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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri P.M. Jagtap(KZ) & Shri A. T. Varkey, JM]
Per Shri A.T.Varkey, JM This is an appeal preferred by the Assessee Trust against the order of Ld. CIT(A) – 25, Kolkata dated 30.11.2017 for AY 2009-10.
The only ground raised by the assessee trust is against the action of the Ld. CIT(A) in disallowing depreciation claimed by it to the extent of Rs.15,04,010/- out of the total claim of depreciation of Rs.19,69,869/- on the ground that amendment made in Income-tax Act, 1961 (hereinafter referred to as the “Act”) in section 11(5) of the Act is retrospective in operation/clarificatory and, therefore, not allowable.
Facts of the case as noted by the Ld. CIT(A) is as under:
“The assessee is a charitable trust having its object of Establishment of schools and educational institutions not to be run for purposes of profit. The Charitable Trust is registered i/s. 12A vide M. No. DIT(E)/8E/437/2001-2002 dated 11/04/2002. The assessee runs a school at Baguihati within Kolkata having a primary and junior high school in one campus and a secondary [ICSE] & H.S [ISC] School in another campus. The schools are affiliated with the Council for the Indian School Certificate Examinations from 1998 and 2001 respectively and the affiliation is continuing. The assessee has started another school at Ranchi and also purchased land for starting third school at Madhubani, a backward district of Bihar. The total strength of students are above 3000 and the staff strength is exceeding 200. Students from the
2 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 schools after securing high marks are pursuing higher study in different streams. The trust was granted approval u/s. 10(23C)(vi) w.e.f. A.Y. 2013-14. The CIT(E), vide Order dated March, 10, 2016, cancelled registration u/s. 12A w.e.f. 01/04/2016 and also withdrew the approval granted u/s. 10(23C)(vi) vide order dated March, 10, 2016. The registration u/s. 80G(5) was also cancelled by the Ld. CIT(E) vide his order dated 14/03/2016 with retrospective effect from 01/04/2006. The ITO, thereafter, issued notice u/s. 148 dated 28/03/2016 received on 30/03/2016. The petitioner filed letter dated 18/04/2016 asking for furnishing recorded reason for issue of notice u/s. 148. Recorded reason was supplied vide letter dated 07/06/2016 received on 09/06/2016. In view of the cancellation order of registration u/s. 12A, the A.O. denied the benefit of Sections 11 & 12 of the 1. T. Act, 1961 and completed the assessment in the status of AOP. Further, depreciation was allowed to the extent of Rs. 4,65,859/- instead of Rs. 19,69,869/- as claimed. Moreover, donation of Rs.20,00,000/- given to 3 (three) parties towards furtherance of charitable object was disallowed and added in the total income but deduction u/s. 80G was not allowed. The claim for credit of TDS of Rs. 71,349/- made in the I.T. return was not allowed nor discussed in the assessment order.”
Being aggrieved by the assessment order, the assessee has preferred an appeal before the Ld. CIT(A) who took note of the fact that the AO has denied section 11 of the Act exemption to the assessee mainly on the reason that the Ld. CIT(E) had cancelled the registration granted to the assessee trust u/s. 12A, and has also withdrawn the approval u/s. 10(23C)(vi) and approval u/s. 80G of the Act. It was brought to the notice of the Ld. CIT(A) during the first appellate proceeding that the aforesaid action of the Ld. CIT(E) cancelling the registration u/s. 12A and withdrawal of approval granted u/s. 10(23C) (vi) of the Act were challenged before this Tribunal and the Tribunal vide a consolidated order dated 17.03.2017 cancelled all the three orders of the Ld. CIT(E). After perusal of the order of the Tribunal, the Ld. CIT(A) at page 10 of his order has also taken note that the Ld. CIT(E), Kolkata has also set aside his own order and thereafter the Ld. CIT(A) was pleased to allow the grounds raised by the assessee for grant of benefit to the assessee u/s. 11 and 12 of the Act. Thereafter, the Ld. CIT(A) has allowed the claim of the assessee in respect of the assessee’s giving donation paid to Lord Krishna Trust amounting to Rs. 20 lakhs. However, the Ld. CIT(A) while deciding the depreciation claim maid by the assessee has upheld the action of AO wherein he was pleased to disallow to the tune of Rs.19,69,869/- . Aggrieved by the action of the Ld. CIT(A) in not allowing depreciation, the assessee has preferred this appeal.
