1961 (the Act). At the outset, it may be stated in connection with the above issue that the law in respect thereof, has evolved over a period of time. In this regard, it may be stated that the first ever judgement in support of the aforesaid view was rendered by the Rajasthan High Court, in the case of Maharana of Mewar Charitable Foundation in Thereafter, various other High Courts, viz. Bombay, Delhi, Madras, Gujarat and MP, have rendered a number of judgements in support of the aforesaid view. The latest judgement in this regard appears to have been rendered by MP High Court, in the case of Gujarati Samaj (Regd), in I intend to make this Article a comprehensive one, wherein all the relevant aspects and past historical background, in this regard, are discussed in detail. The same are discussed as follows : I. The relevant provisions of section 11(1)(a) of the Act There are occasions in the case of a charitable / religious institution, when expenditure incurred in a year exceeds the income of that year. In this situation, an issue arises as to whether the excess expenditure incurred in one year could be adjusted against the income of subsequent years and whether such adjustment would be treated as application of income as contemplated under section 11(1)(a) of the Income-Tax Act, 1961 (the Act).

2 2 In this context, it may be stated that section 11(1)(a) of the Act, provides that income derived from property held under the trust, wholly for charitable or religious purposes, shall not be included in the total income of a person for a previous year, to the extent to which such income is applied to such purposes in India or accumulated or set apart for application to such purposes in India. In the present context, provisions of section 11(1)(a) of the Act, are relevant. For the sake of ready reference, section 11(1)(a) is reproduced as follows : 11. Income from property held for charitable or religious purposes. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; From the aforesaid provisions of section 11(1)(a) of the Act, it may be seen that the scheme of taxation of charitable / religious trusts is quite different from the taxation of other taxable entities under the Act. The reason for the same is that for exemption under section 11(1)(a) of the Act, application of income and / or accumulation of such income for the purposes of the objects of the trust, is relevant. II. Meaning of the term applied as contemplated under section 11(1)(a) of the Act In the first place, it may be stated that there is no word of limitation in section 11(1)(a), providing that the income should be applied for charitable or religious purposes in the year in which the income has arisen. The word applied, means to put to use or to turn to use or to make use or to put to practical use. As regards the provisions of section 11(1)(a), it is clear that when the income of the trust is used or put to use to meet the expenses incurred for charitable purposes, it is considered to be applied for those purposes. The said application of income for charitable purposes takes place in the year in which the income is adjusted to meet the expenses incurred. In other words, the excess of expenditure over income in one year can be set off against the income of subsequent years under section 11(1)(a) of the Act.

3 3 In this context, it may also be stated that amounts sanctioned by a trust and debited to its Income and Expenditure Account, under intimation to the donee, but not disbursed during the year, are also applied for charitable purposes. In order to correctly understand the implication of the word applied, as contemplated under section 11(1)(a), reference may be made to the following legal precedents : 1. CIT Vs Radhaswamy Satsang Sabha [1954] 25 ITR 472 (All) It was held in this case that the word applied need not necessarily imply spent in regard to section 11 of the Act. Even if an amount is irretrievably earmarked and allocated for the charitable or religious purposes, it may be said to have been applied to such purposes. 2. CIT Vs St. George Forana Church [1988] 170 ITR 62 (Ker) It was held in this case that the word applied is wider in import than the word expenditure. According to Webster s Third New International Dictionary, the word applied means to put to practical use; engaged in for utilitarian or contributory purpose; employed in the decoration, design or execution of useful objects. Further, the word, expenditure means disbursement. The word expend means to pay out or distribute, to spend. On page 65 or the Report, the High Court has observed as follows : The word applied in the text means actually applied or actually expended. Such application may be by adding to the corpus of the fund and not merely in the form of revenue expenditure for implementing the purposes of the trust. Therefore, under section 11(1)(a) application of income implies spending such income on the objects of the trust. 3. CIT Vs Trustees of H.E.H. The Nizam s Charitable Trust [1981] 131 ITR 497 (AP) It was, inter-alia, held in this case that in order to secure exemption under section 11(1)(a) of the Act, it is sufficient if the assessee provides or sets apart the funds for a charitable purpose and it is not necessary that the assessee must have spent the amount specified for a charitable purpose during the relevant assessment year. That this is the intention of the Legislature is

