Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C’’ BENCH : BANGALORE
Before: SHRI N.V VASUDEVAN, VICE PRESIDNET & SHRI B.R BASKARAN
PER B.R Baskaran, Accountant Member : The assessee has filed appeals for assessment years 2012-13 to 2015-16. The revenue has filed appeals for assessment years 2013-14 to 2015-16. All these appeals are directed against the orders passed by Ld CIT(A)- Mangaluru. Since identical issues are contested in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
The assessee is a charitable trust registered u/s 12AA of the Act. In all these years, it claimed exemption u/s 11 of the Act.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 3 of 18
We shall first take up the appeals filed by the assessee. The first common issue urged by the assessee in AY 2012-13 and 2013- 14 relate to the disallowance of amount utilized for acquisition of assets as application of income u/s11 of the Act. The second common issue urged in all the four years (AY 2012-13 to 2015-16) relate to the disallowance of claim of repayment of loan as application of income u/s 11 of the Act. Since both these issues are interconnected, both of them are adjudicated together.
The facts relating to the above said issue are that the assessee claimed cost of purchase/construction of assets as application of income. The AO noticed that the assessee has used “loan funds” for the above said purchase/construction of assets. Accordingly, he rejected the claim of “application of income” to the extent of usage of loan funds. The Ld CIT(A) confirmed the disallowance by following the decision rendered by the co-ordinate bench in the case of DCIT vs. M/s Peoples Education Society (ITA No.1074/Bang/2016 dated 09-06-2017).
In all the five years, the assessee has claimed “repayment of loans” as application of income by placing reliance on the decision rendered by Hon'ble Karnataka High Court in the case of CIT vs. Janmabhumi Press Trust (2000)(242 ITR 457). The AO expressed the view that the assessee had utilized the loan funds in the earlier years for purchase of assets and it has already claimed the value of those assets as “application of income”. Accordingly, the AO took the view that the assessee cannot claim the “repayment of said
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 4 of 18
loans” again as ‘application of income’, as it will result in double deduction of same amount. Before Ld CIT(A), the assessee did not submit any working to disprove the view expressed by the AO. Accordingly, the Ld CIT(A) confirmed the disallowance of claim of repayment of loan as application of income.
We notice that identical issues came for the consideration of co-ordinate bench in the case of ITO vs. M/s Medical Relief Society of South Kanara (ITA No.160, 161 & 737/Bang/2018 dated 01-10- 2019) and the bench adjudicated these issues as under:-
The assessee herein is a public charitable trust registered u/s 12A of the Act as well as u/s 10(23C)(via) of the Act. The returns of income filed for AY 2008-09 and 2009-10 were processed u/s 143(1) of the Act. The assessment for assessment year 2010-11 was completed u/s 143(3) of the Act on 27-12-2012. The AO noticed that the assessee has claimed “repayment of loans made during the year” as application of income in all the above said three years. The AO noticed that the loan taken by the assessee was not shown as receipts of the trust nor the same is reduced from the operating expenses or capital expenditure. Accordingly the AO took the view that the above said claim of the assessee was wrong and the same has resulted in escapement of income.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 5 of 18
Accordingly, the AO reopened the assessment of all the three years under consideration.
During the course of assessment proceedings of AY 2008-09 and 2010-11, the AO also noticed that the assessee has sold certain capital assets and the surplus arising on the sale of assets has been directly taken to “Capital Fund”. The AO took the view that the Gross sale consideration arising on sale of asset should be assessed as income of the assessee, since the original cost of asset was allowed in the earlier years as application of income.
With regard to the claim of “repayment of loan” as application of income, the AO took the view that the same would amount to double deduction, since the original cost of asset (which was purchased by using loan proceeds) was allowed as application of income in the earlier years.
Accordingly, the AO completed the assessments by disallowing the claims of “repayment of loan” as application of income in all the three years and also by assessing the sale consideration arising on sale of capital assets in AY 2008-09 and 2010-11 as income of the assessee.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 6 of 18
In the appellate proceedings, the Ld CIT(A) directed the AO to allow the claim of repayment of loan as application of income u/s 11 of the Act. With regard to the sale consideration arising on sale of capital assets, the Ld CIT(A) directed the AO to delete the addition made and substitute the same with the figure of capital gains as computed u/s 45 to 55A. For this purpose, the Ld CIT(A) relied upon the decision rendered by the co-ordinate bench in the case of Al- Ameen Educational Society (ITA No.575 (B)/2011).
The first issue relates to the claim of repayment of loan as application of income. The Ld D.R submitted that the assessee had already claimed the ‘cost of capital assets’ purchased out of loan proceeds as “application of income” in the earlier years, when the said assets were purchased. Hence the repayment of loan taken for acquiring very same asset would result in double deduction of same item. He submitted that the various case laws relied upon by Ld CIT(A) would be applicable only in cases, where the cost of capital asset was not allowed as application of income. He submitted that the concept of deduction when the loan was taken for purchasing the asset has been explained by the co-ordinate bench in the case of DCIT vs. M/s Peoples Education Society (ITA No.1074/Bang/2016 dated 09-06-2017). In the above said case, the
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 7 of 18
Tribunal had expressed the view that benefit of exemption u/s 11 cannot be extended to the assets acquired out of borrowed funds, since borrowed funds is not income in the hands of trust. It was further held that the claim of the assessee for deduction u/s 11 once on acquisition of asset and again on repayment of loan taken would result in double benefit, which cannot be the intention of the statute. Accordingly, the Ld D.R submitted that the Ld CIT(A) was not justified in allowing the claim of the assessee.
On the contrary, the Ld A.R submitted that the “repayment of loan” is held to be application of income by Hon'ble Karnataka High Court in the case of CIT vs. Janmabhumi Press Trust (2000)(242 ITR 457).
We have heard rival contentions on this issue and perused the record. The assessee is registered u/s 12AA of the Act as well as u/s 10(23C)(vi) of the Act. Hence the assessee is eligible for exemption both u/s 11 and sec. 10(23C)(via) of the Act. From the assessment orders, we notice that the assessee has claimed exemption u/s 10(23C)(via) of the Act in all the three years under consideration.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 8 of 18
We notice that the third proviso to sec.10(23C)(via) is akin to sec. 11(1) of the Act. The third proviso, referred above, reads as under:- “Provided also that the fund or trust or institution 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)— (a) applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established and in a case where more than fifteen per cent of its income is accumulated on or after the 1st day of April, 2002, the period of the accumulation of the amount exceeding fifteen per cent of its income shall in no case exceed five years; and (b) ….. The provisions of Section 11(1) also requires 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, and where any such income is accumulated or set apart for application for 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.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 9 of 18
It can be noticed that both the third proviso to sec. 10(23C) as well as section 11(1) of the Act allows exemption of “income applied to objects of the trust”. The provisions of sec.11(1) was interpreted by the co- ordinate bench in the case of M/s Peoples Education Society (supra). It is pertinent to note that the Hon'ble Karnataka High Court has held in the case of Janmabhumi Press Trust (supra) that the “repayment of loan” is application of income within the meaning of sec.11(1) of the Act. Hence the co-ordinate bench held as under in the case of M/s Peoples Education Society (supra):- “19. In our view, Section 11 only contemplates the application of income and if the said income is applied for the aims and objectives of the trust, then the trust is entitled for exemption under the provision. The said analogy cannot be extended to acquisition of assets from the borrowed funds. If we hold so, then we would be equating the borrowed fund with the income of the trust. Under the law, it is the application of income and not of the fund that is required to be seen for the purpose of granting the exemption. In fact, the assessee would be entitled to exemption in view of the judgement oof Hon'ble jurisdictional High Court in the matter of Janmabhoomi Trust (supra), as and when the loan is repaid to the financial institutions. In view thereof, if the claim of the assessee that the borrowed
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 10 of 18
funds were utilized for the objects of the trust, is entertained and accepted at this stage, it would tantamount to double benefit which cannot be the intention of the statute. In view thereof, we find that the CIT(A) erred in allowing the claim for acquisition of capital assets from the borrowed funds….” 12. In the case before the co-ordinate bench, the assessee sought exemption of cost of assets acquired out of borrowed funds. The said claim was rejected on the following reasons:- (a) the assets were not acquired out of “income derived from the property held under the trust” and (b) the repayment of loan was held to be “application of income” within the meaning of sec.11(1) by Hon'ble Karnataka High Court in the case of Janmabhumi Press Trust (supra). The ratio of the above said decision is that the assessee would be entitled to deduction only once.
The Ld D.R submitted that the claim of the assessee to treat repayment of loan as application of income would result in double exemption of same amount. We find force in the said submissions. We may give an illustration to explain this position. (a) Let us assume that “Trust A” acquires a property for Rs.10.00 lakhs out of its own income. It shall be claiming exemption of the above said amount
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 11 of 18
of Rs.10.00 lakhs u/s 11(1) of the Act in the year in which the asset was acquired. (b) Let us take another example. Let us assume that “Trust B” acquires a property for Rs.10.00 lakhs by availing loan of Rs.10.00 lakhs. The assessee may claim exemption as under:- (i) In the first instance, it will claim exemption of Rs.10.00 lakhs, when the asset was acquired and (ii) in the second instance, it will claim exemption of Rs.10.00 lakhs, when the loan is repaid. It can be seen that “Trust B” would be getting exemption twice for the same asset, i.e., once at the time of purchase of asset and again on repayment of loan. As observed by the co-ordinate bench, it could not be intention of the Statute.
In the instant appeals, it is the case of the AO that the cost of assets acquired out of loan funds have been claimed by the assessee as application of income in the years in which those assets were acquired. In that case, if the assessee is allowed to claim exemption again on repayment of loan taken for acquiring the very same asset, then the same would result in double exemption for the very same amount, which cannot be the intention of the statute. Since the assessee has already claimed exemption towards the cost of asset as application of income, in our view, the assessee
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 12 of 18
cannot take support of the decision rendered by Hon'ble Karnataka High Court in the case of Janmabhumi Press Trust (supra) to claim exemption on account of repayment of loan taken for acquiring the above said asset. We notice that the Ld CIT(A) has omitted to consider above said factual aspects and hence we cannot sustain his order passed on this issue. Accordingly, we set aside the order passed by Ld CIT(A) in all the three years on this issue and restore the addition made by the AO in all the three years.”
The co-ordinate bench has taken the view that the assessee cannot claim the value of asset as application of income, if it had been purchased by utilizing loan funds. However, the repayment of loan can be considered as application of income, if the relevant assets were not claimed as application of income. However, if in any of the earlier years, the assets purchased out of loan funds have been allowed as application of income, then the repayment of loans should not be considered as application of income. To clarify further, if any of the assets were purchased out of loan funds and if the value of those assets have not been allowed as application of fund, then only the repayment of loans shall qualify for deduction as application of income.
The Ld Counsels for the assessee submitted that the tax authorities have presumed that the loan funds have been utilized
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 13 of 18
for purchase of assets in the current years as well as in the earlier years, i.e., the nexus between the loan funds and purchase of assets has not been proved. The Ld Counsels submitted that it is not the case that the assessee has always used the loan funds for purchase of assets. It was submitted that the loan funds might have been utilized for some other purposes. Similarly, the surplus funds of the assessee might have been utilized for purchase of assets. Accordingly the Ld Counsels submitted that the nexus of loan funds and utilization should be examined to find out exact position. Accordingly, the Ld Counsels submitted that the assessee may be provided with an opportunity to furnish the details of utilization of loans, so that the correct amount of application of income could be quantified in terms of the ratio laid down in the above said decision.
The Ld. D.R also agreed to the plea put forth by the Ld counsels for the assessees. Accordingly, we set aside the orders passed by Ld CIT(A) in respect of above said two issues in all the years and restore them to the file of the AO with the direction to examine these issues afresh in the light of above said decision of the Tribunal by duly considering the information provided by the assessee with regard to utilization of loan funds. The assessee should be provided with adequate opportunity of being heard.
The next common issue urged in all the appeals relate to rejection of claim of carry forward of current year’s deficit (excess amount of application of income) to subsequent years and also
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 14 of 18
claim of depreciation on assets. The issue of carry forward of deficit amount is consequential to the earlier two issues. Since the assessing officer has disallowed claim of “application of income” in respect of assets purchase out of loan funds and also repayment of loans, the income came to be assessed in positive figure. Hence there was no requirement of holding that the deficit shall be carried forward. Since the earlier two issues have been restored to the file of the assessing officer, this issue shall be dependent upon the result of the consequential order that may be passed by the AO. Accordingly, this issue is also restored to his file with the direction to allow carry forward of deficit, if any, computed in any of the years. The AO is also directed to allow claim of depreciation after examining the same upto assessment year 2014-15, since the provisions of sec.11(6) debars claim of depreciation on the assets, which have been allowed as application of income. The following decisions govern the claims of the assessee on these two issues:- (a) CIT vs. Rajasthan & Gujarati Charitable Foundation (Civil Appeal No. 7186/2014 dated 13-12-2017) (b) CIT vs. Institute of Banking Personnel (2003)(131 Taxman 386)(Bom).
The next common issue urged in all the five years relate to the rejection of claim for exemption u/s 10(23C)(vi) of the Act. At the time of hearing, the Ld Counsels did not press this ground in all the five years. Accordingly this ground is dismissed as not pressed.
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 15 of 18
In the appeals filed by the revenue, following common grounds are urged in all the years:-
“1. Whether on the facts and in the circumstances of the case and in law, the CIT(A) is right in not appreciating the fact that the normal computation of income under respective heads as envisaged u/s 15 to 59 are not applicable to the computation of income in respect of charitable trust/institution for the purpose of claiming exemptions under section II, 12 and 13 and, therefore, the provisions relating to set-off of loss from one source against the income from another source, set- off of loss from one head against income from another head and carry forward and set-off of loss against the income of subsequent years as envisaged u/s. 70 to 79 are also not applicable to the charitable trusts/institutions. IL Whether on the facts and in the circumstances of the case and in law, the CIT(A) is right in not appreciating the fact that the issue of application of income more than the income computed does not arise except in a case where the assessee has incurred huge amount of capital expenditure sourced out of borrowed or corpus donations or 15% of income set apart over a period of time? (Expenditure incurred out of the above sources however cannot be termed as application of funds out of the income earned in a
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 16 of 18
particular assessment year in as much as loan borrowed does not fall under the category of income earned by the assessee, corpus fund donations does not come under income by virtue of section 11(1 )(d) and 15% of income set apart in earlier assessment year cannot be construed as income of the current year and 15% set apart out of the current year income is also excluded from income available for application. As such, the concept of application is only to show that the income is fully utilised rather than claiming excess expenditure either revenue or capital over and above the income so as to claim excess application or deficit/loss to be carried forward to subsequent assessment years. Even in the case of excess application by virtue of borrowed funds/corpus fund donations 15% set part of earlier years, the income of the assessee cannot be converted to loss but at best it can be made Nil. Hence, the carry forward of excess application of income as claimed by the assessee cannot be allowed”.
We heard the parties and perused the record. The grounds of revenue essentially deal with the manner of computation of income u/s 11 of the Act and carry forward of excess amount of application. Both the parties agreed that the issues urged by the revenue are covered against the revenue by the decision rendered by Hon'ble Supreme Court in the case of CIT vs. Rajasthan &
ITA Nos.1165, 1166, 1167, 1405, 1406 & 1464/Bang/2018 ITA No.2820/Bang/2017
Page 17 of 18
Gujarati Charitable Foundation (supra). Accordingly, we dismiss the grounds urged by the revenue in all the three years.
In the result, the appeals of the assessee are treated as partly allowed and the appeals of the revenue are dismissed.
Order pronounced in the open court on 23rd January, 2020.
Sd/- Sd/-
(N.V Vasudevan) (B.R Baskaran) Vice President Accountant Member
Bangalore, Dated, 23rd January, 2019. / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore