IT: Excess application of funds over and above income of trust can arise only when funds are applied from the corpus of the trust, accumulated funds, loans or goods and services received from the creditors

IT: Excess application of funds over and above income of trust can arise only when funds are applied from the corpus of the trust, accumulated funds, loans or goods and services received from the creditors. When funds are applied from borrowed funds or by way of sundry creditors the same can be treated as application of funds in the year in which such loan/sundry creditors are repaid from the income of the trust. However, when amount is applied from the corpus fund or accumulated fund the same cannot be treated as application of funds under section 11, because such funds have already been exempt from the income of trust in the year in which they are received or such amount is set aside. Thus, trust cannot carry forward excess application of funds.

Facts:

(a)		Assesses-trust was running an educational institution. It was registered under sec 12A. It claimed that excess application of income be carried forward. The AO allowed carried forward of certain claim.
(b)		On appeal, the CIT(A) denied the benefit of carry forward of excess application of funds. The aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of revenue as under:

(1)		Section 11(1)(a) provides that "income derived from property held under trust wholly for charitable or religious purpose" shall not be included in the total income to the extent such income is applied for charitable or religious purpose in India. The Act also provides that if upto 15% of such income is accumulated or set apart, then that shall also not be included in total income.
(2)		Further, Section 11(1)(d) provides that income in the form of "voluntary contribution made with specific direction that they shall form part of the corpus of the trust or institution" will not be included in the total income.
(3)		Therefore, what is provided under the Act is with respect to application of income from the income derived from the property held under trust and any voluntary contributions received by the trust other than the contributions made with specific direction that they shall form part of the corpus of the trust. Thus, there is no reference in Section 11 with respect to application of fund from the corpus of the trust, loan obtained by the trust, sundry creditors of the trust or accumulated fund of the trust for claiming exemption under Section 11(1).
(4)		Application of fund by any charitable trust is possible from the following sources:

i.		Voluntary contributions received by the Trust towards its corpus,
ii.		Other voluntary contributions,
iii.		Accumulated fund,
iv.		Amount received by way of loan,
v.		Sundry creditors, and
vi.		Income derived from the "Property" held under the Trust.

(5)		Excess application of fund over and above the income of the trust can arise only when funds are applied from the corpus of the trust, accumulated funds, loans or goods and services received from the creditors.
(6)		When funds are applied from borrowed funds or by way of sundry creditors the same can be treated as application of fund in the year in which such loan/sundry creditors are repaid from the income of the trust.
(7)		However, when amount is applied from the corpus fund or accumulated fund the same cannot be treated as application of funds for the purpose of Section 11, because such funds have already been exempt from the income of trust in the year in which these are received or such amount is set aside and therefore, once again treating the same as application of income will amount to double deduction.
(8)		Therefore, carry forward of excess application of fund in the 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.

[2015] 59 taxmann.com 379 (Chennai - Trib.)

IN THE ITAT CHENNAI BENCH, 'A'

Anjuman-E-Himayath-E-Islam

v.

Assistant Director of Income-tax (Exemption)-IV, Chennai