BMTC,BENGALURU vs. ADDL.D.I.T., BENGALURU

Per Bench :

ITA No.799/Bang/2013 is an appeal by the assessee against the

order dated 18/3/2013 of the CIT(A)-V, Bengaluru, relating to

assessment year 2009-10.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 2 of 17 2. ITA Nos.532/Bang/2014 and 599/Bang/2014 are appeals by the

assessee and the revenue respectively. Both these appeals are

directed against the order dated 28/2/2013 of the CIT(A)-V, Bengaluru,

relating to assessment year 2010-11. ITA No.1536/Bang/2016 is an

appeal by the assessee against the order dated 30/6/2016 of the

CIT(A)-14, LTU, Bengaluru, relating to assessment year 2010-11. This

appeal arises out of order giving effect to earlier orders of appellate

authority. All these appeals involve common issues and were heard

together. We deem it convenient to pass a common order.

preliminary issue in the appeals by the Assessee in ITA

No.779/Bang/2013 & ITA No.532/Bang/2014 is as to whether the

revenue authorities were justified in coming to the conclusion that the

assessee’s activities fall within the ambit of the proviso to section 2(15)

of the Income-tax Act,1961 ['the Act' for short] and therefore, not

entitled to benefit of exemption u/s 11 of the Act. The facts and

circumstances under which the aforesaid issue has to be adjudicated

are as follows:

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 3 of 17 been amended by Finance Act, 2010 w.e.f. 01.04.2009 (i.e., w.e.f. Assessment Year 2009-10). It is not in dispute that the objects of the Assessee would fall within the ambit of “advancement of any object of general public utility” which is one of the purposes mentioned in the definition of Charitable purpose u/s.2(15) of the Act. As stated earlier, the definition of “Charitable Purpose” as given in Sec.2(15) of the Act was amended by the Finance Act, 2010, w.e.f. 1.4.2009. By the aforesaid Amendment, a proviso has been inserted to the definition of “Charitable Purpose” in Sec.2(15) of the Act, which reads as follows:-

“2(15)“Charitable purpose” includes relief of the poor, education, medical relief, [preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest,] and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”]

On 8/11/2011, the DIT(Exemption) passed order cancelling registration

w.e.f assessment year 2009-10 on the ground that the Assessee’s

activities were in the nature of business and therefore the Assessee

should not enjoy the benefit of registration u/s.12A of the Act. The

assessee challenged the order of the DIT(Exemption) dated 8/11/2011

and the Tribunal in ITA No.39/Bang/2012 order dated 20/2/2015

quashed the order of the DIT(Exemption) and restored registration of

the assessee. The order of the Tribunal was also confirmed by the

Hon’ble Karnataka High Court in ITA No.301 of 2015 order dated

12.2.2016 answering all questions of law in favour of the Assessee.

The assessments for assessment years 2009-10 and 2010-11 which are

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 4 of 17 in dispute in these appeals were initiated prior to passing of the

Tribunal order. So also the impugned orders of the CIT(A) were passed

which earlier to the decision of the Tribunal restoring registration u/s

12AA of the Act.

firstly referred to the fact of cancellation of registration u/s 12AA of the

Act by order dated 8/11/2011 and also came to conclusion that the

assessee was involved in activities in the nature of business and was,

therefore, not existing for charitable purposes as per proviso to section

2(15) of the Act for the following reasons:

i) It was providing luxury buses fully air-conditioned on hire for excursion, wedding, pilgrimage etc., to general public and charges for such letting are collected on commercial basis.

ii) The assessee was providing advertisements on busus and charging substantial fees.

iii) The non-operating revenue was less than non-traffic revenue.

iv) In all bus depots in the city of Bengaluru commercial buildings have been constructed above bus terminus and let out on commercial basis to shops, restaurants, etc.

These are the primary reasons assigned by the AO for coming to the

conclusion that the assessee was not existing for charitable purpose

and therefore was not entitled to the benefit of deduction u/s 11 of the

Act. The CIT(A) concurred with the view of the AO. Hence, the appeals

by the assessee before the Tribunal. The facts in assessment year

2010-11 are also identical to the facts as they prevailed in 2009-10.

several decisions of the Tribunal wherein on identical facts, the Tribunal

came to the conclusion that similar activities will not render the

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 5 of 17 assessee as not existing for charitable purposes. The main decisions

cited were the following:

(i) Karnataka Industrial Area Devt.Board Vs. DIT€ ITA

No.661/Bang/2014 order dated 20.4.2016. (ii) Bangalore Development

Authority Vs. Addl.CIT ITA No.1104/Bang/2017 order dated 22.3.2019.

(iii) Hon’ble Delhi High Court in the case of India Trade Promotion

Organization vs. DGIT(Exemption) (371 ITR 333)(Del).

as the decision of the Panaji Bench of ITAT in the case of Entertainment

Society of Goa vs. CIT (2013) 34 taxman.com 210 (Panaji-Trib.)

wherein the Tribunal took the view that organizing and hosting of

International Film Festival and building Multiplexes, Auditorium etc.,

and deriving income from sponsoring and administrative charges for

conducting Film Festival amounts to trade or commerce and is hit by

the proviso to section 2(15) of the Act. Reliance was also placed on the

decision of the Hon’ble Andhra Pradesh High Court in the case of

Andhra Pradesh State Seed Certification Agency vs. The Chief

Commissioner of Income Tax (356 ITR 360)(AP) wherein the assessee’s

society was carrying on functions of certification of seeds agency under

Seeds Act, 1966. The seed growers entered into contract with the

society for certification of seeds before they were sold in the market.

The petitioner collected fee for providing certification. The petitioner

claimed deduction u/s 10(23C)(iv) of the Act. Reliance was also placed

on the decision of the ITAT, Bengaluru Bench in the case of Subharam

Trust vs. Director of Income-tax(Exemptions) (2010)126 ITD 33 (ITAT,

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 6 of 17 Beng.) wherein it was held that building Kalyanmantapa and deriving

rent from letting out of the same will be the nature of trading activities

and hit by the proviso to sec.2(15) of the Act. These decisions were

rendered in cases where the Assessees were not statutory corporation

such as the Assessee in the present case and hence, we are of the view

that the aforesaid decisions will not be of any assistance to the case of

the revenue.

we have already seen, the assessee is formed under the RTC Act, 1950

to provide economic and efficient transport system to the public. It

cannot be denied that this purpose is charitable in nature i.e.,

“advancement of any other object of public utility”. The only ground on

which the revenue authorities came to the conclusion that the assessee

was not existing for charitable purpose is on the basis of source of

revenue derived from renting of space and advertisements. It is not

the case of the revenue that there has been any private profit earned

from the activities carried out by the assessee. The Bengaluru Bench of

Tribunal in the case of Bangalore Industrial Area Devl.Corpn.(supra),

has taken the view that the predominant object of charitable

organization has to be examined before coming to a conclusion

regarding application of the proviso to section 2(15) of the Act. This

aspect has been highlighted by the Hon’ble Delhi High Court in the case

of India Trade Promotion Organization vs. DGIT(Exemption) (371 ITR

333)(Del). The facts of the case before the Hon’ble Delhi High Court in

the case of India Trade Promotion Organization (supra) were that the

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 7 of 17 Assessee in that case enjoyed the benefit of exemption u/s.10(23C)(iv)

of the Act. Sec.10(23C)(iv) provides any income received by any

person on behalf of any other fund or institution established for

charitable purposes which may be approved by the prescribed

authority, having regard to the objects of the fund or institution and its

importance throughout India or throughout any State or States, shall

not form part of the total income under the Act. The prescribed

authority withdrew the approval granted to the Assessee consequent to

the insertion of the proviso to Sec.2(15) of the Act, on the ground that

the Assessee was deriving rental income from letting out space for rent

during trade fairs and exhibitions, was deriving income from sale of

tickets and income from food and beverage outlets. The said withdrawal

was challenged by the Assessee before the Hon’ble Delhi High Court.

The Hon’ble Delhi High Court had to go into the question as to the

scope of the proviso to Sec.2(15) of the Act. The Hon’ble Delhi High

Court has laid down the following very important principles as to how

the proviso to Sec.2(15) of the Act has to be interpreted:

(i) The proviso to Sec.2(15) of the Act introduced by virtue of the Finance Act, 2008 with effect from 01.04.2009 has two parts. The first part has reference to the carrying on of any activity in the nature of trade, commerce or business. The second part has reference to any activity of rendering any service ―in relation to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess or ‘fee‘ or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retention

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 8 of 17 of such income is irrelevant for the purposes of construing the activities as charitable or not.

(ii) If an activity in the nature of trade, commerce or business is carried on and it generates income, the fact that such income is applied for charitable purposes, would not make any difference and the activity would nonetheless not be regarded as being carried on for a charitable purpose. If a literal interpretation is to be given to the proviso, then it may be concluded that this fact would have no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important.

(iii) The meaning of the expression "charitable purposes" has to be examined in the context of “income”, because, it is only when there is income the question of not including that income in the total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income would not make it any less a charitable institution. Whether that institution, which is established for charitable purposes, will get the exemption would have to be determined having regard to the objects of the institution and its importance throughout India or throughout any State or States.

(iv) Merely, because an institution derives income out of activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise qualifies for such a character.

(v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant activity of the institution was not business, trade or commerce, then any such incidental or ancillary activity would also not fall within the categories of trade, commerce or business. If the driving force is not the desire to earn profits but to do charity, the exception carved out in the first proviso to Section 2(15) of the said Act would not apply.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 9 of 17

(vi) If a literal interpretation were to be given to the said proviso, then it would risk being hit by Article 14 (the equality clause enshrined in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above.

(vii) Section 2(15) is only a definition clause. Section 2 begins with the words, ―in this Act, unless the context otherwise requires. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When the expression "charitable purpose", as defined in Section 2(15) of the said Act, is read in the context of Section 10(23C)(iv) of the said Act, we would have to give up the strict and literal interpretation sought to be given to the expression "charitable purpose" by the revenue. (viii) The expression "charitable purpose", as defined in Section 2(15) cannot be construed literally and in absolute terms. The correct interpretation of the proviso to Section 2(15) of the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business, the dominant and the prime objective has to be seen. If the dominant and prime objective of the institution, which claims to have been established for charitable purposes, is profit making, whether its activities are directly in the nature of trade, commerce or business or indirectly in the rendering of any service in relation to any trade, commerce or business, then it would not be entitled to claim its object to be a 'charitable purpose'. On the flip side, where an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (emphasis supplied).

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 10 of 17 but is for providing transportation facilities to members of the public. The State Government fixes fares for travel by public. Buses ply in areas even where it is not economically viable. Sec.18 of the RTC Act, 1950 lays down duties of the corporation which is to provide, secure and promote efficient, adequate, economical and properly coordinated system of road transport services in the State of Karnataka. Sec.22 of the RTC Act, 1950 lays down that the corporation should act on business principles in the sense it has to recover the cost of services rendered to the public which means that it cannot provide service free of cost. Sec.30 of the RTC Act, 1950 provides how profits of the corporation shall be disposed and it lays down that the same shall be used only for road development. The non traffic revenue of the corporation is Rs.234,65,02,000/- in AY 2010-11 and a sum of Rs.2,58,76,489/- alone is advertisement revenue.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 11 of 17 Assessee, we hold that the Assessee's income is entitled to the benefits of Sec.11 of the Act. In view of the above conclusion on the preliminary issue, the other grounds of appeal become academic and require no consideration.

is concerned, facts are identical and in view of the conclusion for the

assessment year 2009-10, the assessee could be entitled to the benefit

of sec.11 of the Act and the other issues would become academic and

require no consideration. We hold and direct accordingly.

AY 2010-11, the issue is with regard to grant of depreciation. As we

have already seen the Assessee exists for a charitable purpose. In the

course of assessment u/s. 143(3) of the Act for AY 2010-11, the AO

noticed from the details of depreciation claimed, that depreciation was

claimed on assets, the cost of acquisition of the said assets had been

claimed by the assessee as capital expenditure towards application of

funds towards the objects of the trust and allowed as such. According

to the AO, allowing such a claim would amount to allowing double

deduction. On the facts of the present case, he was of the view that the

decision of the Hon’ble Supreme Court in the case of Escorts Limited &

another Vs. Union of India 199 ITR 43 is squarely applicable, wherein it

has been categorically held that when deduction u/s 35(2)(iv) is

allowed in respect of capital expenditure on scientific research, no

depreciation is allowable u/s 32 on the same asset.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 12 of 17 The assessee pointed out that Hon'ble High Court of Karnataka in the

case of All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of

St. Ann, 146 ITR 28 (Kar) has taken the view that where capital

expenditure on acquisition of depreciable asset is considered as

application of income for charitable purpose, allowing depreciation on

the very same capital asset would not amount to double allowance.

The assessee also pointed out that the decision of Escorts Ltd. (supra)

will not be applicable as it was rendered on a different set of facts.

The AO however, held that allowance of depreciation when the cost

has already been recovered by way of exemption as application of

income amounts to double deduction and double benefit on the same

asset. The AO referred to the decision of the of Hon'ble High Court of

Kerala in the case of DDIT(E) v. Lissie Medical Institutions, 348 ITR 344

(Ker) wherein it was held that allowing depreciation of a depreciable

asset when the cost of acquisition of depreciable asset was allowed as

application of income for charitable purpose amounts to double

depreciation and therefore depreciation cannot be allowed. The AO also

distinguished the cases cited by the Assessee.

by the AO accepting the contention of the Assessee.

the present appeal before the Tribunal. The relevant ground of appeal

raised by the Assessee is ground No.1 (i) to (iv) in all the appeals

relating to disallowance of depreciation.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 13 of 17

order of AO. The learned counsel for the Assessee relied on the order

of the CIT(A). We have considered the order of the AO. Identical issue

came up for consideration before ITAT Bangalore Bench in the case of

DDIT(E) v. Cutchi Memon Union (2013) 60 SOT 260 Bangalore ITAT,

wherein similar issue has been dealt with by this Tribunal. In the

aforesaid case, the assessee claimed depreciation and the AO denied

depreciation on the ground that at the time of acquiring the relevant

capital asset, cost of acquisition was considered as application of

income in the year of its acquisition. The AO took the view that

allowing depreciation would amount to allowing double deduction and

placed reliance on the decision of Hon'ble Supreme Court in Escorts Ltd.

(supra). The CIT(A), however, allowed the claim of assessee. On

further appeal by the Revenue, the Tribunal held as follows:-

“20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon’ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H) , following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon’ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon’ble Court in the aforesaid decisions.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 14 of 17 21. The issue raised by the revenue in the ground of appeal is thus no longer res integra and has been decided by the Hon’ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P&H). The Hon’ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon’ble Punjab & Haryana High Court made a reference to the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon’ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon’ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon’ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference.

Gujarati Charitable Foundation Poona, (2018) 89 taxmann.com 127(SC)

has since confirmed the view that depreciation has to be allowed as a

deduction even when the cost of acquisition of the depreciable asset

has been treated as application of income in the year of its acquisition.

We may also add that the legal position has since been amended by a

prospective amendment by the Finance (No.2) Act, 2014 w.e.f.

1.4.2015 by insertion of sub-section (6) to section 11 of the Act, which

reads as under:-

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 15 of 17

“(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”

will apply only from A.Y. 2015-16. In view of the above legal position,

we are of the view that the order of the CIT(A) has to be confirmed and

the appeal of the revenue dismissed. There is no merit in this appeal of

the revenue.

for the assessee did not press for adjudication of this appeal.

Accordingly, the same is dismissed as not pressed.

assessee’s appeals for AY 2009-10 & 2010-11, other issues raised by

the assessee in this appeal does not require any consideration. AO is

directed to allow the benefit of sec.11 of the Act to the assessee and

re-compute the total income in accordance with law after affording an

opportunity of hearing to the assessee.

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 16 of 17

partly allowed. ITA No.599/Bang/2014 is dismissed and ITA

No.1536/Bang/2016 is also dismissed.

Order pronounced in the open court on 21st August, 2019.

Sd/- Sd/- SS- Sd/- (JASON P BOAZ) (N.V. VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Place : Bengaluru Dated : 21/08/2019 Srinivasulu/vms, sps

Copy to : 1 Appellant 2 Respondent 3 CIT(A)- 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore

ITA Nos.779/Bang/2013, 532 & 599/Bang/2014 & 1536/Bang/2016 Page 17 of 17 1. Date of Dictation ………………………………………