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: The Supreme Court

The Supreme Court in the case of CIT (E) v. Subros Educational Society (2018) 303 CTR 1/166 DTR 257 (SC) held that as per S. 11 of Income Tax Act: Property held for charitable purposes – Application of income – 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.


The Income Tax Department filed several petitions and appeals in reaction to the judgments handed down by several High Courts, which allowed assessees the benefit of depreciation on the assets they had purchased. The assessees were all registered charitable organizations under Section 12A of the Income Tax Act (which will be referred to simply as the “Act” from this point forward). According to Section 11(1)(a) of the Act, the full expenditure expended for the purchase of capital assets was considered as an application of income for charitable purposes in the year before the year with which the Court was concerned and in which depreciation was claimed. This happened in the year when depreciation was claimed.

The Assessing Officer disallowed the depreciation claimed under Section 32 of the Act because, once the capital expenditure is treated as an application of income for charitable purposes, the assessees have effectively received a 100 percent write-off of the cost of assets, and granting depreciation would be equivalent to giving the assessee a double benefit. This position was adopted to deny the claimed depreciation under Section 32 of the Act.

In the majority of these cases, the CIT (Appeals) had supported the view, but the ITAT had reversed it, and the High Courts had endorsed the ITAT’s ruling, resulting in the dismissal of the Income Tax Department’s appeals. From the judgments of the High Courts, it was possible to conclude that the High Courts have, for the most part, followed the Bombay High Court’s decision in the case Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS) [(2003) 131 Taxman 386 (Bom)(HC), which ruled in favor of the Assessee.

The Court was of the view that the position taken by the Bombay High Court effectively established the legal principles, and there is no need to intervene. It was said that the majority of High Courts adopted the aforementioned viewpoint, except for the High Court of Kerala. In “Lissie Medical Institutions v. Commissioner of Income Tax,” the High Court of Kerala expressed an opposite position. The court further noted that, upon realizing that the Income Tax Act lacked an explicit provision in this regard, the legislature amended Section 11(6) of the Act through Finance Act No. 2/2014, which became applicable for the Assessment Year 2015-2016. This change was introduced in response to the court’s prior observation that the Income Tax Act lacked a particular provision in this regard.

The court concurred with the argument and noted that the Delhi High Court had rightly established that the amendment in question applies prospectively. It was made very clear that if the taxpayer is awarded depreciation, he would also be permitted to carry the depreciation forward. Hence, the Supreme Court affirmed the High Court’s decision, and departmental appeals were refused.

Yet, the Income-tax Department filed an application stating that CA No. 5171 of 2016 was grouped with other appeals, and on 13 December 2017, the Supreme Court issued the aforementioned decision to resolve the batch cases. This request was filed on December 13, 2017. One question, however, remained unanswered: whether or not extra expenses might be deducted the next year.


The court’s judgment on depreciation announced on December 13, 2017, has been made public. The sole issue posed in the miscellaneous application was whether or not any excess expenditures paid by the trust or charity organization in prior assessment years might be deducted from the income of succeeding years by invoking Section 11 of the Income-tax Act of 1961. This question was the only one asked.


Even though the Supreme Court agreed that a mistake had been made and that the issue had not been addressed in the prior ruling, the Court determined during the hearing that there was no foundation for the application and, as a consequence, it was denied.


The Supreme Court has dismissed the Revenue Miscellaneous Application and confirmed the Delhi High Court’s ruling in the Subros Educational Society case (IT No. 382 of 2015 dt. 23rd September 2015). In that judgment, the Delhi High Court ruled that any excess expenditures spent by the trust or charity organization in an earlier assessment year might be deducted from the following year’s revenue.

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Judgement Reviewed by Jay Kumar Gupta, School of Law, Narsee Monjee Institute of Management Studies, Bengaluru

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