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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI JASON P BOAZ
Per Shri Jason P Boaz, A.M. :
This appeal by Revenue is directed against the order of CIT(A), Mangaluru, dated18.09.2017 for assessment year 2010-11.
Briefly stated, the facts of the case are as under:-
2.1 The assessee, a charitable trust, recognized under section 12A of the Income Tax Act, 1961 (in short ‘the Act’) and granted exemption under section 10(23C)(vi) of the Act, filed its return of income for Assessment Year 2010-11 on 27.09.2010 declaring NIL income; claiming depreciation of Rs.6,64,07,894/- on assets and deduction for capital expenditure of Rs.6,20,28,563/- as application of income. After
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claiming exemption under section 11(1) of the Act, the assessee claimed current years deficit of Rs.14,16,03,941/- and brought forward deficit of Rs.45,19,11,077/- pertaining to earlier years. The case was taken up for scrutiny for this Assessment Year and the assessment was concluded under section 143(3) of the Act vide order dated 22.03.2013 by making the following disallowances:
(i) Disallowance of claim of depreciation – Rs.6,64,07,894/- (ii) Denial of carry forward of deficit (excess application over income) to the subsequent years.
2.2 Aggrieved by the order of assessment dated 22.03.2013 for Assessment Year 2010-11, the assessee filed an appeal before the CIT(A)-Mangaluru, who allowed the appeal vide order dated 18.09.2017; granting the assessee relief on both the issues raised; i.e., (1) Depreciation and (2) carry forward of deficit (excess of application over income) to subsequent years.
Revenue, being aggrieved by the order of CIT(A), Mangaluru dated 18.09.2017 for Assessment Year 2010-11, has filed this appeal before the Tribunal wherein it has raised the following grounds:
On Disallowance of depreciation: Whether in the facts and circumstances of the case and in law, the learned 1. CIT(A) erred in allowing depreciation in respect of assets which have already been allowed as application of income in its entirety in earlier years. Whether in the facts and circumstances of the case and in law, the learned 2. CIT(A) is correct in allowing depreciation which amounts to double deduction when already full expenditure has been allowed in earlier years. The CIT(A) has failed to appreciate the fact that the Hon'ble Kerala High 3. Court in the case of Lissie Medical Intuitions Vs. CIT (348 ITR 344) has held that depreciation cannot be allowed on assets, where cost of such assets has already been allowed as application of income in the year of acquisition/ purchase of asset.
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The CIT(A) has failed to appreciate that the Hon'ble Supreme Court in 4. the case of Escorts Ltd. & another Vs. Union of India (199 ITR 43), while dealing with the issue of allowance of expenditure on scientific research u/s 35(1)(iv) [corresponding to section 10(2) (xiv) of the I.T. Act, 1922] held that any expenditure of a capital nature (or incurred towards purchase of capital assets) on scientific research allowed as deduction u/s 35(1)(iv) cannot be allowed once again as deduction in the form of depreciation on such capital assets. While doing so, it was observed by the Hon'ble Supreme Court that no legislature could have at all intended a double deduction in regard to the same business outgoing and if it is intended, it would be clearly expressed in the statute itself. Accordingly, it was held that even in absence of clear statutory indication to contrary, statute should not be read so as to permit an assessee two deductions i.e. once in the form of expenditure incurred towards purchase of capital assets and secondly, in the form of depreciation on such capital assets. It was also held that even before the amendment of the Act in the form of insertion of clause (iv) of sub section (2) of section 35 by Finance Act, 1980, prohibiting allowance of depreciation, the Act did not permit a deduction for depreciation in respect of cost of capital asset acquired for the purpose of scientific research to the extent such cost had been written off/ claimed as deduction u/s 35(1)(iv) on the ground that the amendment only set out more clearly and categorically what the provision intended even earlier.
2) Carry forward of excess application/deficit of current year & brought forward deficit of earlier years 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.
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c) The CIT (A) has failed to discuss the issue in detail bringing out the facts and applying the relevant provisions of the Act, but came to a conclusion that excess expenditure/excess application shall be allowed to be carried forward and set-off against the income of the future assessment years and, thereby, rendering the order perverse.
