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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
O R D E R Per Bench
These are cross appeals by the revenue (ITA Nos.1710 & 11/B/2017) and the assessee (ITA Nos.1655 & 1666/B/17) directed against the common order dated 31.05.2017 of the CIT(Appeals)-14, LTU, Bangalore relating to assessment years 2011-12 & 2012-13 respectively.
As far as the appeals of the revenue are concerned, the two common issues raised by the revenue in both the appeals are with regard to (a) the action of the CIT(A) in directing the AO to allow depreciation on assets, the cost of which was already considered as application for charitable purpose in the year of acquisition. The stand of the revenue is that the Assessee will have double benefit if depreciation is allowed on the assets in the year of acquisition and subsequent assessment years when the cost of acquisition of the asset is considered as application of income by the Assessee for charitable purpose in the year of acquisition of the Asset; (b) whether the CIT(Appeals) was justified in holding that assessee, a trust, is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years?
The assessee is a charitable trust with objects to identify eligible beneficiaries for the purpose of nurturing, promoting, encouraging and developing their talent so that they can compete as professional sports persons in India and abroad and other objects to secure compliance of the above main object. The Assessee was granted recognition as charitable trust u/s.12A of the Act by the DIT(Exemption) vide order dated 13.2.2006.
As far as the first issue is concerned, the facts are that in the course of assessment u/s. 143(3) of the Act for AY 2011-12 & 2012-13, 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 depreciable asset is considered as application of income for charitable purpose, allowing depreciation on the very same capital asset would not amount to double allowance. The assessee also pointed out that the decision of Escorts Ltd. (supra) will not be applicable as it was rendered on a different set of facts. The AO however, held that allowance of depreciation when the cost has already been recovered by way of exemption as application of income amounts to double deduction and double benefit on the same asset. The AO referred to the decision of the of Hon'ble High Court of Kerala in the case of DDIT(E) v. Lissie Medical Institutions, 348 ITR 344 (Ker) wherein it was held that allowing depreciation of a depreciable asset when the cost of acquisition of depreciable asset was allowed as application of income for charitable purpose amounts to double depreciation and therefore depreciation cannot be allowed. The AO also distinguished the cases cited by the Assessee.
On appeal by the Assessee, the CIT(A), following the decisions rendered in the case of St. Ann’s Convent 349 ITR 559 (Karn) and Dr.T.M.A. Pai Foundation, Manipal in to 485/Bang/2009 dated 16.2.2010, held that the claim of the Assessee for depreciation has to be allowed.
Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal.
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 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.” 9. 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.
10. 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, the issue raised by the Revenue in this regard is without any merit and the same is dismissed.
The second issue that arises for consideration in this appeal which is projected by the Revenue in grounds of appeal
, is as to whether the CIT(Appeals) was justified in holding that assessee, a trust, is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? The assessee is a trust registered u/s. 12A of the Act. For the A.Ys. 2011-12 and 2012-13, the assessee filed a return of income claiming set off of an amount of Rs.1,05,68,070 and Rs.68,01,832 respectively. On account of brought forward loss. The assessee sought to carry forward the excess application for setting off as application of income in the subsequent assessment years. According to the AO there was no provision in the Act for carry forward of excess expenditure of earlier year to be adjusted against income of the subsequent year and he therefore denied the claim of the Assessee.
12. On appeal by the assessee, the CIT(A) directed the AO to allow claim of the assessee and in doing so, followed the decision rendered by the ITAT Bangalore in the case of Dr.T.M.A. Pai Foundation, Manipal in to 485/Bang/2009 dated 16.2.2010.
13. Aggrieved by the order of CIT(A), the Revenue has filed the present appeal before the Tribunal.
14. In the grounds of appeal, the Revenue has reiterated the stand of the AO that there is no provision in the Act to allow carry forward of excess application of income for set off as application of income in subsequent years. The ld. DR reiterated the stand of the Revenue as contained in the grounds of appeal.
15. We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj) and CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj.). In CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom) it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under s. 11 in past years. In Govindu Naicker Estate VS. ADIT 248 ITR 368 (Mad), the Hon’ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 146 ITR 28 (Kar.).
16. We are therefore of the view that there is no merit in the issue raised in this regard by the Revenue. Accordingly, the same are dismissed.
In the result, the appeals by the revenue are dismissed.
As far as the appeals of the assessee are concerned, the grounds of appeal raised by the Assessee in both the AYs are identical and they are as follows:
“The Appellant objects to the Assessment Order on the following grounds in so far as it is prejudicial to the Appellant as it is opposed to law and circumstances of the case - 1) The A.O. and CIT (A) was not correct in not appreciating the facts that the expenditure incurred in foreign currency are incurred for the charitable purpose in India for the benefit of Indian Beneficiaries and such expenditures incurred are within the precincts of the main objective of the Trust. 2) The A.O. is not correct in not considering the expenditure incurred in subsequent year before filing of Return of Income as per section 11(1)(a) of the IT Act and not considering the application for accumulation of Income filed in Form 10.
3) The Appellant objects to the levy of interest u/s.234 B & C consequential to the above additions, as it is charitable institution, exempt from tax, hence there cannot be levy of interest on the assessed tax or there cannot be any advance tax payment due on its Returned income. 4) The Appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the Appeal. Wherefore on the above grounds and on such other grounds the Appellant prays the Appellate Authority to delete the additions as above and may pass such other as the Appellate Authority deems fit.”
17. The first common issue in both the appeals by the assessee is with regard to disallowance of expenditure incurred in foreign currency. As already stated, the assessee is a charitable trust. Its objects are as follows:-
“i) Identifying eligible beneficiaries for the purpose of nurturing, promoting, encouraging and developing their talent so that they can compete as professional sports persons in India and abroad. ii) Paying or reimbursing the fees or other consideration paid by the Eligible Beneficiaries to sports trainers, coaches, clubs, gymnasiums, or for the purchase of sports gear, equipment or other articles relating to sporting activity generally. iii) Paying or reimbursing the expenses incurred on travel, including, air fares, lodging and boarding of eligible beneficiaries for engaging in sporting activity in India and abroad. iv) Selecting eligible beneficiaries to form representative teams and nurturing, promoting, encouraging and developing the team members to participate in competitions, championship in India and abroad. v) Arranging, sponsoring or providing for or assisting in arranging, sponsoring or providing for sports related tours or excursions in India and abroad and the cost of travel, boarding and lodging in connection therewith. vi) Advancing, promoting, supporting, sponsoring and encouraging sporting activities by organizing or assisting in organizing sports events, sports meets, training camps and to secure the participation in and promotion of such sports events sports meets, training camps and the like by the eligible beneficiary etc.”
The assessee was established with the main object and purpose of providing financial support, training and global exposure and expert guidance to budding tennis players below the age of 18.
In the course of assessment proceedings for AY 2011-12 & 2012-13, the AO noticed that assessee had incurred a sum of Rs.78,58,960 in AY 2011-12 and a sum of Rs.35,91,611 in AY 2012-13. The assessee explained before the AO that it was training youngsters to master the game of tennis and in this regard sent the students for training abroad. The expenses were towards training, travel, air-tickets, entry tax, lodging & boarding expenditure of eligible beneficiaries for engaging in the game of tennis in India and abroad. The AO, however, was of the view that u/s. 11(1)(a) of the Income-Tax Act, 1961 [“the Act”], income of a charitable trust which is applied in India for charitable purpose is alone exempt and since the expenditure in question was not incurred in India, the AO held that the same will not amount to application of income. Accordingly, the aforesaid sums were added to the total income of the assessee.
On appeal by the assessee, the CIT(Appeals) confirmed the order of the AO. The CIT(A) examined the agreement between the tennis players and the assessee and found that relationship between the training institute and the budding tennis players was not with any charitable intent and purpose, but was clearly commercial. In that view of the matter, the addition made by the AO was confirmed by the CIT(Appeals). Aggrieved by the order of CIT(Appeals), the assessee is in appeal before the Tribunal.
We have heard the rival submissions. Identical issue was considered by the Hon’ble Delhi High Court in the case of CIT v. Associated Chambers of Commerce & Industry of India, judgment dated 24.05.2016. In the aforesaid decision, the Hon’ble Delhi High Court upheld the order of the Tribunal that sending delegates to foreign countries cannot be held as outside the main objects of the assessee. Therefore, exemption cannot be denied on the ground that expenses were incurred outside India.
The ld. DR, however, placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT v. National Association of Software & Services Companies, 345 ITR 362 (Del), wherein a contrary view was taken.
The ld. counsel for the assessee brought to our notice the decision of the ITAT Delhi Tribunal rendered in the case of DDIT v. Associated Chamber of Commerce & Industry of India, order dated 31,97,2915 wherein the decision cited by the ld. DR in the case of CIT v. National Association of Software & Services Companies, 345 ITR 362 (Del),was also considered and the Tribunal following the decision of the Hon’ble Supreme Court in the case of H.E.H. Nizam’s Religious Endowment Trust v. CIT, 59 ITR 582, held as follows:-
“7. On vigilant perusal of the judgment of Hon’ble Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust vs. Commissioner of Income Tax (supra), we are in agreement with the contention of the ld. Counsel of the assessee that the facts of the present case are distinguishable from that case. On careful reading of said judgment of Hon’ble Supreme Court, it is amply clear that in that case, the assessee Nizam’s Trust was denied exemption in regard to the application of income from property as per second part of clause (i) of section 4(3) of the Income Tax Act 1922 (as applicable at that time) which were applied or finally set apart for religious or charitable purposes outside taxable territories. In the present case, it is not the case of the revenue that the assessee association applied its income or receipts outside taxable territories because the issue before us only relates to expense towards foreign travelling of delegation sent by the assessee association for the purposes of promotion of trade and industry in India which is the main object of the assessee association. In view of above, we respectfully hold that the benefit of the ratio of the said decision of Hon’ble Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust vs. Commissioner of Income Tax (supra) is not available for the revenue as the facts and circumstances of the present case are distinguishable from that case.
8. Undisputedly and admittedly, the main objective of the assessee association is to promote trade and industry in India that in the present era of economic globalization, sending delegation to foreign countries cannot be held as outside the ambit of main objective of the assessee association. Per contra, from the Article of Association available at page 3 to 38 of the assessee’s paper book, it is vivid that the main objects as contained in clause (3) of the Memorandum of Association, objectives cannot be fulfilled without sending foreign delegation and, therefore, foreign travelling expenses incurred by the assessee cannot be held as application of income outside taxable territories of the assessee. Therefore, we are inclined to agree with the conclusion of the CIT(A) and we are unable to see any infirmity, perversity or any other valid reason to interfere with the same. Accordingly,
ground no. 1 and 2 of the revenue being devoid or merits are dismissed.” 24. In the light of the aforesaid decision of the Tribunal which was confirmed by the Hon’ble Delhi High Court, we are of the view that the expenses incurred in foreign currency has to be considered as application for charitable purpose and incurred for the charitable purposes in India. We hold accordingly.
As far as the next common issue raised by the assessee in the grounds of appeal is concerned, the same is with regard to not considering the expenditure incurred in subsequent year before filing of return of income as application for accumulation of income. On this aspect, the conclusion of the CIT(Appeals) was as follows:-
“8. The appellant has submitted before me that elaborate claims were made before the AO for allowing accumulation of income by filing revised Form 10 for AY 2011-12 before completion of assessment. The same was not considered by the AO who referred to the original Form 10 filed with the return of income for Rs.9,58,712 and a later Form 10 filed for Rs.68,01,632. The AO did not allow the claim since the amounts in question were already spent and the appellant was requesting for accumulation in the eventuality of the AO not accepting the foreign currency expenditure as application of income. I am in agreement with the AO since the appellant has shown excess of expenditure over available income with a request for carry forward and cannot at the same time apply for accumulation of non-existent funds. In any case, the applicability of Sec.11(2) is not a contingent provision dependent on the AO's treatment of other applications claimed. 8.1 For AY 2012-13, the Form 10 filed with the return was for accumulation u/s.11(2) of Rs.80,00,000. The AO rejected the same stating that no funds are available with the assessee to accumulate and that major portion of the year's receipts were given to sister concerns. I am in agreement with the AO that the accumulation sought was more than the gross receipts of Rs. 71,56,270 and the same had not been invested in specified modes as required u/s.11(5), even including the bank balances (para 17, AO's order).”
We have heard the rival submissions. We are of the view that it would be just and appropriate to set aside the order of CIT(A) on this issue and remand for fresh consideration by the AO the request for accumulation, in the light of our decision upholding the directions of CIT(A) to consider excess expenditure/application/deficit/loss of earlier years against income of the current year and in the light of the law laid down by Hon’ble Supreme Court in the case of Nagpur Hotel Owner’s Association case 247 ITR 201 (SC). We hold and direct accordingly. The AO is also directed to consider the written submissions filed by the assessee on this issue.
In the result, the appeals by the Revenue are dismissed and that of the Assessee are partly allowed.
Pronounced in the open court on this 25th day of January, 2019.