Carry forward and set off by a charitable institution of excess of application of income over its income

he legal controversy surrounding whether a charitable institution is allowed to carry forward and set off deficit (that is, excess of expense over income) and set it off against the income of a subsequent
year.

We examined the issue under the following views:

View 1: Deficit can be set off against income of a subsequent year.

View 2: Deficit cannot be set off against income in subsequent year.

View 3: If deficit is out of borrowings or sundry creditor, then the repayment of such loans/sundry creditors can be claimed as application of income against income of a subsequent year.

Recent judgments of the Supreme Court

2. After the Article was published, there have been two judgments of the Supreme Court.

2.1 Subros Educational Society - The assessee filed its return of income declaring a deficit. The assessing officer disallowed the carry forward of the deficit. Upon second appeal, the Tribunal in Dy. CIT v. Subros Educational Society [IT Appeal No. 1566 (Delhi) of 2012, order dated 10-12-2014] following the ratio of Rajasthan High Court in Maharana of Mewar Charitable Foundation, held that deficit should be allowed to be carried forward for adjustment in subsequent year. The department's appeal was dismissed by the Delhi High Court (IT No. 382 of 2015 dated 23.9.2015).

In CIT (E) v. Subros Educational Society [2018] 303 CTR 1 (SC) (judgment delivered on 16.4.2018), the following question was raised by the tax department before the Supreme Court -

"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 Income Tax Act, 1961?"

The Supreme Court heard the applicant on the aforesaid question and did not find any merit therein and dismissed the application.

The ratio of judgment was followed by the Tribunal in-

(a)		ITO v. Shri Sushilaben Ramniklal Jhaveri Charitable Trust [IT Appeal No. 4131 (Mum.) of 2017, order dated 28-9-2018];
(b)		Love in Action Society v. ITO [IT Appeal No.459 (Coch) of 2018, order dated 4-2-2019];
(c)		Dy. CIT v. J.R.D. Tata Trust [IT Appeal No. 7122 (Mum.) of 2017, dated 13-2-2019];
(d)		KSD Charitable Trust v. Asstt. CIT [IT Appeal No. 3033 (Delhi) of 2015, dated 13-12-2015].

2.2 Rajasthan & Gujarati Charitable Foundation - In CIT v. Rajasthan & Gujarati Charitable Foundation Poona [2018] 89 taxmann.com 127/253 Taxman 165/402 ITR 441 (SC), the Supreme Court held that even though expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under section 11(1)(a), yet depreciation would be allowed on assets so purchased. The Supreme Court also observed as follows:

"It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well"

Thus, the above observation suggests that it is possible for the charitable institution to carry forward deficit to subsequent years.

The decision of the Supreme Court was also followed in J.R.D. Tata Trust(supra) and Medical Trust of Seventh Day Adventists v. Dy. DIT [IT Appeal No. 1708 (CHNY) of 2015, dated 4-9-2018].

Conclusion

3. It appears that the controversy has finally been set to rest by the Supreme Court in favour of the assessee and consequently, a charitable institution is entitled to carry forward and set off excess of application of income of earlier years against income of subsequent year.