ASST.C.I.T., BANGALORE vs. SRI. K.R. KAVIRAJ, HOSPET

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.24.6.2015

of the Commissioner of Income Tax (Appeals) for the Assessment Year

2011-12.

2 ITA No.1224/Bang/2015 2. There is a delay of 17 days in filing the present appeal by the

assessee. The assessee has filed the petition for condonation of delay

supported by an Affidavit of its Trustee Sri A.C. Shanmugam.

learned Departmental Representative and considered the Affidavit filed

by the assessee for delay of 17 days in filing the appeal. The assessee has

stated in the Affidavit that the impugned order was received on

29.7.2015 and the appeal should have been filed by 20.8.2015 however,

a search and seizure action under Section 132 of the Act was carried out

in the premises of the assessee's trust on 6.8.2015. Therefore all the

persons in-charge of the accounts section were completely involved in

the post search proceedings. Since they were attending the income tax

office every day to furnish verification and other details called for, the

assessee could not take the necessary steps to file the appeal within the

period of limitation. Therefore it is pleaded that the delay of 17 days was

neither intentional nor wanton but due to circumstances which were

beyond the control of the assessee.

3 ITA No.1224/Bang/2015 4. The learned Departmental Representative has vehemently opposed

the condonation of delay.

explained by the assessee in the Affidavit, we find that the assessee had

a reasonable cause for not presenting the present appeal within the

period of limitation. We further note that there is nothing on record to

suggest that by filing the appeal belatedly by 17 days, the assessee would

have achieved any ulterior object or purpose. Accordingly, we are

satisfied that the assessee has explained sufficient reason for the delay

of 17 days in filing the appeal. Hence in the facts and circumstances of

the case and in the interest of justice we condone the delay of 17 days in

filing the appeal.

year 1992 by Trust Deed Dt.20.5.1992. The assessee was granted a

Registration under Section 12A of the Income Tax Act, 1961 (in short

'the Act') vide orderdt.16.9.1992. The assessee was also granted

approval under Section 10(23C) of the Act by the Chief Commissioner of

Income Tax, Bangalore-I vide order dt.26.3.2009. The assessee filed its

4 ITA No.1224/Bang/2015 return of income on 11.7.2011 for the Assessment Year under

consideration admitting NIL income after claiming revenue expenses

including depreciation. The Assessing Officer while framing the

assessment under Section 143(3) of the Act on 27.3.2014 determined the

total income of the assessee at Rs.7,63,80,700. The Assessing Officer

disallowed the claim of depreciation as well as made other additions

towards advance fee, income from pharmacy and also denied the

deduction towards accumulation of income allowed @ 15% on gross

receipts. Apart from this, the Assessing Officer also denied the setting

off of excess application of income for the Assessment Year 2010-11

against the income for the Assessment Year under consideration as well

as the deduction of liability for capital expenditure. The assessee

challenged the action of the Assessing Officer before the CIT (Appeals)

but could not succeed. The assessee has filed the present appeal and

raised the following grounds :

“ 1. The Commissioner of Income-tax (Appeals) erred in not allowing the claim of depreciation of Rs. 10,73,00,1241- to the appellants on the ground that the same amounted to double deduction. 2. The Commissioner of Income-tax (Appeals) erred in relying on the amendment made by Finance Act, 2014 as it was effective only from 1/4/2015 and the same is amendatory and prospective in nature as held by the Madras High Court in the case of V.R.Karpagam (54F) and in

5 ITA No.1224/Bang/2015 the case of CIT vs. Coromandel Industries Ltd. (TCA No.443 of 2014 dated 16/12/14 uls 54EC) and therefore would not apply to the assessment year under consideration'. 3. The Commissioner of Income-tax (Appeals) erred in sustaining the addition of Rs. 1,27,67,5301- being the advance fee received as income of the appellants- trust. . 4. The lower authorities ought to have seen that advance fee is only a liability of the appellants trust and they cannot considered as income of the appellant as long as the advance was taken to the fees accov-t in the subsequent years. 5. The Commissioner of Income-tax (Appeals) erred in sustaining the addition of RS.1,10,25,8001- representing the retention money as income of the appellants- trust. 6. The lower authorities ought to have seen that amount standing to the retention money account represent only opening balance and only a sum of RS.30.42.402 relate to the current assessment year and therefore the assessing officer was not justified in adding the entire sum of Rs. 1,10,25,8001- as income of the appellants-trust.

6 ITA No.1224/Bang/2015 12. The Commissioner of Income-tax (Appeals) erred in deducting Rs.7,58,8,285 being the liability for capital expenditure on the grQund that the amounts were not spent for capital expenditure. 13. The lower authorities erred in misinterpreting the word "applied" for the word "spent". The appellants submit that even if the amount has been earmarked and allocated for the purpose of the institution, it will be deemed to have been applied for its purposes as laid down by the Allahabad High Court in the case of CIT Vs. Radhaswami Satsang Sabha (25 ITR 472). 14. The lower authorities ought to have seer, rhat the appellants had offered the income on mercantile basis and part of the receipts are not at all received by the appellants-trust during the year and therefore the assessing officer should have allowed deduction on such income which was not received during the year while computing the quantum of application of income when he has not allowed the expenses on due basis. 15. The appellants therefore pray that the Hon'ble Income-tax Appellate Tribunal may be pleased to a) To allow depreciation of Rs. ·10,73,00,124/- b) To delete the addition of Rs. 1,27,67,530/- being the advance fee received treated as income of the appellants-trust; c) To delete the addition made towards retention money of Rs.1,10,25,8001- d) Not to treat the pharmacy income as business income of the trust; e) To allow accumulation of income at 15% on the gross receipts and not to restrict the same to the net inco.•Ie of the appellants- trust; f) To allow set off of excess application for the assessment year 2010-11 against the income computed for the assessment year 2011-12; g) To allow the liability for capital expenditure of Rs.7,58,82,285 as application of income for capital expenditure; h) To direct the assessing officer to allow deduction of the fees receivable while computing the income of the appellants for application of income as the income was not received during the year”.

adjudication.

7 ITA No.1224/Bang/2015 8. Ground No.2 is regarding claim of depreciation.

8.1 The assessee claimed depreciation of Rs.10,73,00,124. The

Assessing Officer held that the assessee has claimed double deduction by

first showing the outlay for capital asset as application of income and

thereafter claiming depreciation on the capital asset as well. The

Assessing Officer relied upon the decision of Hon'ble Supreme Court in

the case of Escorts & Another Vs. UOI & Others 199 ITR 43 (SC). The

CIT (Appeals) confirmed the disallowance of depreciation made by the

Assessing Officer by holding that the claim of depreciation along with

application of money of capital expenditure amounts double deduction

which is not envisaged under the Income Tax Act, 1961. The CIT

(Appeals) has also referred to the amended provisions of Section 11(6)

by Finance Act, 2014 w.e.f. 1.4.2015.

has submitted that this issue is covered by the various decisions of this

Tribunal as well as Hon'ble High Court. He has relied upon the following

decisions :

8 ITA No.1224/Bang/2015 (i) ITA No.686/Bang/2015 Dt.8.1.2016. CMR Janardhana Trust Vs. Asst.

Director of Income Tax.

(ii) ITA No.676/Bang/2014 Dt.20.3.2015 ACIT Vs. City Hospital Charitable

Trust.

submitted that the depreciation on the expenditure already claimed as

exemption under Section 11 of the Act being application of income is not

provided under the provisions of the IT Act. He has relied upon the

orders of the Assessing Officer and CIT (Appeals).

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 ld. DR, who relied on the order of CIT(A) and the decision of the Hon’ble Delhi High Court in the case of DIT(E) Vs. Charanjiv Charitable Trust (2014) 43 taxmann.com 300 (Delhi). We have considered the order of the CIT(A). 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

9 ITA No.1224/Bang/2015 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 instituitions, 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.

10 ITA No.1224/Bang/2015 16. It is no doubt true that the Hon’ble Delhi High Court in the case of Charanjiv Charitable 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 CIT(A) on the decision of the Hon’ble 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 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 CIT(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. 1.4.2015 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.

received treated as income of the assessee for the year under

consideration.

12.1 The assessee has claimed advance receipt of Rs2,24,27,130 in its

Balance Sheet in respect of collection from the students of medical

11 ITA No.1224/Bang/2015 college, dental college and hospital. The Assessing Officer treated the

same as income of the assessee on the ground that this receipt is an

additional fees named as development fees received from the students

in the first year itself apart from the regular tuition fees fixed by the

Government which was received from the students on the year to year

basis. The Assessing Officer has supported its finding by the statement

recorded during the survey under Section 133A of the Act on 2.7.2010.

The assessee challenged the action of the Assessing Officer before the

CIT (Appeals) and contended that the document obtained during the

survey did not pertain to the impugned assessment year. The CIT

(Appeals) did not impress with the contention of the assessee and

confirmed the addition made by the Assessing Officer on this account.

12.2 Before us, the learned A.R. of the assessee has submitted that

the actual amount during the year was only Rs.1,27,67,530 out of the

total sum shown in the Balance Sheet of Rs.2,24,27,130 and the balance

represents the opening balance which cannot be considered as income

of the assessee. He has submitted that this fact was pointed out to the

authorities below but they have completely ignored the same. The

12 ITA No.1224/Bang/2015 Assessing Officer has given more stress to the fact that the assessee has

used the advances for its capital and revenue expenditure and therefore

it was treated as income. He has further submitted that the CIT

(Appeals) has observed that the assessee has not deposited the advance

fees in a separate account however there is no requirement for deposit

advance fees in a separate bank account. He has further contended that

the assessee produced sufficient evidence in support of the fact that the

amount was only advance fees with full details from the persons whom

the advance was received and the ledger copy of advance fees were also

produced to establish the transfer of the part of such advance as income

of the year. Thus the learned Authorised Representative has referred to

page 11 of the paper book and submitted that the assessee produced

ledger account to show that the details including the opening balance

and the tuition fees received in advance as well as the closing balance.

Thus when the fees does not pertain to the assessment year under

consideration the same cannot be considered as income of the assessee

for the year under consideration.

13 ITA No.1224/Bang/2015 12.3 On the other hand, the ld. D.R. has relied upon the orders of the

authorities below and submitted that when the assessee has not

maintained a separate bank account for the advance fees and it was also

admitted during the survey that the assessee has received this amount as

development fees from the students of the first year apart from the

tuition fees fixed by the Government then the A.O. is justified to add this

amount in the income of the assessee.

12.4 We have considered the rival submissions as well as the relevant

material on record. The Assessing Officer has made the addition of this

amount as income of the year on the ground that the assessee has used

this amount for revenue as well as capital expenditure during the year.

Further the Assessing Officer has placed reliance on the statement

recorded under Section 133A of the Act. It is pertinent to note that

neither the Assessing Officer nor the CIT (Appeals) has disputed this fact

that this amount has been duly recorded in the books of accounts as

advance tuition fees. The assessee filed the ledger account wherein the

details of the opening balance, the advance tuition fees received during

the year as well as closing balance has been shown. The correctness of

14 ITA No.1224/Bang/2015 the accounts has not been examined or disputed by the Assessing Officer

or the CIT (Appeals). It is pertinent to note that if an advance fees is

received by the assessee for a particular academic year spread over more

than one financial year then the part of the fees received by the assessee

which relates to the academic year falling in next financial year cannot be

treated as income of the assessee for the year under consideration. It is

well settled law that the statement recorded under Section 133A cannot

be sole basis for making an addition or disallowance without

corroborating evidence. In this case, the authorities below have not

shown in their findings that any corroborating evidence was found to

support this statement recorded under Section 133A of the Act. In view

of the above facts and circumstances, we find that the addition made by

the Assessing Officer based on the statement recorded under Section

133A and further by giving a reason that the assessee has used the

advance fees received for revenue as well as capital expenditure is not

justified and accordingly we set aside the orders of authorities below qua

this issue and remit the same to the record of the Assessing Officer to re-

15 ITA No.1224/Bang/2015 examine the issue from the record produced by the assessee and then

decide the same as per law.

“retention money”.

15.1 The Assessing Officer noted that at the time of passing the

contract bill, the assessee retained certain portion of the bill amount

captioned as “Retention Money” and such amount would be paid to the

contractor after completion of the project under construction. Till then

the said amount would be reflected in the Balance Sheet as liability. The

Assessing Officer made addition of the said amount on the ground that

the amount was mixed with the other funds of the assessee and used for

the purpose of meeting both revenue and capital expenditure. It was

noted that the retention money was used for the purpose of purchasing

other assets. Accordingly, the Assessing Officer held that the retention

money held by the assessee of Rs.1,10,25,800 would form part of

income for the purpose of application under section 11(1)(a) of the Act.

The assessee challenged the action of the Assessing Officer but could not

16 ITA No.1224/Bang/2015 succeed as the CIT (Appeals) has concurred with the view of the

Assessing Officer.

15.2 Before us, the learned Authorised Representative of the assessee

has submitted that the retention money cannot be treated as income as

held in various decisions of the Hon'ble High Courts. He has further

contended that the retention money retained by the assessee was paid

subsequently to the contractors in the subsequent year whenever the

contract is completed and it is a clear liability of the assessee to repay

the amount. Such amount due to others cannot be treated as income of

the assessee. Alternatively the ld. AR has submitted that the amount of

Rs.1,10,25,800 standing in the retention money account and the

assessed as income mainly represent the amount lying as opening

balance of Rs.79,83,398 in the said account and only a sum of

Rs.30,42,402 relates to the current assessment year. Thus the Assessing

Officer was not justified in adding the entire amount of Rs.1,10,25,800

even if the addition is warranted.

15.3 On the other hand, the learned Departmental Representative

has submitted that the Assessing Officer as well as the CIT (Appeals) has

17 ITA No.1224/Bang/2015 given the finding that the assessee has claimed the use of said amount as

application of money under Section 11(1)(a) and therefore the Assessing

Officer correspondingly treated the said amount as income of the

assessee. He has relied upon the orders of the authorities below.

15.4 We have considered the rival submissions as well as the relevant

material on record. As regards the question of treating the retention

money as income of the assessee is concerned, on principle, we are of

the view that when the retention money is retained by the assessee for

refund in future on completion of project then it is only a liability in the

hand of the assessee and therefore the same cannot be treated as

income. However at the same time the assessee cannot be allowed to

take the benefit of the said amount being used for expenses and

investment being application of income. Therefore if the assessee is

having sufficient fund to cover this amount then the claim of the

assessee under Section 11(1)(a) on account of application of income

would not be effected otherwise to the extent of the amount used from

the retention money the claim would be reduced. Accordingly, we direct

the Assessing Officer to verify all the relevant facts on this issue and then

18 ITA No.1224/Bang/2015 decide the same only on question of allowing the deduction of

application of income and not treating the retention money as income.

16.1 Ground Nos.7 & 8 are regarding addition of Rs.50,66,973 as

income from pharmacy. The assessee runs pharmacy for the purpose of

medical college and hospital attached to the medical college. The

assessee does not maintain separate books of accounts for pharmacy

and the transactions pertaining to it are recorded in the books of

accounts maintained in the name of college and hospital. The Assessing

Officer accordingly treated the said income as business income of the

assessee from pharmacy. The assessee challenged the action of the

Assessing Officer is before the CIT (Appeals) and contended that since

the assessee is also running the pharmacy in the hospital premises itself,

it cannot be treated as business activity but it is incidental to running a

hospital and would constitute an integral part of the hospital run by the

assessee. Thus the assessee contended that it is an incidental to the

objectives of the trust. It was also contended that sales of the pharmacy

is duly considered for the purpose of application of income. The CIT

(Appeals) did not agree with the contention of the assessee and

19 ITA No.1224/Bang/2015 observed that the assessee has not furnished any evidence regarding the

break up of the medicines purchased from the pharmacy by different

categories of the patients and outside public. Accordingly, the CIT

(Appeals) has confirmed the action of the Assessing Officer.

16.2 Before us, the learned Authorised Representative of the assessee

has submitted that the assessee is running a pharmacy from the hospital

attached to the medical college which has not been disputed by the

Assessing Officer however the addition is made by the Assessing Officer

because of the reason that no separate books of accounts were

maintained by the assessee. The learned Authorised Representative has

submitted that it is having a separate trading account for the pharmacy

wherein all the charges and sales are duly accounted for and separate

stock register was also maintained. Once the pharmacy attached to the

medical college/hospital is not a business undertaking, the provisions of

section 11(4) and 11(4A) are not applicable. He has referred the trading

account maintained in respect of the pharmacy at page 16 of the paper

book and submitted that though separate books are not maintained

however separate accounts are maintained in respect of the pharmacy.

20 ITA No.1224/Bang/2015 The learned Authorised Representative has further submitted that the

Assessing Officer has wrongly added Rs.15,35,009 with the closing stock

of Rs.35,31,964 instead of deducting the same for computing the gross

profit from the pharmacy. He has submitted that the correct gross profit

from the pharmacy would be Rs.19,96,955 as it is clear from the trading

account at page 16 of the paper book. He has relied upon the decision of

Chennai Bench of the Tribunal in the case of Franciscan Sisters of St.

Joseph Society Vs. JCIT Dt.6.1.2014 in ITA No.1897/Ch/2013.

16.3 On the other hand, the learned Departmental Representative

has submitted that the activity of the pharmacy is business in the nature

and the Assessing Officer and CIT (Appeals) have rightly treated the same

as business income of the assessee.

16.4 We have considered the rival submissions and the relevant

material on record. The CIT (Appeals) has rejected the claim of the

assessee on the ground that the assessee has not furnished the details

regarding the sales made to the indoor and outdoor patients of the

hospital of the assessee as well as outside public. In such a case, the

entire amount cannot be treated as the income earned by the assessee

21 ITA No.1224/Bang/2015 from the sale of medicines to the outside public when the pharmacy is

within the premises of the hospital and attached to the hospital. It is

pertinent to note that a dispensary/pharmacy is inevitable and

indispensable facility for the hospital. The necessity of the pharmacy

cannot be ruled out as there are regular emergency situation requiring

immediate medicines and other supply of pharmacy for emergency

treatment as well as operation/surgery purposes. The Chennai Benches

of the Tribunal in case of Franciscan Sisters of St. Joseph Society (supra)

has held in paras 7 to 15 as under :

“ 7. In the light of above observation, the Assessing Officer treated the above receipts accounted by the assessee as relating to business activities and accordingly denied exemption under Section 11 of the Income-tax Act, 1961. In respect of receipts arising out of other activities, such as running of hospital, schools, etc., the assessing authority has granted the benefit of Section 11 to the assessee-society. A portion of the income of the assessee- society has been brought to tax on the ground that certain activities involve carrying on of activities in the nature of business. 8. When the matter was taken in first appeal before CIT(Appeals), he confirmed the order of the assessing authority and dismissed the appeal filed by the assessee. The assessee is aggrieved and therefore, the second appeal before the Tribunal. 9. The relevant grounds raised in the present appeal read as below:- “(1.1) The Commissioner of Income Tax (Appeals) erred in confirming the order of assessment denying exemption u/s.11 of the Income-tax Act. (1.2) The Commissioner of Income Tax (Appeals) erred in observing that the assessee does not deny the carrying on activities of typewriting institute, women’s hostel, crèche and pharmacy on a profitable basis.

22 ITA No.1224/Bang/2015 (1.3) The finding of the Commissioner of Income Tax (Appeals) that the appellant did not deny selling of medicines to outsiders. Even assuming so, sale of medicines is only an object of providing medical relief to the poor virtually at cost and would not make it an object of profit.

(1.4) The Commissioner of Income Tax (Appeals) went wrong in holding that the appellant runs dispensaries in two places in a commercial manner, which finding is perverse; and in any event providing medical relief is covered in the first two limbs of Sec.2(15).

(2.1) The Commissioner of Income Tax (Appeals) went confirming the disallowance of depreciation and that it amounts to double deduction.

(2.2) The Commissioner of Income Tax (Appeals) failed to follow the various authorities cited before him and went wrong in relying on a decision which is not applicable to the facts of the case.”

23 ITA No.1224/Bang/2015 hospital, running of the pharmacy is also a must. Therefore, running of the pharmacy by the assessee-society is not an activity carried on by the assessee incidental to the running of the hospital; but, on the other hand, it is an integral part of the hospital run by the assessee. 13. In these circumstances, the assessing authority has erred both on facts and in law in holding that the pharmacy run by the assessee-society is a separate unit, running as a business. The Assessing Officer has observed that the assessee-society has maintained separate accounts for the pharmacy section. Maintaining accounts separately for pharmacy section does not decide the nature of the activities carried on by the assessee through running of the pharmacy. Separate accounts are maintained by the assessee for the purpose of proper accounting and internal control. Even in the case of charitable hospital, it is not possible to provide medicines to every patient, free of cost. It is only in very deserving cases, a charitable institution could provide medicines free of cost. Therefore, running of a pharmacy set up as part of the hospital, involves purchase and sale of medicines. Therefore, not much discussion is necessary to come to a conclusion that in the case of a full-fledged hospital, pharmacy is an essential part thereof and as such, the pharmacy is run as part of the hospital establishment. 14. In the facts and circumstances, we find that the collection received by the assessee from its pharmacy section cannot be excluded from computing the income eligible for exemption under Section 11 of the Income-tax Act, 1961. The pharmacy collection also forms part of the collections accounted by the assessee from its charitable activities. Therefore, Assessing Officer is directed to give exemption under Section 11 in respect of the pharmacy collection as well. 15. Once the pharmacy collection is treated as part of its charitable activities, the total of the remaining items work out to less than Rs. 10 lakhs. The law has provided as on date an exclusion of Rs. 10 lakhs from the rigours of denying exemption under Section 11, in respect of activities involving carrying on business or similar activities. The total of collection from typewriting institute, working women’s hostel and crèche work out to less than Rs. 10 lakhs and therefore, by virtue of the exclusion clause, those amounts also cannot be considered for disallowing exemption under Section 11.” In view of the above discussion as well as the decision of the Chennai

Benches of the Tribunal (supra), we decide this issue in favour of the

assessee.

24 ITA No.1224/Bang/2015 17.1 Ground Nos.9 & 10 are regarding allowing the 15% accumulation

on net income of the assessee instead of gross receipts as claimed by the

assessee.

17.2 We have heard the ld. A.R. as well as the ld. D.R. and considered

the relevant material on record. The ld. A.R. of the assessee has

submitted that this issue is covered by the decision of the Tribunal in the

case of Capuchin Friar Services of Society Vs. DCIT Dt.9.10.2015 in ITA

No.367/Bang/2015.

17.3 On the other hand, the learned Departmental Representative has

relied upon the orders of the authorities below.

17.4 We find that the Tribunal in the case of Capuchin Friar Services of

Society (supra) has dealt with an identical issue in paras 10 & 11 as

under :

“ 10. We find that the issue is covered by the Co-ordinate Bench decision in the case of Jyothy Charitable Trust in ITA No.662/Bang/2015. The relevant extract is reproduced below:- “15. The third issue that arises for consideration in this appeal is as to whether 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure. The Assessee claimed accumulation of income for application for charitable purpose at 15% of the gross receipts. The AO was of the view that accumulation will be allowed only to the extent of 15% of the income after revenue expenditure. In other words income to be set apart u/s.1 1(1)(a) of the Act has to be

25 ITA No.1224/Bang/2015 computed at 15% of the net income i.e., gross receipts minus revenue expenditure and not on the gross receipts as claimed by the Assessee. Since in the case of the Assessee, the gross receipts after revenue expenditure was nil, the AO denied the benefit of accumulation to the Assessee.

26 ITA No.1224/Bang/2015 have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. In other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious. In other words, for the purpose of s. ii(i)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision." This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent and this twenty-five per cent has to be understood as income of the trust under the relevant head of s. 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of s. 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property. If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof and take into account 25 per cent of such income. Their Lordships have pointed that the same has to be taken on "commercial" basis and not "total income" as computed under the IT Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs 1,70,369 which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated. Having regard to the clear pronouncement of their Lordships of the Supreme Court, it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174. Twenty five per cent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon'ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust vs. CIT (supra). No reason whatsoever has been given by the Revenue authorities for deducting Rs. 2,17,126 in this case for purposes of s. I 1(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme ITA No.367/Bang/2015 Page 10 of 11 Court referred to above. The circular of CBDT has also been considered by the Hon'ble Kerala High Court in its decision referred to above. Accordingly, the question referred to is answered in the affirmative and in favour of the assessee."

27 ITA No.1224/Bang/2015 11. Following the decision of the co-ordinate bench of the Tribunal, we set aside the order of the CIT(A).” Following the decision of the co-ordinate bench of this Tribunal, we

decide this issue in favour of the assessee and direct the Assessing

Officer to consider the allowable accumulation of income at 15% of the

gross receipts.

18.1 Ground No.11 is regarding setting off excess application of

income of assessment year 2010-11 against the income of the

assessment year 2011-12.

18.2 At the time of hearing, the learned Authorised Representative

stated that the assessee does not press this ground and the same may be

dismissed.

18.3 On the other hand, the learned Departmental Representative has

not objected to dismissal of the ground.

18.4 Accordingly, we dismiss the ground No.11 as not pressed.

19.1 Ground Nos.12 & 13 are regarding disallowance of deduction of

Rs.7,58,82,285 being the liability for capital expenditure. The Assessing

Officer has made disallowance of claim of capital expenditure to the tune

28 ITA No.1224/Bang/2015 of Rs.7,58,82,285 which shown as increase in the liability for the capital

expenditure on the ground that this was not an actual expenditure

incurred by the assessee. The assessee submitted that the debt balance

of the various party accounts included in the sundry creditors account to

the tune of Rs.1,07,58,875 representing the advance payment made to

the parties to be reduced from the loan funds. The authorities below did

not accept the claim of the assessee on the ground that no evidence was

submitted by way of details of those parties to whom advances have

been given by the assessee. Further the purpose of advances and nature

of transaction was also not supported by the evidence. Accordingly, they

doubted the genuineness of the claim.

19.2 Before us, the learned Authorised Representative has submitted

that even if the amount has been ear marked and allocated for the

purpose of Institution, it will be deemed to have been applied for its

purpose as held by the Hon'ble Allahabad High Court in the case of CIT

Vs. Radhaswami Satsung 25 ITR 472. He has further contended that the

actual payment is irrelevant for the purpose of finding out whether there

has been an application of fund and if the liability for expenditure has

29 ITA No.1224/Bang/2015 been incurred it would be sufficient as held by the Hon'ble Andhra

Pradesh High Court in the case of CIT Vs. Trustees of HEH The Nizam’s

Charitable Trust 131 ITR 497. The learned Authorised Representative

has further contended that the assessee has offered the income on

mercantile basis and part of receipts are not still received by the assessee

trust during the year then the deduction aginst such income which was

not received during the year should have been allowed in respect of

computing the quantum of application of income on account of expenses

on due basis.

19.3 On the other hand, the learned Departmental Representative has

relied upon the orders of the authorities below and submitted that the

assessee has failed to prove the purpose of amount to be incurred by the

assessee and further the details of the parties to whom it was to be paid

against the said expenses were not furnished. Therefore, in the absence

of necessary details, the claim of the assessee cannot be accepted.

30 ITA No.1224/Bang/2015 19.4 We have considered the rival submissions and the relevant

material on record. The dispute is regarding the claim of capital

expenditure which was shown as a liability and not actually paid during

the year under consideration. The assessee also claimed that the

advances have been made to the parties in respect of the prospective

expenditure. However, the authorities below have given the finding that

the nature of transaction and the details of the parties to whom the

advances have been claimed to have been given has not been furnished

by the assessee. So far as the actual payment is concerned, the issue is

settled by the judgment of Hon'ble Allahabad High Court as well as

Hon'ble Andhra Pradesh High Court as referred above. However in the

case of the assessee, the Assessing Officer as well as the CIT (Appeals)

has doubted the expenditure laid out by the assessee whether by the

payment or of credit. Therefore we are of the considered opinion that

this issue require a proper verification on production of the relevant

evidence and details by the assessee. Accordingly, this issue is set aside

to the record of the Assessing Officer for proper verification and

31 ITA No.1224/Bang/2015 examination of the record to be produced by the assessee and then

decide the same as per law.

Order pronounced in the open court on the 13th day of July, 2016.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member

*Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore