THE DY. COMMISSIONER OF INCOME TAX (EXEMPTIONS), CIRCLE-2, AHMEDABAD vs. SADGURU SWAMI AKHANDANAND MEMORIAL CHARITABLE TRUST, VALSAD

Whether depreciation has to tne income of a ciiarifable institution was the question which came computing DCIT (E) Circle-2 Ahmedabad v Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust LT.A. No. 2128/AHD/2016 A.Y.12-13 up before the Karnataka High Court in CFT v. Society of the Sisters of St. Anne [19841146 ITR 28. Noticing the difference between the word 'Income and the expression 'total income and the necessity for providing depreciation in order to maintain correct accounts, the High Court held that 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. Same view has been taken by the Madhya Pradesh High Court in CIT v. Raipur Pallottine Society [19891180 ITR 579: In CIT V.Rao Bahadur Calavala Cunnan Chetty Charities [19821 135_IIR 485, the Madras High Court was required to consider whether for computing accumulation in excess of 25 per cent. as laid down under section 11 (1) (a), 'income has to be computed under the various heads &s enumerated under the 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 of the Act: It held that 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: It observed that the computation under the different categories or heads arises only for the purpose 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.

We are in respectful agreement with the view taken by the Karnataka, Madhya Pradesh and the Madras High Courts. We , therefore , answer both the questions referred to uUs in the affirmative and against the revenue. No order as to costs: DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust LTA. No. 2128/AHD/2016 A.Y.12-13 8 . The above finding of Hon"ble Jurisdictional High Court makes it clear that the allowance of depreciation on assets is allowable in the case of Trust: In view of above, we find no illegality in the order of CIT (A) on this issue. We may also mention that the decision of Hon ble Supreme Court in the case of Escorts India Ltd: v Union of India [1 993] 199 ITR 43 (SC) was also considered by the Hon"ble of DIT(E) V. Ahmedabad South Indian Jurisdictional High Court in the case dated 09.08.2012, wherein, it was held that Charitable Trust in its order on assets is allowable in the case of charitable trust We are note depreciation of introduction of sub-section 6 to section 11 that the amendment brought by way applicable for the assessment year under is prospective in nature, hence, it is not We further note that this issue has been settled by the Hon ble consideration: Court in the case of CIT-Ill, Pune V. Rajasthan And Gujarati Charitable Supreme & Others in Civil Appeal No.7186 of 2014 dated13.12.2017, Foundation Poona wherein view taken by the Hon"ble Bombay High Court in the case of CIT v Institute of Banking Personnel Selection (IBPS) 264 ITR 110 (Bom) [2003] 131 Taxman confirmed and the view of Hon ble High Court that normal 386(Bombay) was can be considered as a legitimate deduction in computing the real depreciation income of the assessee on general principles or under section 11 (1Ja) of Income Tax Act,1961. In the light of above facts and circumstances, we do not find any appeal of Revenue is infirmity in order of Id: CIT (A) hence, this grounds of therefore, dismissed. 9 states that the CIT (A) erred in allowing of carry Ground no. 2 to 5 years and current year to forward of excess capital expenditure of earlier DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust LTA No. 2128/AHD/2016 A.Y.12-13 subsequent years and admitting fresh claim during appellate proceedings without calling remand report from the AO.

Facts in brief are that the assessee had made more expenditure (including capital expenditure) then its receipts in the said year. However, the assessee had filed its return of income much beyond the due date and nowhere has claimed in its return of income or in assessment proceedings that it should be allowed carry forward such capital expenditure to be set-off in future years However, the assessee has taken this plea during the appellate proceedings and the Id. CIT (A) has decided this issue in favour of the assessee without calling for remand report on this issue: The Id. CIT (A) has relied on the decision in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Gui) CIT v. Maharana of Mewar Charitable Foundation 164 ITR 439 (Rai) and CIT v. Institute of Banking Personnel Selection (IBPSJ[2003] 264 ITR 110 (Bom) /[2003] 131 Taxman 386 (Bombay) and directed the AO to allow carry forward of excess unutilized capital expenditure incurred by the appellant to subsequent years I1. Being aggrieved, the Revenue has filed this appeal before the Tribunal. The Ld. CIT (DR) contended that the assessee trust is claiming benefit under section 11; on the criterion of 85% application of income by charitable institution trust. However, if there is an excess expenditure resulting in the deficit should be carried forward to next years is not provided under the law. The assessee has filed its return of income on 21.03.2014, much beyond the due date: As per business principles, the carry forward of losses in case of business entities is not allowable if return is filed beyond due date: Therefore, the finding of CIT (A) based on some DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust L.T.A. No. 2128/AHD/2016 A.Y.12-13 case laws by holding that the set-of of losses is allowed as per commercial principles, is not valid and the reliance on the case laws is misplaced: The tribunal of Delhi bench in the case of Pushpawati Singhania Research Institute of Liver and Digestive Disease V. DCIT [2009] 29 SOT 316 (Del) has upheld the disallowance of carry forward of such losses by the trust claiming exemptions It was held that if income accumulated in earlier years cannot qualify for exemption under section 11 (2), then the excess income applied in the earlier assessment year would also not qualify for exemption: In view of the above facts, the findings of Id. CIT (A) is not correct as there are conflicting decision on the issue: 12. Au contraire, the learned counsel for the assessee submitted that the issue is covered by the decision of Hon ble Bombay High Court in the case of CIT V. Institute of Banking Personnel Selection (IBPS) 264 ITR 110 (Bom) and CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1 995] 211 ITR 293 (Guj) in favour of the assessee. Hence, CIT (A) was right in giving such direction of carry forward of deficit: 13 We have heard the rival submissions and perused the relevant material on record. We find that this issue is covered by the decision of Hon ble Bombay High Court in the case of CIT V. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110 (Bom) [2003] 131 Taxman 386 (Bombay) "

Now coming to question No. 3, the point which arises for consideration is: whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in subsequent year for charitable purposes? It was DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust LTA. No. 2128/AHD/2016 A.Y.12-13 argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilization of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes: In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a Charitable Trust , their income was assessable under self-contained code mentioned in section 1 1 to section 13 of the Income-tax Act and that the income of the Charitable Trust was not assessable under the head "profits and gains of business under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a Charitable Trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of subsequent years: We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the Trust for charitable and religious purposes in the earlier years against the 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 adjustment has been made having regard to the benevolent provisions contained in section 1 1 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11 (1) (a) of the Act. Our view is also supported by the Judgment of DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust LT.A. No. 2128/AHD/2016 A.Y.12-13 the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 21L ITR 293 Accordingly , we answer question No. 3 in the affirma-tive i.e:, in favour of the assessee and against the Department.

We find that this ratio on issue also is also explicitly covered bY decision of Hon ble Jurisdictional High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Gui) wherein it was held that there is nothing in section 11 (IJ(a) of the Act to indicate that the expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of earlier years would not amount to such income being applied for charitable purposes: The relevant para of the order is as under: "At this stage, it would be profitable to refer to the Circular dated January 24, 1973, F. No. 195/1/72-1.T. (A.I) , issued by the Central Board of Direct Taxes, the relevant part of which reads as under (see [1973] 88 ITR (St) 66): "Subject: Repayment of a debf incurred for charitable purposes by a charitable trust and loans advanced by educational trusts-_Application of income: Section 1 1 of the Income-tax Act requires 100 per cent. of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income: () Where & trust incurs & debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust? and__ 2 The Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest bearing loan for higher studies, it will amount to carrying on of money-lending business: If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust E.T.A. No. 2128/AHD/2016 A.Y.12-13 of loans, even interest-bearing, will amount to the application of income' for charitable purposes: As and when the loan is returned to the trust, it will be treated as income of that year. (Circular No. 100, dated January 24, 1973, F_ No. 195/1/72-1.T.- (AI)). According to the above referred circular if a trust wants to spend more money for charitable and religious purposes in a particular year, it can take a loan and the said loan can be repaid out of the income of the subsequent year and the repayment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes under section 11(1) (a) of the Act. The contention that only that part of the income of & charitable trust should be excluded which was applied for charitable and religious purposes during the relevant assessment year in which the income was earned, cannot be accepted, as it would lead to an anomalous situation. If the trust takes & loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the subsequent year , the said repayment would be entitled to exemption from tax under section 11(1) (a) of the Act in view of the circular above referred to_ But, if the trust instead of taking a loan incurs expenses for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year , the trust would not be entitled to claim exemption in respect of such reimbursement under section 11 (1) (a) of the Act if the contention advanced by the Revenue is accepted. The construction which leads to such an anomaly has got to be avoided: 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 or that 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: In the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 432, the Rajasthan High Court considered the question whether the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year in the background of the following facts: The Maharaja of Mewar had donated a sum of Rs. 11 lakhs to the assessee , i.e-, Maharana of Mewar Charitable Foundation, which was a public charitable trust: During the previous year relevant to the assessment year 1970-71, the assessee spent a sum of Rs. 95,863 towards the aims and objects of the trust and the income of the assessee during the said year was only Rs. 36,093 and, thus, a sum of Rs. 59,770 was spent in excess of the income during the period relevant to the assessment year 1970-71. In the previous year relevant to the assessment year 1971-72, the assessee claimed adjustment of a sum of Rs. 59,770 against the surplus of income over expenditure during the assessment year 1971-72. The Income-tax Officer disallowed the claim of the assessee. The Appellate Assistant DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand Memorial Charitable Trust UTA: No. 2128/AHD/2016 A.Y.12-13 Commissioner of Income-tax allowed the said claim: The Tribunal, on appeal, affirmed the order of the Appellate Assistant Commissioner of Income-tax. On & reference, the Rajasthan High Court, after referring to several decisions on the point , has held that the adjustment of the expenses incurred by the trust for charitable and religious purposes in the earlier year against the income earned by the trust in the subsequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment had been made and would have to be excluded from the income of the trust under section 11 (1) (a) of the Act: We are in respectful agreement with the view expressed by the Rajasthan High Court and we also hold that the deficit arising out of excess of expenditure over income during the previous year relevant to the assessment year should be set off against the surplus of income over the expenditure relating to the assessment year in computing the taxable income of the latter assessment year. Viewing the question from @ different angle also, we are of the opinion that the claim made by the assessee was well-founded. In the case of CIT v. Ganga Charity Trust Fund [1986] 162 ITR 612, this court considered the question as to whether deduction of income-tax liability must be taken as an outgoing before the surplus could be ascertained in order to give meaning to the expression "income The court also considered the question as to whether for the purpose of determining the income or surplus available to the trust for the purpose of application of its income towards charitable or religious objects, the surplus realised or available on commercial principles should be taken into consideration or not. After reviewing the case law on the subject, it has been held that income derived from the trust property must be determined on commercial principles and in doing SO , all outgoings including outgoings by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income arises: While holding that the income derived from the trust property must be determined on commercial principles, this court has noted that if such an interpretation is not placed on section 11(1) (a) of the Act, it would render the benevolent provisions found in clause (a) of section 11 (1) of the Act nugatory. In the case of CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598,this court considered the question as to whether having regard to the scheme of the Act "income referred to in section 11 (1) (a) of the Act is to be computed not in accordance with the provisions of the Act, but in accordance with the normal rules of accountancy under which the depreciation has to be allowed while computing such income under section 11 (1) (a) of the Act: In the said case, the assessee, which was, a registered public trust, had income mainly from immovable property: In the returns of income filed for the assessment years 1971-72 and 1972-73, the assessee claimed depreciation and calculated its income accordingly. The Income-tax Officer rejected the claim of the assessee taking the view that the income from house property was required to be calculated according t sections 22 to 27 of the Act: In appeal , the Appellate Assistant Commissioner held otherwise_ The Tribunal dismissed the appeal of the Revenue: DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand L.T.A. No. 2128/AHD/2016 A.Y.12-13 Memorial Charitable Trust On a reference, this court has held that computation under different heads Grises oniy for the categories or purposes of ascertaining the purposes of charge total income for the and the income from the properties held under the trust be arrived at in the normal has to commercial manner without classification under the various heads as set ouf in section 1 4 of the Act. In view of the two decisions of this court above referred positior thct to, it is the well-settled inccmie derived from the trust property has to be determined commercial principles and if commercial principles for on determining the income are applied, it is but natural that the for charitable adjustment of the expenses incurred by the trust and religious purposes in the earlier year against income earned the trust in the subsequent year will by have to be of the trust for charitable regarded as application of income such and religious purposes in the subsequent year in which adjustment has been made having regard to contained in section the benevolent 11 provisions of the Act and will have to be excluded of the trust under section from the income 11 (1) (a) of the Act. In view of the above discussion, we are of the opinion circumstances of the that, on the facts and in the case, the assessee is entitled to carry forward expenses for set off in the subsequent year: The question referred to in the affirmative , US is, therefore, answered i.e:, in favour of the assessee and againsf the Revenue.

We find that this ratio on issue also stands as settled by the Hon ble Supreme Court in the case of CIT-Ill, Pune V. Rajasthan And Gujarati Charitable Foundation Poona & Others in Civil Appeal No.7186 of 2014 dated13.13 2.2017 , wherein the Hon ble Supreme Court after citing the observation of above decision of Hon"ble Bombay High Court observed as st also follows that once assessee is allowed depreciation he shall be entiiled to carry forward the depreciation as well. For the aforesaid reasons, we affirm the view taken by the High Courts, in these cases and dismiss the matters. Thus, in view of the facts the carry forward of depreciation is allowed then on same principle the carry forward of excess expenditure incurred in current year is to be allowed to be carry forward for adjustment in subsequent years: We may mention that the claim of carry forward is being legal one and the CIT (A) has only given direction to allow eligible amount carry forward, hence, there DCIT (E) Circle-2 Ahmedabad v. Shree Sadgurudev Swami Akhandanand LTA. No. 2128/AHD/2016 A.Y.12-13 Memorial Charitable Trust is no admission of any additional evidence or any necessity of any remand report: In the light of forgoing, we do not find any infirmity in the order of Id. CIT (A): Accordingly, same is upheld: Therefore; Ground No. 2 to 5 of appeal of Revenue are dismissed: 16. In the result, the appeal of the Revenue is dismissed. 17 . The order pronounced in the open Court on 2f _ 0( - 20 /3 S7 Sd| (O.P. MEENA) (CM 'GARG) JUDICIAL MEMBER ACCOUNTANT MEMBER H/ Surat, faalich Dated: 25 -0f- 20 /8 Copy of order forwarded to- Assessee/AO /Pr: CIT / CIT (A)/ITAT of ITAT. (DR) /Guard file BY order Assistant Registrar , Surat