Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P BOAZ
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER
ITA No.789/Bang/2014
Assessment years : 2010-11
Bangalore Development Authority, Vs. The Dy. Commissioner of Income-tax T Chowdaiah Road, (Exemptions) Kumara Park West, Range-17, Bengaluru-560 020. Bengaluru PAN – AAALB 0060 D. APPELANT RESPONDENT
Appellant by : Shri S Annamalai, Advocate Respondent by : Dr. Pradeep Kumar, CIT(DR)
Date of hearing : 29.04.2019 Date of Pronouncement : 03.05.2019
O R D E R Per N.V. Vasudevan, Vice President This is an appeal by the assessee against order dated 28/2/2014 of CIT(A), Mysuru relating to asst. year 2010-11.
There is a delay of about 37 days in filing the appeal by the assessee. The reasons for the delay in filing the appeal have been explained in an affidavit filed by the Commissioner of Bangalore Development Authority (BDA) which is the appellant in this appeal. It has been mentioned in the Affidavit that the assessee claimed the benefit of exemption u/s.sec. 11 of the Income Tax Act, 1961 (Act) and filed a return of income for asst. year 2010-11. The benefit of exemption u/s 11 and 12 of the Act was denied by the AO who came to the conclusion that the activities of the assessee were in the nature of business and therefore the objects
ITA No.789/Bang/2014
Page 2 of 20
the assessee were not charitable nature as per the proviso to sec. 2(15) of the Act which defines the expression ‘charitable purpose’. Consequently, the AO treated the surplus as per the profit and loss account as income chargeable to tax. The surplus as per the income and surplus account would not arise if a sum of Rs.4,84,71,49,000/- which was claimed by the assessee as Revenue expenditure would have been accepted by the AO. Another addition was an addition on account of disallowance of expenditure on account of refunds made on cancellation of sites allotted in earlier years. The above 2 additions were deleted by the CIT(A) but the main grievance of the assessee that it was existing for a charitable purpose and it was entitled to the benefits of sec 11 of the Act was denied by the CIT(A). It is in this back grounds that the Assesee approached Mr. A Shankar Advocate for professional advice regarding filing of appeal against the order of CIT(A), even though there would be no tax implications pursuant to the order of the CIT(A). It has been stated that due to his non-availability, there was a delay in getting his advice and he had advised the Assessee that an Appeal should be filed against the order of CIT(A). This is how the delay in filing the appeal has been explained.
The ld counsel for the assessee placed reliance on the following decisions in support of its claim that the delay in filing of appeal should be condoned.
Hon’ble Apex Court in the case of Collector, Land Acquisition Vs. MST. Katiji and Others (198) 167 ITR 471
Concord of India Insurance Co. Ltd., Vs. Smt. Nirmala Devi and Others 118 ITR 507
Radha Krishna Rai Vs. Allahabad Bank & Others [2009] 9 Supreme Court cases 733.
We have heard submission of the ld counsel for the assessee. Keeping in mind the principle laid down in the aforesaid decisions that interest of justice is
ITA No.789/Bang/2014
Page 3 of 20
paramount and a liberal approach in such matters of condonation of delay should be adopted, so long as there is no lack of bonafides or diligence, we are satisfied that the delay in filing the appeal was due to reasonable and sufficient cause and the delay in filing the appeal deserves to be condoned. We accordingly condone the delay in filing the appeal.
As far as the merits of the case of the assesee is concerned, the ld counsel or the assessee submitted that ground 4 if adjudicated will render the adjudication of other grounds as academic and prayed for adjudication of ground No.4 which reads as follows:-
“4. Ground on applicability of proviso to Section 2(15) and related grounds.
(a) The authorities below are not justified in holding that the proviso to section 2(15) of the Act is applicable to the appellant on the facts and circumstance of the case.
(b) The authorities below are not justified in not considering that the appellant falls within several limbs of charity as defined in section 2(15) of the Act and hence ought not to have applied the proviso to the facts of the appellants case. (c) The learned Commissioner of Income Tax (Appeals) is not justified in law in denying the exemption as a charitable institution for the reason that appellant is carrying on business. The inference drawn for holding that the appellants are doing business are purely arbitrary and purely on suspicion and surmise devoid of factual foundation.
(d) The learned Commissioner of Income Tax (Appeals) ought not to have denied exemptions for charitable purpose as the
ITA No.789/Bang/2014
Page 4 of 20
Appellant do not fall under second proviso to section 2(15) of the Act.
(e) The learned Commissioner of Income Tax (Appeals) ought to have taken into account the speech of the Finance Minister which indicate the object and drift of the amendment in as much as that genuine Charitable Trusts are not hit by the proviso to section 2(15) of the Act.
(f) Without prejudice the authorities below ought to have granted exemption in respect of the other limbs of charity by applying the principles of apportionment and ought to have granted proportionate relief in respect of the other limbs of charity being relief to the poor etc. on the facts and circumstance of the case.
(g) Without prejudice, the learned Commissioner of Income Tax (Appeals) failed to appreciate that the appellant fall under first to fifth limb of the definition of charitable purpose on the facts and circumstances of the case.” 6. As far as ground 4 raised by the assesee is concerned, the facts are that the assessee is a statutory body by name Bangalore Development Authority, a statutory body constituted under the Bangalore Development Authority Act, 1976 (BDA Act). The Assessee claimed the benefits of exemption under Sec.11 of the Act on the ground that it was existing for charitable purpose as defined in Sec.2(15) of the Act. Section 2(15) of the Act has 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 Assessee is existing for the following purposes mentioned in the definition of Charitable purpose u/s.2(15) of the Act viz., “advancement of any object of general public utility”. 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:-
ITA No.789/Bang/2014
Page 5 of 20
“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”]
Thus the proviso to section 2(15) (supra) clearly specified that if any charitable organization recognized under section 12A of the Act (i)were to carry out any activity in the nature of trade, commerce or business or (ii)were to carry on any activity of rendering service in relation to any trade, commerce or business. for a cess or fee or any other consideration, then irrespective of the nature of use or application or retention of the income from such activity, such activity shall not constitute activity / activities of charitable purpose or nature, despite the fact that the same are carried out or performed for the advancement of any object of general public utility.
The AO was of the view that the assessee’s activities are hit by the proviso to section 2(15) of the Act, introduced w.e.f. 01.04.2009 by Finance Act, 2010, consequently he denied the assessee the exemption claimed under section 11 of the Act and brought to tax the assessee’s income from Assessment Year 2009-10 onwards. The AO, has laid emphasis on the fact that the objects of the assessee as per BDA Act, was to develop the City of Bangalore and areas adjacent thereto. The AO after referring to the Income and Expenditure Account of the Assessee has observed that the Assessee derives income from selling several categories of properties to the public. He has observed that the focus of the Assessee has been more on selling sites by auction to the highest bidder and was not for providing
ITA No.789/Bang/2014
Page 6 of 20
affordable housing to the public. This is the main reason for the AO’s conclusion that the Assessee was carrying on business and therefore was not existing for charitable object as laid down in the proviso to Sec.2(15) of the Act. The AO has also placed reliance on Schedule-15 of the profit and loss account of the Assessee which shows income from rent of shops, ground rent, development charges etc. The AO has drawn the following inferences to come to conclusion as above:
(i) The assessee is mainly engaged in development of sites and houses and sale of the same to general public at large by way of collecting consideration and in respect of corner sites and flats, sale transactions are done through auction sale wherein highest bidder will only get the eligibility to own the sites or flats. (ii) The assessee is generating huge amount of profits year after year from sale of sites and flats indicating that the assessee is carrying out the activities as a business venture rather than charitable organization. (iii) The assessee is not applying the huge amount of profits generated from the activities towards any charitable activities such as relief of poor, education, medical relief and other objects of advancement of the general public utility and such surplus is being invested in fixed deposits in order to earn interest income. (iv)The activities of the assessee and the generation of profits on account of the same are akin to the activities carried on by real estate companies, property developers, infrastructure firms etc., and therefore, the activities of the assessee are squarely fall under the ambit of activities which are in the nature of trade, commerce or business. Accordingly, the activities of the assessee are hit by the first proviso below section 2(15). 7. On appeal by the assessee, the CIT(A) upheld the stand taken by the AO.
Aggrieved by the order of the CIT(A), the assessee has raised ground No.4 before the Tribunal .
At the time of hearing of the appeal it was agreed by both the parties that identical issue had come up for consideration in assessee’s own case for asst. year
ITA No.789/Bang/2014
Page 7 of 20
2012-13 in ITA No.1104/Bang/2017 and this tribunal vide its order dated 22/3/2019 held that the assessee is entitled to the benefit of sec. 11 of the Act and that its activities cannot be said to fall within the ambit of proviso to sec. 2(15) of the Act. The Tribunal held as follows:-
“5.8.1 We have considered the rival contentions / submissions put forth and perused the material on record placed before us; including the judicial pronouncements cited. At the outset, we have perused section 14 of the BDA Act, 1976, which specifies the objects of‘BDA’ and the same is extracted hereunder:
“14. Objects of Authority:—The objects of the authority shall be to omote and secure the development of the Bangalore Metropolitan Area and for that purpose the authority shall have the power to acquire, hold, manage and dispose of movable and immovable property, whether within or outside the area under its jurisdiction, to carry out building, engineering and other operations and generally to do all things necessary of expedient for the purpose of such development and for purposes incidental thereto.”
5.8.2 A plain reading of the aforesaid objects would show that prima facie, the same does not contain the first five limbs of section 2(15) of the Act namely, 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). However, the claim of the assessee that even though these five limbs are not specifically provided for in section 14 of the BDA Act, the objects enunciated involved preservation of environment, preservation of water bodies, preservation of forest areas, etc., appears to have merit; for it is a fact that planned urban development cannot take place or be done without due consideration being given to the preservation of the environment, water bodies like lakes, streams, etc., and forest areas.
5.8.3 At para 5.9 of the impugned order, the CIT(A) states that she is unable to accept the argument of the assessee that the activities undertaken by it related to the development of parks, lakes
ITA No.789/Bang/2014
Page 8 of 20
and greenery come under the first four limbs of the definition as per section 2(15) of the Act and not the fifth limb. She was of the view that the development of lakes, parks and greenery have been undertaken only as part of layout development and could be considered for enhancing the commercial value of the layouts developed by the assessee. We observe from the financial statements of the assessee for the impugned Assessment Year, that it has expended an amount of Rs.2095.24 lakhs on planting of one crore seedlings in the green belt area for improvement of the environment. Further, it is also seen that the assessee has expended a sum of Rs.2997.42 lakhs towards development of lakes. In the light of the above facts on record, the contentions of the AO and CIT(A) that the assessee has not carried out any of the activities specified / contained in the first five limbs of section 2(15) of the Act is not correct. The assessee has definitely carried out the activity of preservation of environment and water bodies. In our view, the conclusion of the CIT(A) that the developments on these fronts are done only to enhance the commercial value of the layout developed is untenable in the light of the facts of the case on hand.
5.9.1 The question of whether allotment of sites and flats to the economically weaker sections of society constitutes relief for the poor is perhaps a debatable issue. Relief for the poor does not necessarily mean giving something free of cost to the poor. It also includes providing them things at a concessional rate. The question that arises for consideration is which of those sections of society can be said to be ‘poor’ as per section 2(15) of the Act. Whether the word poor can mean only those who are below the official poverty line or does it include all those who are economically weaker, but not necessarily below the poverty line.
5.9.2 In this context, if one were to observe the activities of Educational and Medical institutions, which in the eyes of law, are considered as charitable institutions, it is not necessary that educational / medical assistance is to be given free only to those below the poverty line. It will suffice if education / medical assistance is provided at concessional rates. In fact, the Hon’ble Apex Court has laid down where different slabs of fee structure is approved for different categories / segments of students who are admitted. In fact, recently the Government of India too has declared reservation in government jobs in the country to all sections of the
ITA No.789/Bang/2014
Page 9 of 20
citizenry who are economically backward; i.e., to those whose family’s annual income is less than 8 lakhs; which is a concession to people who are considered economically backward but not necessarily below the poverty line. In other words, it is not mandatory that ‘poor’ confines itself to those sections below the poverty line and that ‘Relief’ means providing something free of cost. In this background, it could be said that the rules that govern the allotment of sites are so formed in order to facilitate the economically weaker sections of society to purchase these sites. In the case of construction of flats, it is clear from the very scheme and the name thereof, that these flats are meant only for the Economically Weaker Sections of society.
