UMMEED CHILD DEVELOPMENT CENTER,MUMBAI vs. ITO (EXEM)-2(4), MUMBAI

The brief facts of the case are that assessee is a trust and registered with Charity Commissioner of Maharashtra and section 12A of the Act with Director of 3 & 1839/Mum/2023 Ummeed Child Development Centre Income Tax (Exem.) vides registration no. INS/36034, dated: 04.09.2001. Assessee filed its return of Income on 30.09.2015 along with Income & Expenditure Account, Balance Sheet and Audit Report in Form No. 10B declaring total income at Rs. NIL.

We have gone through the order of AO, Order of the Ld. CIT (A) and submissions of the assessee along with grounds of appeal

Now for sake of clarity and better understanding of the issue under consideration, the relevant provisions of newly inserted section 11(6) of the Act are reproduced herein-below for ready reference: “11(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.” This newly inserted section 11(6) of the Act w.e.f. A.Y. 2015-16 restricts allowance of depreciation for the purposes of application of income, as this section assumes that assessee must have taken purchase of asset itself as application of income in the year, the asset was acquired. So, it will tantamount to double claim by the assessee i.e., once on the purchase itself and then depreciation thereon.

In our observation, the entire relevant facts can be summarized as under: i. The Appellant has incurred expenses towards purchase of fixed assets which has been capitalized during the year. The said amount is shown under the head "Fixed Assets and depreciation on the same has been claimed as an expense in the Income & Expenditure Account; ii. The amount spent on purchase of fixed assets has not been shown as application of income of the trust, which is evident from the Income & Expenditure Account and also the Computation of Total Income; 5 & 1839/Mum/2023 Ummeed Child Development Centre iii. Further, all the expenses incurred on purchase of fixed assets in current year and earlier years is always capitalized as "Fixed Assets" and never treated as application of income; iv. Depreciation has been claimed on the wear & tear of the assets as per the provisions of the Act which is valid in law.

It is established on record that assessee never claimed purchase of asset as application of income. Assessee only claimed depreciation on assets as application of income. In view of this, we observed that assessee never claimed double deduction. The insertion of section 11(6) of the Act w.e.f. A.Y. 2015-16 is done to curb the practice where assessee claimed deprecation of income on purchase of assets as well as depreciation thereon. The introduction of section 11(6) was intended to overrule certain judicial pronouncements in favour of assessee wherein it was held that assessee is entitled to claim application of income on purchase of assets and deprecation also on the ground of commerciality.

In the instant case, assessee already following the sprit and intentions of section 11(6) of the Act by not claiming purchase of asset as application of income. Section 11(6) of the Act is applicable only in those cases where assessee has already claimed purchase of asset as application of income in any of the previous years and simultaneously claiming depreciation also as application of income relying on various judicial pronouncements in their favour. We found the interpretation taken by AO as wrong and found the practice being adopted by assessee consistently as correct even after the insertion of section 11(6) of the Act. In view of this Ground A with its sub grounds is allowed and AO is directed

Next Ground of appeal pertains to claim of assessee being loss on sale of assets amounting to Rs. 51,489/-. As discussed, (supra), assessee is not claiming purchase of assets as application; consequently all the commercial principles of accounting will be applied, including loss on sale of assets, if any. It is an undisputed fact that the loss that assessee had incurred on sale of fixed assets and the same has been debited to the income and expenditure account of the assessee. We find that the CBDT in Circular No. 5- P(LXX-6) dated 19th June, 1968 has taken a view that the income of the trust should be computed on the basis of commercial principles and should be understood in its commercial sense.

The relevant extract of the Circular reads as under: “Section 11(1) provides that subject to the provisions of sections 60 to 63, "the following income shall not be included in the total income of the previous year. . ....” The reference in clause (a) is invariably to "Income" and not to "total income". The expression "total income has been specifically defined in section 2(45) as "the total amount of income computed in the manner laid down in this Act". It would, accordingly, be incorrect to assign to the word "income", used in section 11(1)(a), the same meaning as has been specifically assigned to the expression "total income" vide section 2(45). In the case of a business undertaking, held under trust, its "income" will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any 7 & 1839/Mum/2023 Ummeed Child Development Centre debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).” We further find that in the following decisions, it has been held that the income of the charitable assessees needs to be computed on the basis of commercial principles: • CIT vs. Programme for Community Organisation (1997) 228 ITR 620 (Ker.) since approved by the apex court (reported at (2001) 248 ITR 1 (SC) • CIT v. Rao Bahadur CalavalaCunnan Chetty Charities (135 ITR 485)(Mad); • CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust (70 taxman 228) (Guj) • CIT v. Institute of Banking Personnel Selection (131 taxman 386)(Bom).

We further find that Clause (6) has been inserted in Section 11 of the Act w.e.f. 01.04.2015 which inter alia mandated that income which is required to be applied or accumulated or set apart for application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset the acquisition of which has been claimed as an application of income in any previous year. The aforesaid clause has been inserted for the purposes as discussed (supra) that in case purchase itself has been claimed as application, no depreciation or other charge can be claimed. But in matter before us as observed (supra), assessee has never claimed purchase of assets as application, hence depreciation as well as loss on sale of assets is to be allowed as application for the purposes of income tax computation. In view of this, claim of the assessee is allowed and order of AO is set aside and ground is allowed.

In the result, appeal of the assessee is allowed.

Since we have already decided the similar ground of appeal raised by the assessee vide ground no. A with its sub-grounds in AY 2015-16 and the facts of this appeal are exactly similar and are applicable mutatis mutandis. Hence, this appeal of assessee is also allowed.

In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on 6th day of November, 2023.