JUDGMENT
R. Jayasimha Babu, J.
1. The assessee is a charitable trust, which is aggrieved by the order of the Director of Income-tax (Exemptions), Madras, holding that the amounts described by the assessee as deficits are relatable to the two years preceding the previous year relevant to the assessment year 1991-92 not having been carried forward, the income of the assessment year 1991-92 cannot be adjusted against those deficits of earlier years. The Director was of the view that in the absence of any specific enabling provisions in the Act, there could be no carry over of deficits of earlier years for being adjusted in those arrears.
2. The deficits so claimed by the assessee were by reason of the payment of interest, and part of the principal to the Indian Bank from which it had obtained a substantial loan for putting up a new building in place of the old building that was owned by it, the new building so put up being a multi-storeyed commercial complex, from which it derived rental income.
3. Though the Director of Exemptions has observed that the repayment of the principal would not qualify for being regarded as expenditure on religious or charitable purposes, there is no finding that the interest paid on the loan cannot be so regarded. There is also no finding as to whether the putting up of the commercial building and the earning of the rental income therefrom could be regarded as expenditure incurred for religious or charitable purpose.
4. The reason for rejecting the arrears claimed as given in the impugned order primarily is that there is no provision in the Act, which would permit the assessee to carry forward deficits of earlier years, to later years.
5. Learned counsel for the assessee submitted that this view of the authority is contrary to the law declared by several High Courts. Counsel in this
context referred to the decision of the Andhra Pradesh, Karnataka, Rajas-than and Gujarat High Courts, besides a decision of this High Court.
6. In the case of CIT v. Nizam’s Supplemental Religious Endowment Trust (Trustees of H.E.H.) [1981] 127 ITR 378, it was held by the Bench of the Andhra Pradesh High Court that with regard to the income of a trust, it is the accounts of the trust alone that had to be taken into consideration, and that though the payment of income-tax and wealth-tax made during the relevant year related to the previous assessment years, the amounts so paid were expenses incidental to the carrying out of the charitable purpose of the trust, and, therefore, were to be excluded from the income of the trust for that year.
7. In the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28, it was held by the Karnataka High Court that while computing the income available for application to charitable and religious purposes by a charitable trust, the depreciation debited to the accounts of the trust were required to be deducted. It was held that the income derived from the property held under a trust cannot be the total income, but the net receipt after deducting all the necessary expenditure of the trust, and the depreciation debited to the accounts of the trust must be regarded as expenditure.
8. In the case of CIT v. Maharana of Mewar Charitable Foundation , it was held that there are no words of limitation in Section 11 of the Income-tax Act that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen, and that even if the expenses for charitable and religious purposes have been incurred in an earlier year, and the expenses are adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purpose had been adjusted. It was also observed by the court therein that if a trust takes a loan for the purpose of incurring expenditure for charitable and religious purposes in a particular year, and that loan is repaid out of the income of the subsequent year, the repayment would be entitled to exemption from tax under Section 11(1)(a) of the Act.
9. The Gujarat High Court, in the case of CIT v. Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 has taken a similar view and held that there are no words of limitation in Section 11 of the Act requiring that the income should have been applied for charitable or religious purposes only in the year in which the income had arisen. It was observed that where the expenditure on charitable or religious purpose had been incurred in an earlier year, such expenditure if adjusted against the income of the subsequent year, the income of that subsequent year can be said to have been applied for charitable or religious purpose in the year in
which the expenditure was incurred. It was also held that income derived from trust property has to be determined on commercial principles and the application of such commercial principles also warrants the conclusion that the expenditure incurred in an earlier year can be set off against the income of the subsequent year. The provisions of Section 11 of the Act were characterised by the court as benevolent.
10. This court in CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485, 495 observed that the income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions, which are attracted by Section 14 of the Act.
11. It is thus clear that the income of the trust has to be arrived at having due regard to commercial principles, that Section 11 of the Act is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in an earlier year or years can be adjusted against the income of the subsequent year. I am in respectful agreement with the views of the learned judges of the aforementioned High Courts with regard to these propositions.
12. Learned counsel for the Revenue contended that the loss incurred under one head can only be set off against the income from the same head and referred to the decision of this court in the case of CIT v. Thiagarajan (S.S.) [1981] 129 ITR 115. That principle is not of any relevance. If the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income on the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure, and in order to incur that expenditure the trust should have an 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. 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 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.
13. As the impugned order has not been made in conformity with the law as set out above, the impugned order will have to be, and is set aside, and the matter is remanded to the Director of Income-tax (Exemptions) for fresh consideration in accordance with law.
14. The writ petition is disposed of accordingly, No costs. Consequently, W. M. P. No. 4099 of 1994, is dismissed.