COMMISSIONER OF INCOME TAX vs. GUJARAT MARITIME BOARD

C/TAXAP/9/2017                                                                                                 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO.  9 of 2017 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE J.B.PARDIWALA Sd/­ and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Sd/­ ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? NO ================================================================ COMMISSIONER OF INCOME TAX Versus GUJARAT MARITIME BOARD ================================================================ Appearance: MRS MAUNA M BHATT  for the Appellant. MR SN SOPARKAR, SR.ADVOCATE with MR G H VIRK for the Opponent. ================================================================ CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

Date : 17/02/2020 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This Tax Appeal under Section 260A of the Income Tax Act, 1961, is at the instance of the Revenue and is directed against Page  1 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT the order passed by the Income Tax Appellate Tribunal, 'C' Bench, Ahmedabad, dated 27th April 2016, in the ITA No.2933/Ahd/2009 for the Assessment Year 2003-04. 2. On 16th January 2017, a coordinate bench of this Court passed the following order : “1. Leave to replace the order of assessment. 2. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned Income Tax Appellate Tribunal dated 27.04.2016 passed in ITA No. 2933/Ahd/2009 for assessment year 2003-04, Revenue has preferred the present Tax Appeal for the following proposed substantial questions of law: (A) Whether the assessee was not duty bound to give details of the premium received on sale of assets and when no details were furnished by assessee, the Assessing Officer was not right in calculating the revenue recognized in the relevant year as the premium was received for the period of 10 years to 20/25. when the assessee is assessed u/s. 11 (1) of the Act? (B) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in confirming the decision of CIT (A) and deleting addition of Rs.20,68,73,968=00 on account of depreciation, when the assessee is assessed u/s. 11 (1) of the Act? Page  2 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 3. We have heard Shri Manish Bhatt, learned advocate appearing on behalf of Revenue and Mr. S.N. Soparkar, learned counsel with Mr. G.H. Virk, appearing on behalf of the assessee. 4. Now so far as proposed question No. A is concerned, it is required to be noted that, as observed by the learned Tribunal, the assessee was following cash method of accountancy and upto the preceding year of assessment, the income of the assessee was exempted under Section 10 (20A) of the Income Tax Act being the local authority. The year under consideration was the first year after the exemption period was over. Therefore, the learned Tribunal has rightly held that, no addition was called for, of Rs.12,92,00,000=00 on account of Revenue recognition of the premium received on allotment of plots by way of spreading the revenue for a period of 10/20/25 years on the basis of AG (Audit) Report. The learned Tribunal has held in Para No. 10.3 as under:- “We have heard the rival contentions and perused the material on record. The issue arising in this ground has raised pursuant to report of AG (Audit), Rajkot relating to Premium Grant and Capital Receipt for being not recognized as revene so far and the suggestion was made to spread the premium for 25 years on account of waterfront/jetty and 10 years in the case of Alang. In our view, the above note of AG (Audit) refers to the presentation of the financial statements so that the true income gets reflected in the year under consideration, because the impugned Page  3 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT premium of Rs.131 crores was not pertaining to one specific year but was for many years and the suggestion was made to bifurcate the amount on the basis of lease period. It is worthwhile to mention here that we have already held that the assessee is not carrying on any business activity, rather carrying on charitable activities in the form of providing services relating to general public utility which in the case before us relates to maintaining of ports in the State of Gujarat. We further observe that both the lower authorities have not appreciated the fact that the accounts of the assessee were being maintained on cash basis upto Financial Year 2001-02 and certainly in the case of the assessee who carries on cash basis of accounting of what is received in a year has to be accounted for and there is no concept of bifurcating or apportioning any advance premium received. Further, it is also undisputed fact that the appellant Board was covered under the provisions of Section 10 (20A) of the Act as a Local Authority upto Assessment Year 2002-2003 and the income was exempt under this section and certainly whatever amount which have been received prior to 01.04.2002 gets covered therein. Therefore, in our view, no addition was called for Rs.12,92,00,000=00 on account of Revenue recognition of the premium received on allotment of plots by way of spreading the revenue for a period of 10/20/25 years on the basis of AG (Audit) Report. Thus, this ground of assessees appeal is also allowed.” Page  4 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 5. We are in complete agreement with the view taken by the learned Tribunal. Under the circumstance, the present Appeal qua question No. A is dismissed, as no substantial question of law arise. 