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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE- & SHRI JASON P.BOAZ
Per N.V. Vasudevan, Vice-President
ITA No.1730 to 1732/Bang/2016 are appeals by the Revenue, while & 1515/Bang/2016 & ITA No.250/Bang/2017 are appeals by the revenue. These appeals are directed againt three orders of CIT(A)-14, LTU, Bangalore all dated 29.7.2016 relating to AY 2010-11 to 2012-13.
We shall first take up the appeals of the revenue for consideration. The first common issue that arises for consideration in all these appeals of the revenue is with regard to disallowance of depreciation made by the AO which was deleted by the CIT(A). The assessee is a charitable trust with objects to provide education by running several educational institutions. In the course of assessment u/s. 143(3) of the Act for AY 2010-11 to 2012-13, 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.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 3 of 23
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.
On appeal by the Assessee, the CIT(A), deleted the addition made by the AO.
Aggrieved by the order of the CIT(A), the revenue has preferred 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.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 4 of 23
We have heard the submissions of the ld. DR, who relied on the 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
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 5 of 23 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. 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.
22. Consequently, ground No.5 raised by the revenue is dismissed.”
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 6 of 23
The Hon’ble Supreme Court in the case of CIT Vs. Rajasthan & 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:-
“(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.”
As already stated, the aforesaid amendment is prospective and 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 reversed. Consequently ground No.2 raised by the Assessee is allowed.
The second common issue that arises for consideration in the appeals by the Revenue which is projected by the Revenue in grounds of appeal No.2 (a) to (c) in all the appeals, is as to whether the CIT(Appeals) was justified in holding that assessee, a trust, is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? The ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 7 of 23 assessee is a trust registered u/s. 12A of the Act. The assessee filed a return of income claiming carry forward of excess application of income pertaining to current year and earlier years against the income of the future assessment years. The assessee sought to carry forward the excess application for setting off as application of income in the subsequent assessment years. According to the AO there was no provision in the Act for carry forward of excess expenditure of earlir year to be adjusted against income of the subsequent year and he therefore denied the claim of the Assessee.
11. On appeal by the assessee, the CIT(A) allowed the claim of the Assessee. Aggrieved by the order of CIT(A), the revenue is in appeal before the Tribunal.
The learned DR reiterated the stand of the AO that there is no provision in the Act to allow carry forward of excess application of income for set off as application of income in subsequent years. The ld. counsel for the Assessee relied on the order of the CIT(A).
We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 8 of 23 charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj) CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj.). In CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom) it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under s. 11 in past years. In Govindu Naicker Estate VS. ADIT 248 ITR 368 (Mad), the Hon’ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 9 of 23 trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 146 ITR 28 (Kar.).
We are therefore of the view that there is no merit in grounds raised by the revenue in this regard and the same is dismissed.
The third issue that arises for consideration in for AY 2011-12 is as to whether 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure. The Assessee claimed accumulation of income for application for charitable purpose at 15% of the gross receipts. The AO was of the view that accumulation will be allowed only to the extent of 15% of the income after revenue expenditure. In other words income to be set apart u/s.11(1)(a) of the Act has to be computed at 15% of the net income i.e., gross receipts minus revenue expenditure and not ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 10 of 23 on the gross receipts as claimed by the Assessee. Since in the case of the Assessee, the gross receipts after revenue expenditure was nil, the AO denied the benefit of accumulation to the Assessee.
17. On appeal by the Assessee, the CIT(A) allowed the claim of the Assessee. Aggrieved by the order of the CIT(A), the Revenue has raised the aforesaid ground of appeal before the Tribunal.