We have heard rival submissions and gone through the facts and circumstances of the case. We note that it was brought to the notice of the Ld. CIT(A) that during the year under
3 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 consideration, the assessee’s total claim of depreciation was to the tune of Rs.19,69,870/- which was included in the total application of amount to the tune of Rs.2,59,67,667/-. It was brought to our notice that out of the total claim of depreciation of Rs.19,69,870/-, since the assets acquired during the year was to the tune of Rs.4,65,859/-, it was allowed by the AO; and because the balance depreciation pertained to the assets which were acquired in earlier years and the cost of which has been deducted as application for charitable purpose in earlier years, it was denied by AO which action has been upheld by Ld. CIT(A). According to the assessee, the assets for which depreciation has been claimed were acquired in earlier years the cost of which has been fully shown as application of income in earlier assessment still, it is an allowable deduction on the following grounds:
“That for the purpose of determining the income of charitable trust eligible for exemption U/s 11, income should be construed strictly in commercial sense i.e. (normal accounting principal) without reference to the heads of income specified in Section 14. The income to be considered is the book income and the total income is defined in Section 2(45). The computation of commercial income necessarily envisages deduction of depreciation on the assets of the trusts and this position is confirmed by the CBDT vide its Circular No. 5.P(LXX - 6) dated 19. 06. 1968. Moreover, normal accounting principal provides for taking depreciation to arrive at income. The income so arrived at after deduction of depreciation is to be computed for application towards charitable purpose. Capital expenditure incurred s an application of income so determined. It was also pointed out that by amendment in section 11 of the Act with effect from 01.04.2015, depreciation is to be disallowed from assessment year 2015-16 in determining income of the charitable trust which are required to apply or accumulate or set apart for application in respect of assets acquired and whose acquisition cost has been claimed as an application of income u/s 11 of the Act. Tthat depreciation on assets whose acquisition cost has been treated as application of income in earlier years of purchases has been allowed all along in the past at the time of assessment. In order to prohibit allowance of such depreciation the Finance Minister made amendment in Section 11 of the I.T. Act, 1961 by insertion of sub-section 6 in that effective from 01.04.2015 i.e. from AY 2015 - 16. By this amendment it has been laid out for determination of income of the Charitable Trust required to be applied or accumulated or set apart for application, then for such purpose 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 in any other previous year. This amendment is prospective and is applicable from A.V. 2015 -16 and onward. This amendment in section 11 applicable from 01.04.2015 has been held to be prospective as held by the Hon'ble High Court at Karnataka in the case of Director of IT (Exemp.) and another - vs. - AL Amen Charitable Trust reported in (2016) 383 ITR 517 (Kar). Accordingly, Jurisdictional Hon'ble High Court at Calcutta in the case of CIT - Vs- Siliguri Accumulated Market Committee Report in (2014) 366 ITR 51(Calcutta) has allowed depreciation, in the similar facts of the case. It is respectfully submitted that precedent and judgment of Jurisdictional Hon'ble High Court at Calcutta should be followed in the State of West Bengal, and depreciation as such should be allowed. It is submitted that I have already filed a copy of the judgment in the matter of Director of Income Tax
4 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 (Exemption) - Vs- Medical Trust of the 7th day Adventists Reported in (2017) 398 ITR 721 Madras. In the said case the Hon'ble Madras High Court considered all the judgments passed post amendment of Section 11 including the judgment of the Hon'ble High Court at Calcutta and after considering particular judgment Kerala High Court in the matter of Lissie Medical Institution - Vs- CIT (2012) 348 ITR 344 (Kerala) which is not in favour of the assessee still the Hon'ble Madras High Court allowed the claim of depreciation of the assessee. In this connection it may be further considered that the judgment of the Jurisdictional High Court at Calcutta has been passed after the said judgment of the Lissie Medical Institution and therefore, it is respectfully submitted that the Calcutta High Court Judgment should be followed.” 