6. Now so far as question No. B is concerned, as the fact that, other Appeal involving the same question of law being Tax Appeal No. 615/2012 is admitted by the Division Bench of this Court, the present Appeal is ADMITTED to consider the following substantial question of law: (B) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in confirming the decision of CIT (A) and deleting addition of Rs.20,68,73,968=00 on account of depreciation, when the assessee is assessed u/s. 11 (1) of the Act? 7. To be heard with Tax Appeal No. 615 of 2012. 8. Shri G.H. Virk, learned advocate waives service of notice of admission on behalf of respondent.” 3. Thus, we are called upon to consider the substantial question of law as formulated in paragraph no.6 of the order passed by this Court dated 16th January 2017 referred to above. We may note that the Tax Appeal No.615/2012 is already disposed of due to low tax effect. It appears that the substantial question of law as formulated in paragraph no.6, which is admitted, is required to be re-framed considering the facts of the case as under : Page  5 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT “Whether in facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the assessee is entitled to depreciation as per the Income Tax Act, 1961 as application of income while determining the income under Section 11(1) of the Income Tax Act, 1961?” 4. The facts giving rise to the present Appeal may be summarized as under : 4.1) The Gujarat Maritime Board, i.e. the respondent assessee, filed its return of income disclosing the income at Nil for the Assessment Year 2004-2005. The respondent-assessee is a statutory body governed by the Gujarat Maritime Board Act, 1981, and is engaged in the activity of advancement of general public utility by way of administering, control and managing minor ports in the State of Gujarat. The CIT, Gandhinagar, by order dated 15th June 2005, has granted registration under Section 12AA of the Act, 1961 with retrospective effect from 1st April 2002. 4.2) It appears that the return of the respondent-assessee was processed under Section 143(1)(a) of the Act, 1961 on 22nd March 2005. However, thereafter, the notice under Sections 143(2) and 143(1) of the Act, 1961, were issued. The Assessing Officer, after considering the reply of the assessee to the issues raised during the assessment proceedings, completed the assessment under Section 143(3) of the Act, 1961 by order dated 29th December 2006. Page  6 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 4.3) The Assessing Officer determined the total income at Rs.1,16,09,23,464=00 and taxed 85% thereof under Section 11(1) of the Act, 1961 amounting to Rs.44,21,89,898=00 at regular rate as AOP and the deemed income under Section 13 of the Act, 1961 amounting to Rs.71,87,33,565=00 at maximum marginal rate for taxation purpose. While determining the income of the respondent-assessee, the Assessing Officer did not allow the claim of the respondent-assessee for depreciation as claimed by the assessee being Rs.52,67,27,832=00 and reworked the depreciation allowable of Rs.42,29,21,795=00, difference being Rs.10,39,06,037=00 4.4) The assessee, being aggrieved and dissatisfied by the assessment order, preferred appeal before the CIT (Appeals) raising various grounds including denying the claim of depreciation of Rs.10,39,06,037=00. The CIT (Appeals), after considering the provisions of sub-section (6) of Section 43 of the Act, 1961, held as under : “The second ground of appeal is as follows: “Learned Addl. CIT has erred in law and on facts in denying the claim of depreciation of Rs.10,39,06,037." 3.1 As para 7 of the assessment order, Assessing Officer wanted to know basis of W.D>V. as on 01/04/2002 because he felt that as per Explanation 5 to section 32(1)(ii) irrespective of the fact that whether the assessee has provided the depreciation or not, the same will have to be taken into account for W.D.V. in the next year. Since the Page  7 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT assessee did not clarify to him, the Assessing Officer proceeded on the assumption that the depreciation pertaining to assessment year 2002-03 has not been taken into account for working out the Gross Block as on 01/04/2002 and consequently proceeded to rework the depreciation allowable. As per Assessing Officer's computation, depreciation allowable to the appellant is Rs.42,29,21,795/- in respect of Rs.52,67,27,832/-, the difference being of Rs.10,39,06,037/-. 3.2 The appellant's reply in the context is as follows: "We are enclosing herewith as Annexure-12 decision of Hon. ITAT, Rajkot bench in Kandla Port Trust vs. ACIT Circle Gandhidham, Kutch incidentally for A.Y. 2003-04 i.e. the same year as in appeal before your goodself. AO raised this issue for the first time in his letter dated 20/12/2007 and also handed over to us personally on the same day at 1730 hrs, when we appeared before him. On the top of it, on noting side of the file he instructed to submit all the details latest by 27/12/2007 was failing which he would take as if we had nothing to submit 25/12/2007 was the only day left. Further, nowhere from his above letter he disclosed his intention to disallow depreciation in contravention of provisions of section 43(6)(b) read with section 43(6)(b] of the Income-tax Act, 1961. Page  8 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Had he disclosed his intention, we would have elaborately submitted in the matter along with the enclosed decision for his ready reference. 3.3 In his rejoinder dated 25/03/2008, the Assessing Officer/D.R. drew attention to the proposed amendment in F.Y. 2008 wherein as per Explanation 6 to section 43 "cost of asset" has been amended for such assessee's where the income of the assessee was exempt from taxation before the relevant assessment year. It was stated that the assessee was the exempt from taxation before the relevant assessment year. It was stated that the assessee was the “Local Authority” till assessment year 2002-03 and its income was not taxable and therefore this amendment will apply to the calculation of “cost of asset” for assessment year 2003-04 as the amendment has been proposed with retrospective effect. It was stated that in view of this development, the calculation of the depreciation in the assessment order needs to be further reduced and the Authorised/Representative/Departmental Representative provided the computation whereby this claim comes to Rs.36,86,34,716/- and the consequent excess claim of depreciation is quantified as Rs.15,80,93,116/-. It was further stated that the decision of ITAT, Rajkot Bench in the case of Kandla Port Trust (supra) is no more applicable. 3.4 In this counter comments dated 15th April 2008, the Authorised Representative has stated that the depreciation had been claimed as per the law applicable and that even Page  9 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT on the day that submission has been given the proposal is still at a stage of Bill. As and when the bill becomes the Act, the appropriate action shall be taken. 3.5 The issue has been given serious consideration. I think, in view of the chronology of events as detailed out, the matter rests conclusively. The Finance Bill 2008 stands passed by the Parliament and have received assent of the President and have consequently become the Act. Therefore, in principle, the mandate of Explanation 6 to section 43 needs to be taken into account for computing depreciation. As per this Explanation, following three adjustment needed to be made in such assessees who were not required to compute their total income for the purpose of this Act: (a) The actual cost of asset has to be adjusted by any amount attributable to revaluation or such assets in the books of accounts; (b) The amount of depreciation provided for preceding previous year in the books of accounts shall be deemed to be the depreciation actually allowed under this Act for computing the cost of asset; and (c) Depreciation allowed under clause (b) has to be adjusted for the depreciation attributable to revaluation of assets. 3.5.1 It is clear that for whatever reasons the Assessing Officer, while computing the depreciation, did not have complete data available and computed the same, primarily keeping clause (b) of the explanation in view. Therefore, the Page  10 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT computation of depreciation will require a relook at the appeal effect stage to see whether (a) & (b) of this Explanation are also applicable or not. 3.5.2 Therefore, to sum up, the contention of the Assessing Officer that depreciation as claimed is not correct is upheld. Prima facie his disallowance working at Rs.15,80,93,116/- appeals to be correct. However, the same shall recomputed as per provisions or Explanation 6 to section 43 at the appeal effect stage after giving due opportunity to the appellant. Prima facie it appears that this will result in enhancement on this ground of appeal.” 4.5) Thus, the CIT (Appeals) upheld the order of the Assessing Officer holding that the depreciation as claimed is not correct and observed that the computation of depreciation requires a re-look at the appeal effect stage to see whether the clauses (a) and (b) of the Explanation 6 to Section 43 of the Act, 1961, are applicable or not. The CIT (Appeals), ultimately, reworked the income of the respondent-assessee by way of enhancement as under : “5.19 Based on that understanding and keeping in view relevant change in value of figures in various claims, I think it appropriate to compute the total income in the appellate order itself. Income from business as per sec.11(4) Income as per books Page  11 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Add :

Rs.64,96,00,374 (i) Depreciation

for

separate

consideration