4 4 evident from the word used, namely, applied in section 11(1)(a). If the intention of the Legislature was otherwise, nothing prevented the Legislature from using the word spent instead of applied in section 11(1)(a) of the Act. It was, thus, held in this case that the amount sanctioned by a trust and debited to its Income and Expenditure Account, under intimation to the donee, but not disbursed during the year, is also income applied for charitable purpose. 4. CIT Vs Thanthi Trust [1982] 137 ITR 735 (Mad) It was, inter-alia, held in this case that transfer of amounts by a trust for charitable purposes by way of book entries, is valid application, where the transferor, viz a trust, has no control or beneficial ownership in respect of the money and it is not necessary that the entire amount should be expended by the donee within the previous year relevant to the assessment year in which the exemption is claimed. 5. CIT Vs Thanthi Trust [1999] 239 ITR 502 (SC) It was, inter-alia, held in this case that the assessee-trust having credited certain amounts in favour of an educational institution and the said institution having drawn from assessee-trust larger sums than what was credited in its favour, assessee is entitled to exemption under section 11, there being no doubt about genuineness of entries in the books of assessee. It may also be stated here that the aforesaid decision of the Madras High Court, in CIT Vs Thanthi Trust [1982] 137 ITR 735 (Mad), was affirmed by the Supreme Court. In the light of the aforesaid legal precedents it may be concluded that under the provisions of section 11(1)(a), when the income of the trust is used or put to use to meet the expenses incurred for charitable purposes, it is considered to be applied for those purposes. The said application of income for those purposes, takes place in the year in which the income is adjusted to meet the expenses. In other words, even if the expenses for charitable and religious purposes have been incurred in earlier year and the said expenses are adjusted against the income of the subsequent years, the application of income is achieved.

5 III. The view that adjustment of excess expenditure incurred by a trust / charitable institution in one year against the income of subsequent years, is application of income under section 11(1)(a), is supported by a number of High Courts In this context, it may be further stated that a number of High Courts have already laid down that a trust / charitable institution is entitled to set off the excess expenditure incurred in earlier year against the income of subsequent years. The aforesaid view is supported by a number of High Courts. The judgements delivered by the various High Courts, in support of the aforesaid view, are discussed as follows : 1. Govindu Naicker Estate Vs ADIT [2001] 248 ITR 368 (Mad) : 167 CTR 303 (Mad) 5 It was held in this case that section 11 of the Income-tax Act, 1961, is a benevolent provision. The income of a charitable trust has to be arrived at having due regard to commercial principles. The object of the charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have income. So long as the expenditure incurred is on religious or charitable purposes, it is expenditure properly incurred by the trust and the income from out of which that expenditure is incurred, would not be liable to tax. If expenditure 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 a 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. In other words, it was held by the Madras High Court that expenditure incurred by a trust on charitable or religious purposes in earlier year or years can be adjusted against the income of the subsequent year, irrespective of the head of income under which it is incurred. 2. CIT Vs Matriseva Trust [2000] 242 ITR 20 (Mad) : 158 CTR 433 (Mad) It was held in this case that the assessee, as a trust, was entitled to set-off the amount of excess application of income of the last year against the deficiency of the present year.

6 In this case, the Madras High Court has followed the judgements of the Rajas-than and Gujarat High Courts in the following cases : 6 (i) CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) : 60 CTR 40 (Raj) It was held in this case that where excess expenditure is incurred by a trust in a year, setoff of such excess against subsequent year s income is application for the purpose of section 11(1)(a) of the Act. (ii) CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj) : [1994] 119 CTR 144 (Guj) It was held in this case that having regard to the benevolent provisions contained in section 11 and commercial principles, deficit arising out of expenses incurred by assessee-trust for charitable and religious purposes over income derived from trust property for the relevant year can be set-off against the surplus of income in subsequent year. 3. CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) : 185 CTR 492 (Bom) It was, inter-alia, held in this case that in case of a charitable trust whose income is exempt under section 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. In this case, it was argued on behalf of the I.T. 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 Assessing Officer did not allow carry forward of excess of expenditure to be set-off against the surplus of the subsequent years on the ground that in the case of charitable trusts, their income was assessable under self-contained code mentioned in section 11 to section 13 of the 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. It was further contended by the I.T. Department 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 the income of subsequent years.

7 7 It was held by the High Court that there was no merit in the aforesaid argument of the Department. The 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 years, would have to be regarded as application of income by the trust for charitable and religious purposes in the subsequent years 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 income of the trust under section 11(1)(a) of the Act. It was further held that the aforesaid view is supported by the judgement of Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj). 4. CIT Vs Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) : 60 CTR 40 (Raj) At the outset, it was held in this case that where excess expenditure is incurred by the trust in a year set-off of such excess against subsequent year s income is application for purposes of section 11(1)(a) of the Act. It was further held that there are no words of limitation in section 11 explaining that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. Therefore, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of the subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes have been adjusted. In addition, it was held that if it were held that only that income of a charitable trust would be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned, it would lead to an anomalous situation. A construction which leads to such an anomaly should be avoided. The adjustment of the expenses incurred by the trust for charitable and religious purposes, in the earlier year against the income earned by the trust in the subsequent year, would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under

8 section 11(1)(a) of the Act CIT Vs Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj) : [1994] 119 CTR 144 (Guj) It was held in this case that having regard to the benevolent provisions contained in section 11 and commercial principles, deficit arising out of expenses incurred by the assessee trust for charitable and religious purposes over income derived from the trust property for the relevant year, can be set-off against the surplus of income in subsequent year. It was further held that there are no words of limitation in section 11 providing that the income should have been applied for charitable or religious purposes only in that year in which the income had arisen. Therefore, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of the subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted. There is nothing in the language of section 11(1)(a) of the Act to indicate that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year, would not amount to such income being applied for charitable or religious purposes. Income derived from trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, 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 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 such adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and will have to be excluded from the income of the trust under section 11(1)(a) of the Act. 6. DIT Vs Raghuvanshi Charitable Trust [2010] 44 DTR 223 (Del) It was held in this case that deficit (excess of expenditure over income) of current year can be adjusted against the income of subsequent year and the same would amount to application of income of the trust for charitable purposes in the subsequent year within the meaning of section 11(1)(a). In this judgement, reliance has been placed on the following judgements :

9 (i) CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj) : [1994] 119 CTR 144 (Guj) 9 (ii) CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) : 60 CTR 40 (Raj) (iii) CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) : 185 CTR 492 (Bom) (iv) CIT v. Matriseva Trust [2000] 242 ITR 20 (Mad) : 158 CTR 433 (Mad) In this context, it will be significant to state that in paragraph (9) of the aforesaid judgement it has been stated that as many as five High Courts have interpreted the provision in an identical and similar manner. The learned Counsel for the Revenue could not show any judgement where any other High Court has taken a contrary view. It is, thus, clear that on the issue under consideration, no High Court has taken a contrary view. In other words, it may be emphatically stated that all the High Courts have taken a view that adjustment of excess expenditure of one year against the income of another year, is application of income under section 11 of the Act. Thus, all the High Courts have taken a view which is totally contrary to the view taken by the Chennai Bench of the Tribunal in the aforesaid decision. 7. CIT Vs Gujrati Samaj (Regd.) [2012] 349 ITR 559 (MP) :[2011] 64 DTR 76 (MP) It has been held in this case that expenditure incurred in the earlier year can be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would amount to such income being applied for charitable or religious purposes. In this case, the provisions of section 11(1)(a) have been examined. It was held that in view of section 11(1)(a) of the Act, it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of earlier year would not amount to such income being applied for charitable or religious purposes. Having regard to section 11(1)(a) of the Act, when the income of the trust is used or put to use to meet the charitable or religious purposes, it is

10 10 applied for charitable purposes and the said application of income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Thus, even if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of the subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which expenses incurred for charitable and religious purposes had been adjusted. There are no words of limitation in section 11(1)(a) of the Act, explaining that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. For this purpose, reliance is place on the judgement of Rajasthan High Court in CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) : 60 CTR 40 (Raj). IV. The aforesaid view is also supported by a number of judgements of the Tribunal. The aforesaid view is also supported by a number of judgements delivered by the various Benches of the Tribunal. These judgements are discussed as follows : 1. ACIT Vs City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang) It was clearly held in this case that in case of a charitable trust whose income was exempt under section 11, excess of expenditure in earlier years, could be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years. It is a detailed order passed by the Bangalore Bench of the Tribunal. It was further held in this case that section 11(1)(a) of the Act 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 under 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 earlier years and the 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.

11 11 Referring to a judgement of Bombay High Court in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom), it was held that in case of a charitable trust, whose income was exempt under section 11, excess of expenditure in earlier years could be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years. It was further held that in Govindu Naicker Estate v. ADIT [2001] 248 ITR 368 (Mad), the High Court held that the income of the trust has to be arrived at having due regard to commercial principles. Besides, section 11 is a benevolent provision and the expenditure incurred on charitable or religious purpose in earlier year or years can be adjusted against the income of subsequent year. The object of charitable or religious trust could only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have income. So long as the expenditure incurred is on charitable or religious purposes, it is the expenditure properly incurred by the trust and the income from out of which the 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 incurred expenditure on charitable or religious purposes from the income of the subsequent year, even though the actual expenditure was in 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. It may also be stated that in this judgement the Tribunal has also relied upon the judgements in the cases of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) and CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj). 2. ACIT(E) v. Dawat E. Hadiyah [2015] 43 ITR (Trib) 476 (Mum) In the present case, it will be relevant to reproduce grounds of appeal Nos. 3, 4 and 5, raised by the I.T. Department before the Tribunal against the order of the CIT(A), on pages 478 and 479 of the Report. The same are as follows : Grounds of appeal 3. Whether on the facts of the case and in law the Ld. CIT(A) erred in allowing the carry forward of deficit of Rs. 278,24,26,641 and allowing set off against the income of the subsequent years allowing the deficit will tantamount to double deduction on account of expenditure out of exempt income. 4. Whether, on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in

12 12 allowing to carry forward of deficit on account of excess expenditure and directing the Assessing Officer to allow carry forward of deficit on account of excess expenditure without appreciating the fact that this would have the effect of granting double benefit to the assessee, first as accumulation1 of income u/s 11(1)(a) or as corpus donations u/s 11(1)(d) in early years/current year and then as' application of income u/s 11(1)(a) in the subsequently years which was legally not permissible? 5. Whether, on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the claim of the assessee for carry forward of the said deficit, ignoring the fact that there was no express provisions in the Act, 1961 permitting allowance of such claim? In this case, during the year, the assessee had deficit of Rs. 278,24,26,641, which is carried forward to next year to be set-off against the income of subsequent years. The AO did not allow carry forward of deficit of Rs. 278,24,26,641 for setoff of the same against the income of subsequent years. The CIT(A) allowed carry forward of Rs. 278,24,26,641 and set-off of the same against the income of subsequent years. On appeal by the I.T. Department before the Tribunal, dismissing the appeal of the Department, it was held that the excess application of income of earlier years was to be allowed to be carried forward to the subsequent years and there was no infirmity in the order of the CIT(A). 3. Dy. CIT Vs Manipal Academy of Higher Education [2015] 44 ITR (Trib) 18 (Bang) In this case, the assessee claimed deficit of earlier years inclusive of current year deficit to be carried forward for setting-off as application of income in subsequent years. The Assessing Officer rejected this on the ground that there was no provision for carry forward of excess expenditure over income under the Income-tax Act, The CIT(A) following the order in the assessee s own case for the AY , allowed the claim of the trust. On appeal by the Department, it was held that the CIT(A) was justified in allowing carry forward of deficit of earlier years and set-off against the surplus of a subsequent year. In this case, the Tribunal has followed its earlier judgement in the case of ACIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang).

13 4.ACIT(E) Vs K.J. Somaiya Trust [2016] 158 TTJ 57 (Mum) 13 In this case one of the issues before the Tribunal was carry-forward of deficit of Rs.47,57,38,232, of earlier years and set-off of the same against the income of subsequent years. The Assessing Officer (AO) denied the carry-forward of deficit of Rs.47,57,38,232, of earlier years, being excess of application of income over the income of the trust. On appeal, the CIT(A) allowed the appeal of the assessee and directed the AO to allow the carry-forward of the brought forward deficit of earlier years to subsequent years. On appeal by the I.T. Department, dismissing the appeal, it was held by the Tribunal that the excess expenditure over income in one year shall be set off against the income of subsequent years, being application of income as per the provisions of section 11(1)(a) of the Act. V. In the meanwhile, the Chennai Bench of the Tribunal delivered two judgements contrary to the aforesaid view, which stood overruled by the later judgement of the Madras High Court In this connection, in the first place, it may be stated that the Chennai Bench of the Tribunal, in the case of Anjuman-E-Himayath-E-Islam Vs ADIT(E) [2015] 127 DTR (Trib) 318 (Chennai), delivered a judgement which is contrary not only to the aforesaid judgements of various High Courts, but also contrary to the two judgements of the Jurisdictional High Court, viz. the Madras High Court. It was, inter alia, held in this case that the carry-forward of excess application of fund on commercial principles cannot be allowed as per the provisions of the Act, because it would result in notional application of income in the subsequent year. Thereafter, the aforesaid judgement of Chennai Bench of the Tribunal, was followed in the case of Sundaram Medical Foundation vs. Dy.DIT(E) [2016] 45 ITR (Trib) 500 (Chennai). It was, inter alia, held in this case that claim of the assessee for carry-forward of excess application of fund to subsequent years was not permissible, as per the provisions of the Act. It may be further stated that in none of the aforesaid judgements delivered by the Chennai Bench of the Tribunal, the aforesaid judgements of various High Courts, as well as two judgements of Madras High Court, were not considered. It may, thus, be concluded that the aforesaid judgements of Chennai Bench of the Tribunal, were delivered in blatant disregard of the

14 14 judgements of the Jurisdictional High Court, as also the judgements of a number of other High Courts, on the issue. Such an action on the part of the Chennai Bench of the Tribunal was nothing but gross judicial indiscipline. However, the aforesaid judgements of Chennai Bench of the Tribunal stood overruled by the later judgement of Madras High Court in the case of DIT(E) Vs Medical Trust of the Seventh Day Adventists [2017] 398 ITR 721 (Mad) : 156 DTR 113 (Mad). It has been held in this case that on merits, the decision of the Madras High Court, in the case of CIT Vs Matriseva Trust [2000] 242 ITR 20 (Mad), would be applied. As already stated in the preceding paragraph (III), it was held by the Madras High Court, in the case of Matriseva Trust, that the assessee, as a trust, was entitled to set off the amount of excess application of income of the last year against the deficiency of the present year. In other words, where the excess expenditure is incurred by a trust in a year, set-off of such excess expenditure against the income of subsequent year is application of income for the purposes of section 11(1)(a) of the Act. In view of the aforesaid reason, it is clearly established that as per the aforesaid judgement of Madras High Court, in the case of Medical Trust of the Seventh Day Adventists, the excess expenditure incurred by a trust in a year, could be set off against the income of subsequent years and such a set-off is application of income, as contemplated under section 11(1)(a) of the Act. In the light of the aforesaid judgement of Madras High Court, in the case of Medical Trust of the Seventh Day Adventists, the aforesaid judgements of Chennai Bench of the Tribunal, in the cases of Anjuman-E-Himayath-E-Islam and Sundaram Medical Foundation, stand overruled. VI. The aforesaid issue now stands settled by the Supreme Court in the case of CIT(E) Vs Subros Educational Society Another very significant development in the present context is the judgement of the Supreme Court, which has been delivered in the case of CIT(E) Vs Subros Educational Society [2018] 166 DTR 257 (SC). In this case a Miscellaneous Application No.941 of 2018, was filed by the IT Department, as according to the IT Department, the Civil Appeal No of 2016, arose out of Special Leave Petition No.8982 of 2016, which was tagged with other appeals and the batch matters were

