COMMISSIONER OF INCOME TAX vs. M/S. SERVICES ASSOCIATION

Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 17.10.2019 CORAM : THE HON'BLE DR.VINEET KOTHARI, ACTING CHIEF JUSTICE AND THE HON'BLE MR.JUSTICE C.SARAVANAN Tax Case (Appeal) No.729 of 2019 Commissioner of Income Tax, Chennai. .. Appellant v. M/s.Services Association of Seventh Day Adventists P. Ltd., AA 148, III Avenue, Anna Nagar, Chennai-600 040. .. Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, 'C' Bench, Chennai, dated 11.05.2012 made in ITA.No.1853/Mds/2011 for the assessment year 2006-2007. For Appellant : Mr.J.Narayanasamy Sr. Standing Counsel For Respondent : Mr.Sriram for M/s.S.Sridhar __________ Page 1 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. JUDGMENT (Delivered by The Hon'ble Acting Chief Justice)

The learned counsel at bar on both sides submit that the controversy in question is covered by a decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax-III, Pune v. Rajasthan & Gujarati Charitable Foundation Poona, reported in [2018] 402 ITR 441 (SC), in which the Hon'ble Supreme Court has held that the assessee Trust is entitled to depreciation on the assets acquired by the expenditure incurred for acquisition of the assets by way of application of income for charitable purposes under Section 11(1)(a) of the Income Tax Act, 1961. The relevant portion of said Supreme Court judgment is quoted below for ready reference: “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 __________ Page 2 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes 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: __________ Page 3 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 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 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 __________ Page 4 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 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 shall 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 32 of the Income Tax __________ Page 5 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 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 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- __________ Page 6 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 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 __________ Page 7 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 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.' 2. 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. 3. 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 [2012] 24 taxmann.com 9/209 Taxman 19 (mag.)/348 ITR 344 '. 4. 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 __________ Page 8 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. amendment is prospective in nature.” 2. The said judgment has been further followed by the Co-ordinate Bench of this Court in the assessee's own case in Tax Case Appeal Nos.412 to 414 of 2013 [Commissioner of Income Tax v. M/s.Medical Trust of Seventh Day Adventists; M/s.The Council of Seventh Day Adventists Educational Institution; and M/s.Service Association of Seventh Day Adventists P. Ltd.]. The said order is also quoted below for ready reference: “These appeals filed by the appellant/Revenue under Section 260A of the Income-tax Act, 1961, are directed against the common order dated 06.07.2012, passed by the Income T ax Appellate Tribunal 'A' Bench, Chennai, in I.T.A.Nos.927, 929 & 928/Mds/2012 for the assessment year 2007-08. 2. The above appeals were admitted, on 25.11.2013, on the following substantial question of law: 'Whether on facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to __________ Page 9 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. claim depreciation on the assets, in the form of, application of income, even though the cost of purchase of asset was treated as application of income under Section 11 of the Act?' 3. Heard Mr.M.Swaminathan, learned Senior Standing Counsel assisted by Ms.V .Pushpa, learned Junior Standing Counsel for the appellant/Revenue; and Mr.A.S.Sriraman, learned counsel for Mr.S.Sridhar, learned counsel for the respondents/assessees. 4. The learned Senior Standing Counsel appearing for the Revenue fairly submits that the substantial question of law, which has been framed in these appeals, has been answered against the Revenue by the Hon'ble Supreme Court in CIT vs. Rajasthan and Gujarati Charitable Foundation reported in [2018] 402 ITR 441(SC). 5. Following the same, these appeals stand dismissed and the substantial question of law is answered against the Revenue. No costs.” __________ Page 10 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. 3. In view of the joint submission made at bar, the present appeal is disposed of in the same terms. No costs. (V.K.,ACJ.) (C.S.N.,J.) 17.10.2019 Index : No sasi To: 1. The Registrar, Income Tax Appellate Tribunal, Madras "C" Bench, Chennai. 2. The Commissioner of Income Tax (Appeals)-XII Chennai – 600 034. 3. The Income Tax Officer (OSD), Exemptions-III Chennai – 600 034. __________ Page 11 of 12 http://www.judis.nic.in Judgment dt. 17.10.2019 in TC(A) No.729 of 2019 CIT v. M/s.Services Association of Seventh Day Adventists P. Ltd. THE HON'BLE ACTING CHIEF JUSTICE AND C.SARAVANAN, J. (sasi)

Tax Case (Appeal) No.729 of 2019 17.10.2019 __________ Page 12 of 12 http://www.judis.nic.in