Rs.9,83,87,745 (ii) Payment to GOG, claimed as Water Rs.44,38,23,000 Front royalty not allowable. (iii) Income not disclosed on account of Rs.12,92,00,000 “Premium on Plots” ---------------------------- Rs.67,14,10,745 Rs.1,32,10,11,119 Less : Depreciation as computed by A.O. Rs.36,86,34,716 Rs.95,23,76,403 =============== Income deemed not applied for purposes of the Board Rs.95,23,76,403 (–) Rs.64,96,00,374 = Rs.30,27,76,028 Application of income of the trust derived Rs.64,96,00,374 from various sources Income derived from business Rs. NIL Total Rs.64,96,00,374 Page  12 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Less : Application : Addition to fixed assets Rs.20,68,73,986 Rs.44,27,26,388 Less : 15% of income allowed for accumulation u/s.11(1) (15% of Rs.64,96,00,374) Rs.9,74,40,056 ------------------------------ Balance income deemed not applied for (B) Rs.34,52,86,332 the purpose of the trust ================ Hence the income deemed not applied for the purposes of Board is Rs.30,27,76,028 (A) + Rs.34,52,86,332 (B) = Rs.64,80,62,360 5.20. It may be noted that – (i) This figure is the same as computed by the Assessing Order in his rejoinder dated 25/03/2008. However, the same is subject to rectification on account of change in computation of depreciation figure, if any. (ii) The Assessing Officer's treatment of payment made to Government of Gujarat amounting to Rs.44,38,23,000/- has not been treated as application of appellate's income. 5.21. Hence, to sum up this composite ground, the appellant's income is assessed at Rs.64,80,62,360/- as Page  13 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT against Rs.38,79,23,874/- assessed by Assessing Officer and as against Nil declared by the appellant in its return of income. 5.22. In the result, the appeal results in enhancement of income. Since the enhancement has resulted due to computation provided by the Assessing Officers, which was due confronted to the Authorised Representative, no separate enhancement notice for this enhanced income.” 4.6) The assessee, being aggrieved by the aforesaid order passed by the CIT (Appeals), preferred appeal before the Income Tax Appellate Tribunal by raising various grounds. The Tribunal framed the substantial issues to be decided in the appeal as under : “6. The assessee has raised various grounds of appeal which are inter-connected, but in our view following substantive issues have been taken up by the assessee. 1. The ld. CIT(A) has erred in confirming the view taken by the Assessing Officer in holding that the activities carried out by the appellant were in the nature of business and not charitable activity for advancement of the object of general public utility. 2. The ld. CIT(A) has erred in law and on facts in confirming the disallowance of Rs.44,38,23,000/- by not allowing it as application of income without appreciating the fact that this amount of Rs.44,38,23,000/- has been spent Page  14 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT towards waterfront charges/royalty paid to Government of Gujarat. 3. Alternatively, ld. CIT(A) has erred in not appreciating the assessment of the appellant, being a charitable institution, and further applying the provisions of Section 43B of the Income-tax Act on the payment of royalty/waterfront charges paid to Gujarat Government after the due date of filing of return of the Trust. 4. The ld. CIT(A) has erred in framing assessment at an income of Rs.64,80,62,360/- by clubbing income under two provisions of Section 22(1) of the Act and also u/s.11(4) of the Act, without appreciating that the said income is being assessed twice. 5. The ld. CIT(A) has erred in confirming the addition made by the Assessing Officer of Rs.12,92,00,000/- as notional income on account of premium of Alang plots. 6. The ld. CIT(A) has erred in granting deduction for accumulation u/s. 11(1) of the Act only on net surplus and not on its gross receipts. 7. The ld. CIT(A) has erred in not allowing the deduction in relation to increase in the fixed assets being application of income amounting to Rs.20,68,73,986/-. 8. The ld. CIT(A) has erred in framing assessment u/s. 11(1) without granting depreciation amounting to Rs.36,86,34,716/-” Page  15 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 4.7) From the issues framed by the Tribunal referred to above, we are concerned with the Issues nos.7 and 8, for which the substantial question of law is framed while admitting the appeal and re-framed as stated herein above. The Tribunal, while dealing with the Issues nos.7 and 8, has held as under : “12. Next, we deal with the substantive ground Nos. 7 & 8, which as under: 7. The ld. CIT(A) has erred in not allowing the deduction in relation to increase in the fixed assets being application of income amounting to Rs.20,68,73,986/-. 8. The ld. CIT(A) has erred in framing assessment u/s 11(1) without granting depreciation amounting to Rs.36,86,34,716/-. 12.1 As regards the claim of depreciation as per Income-tax Act, we observe that while framing the assessment order, the ld. Assessing Officer determined the income under the provisions of Section 11(1) of the Act by adding back the depreciation claim in the books of accounts at Rs.9,83,87,745/- and allowing the application of income towards fixed assets at Rs.52,67,27,832/- and also again giving credit towards application of income by allowing depreciation as per books at Rs.9,83,87,745/-; whereas while determining income as per the provisions of Section 11(4) of the Income-tax Act, treating assessee-charitable- trust, as a business undertaking, firstly added the Page  16 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT depreciation as per books at Rs.9,83,87,745/- to the net profit shown in the Annual Audit Report and then allowing deduction of the depreciation as per Income-tax Act at Rs.42,28,21,795/-. On the other hand, ld. CIT(A), while framing his appellate order, again calculated the income u/s. 11(1) of the Act and u/s. 11(4) of the Act. Ld. CIT(A) and while determining the income u/s 11(1) of the Act, did not add back the depreciation claim in the books of accounts and simply allowed the addition to fixed assets during the year at Rs.20,68,73,986/-. Whereas, while determining the income u/s 11(4) of the Act, the ld. CIT(A) firstly added deprecation as per books at Rs.9,83,87,745/- and gave deduction to the depreciation as per Income-tax Act calculated by the ld. Assessing Officer at Rs.36,86,34,716/-. 12.2 Now the assessee is in appeal before the Tribunal against the order of the ld. CIT(A) for not granting deduction for depreciation as per Income-tax Act at Rs.36,86,34,716/- while determining the income u/s 11(1) of the Act. Here, we would like to mention that we have no information on record about any appeal being filed by the Revenue for the Assessment Year 2003-04 against the order of the ld. CIT(A) dated 18.08.2009. From going through the orders of the lower authorities, we observe that the assessee has shown depreciation as per books of accounts calculated on straight-line method at Rs.9,83,87,745/- and the assessee has calculated depreciation as per Income-tax Act at Rs.52,67,27,832/-. We also observe that the ld. Assessing Officer while framing the assessment order u/s 143(3) of the Page  17 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Act has allowed depreciation as per Income-tax Act at Rs.42,28,21,795/- and has allowed the same while calculating income u/s 11(4) of the Act and thereafter, the ld. Assessing Officer revised the figure of depreciation as per Income-tax Act vide his letter dated 28.12.2007, communicated to ld. CIT(A) and the revised figure of depreciation shown therein was at Rs.36,86,34,716/-. The ld. CIT(A), while framing his appellate order, has allowed the depreciation as per Income-tax Act at Rs.36,86,34,716/- while computing income of appellant-trust has business u/s 11(4) of the Act. From our above observation, one fact which emanates out clearly is that figure of depreciation as per Income-tax Act has changed frequently and there is a variation in the final figure determined by the assessee as well as Department about the depreciation calculated as per Income-tax Act. 12.3 As regards the allowability of addition to fixed assets at Rs.20,68,73,986/- as application of income, there remains no dispute because the ld. CIT(A), while determining the income u/s 11(1) of the Act, has himself allowed the addition to fixed assets at Rs.20,68,73,986/- as deduction towards application of income and therefore, this substantive ground needs no further adjudication on this ground relating to allowability of deduction in relation to increase in the fixed assets being application of income amounting to Rs.20,68,73,968/-, as it has already decided in favour of the assessee by ld. CIT(A) and therefore no interference is called for in the ld. CIT(A)'s order for this ground. Page  18 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 12.4 Now the next issue which we have to examine is whether the assessee is eligible for deduction of depreciation as per Income-tax Act while determining the income under the provisions of Section 11(1) of the Act. In this regard it will be appropriate to refer the provisions of Section 11(1) of the Act and further for the sake of ready reference, Section 11(1) is reproduced hereunder: "11. (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 or religious 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 purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b) income derived from property held under trust in part 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 Page  19 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT India, to the extent to which the income so set apart is not in excess of fifteen per cent of the income from such property; (c) income derived from property held under trust-- (i) created on or after the 1st 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 purposes outside India, and (ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India:" From going through the aforesaid provisions of Section 11(1) of the Act, it may be seen that income derived from property held under a trust, wholly for charitable or religious purposes, will be exempt to the extent to which such income is applied towards objects of the trust in India and, where such income is accumulated or set apart for application towards such objects in India, then the same will also be exempt to the extent to which the income so accumulated or set apart, provided the same is not in excess of 15% of such income from the property. Besides, in this connection, the provisions of Section 11(2) as well as Section 11 (3) of the Act are also relevant. It is also quite clear that the scheme of taxation of charitable/religious trust is quite different from the taxation of other taxable entities under the Act, because Page  20 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT the application of income and/or the accumulation of such income for the purposes of the objects of the trust, is relevant. The term used in section 11(1) of the Act, the "income" and not "total income", which is applicable for the purposes of taxation of other taxation of other taxable entities under the Act. The word "income" should be understood in its commercial sense, i.e., book income, which necessarily envisages deduction of depreciation on the assets of the trust. In the present context, it has to be clearly understood if the depreciation is not allowed as a necessary deduction in computing the income of the charitable/religious trusts, then there would be no way to preserve the corpus of the trust and therefore, a charitable/ religious trust is entitled to depreciation in respect of the assets owned by it. 12.5 This view gets further supported by the decision of Hon'ble Madhya Pradesh High Court in the case of CIT vs. Raipur Pallottine Society, reported in [1989] 180 ITR 579 (MP), wherein it has held that the charitable trust is entitled to depreciation in respect of asset owned by it. It was further held that depreciation is the exhaustion of the effective life of a fixed asset owing to "use" or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure incurred in acquiring the asset over its effective lifetime and the amount of provision made in respect of an accounting period is intended to represent the proportion of such expenditure which has expired during Page  21 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT that period. If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of the trust. A charitable trust is, therefore, entitled to depreciation in respect of the assets owned by it. 12.6 We further observe that the Hon'ble Gujarat High Court in the case of CIT vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, reported in [1992] 198 ITR 598 (Guj), it was held that the income from the properties held under trust has to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 of the Income-Tax Act. The expression “income" has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. The computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chapter III. The amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes. 12.7 Respectfully relying on the decision of the Hon'ble Madhya Pradesh High Court in the case of Raipur Pallottine Page  22 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Society (supra) and decision of Gujarat High Court in the case Sheth Manilal Ranchhoddas Vishram Bhavan Trust (supra), we are for the considered view that the assessee is entitled to deprecation as per the Income-tax Act as application of income while determining income u/s 11(1) of the Act. However, in the present case, due to the variation of figures of depreciation as per Income-tax Act in between the assessee as well as Department, it will be appropriate to set aside the matter to the file of the ld. Assessing Officer for the limited purpose of calculating the correct amount of deprecation as per Income-tax Act for the year under appeal. It is needless to mention that proper opportunity of being heard to be given to the assessee and both the parties should arrive at a consonance on the correct figure of depreciation as per Income-tax Act and the same should be allowed as application of income for the purposes of determining income u/s 11(1) of the Act. Accordingly, this ground of the assessee is allowed for statistical purposes.” 5. Thus, the Tribunal, after due consideration of the provisions of Section 11(1) of the Act, 1961, held that the addition to the fixed assets at Rs.20,68,73,986=00 as deduction and application of income has already been allowed by the CIT (Appeals) and, therefore, the said ground need not be adjudicated. The Revenue did not prefer any appeal before the Tribunal against the allowance of addition to the fixed asset at Rs.20,68,73,986=00 as deduction towards application of income. Therefore, the amount referred to in the question proposed by the Revenue does not arise from the impugned order. The only issue which requires to be examined is, whether, while Page  23 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT determining the income under the provisions of Section 11(1) of the Act, 1961, the assessee is eligible for deduction of depreciation as per the provisions of the Act, 1961, or not? 6. It is therefore, necessary to refer to the provisions of Section 11(1) of the Act, which reads thus : “11. 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 or religious 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 purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b) income derived from property held under trust is part 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 per cent of the income from such property; Page  24 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT (c) income derived from property held under trust--- (i) created on or after the 1st 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 purposes outside India, and (ii) for charitable or religious purposes, created before the 1st 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 contributions made with a specific direction that they shall form part of the corpus of the trust or institution.” 7. On perusal of the above provisions of Section 11(1), it is clear that any public charitable or religious Trust is entitled to exemption of income derived from the property held under such Trust wholly for charitable or religious purposes subject to the condition that such income is applied to such purposes in India or such income is accumulated or set apart for application towards the object of the Trust. It is also subject to further condition that such accumulated or set apart of income for application should not exceed fifteen per cent of the income from such property. Page  25 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT 8. Sub-sections (2) and (3) of Section 11 are also relevant so as to determine the exempt income in the hands of any public charitable or religious Trust. Sub-sections (2) and (3) of Section 11 read thus : “(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely :- (a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years; (b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5): Provided that in computing the period of ten years referred to in clause(a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded : Page  26 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words 'ten years' at both the places where they occur, the words 'five years' had been substituted.” “(3) Any income referred to in sub-section (2) which --- (a) is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto, or (b) ceases to remain invested or deposited in any of the forms or modes specified in sub-section (5), or (c) is not utilised for the purpose for which it is so accumulated or set apart during the period referred to in clause (a) of that sub-section or in the year immediately following the expiry thereof, (d) is credited or paid to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall be deemed to be the income of such person of the previous year in which it is so applied or ceases to be so Page  27 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT accumulated or set apart or ceases to remain so invested or deposited or credited or paid or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.” 9. The plain reading of the provisions of Section 11 of the Act, 1961, would indicate that it provides for computation of income from the property held for charitable or religious purposes. It is, therefore, necessary to take into consideration the import of the word “income”, which is defined under Section 2(24) of the Act, 1961, which provides that income includes profits and gains, dividend, voluntary contributions, etc., whereas Section 2(45) of the Act, 1961, defines the “total income”, which means the total amount of income referred to in Section 5 computed in the manner laid down in the Act, 1961. Thus, computing the income of a public charitable and religious Trust is different than the computation of total income under the provisions of the Act, 1961, for other entities. 10. The Tribunal has rightly relied upon the decision of Madhya Pradesh High Court in the case of CIT vs. Raipur Pallottine Society, reported in (1989)180 ITR 579 (M), wherein, it is held that a public charitable Trust is entitled to depreciation in respect of the assets owned by it. 11. This Court, in the case of CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, reported in (1992)198 ITR 598 (Guj), held that income from the properties held under the public Trust has to be arrived at in the normal commercial manner without classification under the various heads set out in Page  28 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT Section 14 of the Act, 1961. The Court has observed as under : “...In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485, the Madras High Court was required to consider whether, for the purpose of computing accumulation in excess of 25 per cent as laid down in section 11(1)(a) of the Act, "income" has to be computed under the various heads enumerated in the Income-tax Act. It held that the income from the properties held under trust would have to be arrived at in the normal commercial manner without classification under the various heads set out in section 14. It held that the expression "income" has to be understood in the popular general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. It observed that the computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chapter III.” 11. From the above dictum of law, it emerges that deduction of depreciation on the assets of the Trust for charitable and religious purpose is required to be considered to arrive at the income of such Trust in commercial sense, i.e. income as per the books. It is also necessary to understand that if depreciation is not allowed as necessary deduction in computing the income of Page  29 of  30

C/TAXAP/9/2017                                                                                                 JUDGMENT such Trust, then it would not be possible for the Trust to preserve the corpus of the Trust. 12. In such circumstances, for the purpose of computation of the income of the charitable or religious Trust, the amount of depreciation debited to the account of a charitable institution is required to be deducted to arrive at the income available for application of objects of such Trust. The Tribunal has, therefore, rightly remanded the matter to the Assessing Officer so as to determine the depreciation allowable as per the Act, 1961, as there was a difference between the claim made by the assessee and depreciation allowed by the Assessing Officer for the limited purpose of calculating the correct amount of depreciation as per the Act, 1961, for the Assessment Year 2004-2005. 13. In view of the above, we are of the opinion that there is no infirmity in the impugned order passed by the Tribunal in view of the settled legal position that the respondent-assessee is entitled to get deduction of depreciation while computing the income under Section 11(1) of the Act, 1961. The substantial question of law is, therefore, answered in favour of the assessee and against the Revenue. 14. The Appeal, therefore, fails and is accordingly dismissed. (J. B. PARDIWALA, J.) (BHARGAV D. KARIA, J.) /MOINUDDIN Page  30 of  30