Ground No.1 – Depreciation on Fixed assets
4.1.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. On an appreciation of the material on record, it is seen that the AO disallowed the assessee's claim for deduction on account of depreciation on assets, since he was of the view that as the cost of acquisition of the said assets had been claimed as capital expenditure towards application of funds in furtherance of the objects of the trust; and allowing the assessee's claim of depreciation would amount to allowing double deduction. In coming to this view the AO placed reliance on the decision of the Hon'ble Apex Court in Escorts Ltd., (1993) 199 ITR 43 (SC). Reliance was also placed on the decision of the Hon'ble Kerala High Court in the case of Lissie Medical Institutions (2012) 348 ITR 344 (Kerala), wherein it was held that allowing depreciation on an assets when the cost of acquisition of the said asset was allowed as application of income for charitable purpose in the year of acquisition would amount to double deduction and therefore depreciation cannot be allowed.
4.1.2 On appeal, the assessee while reiterating its claim for being allowing deduction of depreciation on assets, inter alia, placed reliance on the following decisions of the Hon'ble Karnataka High Court and other High Courts and of the Co-ordinate benches of this Tribunal. (i) DIT (Exemption) & Other Vs. Al-Ameen Charitable Fund Trust (and connected Appeals)(2016) 383 ITR 517 (Kar). (ii) CIT Vs. Society of Sisters of St. Anne (1984) 146 ITR.
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(iii) Karnataka Reddy Janasangha Vs. DIT (E) (ITA No.220/Bang/2011 dated 07.09.2012) (iv) ACIT Vs. Medical Relief Society of South Canara (ITA No.1713/Bang/2013 dated 10.12.2014) (v) Sadvidya Educational Institution Vs. Addl. CIT (ITA No.604, 65 & 324/Bang/2011 dated 28.03.2014). (vi) ITO(E) Ward – 1, Mangaluru Vs. Our Lady of Milagares Church (ITA No.138/Bang/2015 dated 11.06.2015). (vii) Krupanidhi Educational Trust Vs. DIT (E) (ITA No.495/Bang/2014 dated 20.02.2015) (viii) ACIT Vs. Adi Chinchunagiri Shikshana Trust 775/Bang/2009.
The learned CIT(A), in the impugned order dated 18.09.2017 for Assessment Year 2010-11, allowed the assessee’s claim for depreciation on fixed assets by following the aforesaid decision of Hon’ble Karnataka High Court in Al-Ameen Charitable Fund Trust (supra).
4.1.3 Before us, the learned AR for the assessee reiterated the assessee’s claim for being allowed deduction on account of depreciation on fixed assets and submitted that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of Al-Ameen Charitable Fund Trust reported in (2016) 383 ITR 517 (Kar).
4.1.4 We find that an identical issue as the one before us in the case on hand came up for consideration before a coordinate bench of this Tribunal in the case of ACIT Vs. City Hospital Charitable Trust (2016) 68 taxmann.com 429 (Bangalore - Trib). In the aforesaid case, the assessee claimed deprecation on assets, which claim was denied by the AO on the ground that since at the time of acquisition of the
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relevant capital asset, cost of acquisition was considered as application of income, therefore if depreciation was to be allowed on the said assets it would amount to allowing double deduction. In coming to this conclusion, the AO placed reliance on the decision of the Hon'ble Apex Court in Escorts Ltd. (Supra). The co-ordinate bench, while considering and upholding the asessee's trusts claim that it is entitled for deprecation on assets the cost of which has been claimed as application of income u/s 11 of the Act held as under at para 7 to 9 of its order:- "7. We have heard the submission, of the Id. DR, who relied on the order of AO. We have considered the order of the AO. Identical issue come up for consideration before ITAT Bangalore Bench in the case of Iv, D/T(Exemptions) v. Cutchi Memon Union [2013] 60 SOT 260/38 taxmann.com 276 (Bang), wherein similar issue has been dealt with 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 a 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 Esc 'is 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 s the income. It was so held by the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT v. Tiny Tots Education Society [20111330 ITR 21 (P&H), following -CIT v. Market Committee, Pipli [20111330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in
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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 3 (SC) have been referred to and distinguished by the Hon'ble Court in the aforesaid decisions. 2 1. 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 Lid. (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 II 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 in the 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)( v) 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 oil 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 ' 8. 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.. 1 1.2015 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 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
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which has bee- claimed as an application of income under this section in the same or any other previous year." 9. 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) does not call for any interference. Consequently grounds No.2 to 2.5 raised by the Revenue are dismissed."
4.1.5 Similar views have been laid down and upheld by the Hon'ble Karnataka High Court in the case of DIT (Exemptions) Vs. Al-Ameen Charitable Fund Trust (Supra). In this case, the Hon'ble jurisdictional High Court has held that the assessee Trust’s claim for depreciation on assets is to be allowed while computing its income u/s 11 of the Act; even though the amount spent on acquisition of the said capital asset was already allowed as application of income for furtherance of the objects of the trusts in the year of such acquisition. Revenue's argument advanced apprehending double deduction was held to be totally misconceived. The Hon'ble High Court also held that sec. 11(6) inserted w.e.f 1/4/2015 by Finance Act No.2/2014 is prospective in nature and since it operates w.e.f 1/4/2015 will accordingly apply from asst. year 2015-16 and subsequent years.