18. The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under Sec.11(1)((a) of the Act, one has to take the gross receipts or gross receipts after expenditure for chartiable purpose i.e., the net receipts. This is issue is no longer res integra and has been decided by the Special Bench Mumbai in the case of Bai Sonabai Hirji Agiary Trust Vs. ITO 93 ITD 0070 (SB). The facts in the aforesaid case were that the assessee was a public charitable trust enjoying exemption under s. 11 of the IT Act. As per the requirement of s. 11(1) of the IT Act, as it prevailed at that point of time, the assessee had to apply 75 per cent of its income for the objects and purposes of the trust and the assessee was permitted to accumulate or set apart up to 25 per cent of its income, which was subject to fulfilment of other conditions. While calculating the aforesaid 25 per cent, the important question which arose was as to whether for this purpose, the gross income earned by the assessee is relevant or the income as computed in accordance with the provisions of IT Act. In other words, whether outgoings from out of gross income which are in the nature of application of income, should be first deducted
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 11 of 23 from the gross income and 25 per cent of only the remaining amount should be allowed to be accumulated or set apart. The Special Ben ch of the ITAT on the issue held as follows:
“9. Coming to the merits of the issue, we are of the view that the same is clearly covered by the decision of the Hon’ble Supreme Court in the case of CIT vs. Programme for Community Organization (supra). In the decision, their Lordships, after taking note of provisions of s. 11(1)(a), have held as under :
"Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty five per cent of Rs. 87,010.
For the aforesaid reasons, the civil appeal is dismissed."
It is clear from the above that deduction of twenty-five per cent was held to be allowable not on total income as computed under the IT Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five per cent to be accumulated. Their Lordships, as noted earlier, affirmed the decision of Kerala High Court in (1997) 141 CTR (Ker) 502 : (1997) 228 ITR 620 (Ker) (supra) wherein it is held as under :
"At the outset, the statutory language of s. 11(1)(a) of the IT Act, 1961, relates to the income derived by the trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 12 of 23 thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. In other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious. In other words, for the purpose of s. 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision."
This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent and this twenty-five per cent has to be understood as income of the trust under the relevant head of s. 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of s. 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property.
If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof and take into account 25 per cent of such income. Their Lordships have pointed that the same has to be taken on "commercial" basis and not "total income" as computed under the IT Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs 1,70,369 which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated.
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 13 of 23
Having regard to the clear pronouncement of their Lordships of the Supreme Court, it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174. Twenty five per cent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon’ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust vs. CIT (supra). No reason whatsoever has been given by the Revenue authorities for deducting Rs. 2,17,126 in this case for purposes of s. 11(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme Court referred to above. The circular of CBDT has also been considered by the Hon’ble Kerala High Court in its decision referred to above. Accordingly the question referred to is answered in the affirmative and in favour of the assessee.”
The aforesaid decision clearly supports the plea of the Assessee. Following the same, we hold that the accumulation u/s.11(1)(a) of the Act should be allowed as claimed by the Assessee. The relevant ground of appeal of the revenue is accordingly dismissed.
In the result, the appeals by the revenue are dismissed.
As far as the appeals by the Assessee are concerned, there are basically 3 issues to be adjudicated. The first issue to be adjudicated is as to whether the expenditure incurred by the assessee in foreign currency is outside India for the purpose of educational tours undertaken by the students of the assessee can be disallowed on the ground that the income has not been applied for charitable purposes in India within the meaning of sec. 11(1) (a) of the Act.
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 14 of 23
The second issue to be decided is as to whether capital expenditure can be disallowed on the ground that the payment in respect of capital expenditure has not been made to the concerned person.
The 3rd issue to be adjudicated is as to whether the amount borrowed by the assessee which was used for acquiring capital asset should not be allowed as application of income for the purpose of charitable purposes.
As far as 3rd issue is concerned the ld counsel for the assessee pointed out that in asst. year 2012-13, the AO has allowed repayment of the amount borrowed for acquiring capital asset as application of income for charitable purposes. His submission was that if a similar relief could be allowed in respect of repayment of amounts borrowed in the year in which they are repaid as application of income for charitable purpose then that would be sufficient. We are of the view that since the AO in asst. year 2012- 13 has considered repayment of amount borrowed for acquiring capital asset his application of income for charitable purpose also gave similar treatment for the capital expenditure incurred in asst. year 2010-11 and 2011-12 and treat repayment of loans as application for charitable purposes. We hold and direct accordingly.
As far as issue 1st is concerned the factual details are as follows.
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 15 of 23 In asst. year 2010-11, the AO incurred expenditure of Rs.40,62,059/- in foreign currency outside India. The details of which are as follows:-
It is not in dispute that the aforesaid expenses were incurred towards educational tour i.e visit by students to foreign universities for promotion of educational activities. According to the AO u/s 11(1)(a) of the Act income of charitable institution shall not be included in the total income only to the extent to which such income is applied to such purposes in India. According to the AO since the aforesaid expenditure was not incurred in India the assessee cannot claim the benefit of deduction of the aforesaid expenditure as an application of income. Accordingly the aforesaid sum was added to the total income of the assesee. Similar expenses incurred not in asst. year 2011-2 and 2012-13 were also disallowed for the same reason and added to the total income of the ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 16 of 23 assessee. The details of the expenditure incurred in asst. year 2011-12 are as follows:-
The details of expenditure incurred in asst. year 2012-13 was sum of Rs.24,50,195/-. The breakup of the aforesaid expenditure is not available in the order of assessment.
The action of the AO was confirmed by the CIT(A).
Aggrieved by the order of the CIT(A), the assessee has preferred the present appeal before the Tribunal.
We have heard the submissions of the ld counsel for the assessee and the ld DR relied on the order of the CIT(A). The ld counsel for the assessee brought to our notice that the decision of the Karnataka High Court in the case of CIT(E) Vs. Ohio University, Christ College (2018) 408 ITR 352 (Kar). The aforesaid decision the question that arose for consideration was whether the payments
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 17 of 23 made to prefessors of Ohio University, USA could be allowed as deduction. The Hon’ble Karnataka High Court after referring to the decision of the Delhi Tribunal in the case of Nasscom Vs. DDIT, 130 TTJ 377 which was later confirmed by the Hon’ble Delhi High Court in the decision reported in 21 taxmann.com 231(del.) came to the following conclusion and held as follows:-
“6. Depending upon the normal accounting practices adopted by the assessee in ordinary course c business, if a provision for an expenditure is made in a particular year and the amount in question 'spent' in the subsequent period, it cannot be said that the amount is not 'applied' for the specified purpo in that relevant assessment year. In the present case. the Tribunal has found that the payment made to ti Professors of Ohio University, USA who visited the class rooms of the respondent - educational institution in Bangalore and imparted higher education to the students of the respondent - Trust, the provision for Such payments to the Ohio University was made in the relevant year and the remittances or payment was made in the next year itself, which payments have also been brought to taxation under the Indian Income tax Act, as Ohio University, USA had a 'permanent establishment' in India and offered the said receipts of remittances from the respondent - Trust to taxation in India.
7. Thus, neither the liability for payment was admitted by the respondent - Trust by making a provision for such payment is disputed by the Revenue nor the fact of actual payment made in the subsequent or next year is also disputed. Therefore, in fact and in substance, the condition of 'application of the income' of the Charitable Trust for the specified purpose, namely of imparting higher education is satisfied and the exemption to the said Charitable
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 18 of 23
Trust cannot he denied on the anvil of non-fulfillment of' the said conditions under Sec. 11(a) of the Act.”
The Hon’ble High Court also held as follows:-
“15. Thus, we are of the opinion that in view of the findings of fact recorded by the learned Tribunal that a provision was made to the Ohio University for charitable activity by way of education being imparted in India and the fact of the actual payment made to the Ohio University in the very next year and that too offered for taxation in India being undisputed, no such substantial question of law arises for our further consideration.”
He also drew our attention to the decision of the Hon’ble Delhi High Court in the case of Institute of chartered Accountant of India Vs. DDIT wherein an identical issue Tribunal held as follows:-
It is quite clear from the above provisions that there is no such condition as being stated by the DIT(Exemption) in Section 1O(23C)(iv). Furthermore, Section 11(l)(c) is applicable only with reference to those trusts which are claiming exemption u/s 11, and it is not applicable to exemption u/s 10(23C)(iv). Due clarification was given to the DIT(Exemption) during the course of proceedings u/s 263 as stated above. However, the objection raised by the DIT(Exemption) with regard to CBDT permission is applicable when any expenditure is incurred which tends to promote international welfare. However, the institute does not have any welfare nor any ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 19 of 23 expenditure has been incurred for that purpose. However, the expenditure has been incurred on overseas travel etc. which was for the purpose of its object. Mere fact that expenditure has been incurred on foreign travel will not mean that institute has incurred such expenses for purposes which are not for India.
After going through various provisions under the Chartered Accountants Act, we found that institute has obligation u/s 15(2)(j) of the Chartered Accountants Act 1949 to maintain status and standard of professional qualification of chartered accountancy and for that purpose, it is necessary to observe developments taking place in the world. The expenditure so incurred would be for the purpose in India and not international welfare as alleged by the DIT(Exemption). Furthermore, since the assessee was claiming exemption u/s 10(23C)(iv), where there is no such condition, thus DIT(Exemption) otherwise was also not justified in invoking Section 11(l)(c) of the Act. As per our considered view, whether it is exemption u/s 10(23C)(iv) or exemption u/s 11, overseas expenses will not come in the way of allowing exemption.
The ld DR relied on the order of the AO.
We have considered the rival submissions. As we have already seen under the provision of sec. 11(1)(a) of the Act exemption is allowed only to the extent income of charitable trust is applied to such purposes in India. The Hon’ble Karnataka High Court dealing with an identical situation held that when teaching services were rendered to assessee educational trust by faculty
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 20 of 23 members of foreign university and when such services were utilized for the purpose of trust objective of imparting education in India payment made to foreign university towards faculty teaching charges was allowable as deduction. We are therefore of the view that in the light of the decision that Hon’ble Karnataka High Court the deduction claimed should be allowed. It cannot be said that the assessee has not applied the income for charitable purposes outside India as beneficiaries of the education imparted outside India where the assessee’s students. Accordingly the relevant grounds of appeal for the assessee are allowed.
35. As far as second issue is concerned the question that arises for consideration is that when the assessee incurred capital expenditure for acquisition of capital assets but the payment for acquisition of the aforesaid capital assets were outstanding and were not paid, can it be regarded as application of income for charitable purpose. The AO was of the view that the deduction can be claimed only on the basis of actual payment and not on the basis of the outstanding liability shown in the balance sheet. The view of the AO was confirmed by the CIT(A) against which the assessee has preferred present appeal before the Tribunal.
36. The ld DR relied on the order of the CIT(A) on this issue and the CIT(A) in upholding the order of the AO came to the conclusion that unpaid paid liability will not amount to application of income u/s 11(1)(a) of the Act.
37. Aggrieved by the order of the CIT(A) the assessee is in the appeal before the Tribunal.
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 21 of 23
The ld DR relied on the order of the CIT(A). The ld counsel for the assessee placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT VS. Ohio University, Christ College (Supra) and also the decision of the Hon’ble Andhra Pradesh High Court in the case of CIT Vs. Trustees of HEH, The Nizzams Charitable Trust (1981) 7 taxmann.com 178 (AP). The Hon’ble A.P. High Court in the aforesaid decision took the view that the word ‘applied’ used in sec. 11(1)(a) should not be equated with the word ‘spent’. The court therefore held that the amount which was sanctioned for use for charitable purposes, which was not actually spent in the relevant previous year would also constitute application of funds for charitable purposes within the meaning of sec. 11(1)(a) of the Act. Reliance was also placed on the decision of ITAT Mumbai Bench in the case of Gem and Jewellery in respect of Export promotion Counsel Vs. VIth ITO wherein it was held that income of a trust has to be computed on commercial principles taking into account provisions of the Act.
We have given a careful consideration to the relevant submission and are of the view that the plea of the assessee deserves to be accepted. As the decision of the Hon’ble Andhra Pradesh High Court in the case of Nizzam Trust (Supra) supports the plea of the assessee. The law is well settled that the income of a trust has to be computed keeping in mind commercial principles as per the accepted commercial principles amount due but not paid and should also to taken into consideration for determining income.
ITA Nos.1514, 1515, 1730, 1731 & 1732/Bang/2016 Page 22 of 23
In view of eh above, the relevant ground of appeal raised by the assessee are allowed.
In the result, the appeal of the Revenue are dismissed while the appeals by the assessee are partly allowed.
Pronounced in open court on 21st August, 2019.