5.9.3 We also observe that the finding of the AO in para 6.20(iii) of the order of assessment, and which is impliedly endorsed by the CIT(A) in the impugned appellate order, i.e., that (iii) “The assessee is not applying the huge amount of profit generated from the activities towards any charitable activities such as relief of poor, education, medical relief and other objects of advancement of general public utility and such surplus is being invested in fixed deposits in order to earn interest income” is also not correct in as much as it is evident from the financial statements of this year that the assessee has spent an amount of Rs.278,78,43,000/- (disallowed by the AO – para 15.20 of Assessment Order and reflected int eh computation of total income) on activities that fall under the head ‘Advancement of General Public Utility’ like construction of grade separators, PRR Bridges on Flyovers, renovation and remodeling works, Maintenance of BBMP facilities, Development of Lakes, etc. Be that as it may, if one were to peruse the object for which the assessee, viz., BDA was constituted, it is clear that the intent and purpose is for planned urban development of Bangalore City and not with the purpose of profit making; i.e., the activity of formation of layouts and allotment of sites is only carried out with the primary and main object to ensure planned development of Bangalore City and not with the intention to make profits.
5.9.4 The Hon’ble Apex Court in the case of Barendra Ray and Others Vs. ITO (1981) 129 ITR 295 has held that the word “business” implies commercial transactions with a view of making profits and gains therefrom. Therefore, carrying on business connotes some substantial, systematic and organized activity with the
ITA No.789/Bang/2014
Page 10 of 20
object of making gain and profit thereon, with the inevitable control and direction vis-à-vis such activity of business. Profit motive is surely the essence of trade, commerce or business and therefore in situations and circumstances in which services are rendered without a profit motive, such rendering of service will not have anything in common with trade or commerce or business. If one were to test the proviso to section 2(15) of the Act against the background of a recognized charitable organization, then one has to see whether the predominant object of the activity is to make profit or whether the predominant object of the activity is to carry out charitable purposes and not profit making.
5.9.5 The Hon’ble Apex Court in the case of Surat Art Silk Organisation Vs. CIT (121 ITR 1), has held that a charitable organization cannot be expected to balance its accounts in such a manner that the income for the year matches exactly with its expenditure. It is inevitable that in carrying on the activities, certain surplus may ensue. The earning of such surplus, in itself, would not mean that the organization existed for profit. The Hon’ble Apex Court went on to observe that every Association requires funds for expanding the range of its activities (for example; an Educational Institution may require additional infrastructure under which more class rooms can be set up / created). If profits are generated to support and expand these activities, then it cannot, in the view of the Hon’ble Apex Court, be held that there is a profit motive involved to deny the exemption. From the above ratio of the decision of the Hon’ble Apex Court, it is clear that it is the basic motive behind the activity, which is important to be considered; whether it is one with profit motive or not. Merely because surplus is generated from a particular activity, it cannot be said that such activity is in the nature of trade, commerce or business. What needs to be seen is, what the intent and purpose of starting such activity is. In the case on hand, the BDA’s embarkation of the activity of setting up of residential layouts, including the activity of sale of sites and flats, is definitely not with a view to earn profit, but to ensure planned urban development and also to accomplish a social objective of providing an opportunity to economically weaker sections of society to be able to own a residence on their own.
5.10.1 We find that the view of the AO in (iv) of para 6.20 of the order of assessment and which is impliedly endorsed by the CIT(A)
ITA No.789/Bang/2014
Page 11 of 20
in the impugned order; i.e., that (iv) “The activities of the assessee and the generation of profits on account of the same are akin to the activities carried on by real estate companies, property developers, infrastructure firms, etc., and therefore, the activities of the assessee squarely fall under the ambit of activities which are in the nature of trade, commerce and business. Accordingly the activities of the assessee are hit by the first proviso to section 2(15)”; is in our opinion rather superfluous in nature. No doubt, it is a fact that one will see a lot of similarities in the activity of the assessee vis-à-vis that of a real estate developer. However, the issue to be considered is, not whether the activity of the assessee is similar to that of the private real estate developer or not, but whether the underlying purpose of the activity is the same as that of the private real estate developer, i.e., making and maximization of profit. In the case of this assessee; viz., BDA, the underlying motive / objective is not making and maximizing of profits, but planned development of Bangalore City. It is important in this context to note the fact that concerned Income Tax authorities have recognized the assessee as a public charitable organization by grant of registration under section 12A of the Act since 26.03.2003 and that the assessee’s objects clause, i.e., section 14 of the BDA Act has not undergone any change or modification since its enactment; which is what must have prompted the Income Tax Department to take the view that it was charitable in nature. In other words, the Income Tax Department considered the assessee, ‘BDA’ to be covered by the provisions of section 2(15) of the Act.
5.10.2 It is after the introduction of the proviso to section 2(15) of the Act that the Income Tax Department took a view that the activity of ‘BDA’ was in the nature of trade, commerce or business and cancelled the registration, granted under section 12A of the Act, vide order dated 08.11.2011. The assessee’s registration under section 12A of the Act however stood restored by a decision of the Co- ordinate Bench of this Tribunal vide order in ITA No.12/Bang/2012 dated 10.04.2015. In this prevailing factual matrix, there is no change in the objects and the only issue which apparently prompts Revenue to take the view it has taken, i.e., that the activity of the assessee is hit by the proviso to section 2(15) of the Act; is the fact that the activity of the assessee has resulted in huge surplus or profits. In our view, the fact of surplus or shortfall is not to be reckoned as the test for applicability of the proviso to section 2(15) of the Act; but rather, whether the activity is embarked upon solely
ITA No.789/Bang/2014
Page 12 of 20
with the view to earn profit or not; which the AO and CIT(A) have not done.
5.10.3 In support of the assessee’s contentions, the learned AR of the assessee has placed reliance on the following judicial pronouncements:
(i) Ahmedabad Urban Development Authority Vs. ACIT (Exemptions) (2017) 396 ITR 323 (Guj.); (ii) Jaipur Development Authority Vs. CIT (2014) 52 taxmann.com 25 (Jaipur – Trib.) (iii) Haridwar Development Authority Vs. CIT (2015) 57 taxmann.com 6 (Dlehi – Trib.) (iv) CIT Vs. Lucknow Development Authority (2013) 38 taxmann.com 246 (Allahabad) (v) CIT Vs. Jodhpur Development Authority (2017) 79 Taxmann 361 (Raj.).
5.10.4 We find that the aforesaid judicial pronouncements relied upon by the assessee are those of other urban development authorities, in whose cases also the AO has taken the view that the activities of city development are hit by the proviso to section 2(15) of the Act. Referring to the above cited cases, we find that in the case of Ahmedabad Development Authority (2017) 396 ITR 323, the Hon’ble Gujarat High Court has upheld the appeal of the assessee, by overruling therein the decision of the Ahmedabad Tribunal in that case. In the case of Lucknow Development Authority (2018) 39 taxmann.com 246, the Hon’ble Allahabad High Court has upheld the decision of the Lucknow Bench of ITAT which was in favour of the assessee. We find that in the above judicial pronouncements cited by the assessee, the facts are identical to that of the assessee in the case on hand; that the AOs in these cases have taken a view that the activity is in the nature of trade, commerce or business and hit by the proviso to section 2(15) of the Act and the assessees have got relief at the higher appellate forums, viz., the Hon’ble High Courts and / or Tribunals.
ITA No.789/Bang/2014
Page 13 of 20
5.10.5 In support of the view / contention that the activities of the assessee are squarely hit by the proviso to section 2(15) of the Act and is consequently not eligible and to be claimed exemption under section 11 of the Act, the AO has placed reliance on the following judicial pronouncements:-
(i) Jammu Development Authority Vs. UoI in ITA No.164/2012, CMA/2/2012 (J & K High Court); (ii) Punjab Urban Planning and Development Authority (103 TTJ 98) (ITAT – Chandigarh); (iii) Indore Development Authority – ITA No.366/Ind/2008 (ITAT – Indore). (iv) Improvement Trust Vs. CIT, Bhatirda (41 Taxmann.com 403) (ITAT – Amritsar).
The above cited cases relied upon by the AO find mention in the impugned order of assessment and the AO has briefly discussed these judicial pronouncements therein. We find from the discussions therein that in all these citations, the issue involved was the cancellation of registration under section 12A of the Act and not assessments made on the basis that the activities in those cases are hit by the proviso to section 2(15) of the Act. In our view, these judicial pronouncements cannot be applied to the assessee in the case on hand for the reason that the assessee’s Registration under section 12A of the Act which was cancelled by the CIT(Exemption), has since been restored by a Co-ordinate Bench of this Tribunal, by following the decision of the Hon’ble Karnataka High Court in the case of Director of Income Tax (Exemption) Vs. Karnataka Industrial Area Development Board (ITA No.261/2013 dated 07.11.2014). In that legal view of the matter, the judicial pronouncements relied upon by the AO would not come to the rescue of Revenue in the case on hand. Further, in view of the decision of the Hon’ble Apex Court in the case of CIT Vs. Vegetable Products (88 ITR 192) (SC), it is judicially correct to follow the decisions of Hon’ble High Courts of Gujarat and Allahabad which support the case of the assessee (supra), when the same are in favour of the assessee; despite there being decisions contrary by other High Courts; when there is no decision of the jurisdictional High Court against the assessee. In
ITA No.789/Bang/2014
Page 14 of 20
view of the factual and legal matrix of the case, as discussed above, we hold that the activities of the assessee, i.e., Bangalore Development Authority are not hit by the proviso to section 2(15) of the Act. Having held so, we direct the AO to allow the assessee the benefits of section 11 of the Act while giving effect to this order. Consequently, grounds raised by the assessee on this issue are allowed.”
In view of the aforesaid decision of the tribunal, we are of the view that the assessee’s activities have to be regarded as charitable in nature. The assesee would be entitled to the benefits of sec. 11 of the Act, we hold accordingly and allow ground No.4.
The assesee has filed application for admission of the following additional grounds of appeal which reads as follows:-
“1. The Appellant denies itself liable to be assessed on an income of more than the returned loss of Rs.137,52,78,000/- on facts and circumstances of the case. 2. Denial of depreciation on the ground that the same has been claimed as application of income Without prejudice, the authorities below is not justified in law in holding that the assets held by the appellant prior to financial year 2008-09 is already claimed as application of income and consequently the appellant is not entitled to claim depreciation on the said assets on the facts and circumstances of the case. (Reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT-Ill Vs. Rajasthan and Gujarati Charitable Foundation Poona, Civil Appeal No.7186 of 204 (SC) dated 13. 12.2017). 3. The authorities below failed to appreciate that the appellant is performing the functions of the State and consequently not a person for the purpose of income-tax and not exigible to income-tax on the facts and circumstances of the case.
ITA No.789/Bang/2014
Page 15 of 20
The Appellant craves leave to add, alter, amend, substitute, change and delete any of the grounds of appeal. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, the Appellant prays that the appeal may be allowed and justice rendered.” 12. Though these grounds were not raised before the CIT(A), the grievance projected in the additional grounds arise out of the order of the AO hence, the same is admitted for adjudication keeping in mind the decision of the Hon’ble Supreme Court in the case of National Thermal Power Corporation 229 ITR 383 (SC)
As far as the merits of the additional grounds of appeal is concerned, the learned counsel argued only for adjudication of Ground relating to denial of depreciation alone and no argument were advanced on other additional grounds. 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 2009-10 the AO noticed from the details of depreciation claimed, that the 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.
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
ITA No.789/Bang/2014
Page 16 of 20
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.
We have heard the submissions of the ld. DR, who relied on the order of AO. 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
ITA No.789/Bang/2014
Page 17 of 20
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. 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 No.789/Bang/2014 Page 18 of 20
The Hon’ble Suprme Court has now settled the aforesaid issue in the case of CIT-Ill Vs. Rajasthan and Gujarati Charitable Foundation Poona, Civil Appeal No.7186 of 204 (SC) dated 13. 12.2017 in favour of the Assessee. 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.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 3rd May, 2019. Sd/- Sd/-
(JASON P BOAZ) ( N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated, 3rd May, 2019. / vms /
ITA No.789/Bang/2014
Page 19 of 20
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.
ITA No.789/Bang/2014
Page 20 of 20
Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. Date of Despatch of Order. 13. ……………………………………………..