ITAT Hyderabad Clarifies: Excess Application of Income Can Be Set Off If Evident from Books
The Hyderabad Bench of the Income Tax Appellate Tribunal, in the case of Nizamia Hyderabad Womens Association Trust Vs ITO, has once again affirmed the principle that a charitable trust is entitled to adjust excess application of income (including capital expenditure) incurred in earlier years against income of subsequent years, so long as the claim is clearly supported by its books of account and records.
The Tribunal has treated the appeal as allowed for statistical purposes and has remanded the issue to the Assessing Officer (AO) only to verify the factual correctness and quantum of the excess application claimed. Importantly, it has rejected the Revenue’s contention that such set-off is barred merely because no specific “carry forward” claim was made in returns of the earlier assessment years.
Background of the Trust and Assessment
Registration and Activities
- The assessee is a charitable trust registered under
Section 12Aof the Income Tax Act 1961. - Its main objective is to run educational institutions and promote the education and overall development of women, consistent with its trust deed.
Return Filing Pattern for AY 2017-18
- For Assessment Year (AY) 2017-18, the assessee filed its original return of income on 28/10/2017 declaring Nil income.
- The trust initially filed Form No. 10 on 31/10/2018, showing an accumulation of Rs. 35 lakh and claiming exemption under
Section 10(23C)(iiiad). - Subsequently, a revised return was filed on 31/03/2019, again declaring Nil income, wherein the assessee withdrew the earlier accumulation claim.
The case was picked up for scrutiny under Section 143(2) and culminated in an assessment under Section 143(3) dated 11/12/2019.
Core Dispute: Set-off of Earlier Years’ Excess Application
Claim of Excess Application
During scrutiny, the AO noticed that the assessee claimed an adjustment of excess application/excess capital expenditure amounting to Rs. 1,69,14,522 relating to earlier financial years.
- This amount primarily represented capital expenditure on acquisition of land during FY 2013-14 and FY 2014-15 for charitable purposes.
- The assessee treated this earlier excess application as eligible to be set off against income of AY 2017-18 while computing application of income under
Section 11.
AO’s Reasoning
The AO rejected the claim on a narrow technical basis:
- The capital expenditure had undoubtedly been incurred in earlier years.
- However, in those earlier years:
- The assessee had not made a specific claim in its returns regarding excess application, and
- There was no explicit claim of carry forward of such excess.
On that reasoning alone, the AO disallowed the set-off of Rs. 1,69,14,522 and brought the amount to tax in AY 2017-18.
CIT(A)’s View
On appeal, the Commissioner of Income Tax (Appeals), NFAC, sustained the AO’s conclusion:
- The CIT(A) held that since the assessee had not claimed such excess application in the earlier years’ returns, it could not seek adjustment in AY 2017-18.
- According to the CIT(A), the absence of a specific claim in prior returns was fatal to the assessee’s case.
Assessee’s Contentions Before ITAT
Legal Position Prior to Finance Act 2021
The assessee argued that, prior to the insertion of Explanation 5 to Section 11(1) by the Finance Act, 2021, the settled law allowed:
- Carry forward of excess application of income (both revenue and capital) by charitable trusts, and
- Its adjustment against income of subsequent years, while determining application under
Section 11.
The assessee emphasised:
Section 11does not prescribe any statutory mechanism akin toSection 72–Section 74for “carry forward of losses”.- Nor does it mandate that a specific carry-forward claim must be made in the return of income for earlier years to enable such set-off.
- The only requirement is that income must be “applied” for charitable or religious purposes, and where application exceeds income in a year, such excess can be adjusted in later years on commercial principles.