ITAT Allows Charitable Trust to Set Off Earlier Deficit Against Current Income

Background

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has held that a charitable trust can set off excess expenditure incurred in earlier years against income of a subsequent year under Section 11 of the Income Tax Act. The ruling came in the case of Chitradurga Zilla Reddy Jana Sangha (R) for the Assessment Year 2017–18, where the Tribunal partly allowed the appeal and remanded the matter to the Assessing Officer (AO) for verification. The assessee trust, which has been registered under Section 12A since 1978, filed its return declaring nil income for AY 2017-18. However, while processing the return under Section 143(1), the Central Processing Centre (CPC) disallowed ₹76.29 lakh on the ground that the trust had claimed exemption under the provision relating to income deemed to be applied for charitable purposes but had not filed Form-9A within the prescribed time under Rule 17 of the Income Tax Rules. The trust argued that the surplus was inadvertently claimed under the wrong provision and that only 15% of income (₹26.05 lakh) should have been treated as permissible accumulation, while the remaining ₹50.23 lakh should have been set off against accumulated deficit from earlier years.

The first appellate authority partially accepted the trust’s claim and restricted the disallowance to ₹50.23 lakh instead of the entire ₹76.29 lakh. However, the trust approached the ITAT contending that even this amount should be allowed to be set off against the carried-forward deficit accumulated over previous years, which reportedly amounted to ₹4.33 crore.

Findings

The Tribunal examined the provisions of Section 11 and noted that the restriction on setting off excess application of earlier years was introduced only through the Finance Act, 2021 with effect from 1 April 2022. Since the present case related to AY 2017-18, the amendment would not apply retrospectively. Relying on earlier judicial precedents, including decisions of several High Courts and the Supreme Court, the Tribunal held that adjustment of excess expenditure of earlier years against subsequent income constitutes application of income for charitable purposes.

Accordingly, the ITAT directed the Assessing Officer to verify the trust’s claim regarding the carried-forward deficit and allow the set-off of ₹50.23 lakh if the records support the claim. The appeal was therefore partly allowed for statistical purposes.