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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI ABY T VARKEY, HON’BLE & SHRI S. RIFAUR RAHMAN, HONBLE
PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 13.07.2023 for the A.Y.2016-17.
Brief facts of the case are, assessee filed its return of income for the A.Y. 2016-17 on 20.03.2017 along with the Income And Expenditure Account, Balance Sheet and Audit Report in Form – 10B declaring total income at ₹.NIL. The case was selected for scrutiny and notices under section 143(2) and 142(1) of Income-tax Act, 1961 (in short “Act”) were issued and served on the assessee along with questionnaire. In response Authorised Representative of the assessee submitted the information as called for through I.T. Portal.
The Trust is registered with the Commissioner of Income Tax, Bombay City – IV, under section 12A of the Act. The assessee is engaged in charitable activities, relief to the poor, education and medical relief. During the course of assessment proceedings, Assessing Officer observed that assessee has claimed expenditure on account of depreciation of
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation ₹.27,68,680/-. He observed that the assessee has claimed depreciation as well as capital expenditure for addition to fixed assets. Accordingly, a show cause notice was issued to the assessee asking for clarification on the above issue with documentary evidences in view of the amended provisions of section 11(6) of the Act. In response, Ld.AR of the assessee submitted as under: -
"...As trust has claimed exemption u/s 10(23C) and not u/s 11 as mentioned in showcause hence applicability of section 11(6) doesn't arise in our case. We would further like to state that as trust while creating assets has never taken utilization of fund u/s 11(1A) hence depreciation taken under revenue should be allowed. We are also attaching judgement CIT v/s Rajasthan and Gujarat Charitable Foundation Poona (SC) to support our stand 4. After considering the above submissions, Assessing Officer rejected the same and observed that on perusal of the return of income, assessee itself claimed exemption under section 11 of the Act and also assessee has not submitted any documentary evidences in support of its claim that the assets were created from the funds which were never taken as utilization under section 11(1A) of the Act. Therefore, he came to the conclusion that the claim of the assessee is not allowable as it tantamount to double deduction. He discussed in his order that by way of claiming capital expenditure towards purchase of fixed assets and secondly by way of depreciation. He discussed in his order the old provision and new
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation provision as amended by the Finance Act. By relying on the amended provisions of section 11(6) of the Act, he has disallowed the depreciation claimed by the assessee.
Aggrieved with the above order, assessee preferred appeal before the Ld. CIT(A) and before Ld. CIT(A) assessee has filed detailed submissions which is reproduced at Page No. 3 to 6 of the appellate order. After considering the submissions of the assessee, Ld. CIT(A) has rejected the submissions and grounds raised by the assessee with the following observations: -
“4.1.3 In short, the appellant had revenue receipts of Rs. 3,18,00,669/- and shown revenue expenditure (application of income) to the tune of Rs. 2,75,51,389/-, which includes rates & taxes of Rs. 98,842/-, establishment expenses of Rs. 19,95,354/-, educational expenditure of Rs. 2,11,541/-, medical relief of Rs.2,24,76,972/- and depreciation of Rs. 27,68,680/-, The AO has pointed out that the appellant had claimed depreciation of Rs.27,68,680/- (Rs. 1,11,93,813-Rs. 84,25,133) as application of income which is not eligible for exemption u/s 11(6) of the I.T. Act. The appellant contended that it did not created assets after utilization of fund u/s 11(1A) of the Act. However, the appellant did not furnish any documentary evidence in support of its submission during the assessment proceedings as well as appellate proceedings to show the actual source of purchase of assets. Further, the appellant submitted that there was no provision in section 10(23C) of the Act similar to section 11(6) of the Act. This particular argument has been examined and found that there is an explanation below to section 10(23C) of the Act, which restrict the depreciation on assets be an application of income, if the asset was acquired by way of application of income. In the present case, it is seen that the appellant claimed accumulation of income up to 15% of its income year-to-year basis and the same accumulated income was invested in the acquisition of assets. For example, the appellant has shown accumulated amount in the Balance sheet as on 31.03.2016 at
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation Rs.2,39,32,579/- and shown gross investment in acquisition of furniture & fixture at Rs. 3,03,24,550/-. This shows that most of the accumulated income has been applied for acquisition of assets, which has already been exempted by way of accumulation upto@15% of its income year-to-year basis under deeming concept. Hence, it is safely held that the assets were acquired out of the accumulated income and directly hit by the newly inserted explanation below to section 10(23C) of the Act. Thus, applicant submission that there is no provision under section 10(23C) of the Act parallel to section 11(6) of the Act is incorrect. 4.1.4. After consideration of all these facts and provision of law, I am of the considered opinion that the depreciation on the fixed asset in the present case is not an application of income for the present assessment year u/s 10(23C)(iv) of the Act and the AO has rightly restricted the exemption by not considering the depreciation as application of income. Thus, the sole issue of the appellant is dismissed.” 6. Aggrieved, assessee is in appeal before us raising following grounds in its appeal: -
“Disallowance of Rs. 27,68,680/- being depreciation claimed on fixed assets 1. The Comm. of Income Tax (Appeals), NFAC Delhi [CIT(A)] erred in upholding the disallowance of depreciation of Rs.27,68,680/- claimed on fixed assets. 2. The CIT(A) erred in failing to appreciate that the appellant trust had not claimed additions to fixed assets as application of income and hence they were entitled to allowance of depreciation claimed. Allowance of capital expenditure of Rs. 56,11,537/- being additions of fixed assets 3. The CIT(A) erred in not allowing capital expenditure of Rs. 56,11,537/- as application of income for the said year. 4. The CIT(A) erred in failing to appreciate that since he had upheld disallowance of depreciation on fixed assets, he ought to have allowed the said capital expenditure as application of income as the same was not claimed by the appellant trust in its return of income.”
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation 7. At the time of hearing, Ld.AR of the assessee submitted that assessee is into charitable activities by running hospital and it was submitted that assessee is registered under section 10(23C)(iv) of the Act and eligible to claim exemption under section 10(23C)(iv) of the Act. Ld.AR of the assessee submitted that during the current assessment year assessee has claimed depreciation and it was submitted that assessee has not claimed any capital expenditure. Therefore, assessee should be allowed to claim depreciation. In this regard, she brought to our notice Page No. 36 of the Paper Book which is the computation sheet and it was submitted that assessee has received “Income from other sources” which includes, interest, voluntary contributions and receipt from patients, out of which assessee has applied for the charitable purposes and she also brought our attention to Page No. 38 of the Paper Book which is the Income and Expenditure Account. It was submitted that majority of the receipts is received from patients and she also brought to our notice that out of total receipt from patients of ₹.2,69,34,204/-, assessee has applied towards the objects of the Trust i.e., medical relief to the extent of ₹.2,24,76,972/- and further it was submitted that Establishment Expenses and Rates Taxes were claimed as expenditure to the extent of ₹.19,95,354/- and ₹.98,842/- respectively. Apart from the above assessee has claimed the depreciation of ₹.27,68,680/-.
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation 8. Ld.AR of the assessee submitted that during the year assessee has made addition of fixed assets to the extent of ₹.56,11,537/- and the investments in fixed assets was never claimed as application of funds by the assessee. Therefore, it was submitted that as per the amended provision from assessment year 2015-16 the assessee has the option to claim either expenditure on capital assets can be claimed as application of funds or depreciation. Ld.AR of the assessee submitted that as per the amended provisions of section 11(6) of the Act, assessee has the option to choose one of the method and accordingly, assessee has preferred to claim the depreciation in the current assessment year as per the finance records can be seen that assessee has not claimed any application of funds during the year except claimed the actual depreciation.
On the other hand, Ld. DR objected to the above submissions and heavily relied on the findings of the lower authorities.
Considered the rival submissions and material placed on record, we observe that during the current assessment year assessee has claimed depreciation of ₹.27,68,680/- as the expenditure. However, Assessing Officer disallowed the same by observing that the assessee has claimed 85% of the receipt as application of funds. Therefore, assessee cannot
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation claim double deduction by way of claiming investments in fixed assets as application of funds at the same time claiming the depreciation as expenditure as per the amended provisions of section 11(6) of the Act. Before us, Ld. AR submitted that the amendment made w.e.f A.Y.2015-16 the assessee is allowed to claim the application of funds as deduction which are also applied for purchase of fixed assets or assessee may claim only the depreciation without claiming the capital investments from the gross receipts of the society, with that submission Ld.AR of the assessee brought to our notice financial statements for the A.Y.2015-16 and submitted that assessee intend to follow only the second method i.e., claiming the depreciation. Accordingly, she brought to our notice the financial statements of A.Y. 2015-16 and A.Y.2016-17. From the analysis of the above financial statements and in order to allow the assessee to follow one of the approved method in the amended section 11(6) of the Act i.e., to claim only the depreciation and source of the investments in capital assets are sourced not from application of regular funds of the society. We observe that assessee has carried forward fixed assets from financial year A.Y. 2014-15 for the value of ₹.1,16,68,851/- since the assessee intend to follow the method of claiming depreciation as deduction, the opening balance as on 01.04.2014 which were procured on the basis of application of funds in those assessment years. Therefore,
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation in our view, assessee cannot claim any depreciation on the opening balance of the assets as on 01.04.2014. Therefore, during the assessment year i.e., A.Y. 2015-16, assessee has made the addition of ₹.1,30,44,162/- in the fixed assets, from the finance records we observe that the funds mobilized to procure the above assets are as under: -
a) The assessee has opening cash / bank balance of ₹.2,19,34,901/- and closing cash balance of ₹.1,84,55,148/-. The difference of ₹.36,61,195/-, was utilized for procuring the above assets.
b) We observe that assessee has collected corpus donation during the year to the extent of ₹.38,95,000/-. Those funds also utilized for the purpose of procuring the fixed assets.
c) Further, we observe that from the funds available with the society from the regular activities of running the hospital and other charity activities, assessee has a surplus funds of ₹.43,38,754/- during this assessment year. Therefore, the assessee cannot utilize the surplus from operation in procuring the fixed assets when the assessee intend to follow the depreciation method.
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation 11. Therefore, we direct the Assessing Officer to arrive at the adjusted WDV as on 31.03.2015 i.e., by removing the WDV as on 01.04.2014 and the surplus funds generated in the regular activities to the extent of ₹.43,38,754/- from the fixed assets procured during the A.Y.2015-16. Therefore, the assessee should be allowed to claim the depreciation on the value of adjusted WDV value of ₹.87,05,408/- (i.e. procured from the special funds and opening cash / bank balance).
Coming to the current assessment year, we observe that assessee has procured fixed assets to the value of ₹.56,11,537/-. We noticed that during the year, assessee has received corpus donation and specific fund / donation for the value of ₹.58,89,476/-. Therefore, during this assessment year, assessee has received corpus donation and a specific donation to the extent of fixed assets purchased by the assessee. Therefore, the assessee has not utilized any of the regular funds from the operation for the purpose of procuring any fixed assets. Therefore, we direct the Assessing Officer to determine the actual depreciation for the current assessment year to be determined based on the adjusted WDV as on 01.04.2015 and actual additions made during the current assessment year. We have determined the above details from the following cash flow statement, for the sake of clarity it is reproduced below: -
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation Statement of Cash Flows Particulars 31st March 31st March 2016 2015 Surplus as per income and expenditure a/c 42,49,280 16,89,717 Adjustments for: Depreciation 27,68,680 24,81,423 Interest income (31,51,337) (13,30,656) Interest expense - Operating Surplus/(deficit) before working 38,66,623 28,40,484 capital changes Working capital changes: (Increase) / Decrease in income outstanding (3,94,471) 4,25,900 (Increase) / Decrease in advances 3,27,306 4,79,223 Increase / (Decrease) in liabilities (5,71,488) 21,38,978 (Increase )/ Decrease in Inventories 3,40,071 (15,45,831) Cash generated from operations (2,98,582) 14,98,270 Net cash from operating activities (A) 35,68,041 43,38,754 Cash flows from investing activities Sale of fixed asset - - Purchase of fixed assets (56,11,537) (1,30,44,162) Interest income 31,51,337 13,30,656 Net cash used in investing activities (B) (24,60,200) (1,17,13,5061 Cash flows from financing activities Corpus donation received 21,64,200 38,95,000 Spefic fund - Kukma School Project 37,25,276 - Spefic fond - Medical Relief - - Long-term borrowings - - Long Term Loans & Advances - - Interest paid - - Net cash used in financing activities (C) 58,89,476 38,95,000 Net increase/(decrease) in cash and cash 69,97,317 (34,79,752) equivalents (A + B + C) Cash and cash equivalents at beginning of 1,84,55,149 2,19,34,901 period Cash and cash equivalents at end of period 2,54,52,465 1,84,55,149 Cash flow statement (Continued) for the year ended 31 March 2016 31st March 31st March 31st March Particulars 2016 2015 2014 Cash and cash equivalents comprise: Balance with banks - In savings accounts 1,03,48,612 19,07,216 46,77,246 27,70,030 -In deposit account 1,47,50,000 1,63,50,000 1,72,41,165 8,91,165 Cash on hand 3,53,853 1,97,932 16,490 Cash and cash equivalents as at 2,54,52,465 1,84,55,148 2,19,34,901 36,61,195 the year end *
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation 13. From the above we direct the Assessing Officer to allow the assessee to claim the depreciation on the fixed assets, which are procured from the special funds and not from the regular funds from charitable activities. We direct the Assessing Officer to allow the assessee to claim the depreciation as per the above direction since assessee has decided to follow this method and assessee intends to consistently follow the above method in its financial statements. In short, we direct the Assessing Officer to first determine the adjusted WDV as on 01.04.2015 and add the additions made during F.Y. 2015-16. The depreciation may be calculated on the value of above adjusted figures. Accordingly, appeal filed by the assessee is partly as per above directions.
In the result, appeal filed by the assessee is partly allowed as per above direction.
Order pronounced in the open court on 20th December, 2023
Sd/- Sd/- (ABY T VARKEY) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 20/12/2023 Giridhar, Sr.PS
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ITA NO. 3156/MUM/2023 (A.Y: 2016-17) Sundeep Foundation
Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum
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