THE DY. CIT (EXEMPTIONS), CIRCLE-1,, AHMEDABAD vs. UTTHAN SEWA TRUST,, AHMEDABAD

PER MAHAVIR PRASAD, JUDICIAL MEMBER

ITA No . 21/Ahd/2018 2 . A.Y. 2014-15 1. The Ld. CIT(A) has erred in the law allowing the depreciation of Rs,47,10,927/- to the assessee which amounts to double deduction as 100% deduction was allowed to the assessee as application of income. 2. The Ld.CIT(A) has erred in the law and on facts in allowing the benefit of the deficit of Rs.2,59,85,896/- for earlier years against the income of subsequent year in absence of any express provision m the Act regarding the same and also by overlooking the decisions in favour of revenue in this regard. 3. The revenue craves over leave to add, alter, amend, modify, substitute, delete and/or rescind all or any Grounds of Appeal on or before the final hearing, in necessity so arises.

4.1 In this regard, vide notice u/s. 142(1) (in point No. 18) dated 12/08/2016, the assessee was required to show-cause as to why the claim of depreciation should not disallowed as it amounts to double deduction. In this regard the assessee submitted the required details vide letter dt. 29/08/2016 that, I. The scheme of taxation of charitable/ religious trusts is quite different from the taxation of other taxable entities under the Income-Tax Act,1961. In this regard, it will be appropriate to refer to the provision of section 11(1) of the Act. for sake of ready reference the relevant part of section 11(1) is produce as follow: II. Income from property held for charitable or religious purposes. 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 purposes, to the extent to which such income is applied to such purposes in India; and where any such income is accumulated or set apart for application to such

ITA No . 21/Ahd/2018 3 . A.Y. 2014-15 purposes in India, to the extent to which the income so accumulated or set apart is not excess of fifteen percent of income from such property; b. income derived from property held under trust in par only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of fifteen percent of the income from such property: c. income derived from property held under trust- i. created on or after the first day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purpose outside India, and ii. for charitable or religious purposes, created before the first day of April,1952, to the extent to which such income is applied to such purposes outside India provided that the board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income; d. income in the form of voluntary contribution made with specific direction that they shall form part of the corpus of the trust or institution. From the aforesaid provisions of section ll(l)(a) of the Act, it may be seen that income derived from property held under the trust, wholly for charitable and religious purposes will be exempt to the extent to which such income is applied towards the objects of the trust in India where such income is accumulated or set apart for application towards such object in India, then the same will also be exempt to the extent to which the income is so accumulated or set apart, provided the same is not in excess of fifteen percent of the income from such property. Besides, in this connection the provision of section 11(2), as well as section 11(3) of the I.T.Act are also relevant. From the aforesaid provisions of section 11(1)(a) of the Act, it is quite clear that the scheme of taxation of charitable/religious trust is quite different from the taxation of other taxable entities under the Act. the reason for the same is therefore exemption under section 11(1)(a), the application of income and /or accumulation of such income for the purposes of the objects of the trust, is relevant. Thus, the concept of "total income", as contemplated u/s. 2(45) of the Act, is not relevant in the present context. 2. The concept of "Total Income", is not applicable in case of charitable/ religious trust

ITA No . 21/Ahd/2018 4 . A.Y. 2014-15 From the provisions of section 11(1)(a) of the Act, it may be seen that the term used therein is "Income " and not "Total Income", which is applicable for the purposes of taxation of other taxable entities under the Act.

5.2 I have carefully considered rival contentions and observations made by the A.O. in the assessment order. It is seen from the order of assessment that A.O. has disallowed carry forward of deficit of Rs.2,59,85,896/- to be set off against current year's income. The appellant has relied upon the order of jurisdictional High Court in the case of CIT vs Shri Plot Shwetamba-r Murtipujak Jain Mandal 211 ITR 293(Guj.), CIT vs Maharana of Mewar Charitable Foundation (1987) 164 ITR 439 476 (Raj), Raguvanshi Charitable Trust & Others v. DIT (2011) 211 Taxation 250 (Del) etc.. Hon'ble Gujarat High Court in the case of Shri Plot Shwetambar Murtipujak Jain Mandal has held as follows :- "A bare perusal of section 11 of the Income-tax Act, 1961, 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 the income had arisen. The word "apply" means "to put to use" or "to turn to use" or "to make use' or "to put to practical use". Having regard 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 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

ITA No . 21/Ahd/2018 5 . A.Y. 2014-15 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. 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 and 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. Income derived from 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)."

5.3 I agree with the contention of the appellant as well as the reliance placed on the: decision of Jurisdictional Gujarat High Court and hereby direct the A.O. to allow the benefit of the deficit of current year against the future incomes. While giving effect of this order, AO is directed to allow capital expenditure incurred from income of the trust as application of income including depreciation and deficit of earlier years first. Thereafter the excess of expenditure over the income of current year would be allowed to carry forward as deficit. No accumulation u/s 11(1)(a) @ 15% would be allowed alongwith carry forward of deficit. Accordingly, ground of appeal No. 2 is allowed subject to these remarks. 6 The last ground of appeal is residuary in nature. Appellant has not availed this ground of appeal. Accordingly, this ground of appeal is dismissed. 7. In the result, the appeal is partly allowed.

ITA No . 21/Ahd/2018 6 . A.Y. 2014-15 6. We have gone through the relevant record and impugned order and heard both the parties. At the outset, ld. A.R. stated that the matter is squarely covered by the judgment of the Hon’ble Supreme Court in Civil Appeal No. 7186 of 2014 in the matter of Rajasthan And Gujarati Charitable Foundation Poona wherein Hon’ble Supreme Court has allowed such claim and dismiss the appeal of the revenue with following observation:

”These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as 'Act'). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable puruposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in 'Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)' [(2003) 131 Taxman 386 (Bombay)]. In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner: 3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income

ITA No . 21/Ahd/2018 7 . A.Y. 2014-15 from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of . computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Curt, we

ITA No . 21/Ahd/2018 8 . A.Y. 2014-15 answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department. 4. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department.”

After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in 'Lissie Medical Institutions v. Commissioner of Income Tax'. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

ITA No . 21/Ahd/2018 9 . A.Y. 2014-15 For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters.”

Order pronounced in Open Court on 20 - 02- 2020

Sd/- Sd/- (PRADIP KUMAR KEDIA) True Copy (MAHAVIR PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 20/02/2020 Rajesh Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) – 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad