J.M. Panchal, J.
1. At the instance of the Commissioner of Income-tax, Rajkot, the Income-tax Appellate Tribunal, Ahmedabad Bench 'A' ('the Tribunal', for short), has referred the following question of law for the opinion of this court under Section 256(1) of the Income-tax Act, 1961 ('the Act', for short) :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to the carry forward of the expenses for set off in the subsequent year ?'
2. This reference relates to the assessment year 1973-74. The assessee, i.e., Shri Plot Swetamber Murti Pujak Jain Mandal, Rajkot, is a registered public trust. The assessee filed a return of income on October 16, 1974, declaring nil income. Again a revised return was filed on September 30, 1975, declaring a deficit of Rs. 2,916. Before the Income-tax Officer, the assessee claimed set off regarding carry forward of the expenses. The Income-tax Officer, without assigning any reasons, disallowed the said claim of set off. The assessee, therefore, carried the matter in appeal before the Appellate Assistant Commissioner of Income-tax, Rajkot Range, Rajkot,without any success. In second appeal before the Tribunal, the Tribunal took the view that the issue was covered by the decision of the Tribunal in the case of ITO v. Trustees of Balkan-ji-Bari and held that the assessee was entitled to the set off claimed by it.
3. Thereupon, the Revenue moved the Tribunal for referring the question of law arising out of the order dated October 15, 1980, passed by the Tribunal in Income-tax Appeal No. 1864/(Ahd.) of 1979 for the opinion of the High Court. The Tribunal agreed that a question of law arises out of the aforesaid order for the opinion of the High Court and has, therefore, referred the above mentioned question for the opinion of this court :
Before answering the question referred to us, it would be worthwhile to note the scheme of Section 11 of the Act. The relevant provisions which need to be examined are those contained in Section 11(1)(a), Section 11(2) and Section 11(3) of the Act. The said provisions as they stood during the relevant assessment year were as under :
'11. (1) Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income -
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; . . . . 11. (2) Where any income referred to in Clause (a) or Clause (b) of Sub-section (1) read with the Explanation to that Sub-section is not applied or is not deemed to have been applied to charitable or religious purposes in India during the previous year but is accumulated, or finally set apart, for application to such purposes in India, such income shall not be included in the total income of the previous year of the person in receipt of the income provided the following conditions are complied with, namely :
(a) such person specifies, by notice in writing given to the Income-tax Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart which shall in no case exceed ten years ;
(b) the money so accumulated or set apart is -
(i) invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944 (18 of 1944), or in any othersecurity which may be approved by the Central Government in this behalf, or
(ii) deposited in any account with the Post Office Savings Bank [including deposits made under the Post Office (Time Deposits) Rules, 1970] or a banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in Section 51 of that Act) or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank), or
(iii) deposited in an account with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purposes of Clause (viii) of Sub-section (1) of Section 36.
11. (3) Any income referred to in Sub-section (2), which-
(a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or
(b) ceases to remain invested or deposited in any of the forms or modes specified in Sub-section (5), or
(c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in Clause (a) of that Sub-section or in the year immediately following the expiry thereof,
shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so accumulated or set apart or ceases to remain so invested or deposited, or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.'
4. A bare perusal of the above-referred provisions of the Act shows that the income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India is to be excluded for the purposes of computing the income of the trust for the purpose of assessment. There are no words of limitation in this section providing that the income should have been applied for charitable or religious purposes only in the year in which theincome had arisen. The word 'applied' means 'to put to use' or 'to turn to use' or 'to make use' or 'to put to practical use'. Having regard to the provisions of Section 11 of the Act, it is clear that when the income of a trust is used or put to use to meet the expenses incurred for religious or charitable purposes, it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words, even if expenses for charitable and religious purposes have been incurred for the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted.
5. At this stage, it would be profitable to refer to the Circular dated January 24, 1973, F. No. 195/1/72-I.T. (A.I), issued by the Central Board of Direct Taxes, the relevant part of which reads as under (see [1973] 88 ITR 66) :
'Subject : Repayment of a debt incurred for charitable purposes by a charitable trust and loans advanced by educational trusts--Application of income.
Section 11 of the Income-tax Act requires 100 per cent. of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income :
(i) Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust and ....
2. The Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest bearing loan for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.' (Circular No. 100, dated January 24, 1973, F. No. 195/1/72-I.T.(A.I.)).
6. According to the abovereferred circular if a trust wants to spend more money for charitable and religious purposes in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under Section 11(1)(a) of the Act. The contention that only that part of the income of a charitable trust should be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned, cannot be accepted, as it would lead to an anomalous situation. If the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year, the said repayment would be entitled to exemption from tax under Section 11(1)(a) of the Act in view of the circular above referred to. But, if the trust instead of taking a loan incurs expenses for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement under Section 11(1)(a) of the Act if the contention advanced by the Revenue is accepted. The construction which leads to such an anomaly has got to be avoided. There is nothing in the language of Section 11(1)(a) of the Act to indicate that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year or that utilization of such income for meeting the expenditure of the earlier year, would not amount to such income being applied for charitable or religious purposes.
7. In the case of CIT v. Maharana of Mewar Charitable Foundation the Rajasthan High Court considered the question whether the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year in the background of the following facts :
The Maharaja of Mewar had donated a sum of Rs. 11 lakhs to the assessee, i.e., Maharana of Mewar Charitable Foundation, which was a public charitable trust. During the previous year relevant to the assessment year 1970-71, the assessee spent a sum of Rs. 95,863 towards the aims and objects of the trust and the income of the assessee during the said year was only Rs. 36,093 and, thus, a sum of Rs. 59,770 was spentin excess of the income during the period relevant to the assessment year 1970-71. In the previous year relevant to the assessment year 1971-72, the assessee claimed adjustment of a sum of Rs. 59,770 against the surplus of income over expenditure during the assessment year 1971-72. The Income-tax Officer disallowed the claim of the assessee. The Appellate Assistant Commissioner of Income-tax allowed the said claim. The Tribunal, on appeal, affirmed the order of the Appellate Assistant Commissioner of Income-tax. On a reference, the Rajasthan High Court, after referring to several decisions on the point, has held that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under Section 11(1)(a) of the Act. We are in respectful agreement with the view expressed by the Rajasthan High Court and we also hold that the deficit arising out of excess of expenditure over income during the previous year relevant to the assessment year should be set off against the surplus of income over the expenditure relating to the assessment year in computing the taxable income of the latter assessment year.
8. Viewing the question from a different angle also, we are of the opinion that the claim made by the assessee was well-founded. In the case of CIT v. Ganga Chanty Trust Fund : [1986]162ITR612(Guj) this court considered the question as to whether deduction of income-tax liability must be taken as an outgoing before the surplus could be ascertained in order to give meaning to the expression 'income'. The court also considered the question as to whether for the purpose of determining the income or surplus available to the trust for the purpose of application of its income towards charitable or religious objects, the surplus realised or available on commercial principles should be taken into consideration or not. After reviewing the case law on the subject, it has been held that income derived from the trust property must be determined on commercial principles and in doing so, all outgoings including outgoings by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income arises. While holding that the income derived from the trust property must be determined on commercial principles, this court has noted that if such an interpretation is not placed on Section 11(1)(a) of the Act, it would render the benevolent provisions found in Clause (a) of Section 11(1) of the Act nugatory.
9. In the case of CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust : [1992]198ITR598(Guj) this court considered the question as to whether having regard to the scheme of the Act 'income' referred to in Section 11(1)(a) of the Act is to be computed not in accordance with the provisions of the Act, but in accordance with the normal rules of accountancy under which the depreciation has to be allowed while computing such income under Section 11(1)(a) of the Act. In the said case, the assessee which was a registered public trust, had income mainly from immovable property. In the returns of income filed for the assessment years 1971-72 and 1972-73, the assessee claimed depreciation and calculated its income accordingly. The Income-tax Officer rejected the claim of the assessee taking the view that the income from house property was required to be calculated according to Sections 22 to 27 of the Act. In appeal, the Appellate Assistant Commissioner held otherwise. The Tribunal dismissed the appeal of the Revenue. On a reference, this court has held that computation under different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge and the income from the properties held under the trust has to be arrived at in the normal commercial manner without classification under the various heads as set out in Section 14 of the Act.
10. In view of the two decisions of this court above referred to, it is the well-settled position that income derived from the trust property has to be determined on commercial principles and if commercial principles for determining the income are applied, it is but natural that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made having regard to the benevolent provisions contained in Section 11 of the Act and will have to be excluded from the income of the trust under Section 11(1)(a) of the Act.
11. In view of the above discussion, we are of the opinion that, on the facts and in the circumstances of the case, the assessee is entitled to carry forward expenses for set off in the subsequent year. The question referred to us is, therefore, answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
12. The reference stands disposed of accordingly with no order as to costs.