4.1.6 In the factual and legal matrix of the issue before us, as discussed above the paras 4.1 to 4.1.6, we are of the opinion that the assessee trust in the case on hand is to be allowed its deduction of depreciation on assets while computing its income u/s 11 of the Act, even though the amount spent on acquisition of the said capital asset was already allowed as application of income in furtherance of the objects/charitable activities of the assessee trust in the year of acquisition. In coming to this view, we place reliance on the decisions of the Hon'ble Karnataka High Court in the cases of CIT Vs. Society of Sisters of St. Anne (Supra), Al-Ameen Charitable Fund Trust (Supra) and Karnataka Reddy Janasangha (Supra) and the decisions of the co-ordinate bench in the case of City Hospital Charitable Trust (Supra) and Jyothi Charitable (Trust) which have decided the issue in favour of the assessee and against revenue on the issue
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of the assessee being entitled to be allowed depreciation on assets, the cost of which has already been claimed as application of income u/s 11 of the Act. We consequently uphold the order of the learned CIT(A) on this issue and consequently, Revenue’s ground of appeal No.1 is dismissed.
Ground No.2 – Carry forward of current year’s deficient (excess application over income) and earlier years deficit to subsequent years
5.1 The Id DR was heard in support of grounds raised (Supra) and relied on the findings rendered by the AO.
5.2 According to the learned AR for the assessee, the assessee is entitled to carry forward the current year’s deficit (excess of expenditure over income) and current year’s deficit for set off against assessee’s income the subsequent years. It is submitted that the said issue is covered in favour of the assessee and against Revenue by the decision of the Co-ordinate bench of this Tribunal in the cases of City Hospital Charitable Trust in ITA No.676/Bang/2014 dated 30.05.2015; Jyothy Charitable Trust in ITA No.522/Bang/2014 dated 11.06.2015; Manipal Academy of Higher Education in ITA No.658/Bang/2014 dated 24/7/2015 and Shraddha Trust in ITA No.899/Bang/2016 dated 7/4/2017.
5.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the issue before us of carry forward of current year’s deficit (excess application over income) along with brought forward deficit of earlier years for set off to subsequent years; is covered in favour of the assessee and against Revenue by the decisions of the Co-ordinate Benches of this Tribunal in the cases of City Hospital Charitable Trust in ITA No.676/Bang/2014 dated 20.03.2015; Jyothi Charitable Trust (60 taxmann.com 165) and the case of ITO (Exemption) Vs. Shraddha Trust in ITA No.899/Bang/2016 dated 07.04.2017.
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In the case of Shraddha Trust (supra), the Co-ordinate Bench at para 8 of its order has held as under:- “8. The final grounds of appeal relates to carry forward of excess application of income to subsequent years. This issue is covered against the revenue by co-ordinate bench of Tribunal in the case of Deputy Director of Income-tax vs. Jyothy Charitable Trust (60 taxmann.com 165). The relevant part of the order is reproduced below: “14. We have considered his submission. Section 11(1Xa) 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. 1-knee, 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 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 v. Afaharana of Mewar. Charitable Foundation [1987] 164 ITR 439/[1986] 29 Taxman 476 (Raj) and CIT v. Plot Swetamber Afurti Pukik Jain Mandal [1995] 211 ITR 293 (Guj.). In CIT v. Institute of Banking Personnel Selection [2003] 264 ITR 1101 31 Taxman 386 (Born.) it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier in 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 v. Asstt.. DIT [2001] 248 ITR 368[1999] 105 Taxman 719 (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
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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 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 Society of Sisters of ST. Anne (supra).”
5.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Shraddha Trust in ITA No.899/13ang/2016 dated 7/4/2017, we uphold the order of the learned CIT(A) in allowing the assessee’s claim to carry forward of current year’s deficit along with earlier year’s deficit for set off to the subsequent years. Consequently, the ground No.2 raised by Revenue in this appeal is dismissed.
In the result, Revenue's appeal for Assessment Year 2010-11 is dismissed.
Order pronounced in the open court on this 12th day of June, 2019.
Sd/- Sd/- (N. V. VASUDEVAN) (JASON P BOAZ) Vice President Accountant Member Bangalore. Dated: 12th June, 2019. /NS/*
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Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.