INCOME TAX OFFICER EXEMPTIONS WARD-1 , MANGALORE vs. M/S SHIRURU WELFARE TRUST , UDUPI

PER SHRI JASON P BOAZ, ACCOUNTANT MEMBER : This appeal by the Revenue is directed against the order of the Commissioner of Income-tax (Appeals), Mangaluru dated 17/8/2017 for the Assessment Year 2011-12. 2. Briefly stated, the facts of the case are as under:- 2.1 The assessee is a trust registered u/s 12A of the Income-tax Act, 1961 (in short ‘the Act’) engaged in running and maintaining the following educational institutions; (1) Green Valley National School

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(LKG to 7th std.,), (ii) Green Valley National School (English Medium High School) and (iii) Green Valley National School (One university college). For asst. year 2011-12, the assessee filed its return of income on 24/11/2011 declaring NIL income. The return was subsequently taken up for scrutiny. The Assessing Officer (AO) completed the assessment u/s 143(3) of the Act vide order dated 9/12/2013, (i) disallowing the assessee’s claim for depreciation amounting to Rs.86,01,301/- holding that the assessee has claimed double deduction, first by showing the outlay for capital asset as application of income and then also claiming depreciation on the capital asset and (ii) rejecting the assessee’s claim for being allowed carry forward of deficit for application against income in subsequent years. 2.2 Aggrieved by the order of assessment dated 9/12/2013 for asst. year 2011-12, the assessee preferred an appeal before the CIT(A), Mangalore. The assesee’s appeal on the above two issues was allowed by the ld CIT(A) vide order dated 17/8/2017. 3.1 Aggrieved by the order of the CIT(A), Mangalore dated 17/8/2017 for asst. year 2011-12, Revenue has preferred this appeal raising the following grounds:-

“1. The order of the Ld. CIT (A) is opposed to Law and facts of the case. 2. Depreciation :- 2.1 The learned CIT(A) erred in allowing assessee's claim for depreciation on assets put into use during the accounting year relevant to the assessment year, even though the entire cost of these assets has been claimed by

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the assessee as application of income for charitable activities. 2.2 The learned CIT(A) erred in not following the ratio laid down by the Hon'ble Apex Court in the case of Escorts Ltd and Anr Vs Union of India - 199 ITR 43 wherein it is held that double deduction cannot be presumed unless specifically provided for by law. 2.3 The learned CIT(A) failed to take cognizance of the fact that allowing the total cost of the asset as an application of income and allowing deprection on the value of such assets in the same year results in double deduction and it is not as per the provisions of the Income Tax Act. 2.4 The learned CIT(A) erred in not following the ratio laid down by the Hon'ble Kerala High Court in the case of Lissie Medical Institution ITA No. 42 of 2011 dated 17.02.2012 wherein it is held that in order to reflect the true income available for application for charitable purposes, the assessee should write back in the accounts the depreciation amount to form part of the income to be accounted for application for charitable purposes. 2.5 The order of learned CIT(A) may be set aside and that of AO be restored by placing reliance of the recent judgment of Hon'ble High Court of Delhi in the case of DIT(Exemption) vs. Charanjiv Charitable Trust dt. 18.03.20 14 in ITA No. 321 to 323/ 2013 wherein it is held that Tribunal was not justified in directing the allowance of depreciation in respect of assets, the cost of which has been allowed as deduction as application of income of the Trust. 3. Carry forward and set off of unabsorbed deficit:- 3.1 The learned CIT(A) erred in directing the AO to allow carry forward of unabsorbed deficit, when there is no provision in the Income Tax Act to allow carry forward of such deficit. 3.2 The learned CIT(A) erred in not appreciating that Sections 70 to 80 of the Income Tax Act deal with carry forward & set off of 'loss' & not excess expenditure. The

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learned CIT (A) erred in not specifying the provisions of the Income Tax Act while directing the AO to allow carry forward of deficit. 4. For these and such other grounds it is urged that the order of the Ld. CIT(A), on the above points may be set aside and the order of the Assessing Officer be restored. 5. The appellant craves leave to add, alter or amend all or any of the grounds of appeal before or at the time of the hearing of the appeal.”

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application of income and, therefore, depreciation on capital assets cannot be allowed as it would amount to allowing the assessee double deduction. 5.3.1 According to the ld AR for the assessee the issue in respect of the claim of depreciation is covered by the decision of the Hon’ble Karnataka High Court in the case of DIT(E) Vs. Al-Ameen Charitable Trust and Others (383 ITR 517) (Kar) vide order dated 22/2/2016. The ld AR also inter alia placed reliance on the following decisions of the Co-ordinate Benches: (i) Moogambigai Charitable Trust Vs. Addl. CIT (Exemption) in ITA No.1224/Bang/2015 dated 13/7/2016; (ii) ITO Exemption Vs. Sharaddha Trust in ITA No.899/Bang/2016 dated 7/4/2017, (iii) Jyothi Charitable Trust Vs. DCIT (Exemption) in ITA No.622/Bang/2015 dated 14/8/2015.

5.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the issue of claim of depreciation by a charitable trust u/s 11 of the Act has been considered and held in favour of the assessee by various Co-ordinate benches of this Tribunal as cited (Supra) and also by the Hon’ble Karnataka High Court, in the case of DIT(Exemption) Vs. Al-Ameen Charitable Fund Trust & Others (383 ITR 517) (Kar). In the case of Moogambigai Charitable and Education Trust Vs. ADIT (Exemption), the Co-ordinate bench in its order in ITA No.1224/Bang/2015 dated 13/7/2016, at para 11 thereof has held as under:-

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“11. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that this issue has been considered by this Tribunal in a series of decisions. In the case of M/s, CMR Janardhana Trust (supra). the Tribunal has again considered and decided this issue in paras 15 to 17 as under: 15. We have heard the submissions of the Id. OR, who relied on the order of CIT(A) and the decision of the Hon'ble Delhi High court in the case of 011(E) Vs. Charanjiv Charitable Trust (2014) 43 taxmann.com 300 (Delhi). We have considered the order of the 01(A). Identical issue came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union (2013) 60 501 260 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 A0 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

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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 till 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, Pipil, 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(l)(iv) of the Act. The Hon'ble Court thereafter held that a trust claiming

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depredation 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" 16. It is no doubt true that the Hon'ble Delhi High Court in the case of Charanjiv Charitabe Trust (supra) has taken a contrary view but then when two views are possible on an issue, the view favourable to the Assessee has to be followed. The decision of the Hon'ble Punjab & Haryana High Court is in favour of the Assessee and has followed the decision of the Hon'ble Karnataka High Court in the case of Society of Sisters of Anne (supra). The interpretation to the contrary given by the C1T(A) on the decision of the Honbie Karnataka High Court in the case of Society of Sisters of Anne (supra) cannot therefore be accepted. 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 subsection (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

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application of income under this section in the same or any other previous year" 17. 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 01(A) has to be reversed. Consequently grounds No.4 & 5 raised by the Assessee are allowed. There is no dispute that the amendment of section 11(6) of the Act by the Finance Act, 2014 is prospective w.e.f. 14.2015 and therefore the said amended provision is not applicable for the assessment year under consideration, Following the earlier decisions of this Tribunal, we decide this issue in favour of the assessee and against the revenue.”

5.4.2 Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Al-Ameen Charitable Fund Trust & Others (383 ITR 517), wherein the Hon’ble High Court has distinguished the decision of the Hon’ble Kerala High Court in Lissie Medical Institutions (Supra) and also following the decision of the co-ordinate Bench in the case of M/s Moogambigai Charitable & Educational Trust, in ITA No.1224/Bang/2015 dated 13/7/2016, we dismiss the ground 2(2.1 to 2.5) raised by the Revenue on this issue.

Ground No.3(3.1 and 3.2) – Carry forward of undisclosed deficit for application

6.1 The ld DR was heard in support of the grounds raised on this issue (Supra) and submitted that carry forward of unabsorbed deficit

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for application in subsequent years is not permissible since there is no specific provision in this regard in either sections 11 and 13 of the Act which are in respect of assessment of trusts, and therefore, contended that assessee’s claim be rejected. Strong support was placed to the orders of the Assessing Officer on this issue.

6.2 According to the ld AR for the assessee, the assessee is entitled to carry forward the unabsorbed deficit for application against income of subsequent years. It is submitted that the said issue is covered by the decision of the Co-ordinate bench of this Tribunal in the case of ITO (Exemption) Vs. Shraddha Trust in ITA No.899/Bang/2016 dated 7/4/2017. 6.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the issue before us of carry forward of unabsorbed deficit for application against income of subsequent years is covered by the decisions of the Co-ordinate Benches of this Tribunal in the case of Jyothi Charitable Trust (60 taxmann.com 165) and the case of ITO (Exemption) Vs. Shraddha Trust in ITA No.899/Bang/2016 dated 7/4/2017. In the case of Shraddha Trust (Supra) the Co-ordinate bench at para 8 of its order has held as under:-

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ordinate bench of Tribunal in the case of Deputy Director of Income-tax vs. Jyothy charitable Trust (60 taxmann.com 165). The relevant part of the order is reproduced below: "14. We have considered his submission. Section I 1(l)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 1 l(l)(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 v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 4391[1986] 29 Taxman 476 (Raj) and CIT V. Plot Swetamber Murli Pujak Jain Mandal [1995] 211 ITR 293 (Guj.). In CIT Vs. Institute of of Banking Personnel Selection [2003] 264 ITR 110/131 Taxman 386 (Born.) 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 v. Asst. DIT [2001] 248 ITR 368/[1999] 105 Taxman 719 (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

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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 toss 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 hooks of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can he 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 Society of Sisters of ST. Anne (supra )." Respectfully following the ratio laid down in the above decision we dismiss the ground of appeal raised by the revenue.”

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6.3.2 Following the decision of the co-ordinate bench in the case of Shraddha Trust in ITA No.899/Bang/2016 dated 7/4/2017, we dismiss ground No.3(3.1 and 3.2) raised by the Revenue. 7. In the result, Revenue’s appeal for asst. year 2011-12 is dismissed. Order pronounced in the open court on 28th March, 2018.

Sd- Sd/- (N.V VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore Dated : 28/3/2018 Vms

Copy to :1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order

Asst. Registrar, ITAT, Bangalore.