DEPUTY COMMISSIONER OF INCOME TAX (E) CIRCLE-1 , BANGALORE vs. M/S KARNATAKA JESUIT EDUCATIONAL SOCIETY , BANGALORE

PER SMT BEENA PILLAI, JUDICIAL MEMBER present appeal has been filed by revenue against order dated 19/02/2018 passed by Ld. CIT (A)-10, Bangalore for assessment year 2013-14 on following grounds of appeal:

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Carry forward of excess application/deficit of earlier year for application in subsequent (future) year: a) The CIT (A) has erred in directing the assessing officer to allow set-off of excess expenditure/application pertaining to current asst. year and earlier years against the income of the future asst. year without appreciating the fact that as per the scheme of taxation of charitable or religious trust/institution as codified u/s.11,12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust.

b) The CIT (A) has failed to appreciate 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 exemption under sec.11, 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.

c) C IT (A) has f ailed to discuss the issue in de tail bringing ou t the f ac ts and applying the relev an t provisions of the Ac t, but c ame to a conclusion th at excess expenditure/excess

ITA No.1383(B)/2018 3 applic ation sh all be allo wed to be c arried forward and se toff ag ains t the income of the future assessmen t ye ars and, thereby, rendering the order perverse”.

Brief facts of the case are as under: Assessee is a trust under section 12 A of the act and has also got approval of recognition under section 80 G (5) (vi) Vide No. DIT (E) BLR/80G(R)/59/AAATK2245D/ITO(E)- I 2010-11 dated 10/06/10. Assessee filed its return of income on 08/08/13 declaring ‘nil’ income, after claiming exemption under section 11 of the Act. The return was processed resulting in a refund of Rs.44,30,520/-. The case was selected for scrutiny and notice under section 143 (2) and 142 (1) along with questionnaire was issued to assessee. In response to statutory notices, representatives of assessee appeared before Ld.AO and furnished details from time to time as called for. Ld.AO after considering various details filed by assessee disallowed depreciation amounting to Rs.4,24,34,335/-as application money, and unabsorbed brought forward deficit of Rs.11,13,47,743/- to be carried forward to the subsequent years. 2. Aggrieved by the additions made by Ld. AO assessee preferred appeal before Ld. CIT (A) who allowed the claim of assessee. Aggrieved by the order of Ld. CIT (A) revenue is in appeal before us now. 3. The only issue raised by revenue is in respect of brought forward of excess application and carry forward of excess application of

ITA No.1383(B)/2018 4 income of current year to subsequent years, allowed by us Ld. CIT (A). 3.1 Ld. AR submitted that identical issue has been considered by this Tribunal in various cases which has been relied upon by Ld. CIT (A) in order to grant relief to assessee. Referring to para 5.3 of the impugned order, Ld.AR submitted that excess application of a charitable fund in a particular year is allowed to be carried forwarded to subsequent year for set off against any shortfall in spending in that year under the provisions of fact. Ld.AR submitted that expenses incurred by the trust in earlier years against the income earned by the trust in subsequent year will have to be regarded as application of income of trust. Further it is observed that assessing officer disallowed the claim only on the ground that there is no express provision in the act permitting adjustment of earlier years bought forward expenses as application of income in current year. Ld.AR submitted that identical issue has been considered by Hon’ble Karnataka High Court in case of CIT (E) vs Ohio University Christ College reported in (2018) 99 taxman.com 377. 4. Ld.Sr.DR though supported the view of Ld.AO, however could not refute observations of Hon’ble Karnataka High Court in aforestated case. 5. We have perused submissions advanced by both sides in the light of the records placed before us. Karnataka High Court has considered the issue in following question of law raised therein:

ITA No.1383(B)/2018 5 “…….. (2) whether on the facts and circumstances of the case, the tribunal is right in confirming the order of the CIT directing the assessing authority to allow the claim of assessee for set off of brought forward excess application of income/loss of income/laws of income for earlier years by relying upon the decision of this Hon’ble Court in case of ACIT vs Sisters of St.Anne (reported in 146 ITR page 28 and circular No. 5-P (lxx)-6 of 1968 when the assessing authority rightly disallowed the claim by holding that no such set of brought forward excess application of income/loss of income of earlier years are permitted under the provisions of the act in the case of educational institution? Hon’ble court considered the issue as under: 16. In so far as the second question proposed by the Revenue, quoted above is concerned also, we find that the Tribunal's findings in this regard do not give rise to any substantial question of law. The said findings are quoted below for ready reference : "5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of expenditure of earlier years, which has been brought forward and set off in the year under consideration. The Assessing Officer disallowed the same on the ground that there is no express provision in the Act permitting the adjustment of earlier years brought forward expenses as application of income in the current year. According to the Assessing Officer, the application of income for charitable purposes must be during the relevant previous year. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85% of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee's claim of

ITA No.1383(B)/2018 6 expenditure of earlier years being brought forward and set off during the year. 5.2 On appeal, the learned CIT (Appeals) allowed the amortization of the expenditure as claimed by the assessee and deleted the disallowance made by theAssessing Officer by placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of the Sisters of St. Anne reported in 146 ITR 28 (1984) and CBDT Circular No.5-P(LXX)-6 of 1968. 5.3.1 We have heard the rival contentions of both the learned Departmental Representatives for Revenue and the learned Authorised Representative for the assessee and perused and carefully considered the material on record, including the judicial pronouncements cited. The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 1/5th of the expenditure. The un-amortized expenditure has been brought forward and set off as application of income in subsequent years, including the assessment years 2008-09 and 2009-10 which are under consideration. 5.3.2 We find that the issue before us is directly related to the issue decided by the Hon'ble Karnataka High Court in the case of Sisters of St. Anne (supra) cited by the assessee. In the said case, the Hon'ble Karnataka High Court at paras 8 to 10 thereof has held as under : 5.3.3 Further, the CBDT Circular No.5-P (LXX)-6 of 1968 cited by the assessee makes it clear that income should be understood in its commercial sense : in the case of trusts also and therefore the commercial principle enunciated by the Hon'ble Karnataka High Court in the above referred case of Sisters of St. Anne (supra) applies to trusts as well.

ITA No.1383(B)/2018 7 In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses. Consequently, Ground No.B (1 to 6) of the Revenue's appeal for Assessment Year 2008-09 and Ground No.0 for Assessment Year 2009-10 are dismissed." 17. In our opinion, the matter is squarely covered by a decision of the cognate Bench of this Court in the case of CIT v. Society of the Sisters of St. Anne (1984) 16 Taxman 400/146 ITR 28 (Kar.) wherein the congnate Bench of this Court held that even the depreciation not involving any cash outflow is also in the character of expenditure and therefore such depreciation is nothing but decrease in the value of property through wear and tear, deterioration or obsolescence and the allowance made for that purpose in the books of account were deemed to be the application of funds for the purpose of Sec. 11 of the Act. The relevant portion of the said judgment is also quoted below for ready reference: '11. Mr. Srinivasan, however, urged that there are enough indications in Section 11 to exclude the mercantile system of accounting. The learned counsel relied upon sections 11(1)(a) and 11(4) in support of his contention. We do not think that there is anything in these sub-sections to support the contention of Mr. Srinivasan. Explanation to section 11(1)(a) on the contrary takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not only be on cash basis. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the Act in respect of business undertaking. 12. The depreciation if it is not allowed as necessary deduction for computing the income from the charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income. The Board also appears to have understood the 'income' under section 11(1) in its commercial sense. The relevant portion of the Circular No.5XX-6

ITA No.1383(B)/2018 8 of 1968, dated 19-6-1968 (See Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn. P.85) reads: "Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word 'income' should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should not be less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1)." 12. In CIT v. Trustee of H.E.H. The Nizam's Supplemental Religious Endowment Trust (1981) 127 ITR 378, the Andhra Pradesh High Court has accepted the accounts maintained in respect of the trust in conformity with the principles of accountancy for the purposes of determining the income derived from the property held in trust.' 18. In view of the aforesaid findings of the learned Tribunal, allowing any expenditure of the earlier year which has been brought forward and set off in the year under consideration, is a justified finding of fact based on the correct interpretation of law and the judgment relied upon by it rendered by the cognate Bench. Therefore, the same does not call for interference. A similar view was also taken by the Division Bench of Bombay High Court in CIT Vs Institute of Banking Personnel Selection (IBPS) 20031 264 ITR 110/131 Taxman 386 wherein the Division Bench of Bombay High Court held that the 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

ITA No.1383(B)/2018 9 will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year. The relevant portion of the said judgment of Bombay High Court is also quoted below for ready reference : "Normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-tax Act, 1961. Income of a charitable trust derived from building, plant and machinery and furniture is liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Act providing for depreciation, for computation of income derived from business or profession is not applicable. However, the income of the trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from the gross income of the trust. 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 had been made having regard o the benevolent provisions contained in section 11 of the Act and such investment will have to be excluded from the income of the trust under section 11(1)(a)”.

Respectfully following the same we do not find any infirmity with the view taken by Ld. CIT (A) and the same is upheld. Accordingly ground raised by revenue stands dismissed. In the result appeal filed by revenue stands dismissed.

ITA No.1383(B)/2018 10 Order pronounced in the open court on

(B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File

By Order Asst. Registrar