Surplus generated by educational institutions can be tax-exempt

Our trust has incurred deficit in the earlier years. Now in the current year there is sizeable income out of which we are required to spend 85%. Can we deduct deficit of earlier years?

Income of the trust has to be applied in the year of income and there is no specific provision in the Income Tax Act, 1961, for set-off of deficit of earlier year(s) in case of a charitable or religious trust.

But at the same time position of law has been fairly decided that income of the trust has got to be computed on commercial principles.

If commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the 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 adjustment has been made having regard to the benevolent provisions contained in the Section 11 of the Act and that such adjustment will have to be excluded from the income of the trust under Section 11(1)(a) of the said Act.

Whether our educational institution can have surplus without tax liability? Whether we can construct a building out of the surplus fund?

Merely because an educational institution accumulates income, it does not go out of consideration of section 10(23C)(vi) of the Income Tax Act, 1961, provided, however, that the same is not applied for purposes other than education.

Accumulation of surplus by an educational institution or trust is within parameters of the Act and it will be entitled to benefit of exemption.

Capital or revenue expenditure towards acquisition of assets including a building would be allowable as application provided the assets are for the purposes of objects of the trust.

The writer is a chartered accountant and can be reached at ghiatarun@rediffmail.com