15 decided by the Supreme Court on However, the following question was also raised in the aforesaid appeal, which was not the subject matter of the aforesaid appeals. 15 Whether any excess expenditure incurred by the trust / charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking section 11 of the I.T. Act, 1961? The Senior Counsel appearing on behalf of the IT Department was heard on the aforesaid question of law, but the Supreme Court did not find any merit therein. Accordingly, the aforesaid Miscellaneous Application, filed by the I.T. Department, was dismissed. In this connection, it would also be relevant to state that the aforesaid Miscellaneous Application arouse out of Civil Appeal No.5171 of It may also be stated here in this context that in paragraph (2) of the aforesaid judgement of the Supreme Court, it is stated Therefore, we have heard him on the aforesaid question of law as well, but did not did any merit therein. As the Hon. Supreme Court had heard the Senior Counsel of the IT Department on the aforesaid question of law and thereafter, did not find any merit therein, it is clearly established that the Supreme Court answered the aforesaid question of law in the affirmative, viz. against the IT Department and in favour of the assessee. In support of the aforesaid view, a reference may also be made to the following legal precedents : (i) Snowcem India Ltd Vs Dy.CIT [2009] 313 ITR 170 (Bom) In this case, a reference has been made to the judgement of the Supreme Court, in the case of CIT Vs Kwality Biscuits Ltd [2006] 284 ITR 434 (SC), wherein the following order was passed The appeals were dismissed. In this regard, paragraph (5) of the aforesaid judgement in the case of Snowcem India Ltd, on pages 173 and 174 of the Report is also relevant, which is reproduced as follows : 5. If the Special Leave Petitions had only been dismissed then perhaps it would have been possible to say that there was no merger of the judgment of the Karnataka High Court and that the Supreme Court had refused to grant Special leave to appeal and consequently it was not an order of affirmation. See Kunhayammed vs. State of Kerala (2000) 162 CTR (SC) 97 : 2001 (129) ELT 11 (SC). However, the order passed by the Supreme Court is "The appeals are dismissed" being Civil Appeal Nos and 1285 of Once the appeals are dismissed then it can be said that the judgment of the

16 16 Karnataka High Court has been affirmed by the Supreme Court. That would not be the case in the event only Special Leave Petitions had been dismissed in which event it would be said that the Supreme Court chose not to interfere with the judgment of the Karnataka High Court. In such an event the doctrine of merger would not apply. Once the judgment of the Karnataka High Court in Kwality Biscuits Ltd. (supra) has been affirmed by the Supreme Court by dismissing the appeals, in our opinion, the law binding on us would be the judgment in Kwality Biscuits Ltd. (2006) 284 ITR 434. [Emphasis added] In the light of the aforesaid observations of the Bombay High Court, it is clearly established that the Supreme Court, in the aforesaid judgement in the case of Subros Educational Society, has affirmed the view that any excess expenditure incurred by the trust / charitable institution in earlier assessment year, could be allowed to be set off against the income of the subsequent years by invoking section 11 of the I.T.Act, (ii) CIT Vs Natural Gems Ltd [2010] 327 ITR 269 (Bom) It was held in this case that the judgement of the Karnataka High Court in CIT Vs Kwality Biscuits Ltd Vs CIT [2000] 243 ITR 519 (Karn) was taken in appeal before the Supreme Court by way of special leave petition. The appeals were heard meaning thereby the leave was granted and the appeals were dismissed. The dismissal of the appeal by the Supreme Court in the case of CIT Vs Kwality Biscuits Ltd [2006] 284 ITR 434 (SC) would amount to confirmation of the law as held by the Karnataka High Court. (iii) Shree Bharkha Synthetics Ltd Vs ACIT [2002] 75 TTJ 1 (Jd) It was, inter alia, held in this case that the law declared by the Supreme Court is the law of the land and even obiter dicta of the Supreme Court is binding on the subordinate Courts / Tribunals. In the light of the fact that the aforesaid question of law raised by the IT Department was considered by the Supreme Court and thereafter, the issue raised therein was decided against the IT Department and in favour of the assessee; it is clearly established that the Supreme Court has affirmed the view that any excess expenditure incurred by the trust / charitable institution in earlier assessment year could be allowed to be set off against the income of subsequent years by invoking section 11 of the I.T.Act, 1961.

17 Therefore, the view that the excess expenditure incurred by a trust / charitable institution in earlier assessment year could be set off against the income of subsequent years, stands settled by the Supreme Court. 17 S. K. TYAGI Office : (020) Flat No.2, (First Floor) M.Sc., LL.B., Advocate : (020) Gurudatta Avenue Ex-Indian Revenue Service Residence : (020) Popular Heights Road Income-Tax Advisor Website: s : tyagi@sktyagitax.com : sktyagitax@gmail.com : sktyagidt@airtelmail.in Koregaon Park PUNE