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Income Tax Appellate Tribunal, “SMC-B” BENCH : BANGALORE
Before: SHRI JASON P. BOAZ
Assessment Year : 2011-12 M/s. Shrimad Rajchandra Gyan Vs. Assistant Commissioner of Mandir Trust, Income-Tax, Beside SBI, Zonal Office, Circle-3(1), Kusagal Road, Keswapur, Hubli. Hubballi – 580 023. PAN : AACTS 4573 L APPELLANT RESPONDENT Assessee by : Smt. Sowmya, Advocate Revenue by : Shri. Sumer Singh Meena, Addl. CIT Date of hearing : 23.04.2019 Date of Pronouncement : 03.05.2019 O R D E R
This appeal by Revenue is directed against the order of CIT(A)-Hubballi, dated 22.10.2018 for Assessment Year 2011-12.
Briefly stated, the facts of the cases are as under:
2.1 The assessee trust, registered under section 12AA of the Act vide order dated 14.03.2002, filed its return of income for Assessment Year 2011-12 on 30.03.2012 declaring NIL income. The case was selected for scrutiny for this Assessment Year and the assessment was concluded under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 27.12.2013 wherein the assessee’s income was determined at Rs.10,66,444/-, thereby denying the assessee’s claim for carry forward and set off of brought forward expenditures
Page 2 of 9 of earlier years amounting to Rs.17,33,585/-. The assessee’s appeal thereon was dismissed by the CIT(A) - Hubballi, vide order dated 22.10.2018 by upholding the Assessing Officer’s (AO) action in rejecting the assessee’s claim for set off of carry forward of deficit / expenditure of earlier years amounting to Rs.17,33,585/- as claimed by the assessee and to allow carry forward of excess expenditure / deficit of Rs.3,03,107/- to be set off against income of subsequent years.
3.0 Aggrieved by the order of CIT(A) – Hubballi dated 22.10.2018 for Assessment Year 2011-12, the assessee has preferred this appeal before the Tribunal, wherein it has raised the following grounds:-
The learned CIT(A) erred in passing the order in the manner he did. The learned CIT(A) ought to have accepted the return filed by the 2. appellant society and considered the submission made by the Appellant. Thus the disallowance was confirmed by the CIT(A) ought to have been deleted. The learned CIT(A) ought to have accepted the set off of expenditure 3. on the objects of the society incurred in, earlier years as claimed by appellant society against the current year surplus and ought to have held that there is no surplus liable to tax. Without prejudice the learned CIT(A) having disallowed the claim of 4. the appellant ought to have given opportunity to the appellant for filing application u/s.11(2) of the Act for accumulation of the surplus. Without prejudice, the addition/disallowance made are excessive and 5. there liable to be reduced substantially. For these and other grounds of appeal that may be urged at the 6. time of hearing, the appellant prays that the appeal may kindly be allowed.
4. Ground Nos. 1, 5 and 7, being general in nature, no adjudication is called for thereon.
Page 3 of 9 5. Ground No.6 – Charging of Interest under section 234B of the Act 5.1 In this ground (supra), the assessee denies itself liable to be charged interest u/s 234B of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and I, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B of the Act. The AO is, however, directed to re-compute the interest chargeable u/s 234B of the Act, if any, while giving effect of this order.
Ground Nos. 2 to 4 – Carry forward of loss/deficit for set off against income of assessee 6.1 In these grounds (supra), the assessee assails the orders of the authorities below in disallowing the assessee’s claim for carry forward and set off of earlier years deficit of Rs.17,33,585/- against assessee’s income in the current year and to carry forward of excess expenditure / deficit of Rs.3,03,107/- for set off against assessee’s income in subsequent years. The learned AR submitted that the issue in question stands covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of CIT(Exemption), Bangalore Vs. Jyothy Charitable Trust in dated 14.08.2018.
Page 4 of 9 6.2 Per contra, the learned DR vehemently supported the orders of the authorities below.
6.3.1 I have considered the rival contentions and perused the material on record; including the judicial pronouncement cited. I find that, as contended by the learned AR, the issue before us; i.e., of the assessee’s claim for being allowed carry forward of deficit/expenditure for being set off against the assessee’s income for the current and subsequent years is squarely covered by the decision of the Hon’ble High Court of Karnataka in the case of CIT(Exemption) and Another Vs. Jyothy Charitable Trust (supra). In its order in dated 14.08.2018, the Hon’ble Karnataka High Court in the case of Jyothy Charitable Trust, following its own earlier decision in the case of CIT(Exemption) and Another Vs. Ohio University Christ College in ITA Nos. 312 and 313/2016 dated 17.07.2018, held at para 4 of its order as under: “With regard to carrying forward of the losses for being set off against the income of the charitable trust for the present Assessment Year, the controversy is covered by the judgment in. Commissioner of Income Tax (Exemptions) and another .vs. Ohio University Christ College rendered on 17.07.2018 in ITA.No.312/2016 and ITA No. 313/2016, in which this Court held 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.
Page 5 of 9 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 65% 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 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 the Assessing Officer by placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. 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 scar 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.
Page 6 of 9 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 C.BDT Circular No.5-P (I,XX)-6 of 1968 cited by the assess: makes it clear that income should he 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 Si. Anne (supra) applies to trusts as well. 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."
In our opinion, the matter is .squarely covered by a decision of the cognate Bench of this Court in the case of CIT vs. Society of the Sisters of St. Anne (1984) 16 Taxman 400 (Kar.) and (1984) 146 ITR 28, wherein the cognate 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 accounts 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 II to exclude the mercantile system of accounting. The learned counsel relied upon sections 1 1(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 Ply be on cash basis. Section 11(4) is not intended to explain, how the accounts of the business undertaking .3hould 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 Page 7 of 9 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 of 1968, dated 19-61968 (See Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn. P.85) reads: "Where the trust derives income from house property, intere:3t 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 bock 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)."
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 13. 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 principles of accountancy for the purposes of determining the income derived from the property heir,' in trust."
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 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 Commissioner of Income- tax v. Institute of Banking (2003) 264 ITR 110, 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 will have to be regarded as application of income of the trust for charitable and religious
Page 8 of 9 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 II 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 to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a).
In view of the controversy covered by the above decisions of this Court, we are of the opinion that the substantial questions of law as suggested by the appellants does not now arise for our further consideration in the present appeal. The appeal filed by Revenue is accordingly disposed of in terms of the aforesaid judgments of this Court. No costs.”
6.3.3 Respectfully following the decision of the Hon’ble Karnataka High Court in the case of CIT(E) Vs. Jyothy Charitable Trust (supra), I direct the AO to allow the assessee’s claim for being allowed the benefit of carry forward and set off of deficit/expenditure of earlier years against the assessee’s current years
Page 9 of 9 income as well as carry forward of remaining deficit if any for set off against assessee’s income in subsequent years. Consequently, grounds 2 to 4 of assessee’s appeal are allowed.
In the result, assessee’s appeal for Assessment Year 2011-12 is allowed as indicated above.
Pronounced in the open court on 3rd May, 2019.