ASSISTANT COMMISSIONER OF INCOME TAX, (EXEMPTIONS), CIRCLE-1, MANGALURU vs. M/S. DR. T. M. A. PAI FOUNDATION, MANIPAL

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE

BEFORESHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER

ITA No.783/Bang/2018 Assessment Year :2009-10

M/s. Dr. T.M.A. Pai The Assistant Commissioner of Foundation, Income Tax (Exemptions), Vs. Syndicate House, Circle – 1, Manipal – 576 104. Mangaluru. PAN: AAATD1327M APPELLANT RESPONDENT Assessee by : Smt. Sheetal Borkar, Advocate Revenue by : Smt. Sri Nandini Das, Addl. CIT (DR) Date of hearing : 10.10.2018 Date of Pronouncement : 12.10.2018 O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the revenue and the same is directed against the order of ld. CIT(A)-10, Bangalore dated 27.12.2017 for Assessment Year 2009-10. 2. The grounds raised by the revenueare as under. “I. Whether on the facts and in the circumstances of the case and in law, the CIT(A) is right in not appreciating 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 section 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 setoff of loss against the income of subsequent years as envisaged u/s70 to 79 are also not applicable to the charitable trusts/institutions. II. Whether on the facts and in the circumstances of the case and in law, the CIT(A) is right in not appreciating the fact that the issue of application of income more than the income computed does not arise except in a case where the assessee has incurred huge amount of capital expenditure sourced out of borrowed or corpus donations or 15% of income set apart over a period of time? (Expenditure incurred out of the above sources however cannot be termed ass application of funds out of the income earned in a particular assessment year inasmuch as loan borrowed does not fall under the category of income earned by the assessee, corpus fund donation does not come under

ITA No. 783/Bang/2018 Page 2 of 10 income by virtue of section 11(1)(d) and 15% of income set apart in earlier assessment year cannot be construed as income of the current year and 15% set apart out of the current year income is also excluded from income available for application. As such, the concept of application is only to show that the income is fully utilized rather than claiming excess expenditure either revenue or capital over and above the income so as to claim excess application or deficit/loss to be carried forward to subsequent assessment years. Even in the case of excess application by virtue of borrowed funds/corpus fund donations/ 15% set apart of earlier years, the income of the assessee cannot be converted to loss but at best it can be made Nil. Hence, the carry forward of excess application of income as claimed by the assessee cannot be allowed)?” 3. The ld. DR of revenue supported the assessment order whereas the ld. AR of assessee supported the order of CIT(A). She also submitted a copy of Tribunal order rendered in the case of ACIT(Exemptions) Vs. Dr. T.M.A. Pai Foundation in ITA Nos. 1968 & 1969/Bang/2016 dated 03.02.2017 and submitted that the issue involved in this appeal is covered in favour of the assessee by this Tribunal order in which the Tribunal has followed the judgement of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Karnataka Reddy Janasangha as reported in 389 ITR 229 and has reproduced the relevant paras of this judgement deciding the issue in respect of allowability of depreciation. Regarding the second issue i.e. benefit of set off of carry forward deficit of earlier years, the Tribunal in that case has followed the judgement of Hon’ble Bombay High Court rendered in the case of CIT Vs. Institute of Banking Personnel Selection (IBPS) as reported in 264 ITR 110. 4. We have considered the rival submissions and we find that on both the issues, the matter is covered in favour of the assessee by this Tribunal order on which reliance has been placed by ld. AR of assessee. In respect of first issue i.e. regarding allowability of depreciation, the issue was decided by the tribunal as per Para 9 of this Tribunal order and for the second issue, paras 11 and 12 of this Tribunal order are relevant and hence, for the sake of ready reference, we reproduce paras 9,11 and 12 from this Tribunal order. These paras are as under. “9. We heard rival submissions and perused material on record. The issue of allowance of depreciation, where the cost of acquisition of which was allowed as application of income is no more res integra as the Hon’ble jurisdictional High Court in plethora of decisions held that the allowance of depreciation in respect of which cost was

ITA No. 783/Bang/2018 Page 3 of 10 allowed as application of income u/s 11, does not amount to double taxation and the provisions of sub-section (6) of section 11 were inserted only w.e.f. 1/4/2015 by the Finance Act No.2 of 2014 and the provisions cannot be applied retrospectively. The relevant part of the latest judgment in the case of CIT vs. Karnataka Reddy Janasangha (389 ITR 229) is as under: “15. The question involved in this case is no more res integra. This question was considered by this Court as far back as in the year 1984, in the case of Society of the Sister's of St.Anne (supra) wherein the Division Bench of this Court has held thus: '9. It is clear from the above provisions that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression "total income" has been defined under s. 2(45) of the Act to mean "the total amount of income referred to in s. 5 computed in the manner laid down in this Act". The word "income" is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word "income", therefore, is a much wider term than the expression "profits and gains of business or profession". Net receipt after deducting all the necessary expenditure of the trust (sic). 10. There is a broad agreement on this proposition. But still the contention for the Revenue is that the depreciation allowance being a notional income (expenditure?) cannot be allowed to be debited to the expenditure account of the trust. This contention appears to proceed on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In Spicer & Pegler's Book-keeping and Accounts, 17th Edn., pp. 44, 45 & 46, it has been noted as follows : 'Depreciation is the exhaustion of the effective life of a fixed asset owing to 'use' or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period.' 16. Similar view is taken by the other High Courts viz., Gujarat, Punjab and Haryana, Delhi, Madras, Calcutta and Madhya Pradesh in the following judgments.

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(1) Commissioner of Income-tax, v. Framjee Cawasjee Institute, 109 CTR 463 [Guj.]; (2) Commissioner of Income-tax, v. Raipur Pallottine Society,.[1989] 180 ITR 579 [MP] (3) Commissioner of Income-tax, v. Seth Manilal Ranchoddas Vishram Bhavan Trust 198 ITR 598 [Guj.]; (4) Commissioner of Income-tax, v. Bhoruka Public Welfare Trust [1999] 240 ITR 513 [Cal.]; (5) Commissioner of Income-tax, v. RaoBahadur Calavala Cunnan Chetty Charities 135 ITR 485 (Mad.)] (6) Commissioner of Income-Tax v. Market Committee, Pipli[(2011) 238 CTR (P&H) 103 Allowing depreciation in subsequent years, on the capital asset, which has already availed the benefit of deduction in computing the income of the trust in the year of its acquisition is considered by the Punjab and Haryana High Court in the case of Market Committee, Pipli (supra) and held thus: '9. In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. Judgment of the Hon'ble Supreme Court in Escorts Ltd., &Anr. (supra) is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee.' 17. High Court of Bombay in the case of Institute of Banking (supra) after placing reliance on the Judgment of CIT v. Muniswarat Jain (1994 TLR 1084) on an identical issue, held:— 'In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The court rejected this argument. It was held that 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. The court rejected the argument on behalf of the revenue that section 32 of the

ITA No. 783/Bang/2018 Page 5 of 10 Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in 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 Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforestated Judgment of the Bombay High Court, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the department.' 18. The Judgment in Escorts Limited (supra) was rendered by the Apex Court in the context of Section 10(2)(vi) and Section 10(2)(xiv) of the 1922 Act or under Section 32(1)(ii) and Section 35(2)(iv) of the 1965 Act. It was the case of the assessee claiming a specified percentage of the written down value of the asset as depreciation besides claiming deduction in 5 consecutive years of the expenditure incurred on the acquisition of the capital asset used for scientific research. In such circumstances, the Apex Court held thus: 'There is an apparent plausibility about these arguments, particularly in the context of the alleged departure in the language used by S. 10(2)(xiv) from that employed in S. 20 of the U.K. Finance Act, 1944. We may, however, point out that the last few underlined words of the English statute show that there is really no difference between the English and Indian Acts; the former also in terms prohibits depreciation only so long as the assets are used for scientific research. In our opinion, the other provisions of the Act to which reference has been made - some of which were inserted after the present controversy started - are not helpful and we have to construe the real scope of the provisions with which we are concerned. We think that all misconception will vanish and all the provisions will fall into place, if we hear in mind a fundamental, through unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing, and if it is intended it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions both under S. 10(2)(vi) and S. 10(2)(xiv) under the 1922 Act or under S. 32(1)(ii) and 35(2)(iv) of the 1922 Act - qua the same expenditure. Is then the use of the words "in respect of the same previous year" in clause (d) of the proviso to S. 10(2)(xiv) of the 1922 Act and S. 35(2)(iv) of the 1961 Act contra- indication which permits a disallowance of depreciation only in the previous years in which the other allowance is actually allowed. We think the answer is an emphatic 'no' and that the purpose of the words above referred to is totally different. If, as contended for by the assessees, there can be no objection in principle to allowances being made under both the provisions as their nature and purpose are

ITA No. 783/Bang/2018 Page 6 of 10 different, then the interdict disallowing a double deduction will be meaningless even in respect of the previous years for which deduction is allowed under S. 10(2)(xiv)/S. 35 in respect of the same asset. If that were the correct principle, the assessee should logically be entitled to deduction by way of depreciation for all previous years including those for which allowance have been granted under the provision relating to scientific research. The statute does not permit this. The restriction imposed would, therefore, be illogical and unjustified on the basis suggested by the assessees. On the other hand, if we accept the principle we have outlined earlier viz. that, there is a basic legislative scheme, unspoken but clearly underlying the Act, that two allowances cannot be, and are not intended to be, granted in respect of the same asset or expenditure, one will easily see the necessity for the limitation imposed by the quoted words. For, in this view, where the capital asset is one of the nature specified, the assessee can get only one of the two allowances in question but not both.' 19. Section 11 of the Act deals with application of income different from revenue expenditure or allowance. Thus, the Judgment of the Apex Court in the case of Escorts Ltd., (supra) is distinguishable and as such is not applicable to the Charitable Trusts where income is to be computed under Chapter III of the Act. Accordingly, the judgment of Lissie Medical Institutions (supra) based on Escorts Ltd., (supra), is not applicable to the facts of the present case. 20. It is also to be noticed that while in the year of acquiring the capital asset, what is allowed as exemption is the income out of which such acquisition of asset is made and when depreciation deduction is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital asset incurred if, not allowed then there is no way to preserve the corpus of the Trust for deriving its income as held in Society of Sisters of St. Anne (supra). This judgment of co-ordinate Bench of this Court is binding on us and we have no reasons to disturb the settled position of law at this length of time/depart from the said reasoning. As such, the arguments advanced by the Revenue apprehending double deduction is totally misconceived. 21. Section 11[6] inserted with effect from 1.4.2015 by Finance Act No. 2/2014, 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.' 22. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of Charitable Trust is to be effective from 1.4.2015. This view is further supported by the Notes on Clauses in Finance [No. 2] Bill, 2014,

ITA No. 783/Bang/2018 Page 7 of 10 memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard. Clause No. 7 of the Notes on Clauses reads thus: 'Clause 7.of the Bill seeks to amend section 11 of the Income-tax Act relating Income from property held for charitable or religious purposes. The existing provisions of the aforesaid section contain a primary condition that for grant of exemption in respect of income derived from property held under trust, such income should be applied for the charitable purposes in India, and where such income cannot be so applied during the previous year, it has to be accumulated in the prescribed modes. It is proposed to insert sub-sections (6) and (7) in the said section so as to provide that— (i) 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 any previous year, and (ii) where a trust or an institution has been granted registration under clause (b) of sub- section (1) of section 12AA or has obtained registration at any time under section 12A [as it stood before is amendment by the Finance (No. 2) Act, 1996] and the said registration is in force for any previous year, then, nothing contained in section 10 [other than clause (1) and clause (23C) thereof] shall operate to exclude any income derived from the property held under trust from the total income of the person in receipt thereof for that previous year. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 and subsequent years'. The Memo explaining the provisions in Finance [No. 2] Bill, 2014 reads thus: 'The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not excluded from the condition of application of income for charitable purpose'.

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from a fixed date; (ii) retrospective amendments with effect from a fixed anterior date; and (iii) clarificatory amendments which are prospective in nature. Keeping in view, the aforesaid principles enunciated by the Apex Court, in Vatika Township (P.) Ltd.'s case (supra), it would be safely held that Section 11(6) of the Act is prospective in nature and operates with effect from 01.04.2015. This is further clarified when compared with certain other provisions which have been made retrospectively in the same Finance Act.” Similar view was taken by the Hon’ble jurisdictional High Court in the case of Director of Income-tax(Exemptions) vs. Al-Ameen Charitable Fund Trust(383 ITR 517).

ITA No. 783/Bang/2018 Page 10 of 10 religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11(1)(a) of the Act. Our view is also supported by the Judgment of the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal[1995] 211 ITR 293 . Accordingly, we answer question No. 3 in the affirmative i.e., in favour of the assessee and against the Department.”

Sd/- Sd/- (N.V. VASUDEVAN) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 12th October, 2018. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.