6. However, it is noted that the Ld. CIT(A) has referred to an order of the coordinate bench of Tribunal, Chennai Bench in the case of The Music Academy Madras, Chennai Vs. Assessing Officer on 22.04.2016 and disallowed the claim of depreciation. However, we do not countenance the action of Ld. CIT(A) on the simple ground that the claim made by the assessee for depreciation for the year under consideration is no longer res integra since the Hon’ble Supreme Court in the decision in CIT Vs. Rajasthan & Gujarati Charitable Foundation (2018) 402 ITR 441 (SC) has held at para 4(infra) that the amendment in section 11(6) of the Act vide Finance Act No. 2/2014 would be effective from AY 2015-16 and has approved the Hon’ble Delhi High court’s declaration that the said amendment is prospective in nature as under:
“These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as ‘Act’). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable puruposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in ‘Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)’ [(2003) 131 Taxman 386 (Bombay)]. In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner:
“3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It
5 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. 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 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 form 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 aforesatated judgment of the Bombay High Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department.
Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as ‘application of income’ of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department.”
After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same.
6 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 3. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in ‘Lissie Medical Institutions v. Commissioner of Income Tax’.
It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015- 2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.
It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.
For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters.”
Thus, from a perusal of the aforesaid decision, we note that the Hon’ble Supreme Court has upheld the action of the Hon’ble High court which in turn upheld the action of Tribunal in allowing the depreciation claimed by the assessee on the assets acquired/expenditure made has been allowed as application of income as well as the Hon’ble Supreme Court also taken note that the amendment in section 11(6) of the Act inserted vide Finance Act No. 2/2014 is effective from AY 2015-16 and, therefore, is prospective in nature, therefore, we allow the claim of the assessee by following the decision of Hon’ble Supreme court in the case of Rajasthan & Gujarati Charitable Foundation (supra) and note that the ratio decidendi of the Tribunal (Madras) is not a good law in the light of the Hon’ble Supreme Court in Rajasthan & Gujarati Charitable Foundation(supra) and the reliance made by the Ld. CIT(A) is thus erroneous and has to be set aside and we direct that depreciation claimed to be allowed. Before parting, we would like to observe that though the Ld. CIT(A) was aware that the Hon’ble jurisdictional High Court , Calcutta has passed an order in a similar case CIT Vs. Siliguri Regulated Market Committee reported in (2014) 366 ITR 51 (Cal) by allowing the claim of depreciation [refer page 9 of the impugned order of CIT(A)] and though the ratio of the case is binding on the Ld. CIT(A) he has preferred to apply the ratio of the Tribunal, ie, Chennai which is situated outside the jurisdiction of State of West Bengal, which is not in consonance with the judicial discipline and cannot be accepted and we expect the lower authorities to be clear in mind that the law laid by the Hon’ble jurisdictional High Court is
7 ITA No. 320/Kol/2018 Jha Educational Trust, AY: 2009-10 binding on us and Ld. CIT(A) and AO and others. We, we hope and expect them to follow the Ratio-decidendi of the Hon’ble jurisdictional High Court without fail.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 29th November, 2019 Sd/- Sd/- (P.M. Jagtap) (Aby. T. Varkey) Vice-President Judicial Member Dated : 29th November, 2019 Jd. (Sr. P.S.) Copy of the order forwarded to: 1. Appellant – Jha Educational Trust, C/o Calcutta Public School, P.O. Aswini Nagar, Baguiati, Kolkata-700 159. 2 Respondent – ITO (Exemption) Ward-1(1), Kolkata. 3. The CIT(A) - 25, Kolkata. (sent through e-mail)
CIT Kolkata 5. DR, ITAT, Kolkata. (sent through e-mail) /True Copy,
By order, Assistant Registrar ITAT, Kolkata