INCOME TAX OFFICER(EXEMPTIONS), BANGALORE vs. SHRADDA TRUST, BANGALORE

O R D E R

Per Shri A.K. Garodia, Accountant Member

(i). The CIT(A) has failed to appreciate the fact that the Hon'ble Kerala High Court in the case of Lissie Medical Intuitions Vs. CIT (348 ITR 344) has held that depreciation cannot be allowed on assets, where cost of such assets has already been allowed as application of income in the year of acquisition/ purchase of asset. (ii). The CIT(A) has failed to appreciate that the Hon'ble Supreme Court in the case of Escorts Ltd. & another Vs. Union of India (199 ITR 43), while dealing with the issue of allowance of expenditure on scientific research u/s 35(1)(iv) [corresponding to section 10(2) (xiv) of the I.T. Act, 1922] held that any expenditure of a capital nature (or incurred towards purchase of capital assets) on scientific research allowed as deduction u/s 35(1)(iv) cannot be allowed once again as deduction in the form of depreciation on such capital assets. While doing so, it was observed by the Hon'ble Supreme Court that no Page 2 of 5 legislature could have at all intended a double deduction in regard to the same business outgoing and if it is intended, it would be clearly expressed in the statute itself. Accordingly, it was held that even in absence of clear statutory indication to contrary, statute should not be read so as to permit an assessee two deductions i.e. once in the form of expenditure incurred towards purchase of capital assets and secondly, in the form of depreciation on such capital assets. It was also held that even before the amendment of the Act in the form of insertion of clause (iv) of sub section (2) of section 35 by Finance Act, 1980, prohibiting allowance of depreciation, the Act did not permit a deduction for depreciation in respect of cost of capital asset acquired for the purpose of scientific research to the extent such cost had been written off/ claimed as deduction u/s 35(1)(iv) on the ground that the amendment only set out more clearly and categorically what the provision intended even earlier. iii). The CIT(A) has failed to appreciate the fact that the issue involved in respect of capital expenditure on scientific research u/s 35(1)(iv) is similar to that of issue involved in respect of allowance of expenditure incurred towards purchase of capital assets for charitable purposes as application of income u/s 11(1)(a). Accordingly, the Law laid down by the Hon'ble Supreme Court is squarely applicable to taxation of charitable/ religious trust or institution u/s 11, 12 and 13 of the I.T. Act.

(iv) Though the Finance Act, 2014 has amended the Income Tax Act, 1961 with regard to non-allowance of depreciation to charitable/ religious trust or institution on the value of assets which has already been allowed as application of income u/s 11(1) by inserting sub- section (6) of Section 11, w.e.f 01.04.2015, such amendment cannot be construed as effective prospectively inasmuch as in accordance with the ratio laid down by the Hon'ble Supreme Court in the case of Escorts Ltd. & another Vs. Union of India (Supra), the amendment only set out more clearly and categorically what the legislature had intended and conveyed u/s 11(1) even earlier to the said amendment. As such, the amendment shall be considered as clarificatory in nature making it clear that the assessee is not entitled to claim double deduction in respect of same expenditure u/s 11(1) as application of income and also depreciation simultaneously. On Net receipts Vs. Gross receipts in computation of application i) Whether, in the given facts and circumstances, the CIT(A) is correct in law in not considering the Board Circular on this issue i.e. Board Circular no. 12-(PXX-7 of 1968) dated 26.11.1968, on which the AO placed reliance for disallowance of accumulation / set apart of income u/s 11(1)(a), wherein it is clearly explained that if a trust fails to comply with accumulation provisions u/s 11(2), then the entire income accumulated would be liable to assessment u/s 11(3), including 15%

Page 3 of 5 of income set apart or accumulated u/s 11(1)(a), and, therefore, rendered a perverse decision. ii) Whether, in the given facts and circumstances, the CIT(A) is correct in law in holding that the provisions of sub-section (1) and (2) of section 11 operate independently, and, therefore, disallowance of accumulation u/s 11(2) has no effect on allowance of set apart/accumulation u/s 11(1)(a). iii) Whether, in the given facts and circumstances, the CIT(A) is correct in law in ignoring the fact that in case the assessee is claiming 15% of income set-apart/ accumulation on the basis of gross receipts, the assessee shall produce evidence that such amount is invested in the modes specified u/s 11(5) r.w.s. 13(1)(d)(i). However, as the net surplus available in the hands is less than 15% of gross receipts, the assessee will not be in a position to invest higher amount/ more than net surplus in the modes specified u/s 11(5). iv) Whether, in the given facts and circumstances, the CIT(A) is correct in law in not considering the fact that if the gross receipts are considered as income within the meaning of Section 11(1)(a), then in the event of assessee losing the exemption due to violation of conditions stipulated u/s 13, then the entire gross receipts being the income is liable to be taxed, which is grossly unjustified and unviable and beyond the purview of Section 11(1)(a). On the other hand, it is not the case of the assessee to argue that for the purpose of claiming 15% of income set apart/ accumulation, income to be reckoned on the basis of gross receipts, but in the event of assessee losing the exemption, the income will be recognized on the basis of net surplus/book profits rather than gross receipts. 2) On Set-off of excess expenditure/application/deficit/loss:- a) The CIT (A) has erred in directing the assessing officer to allow set-off of excess expenditure/application pertaining to current asst.year and earlier years against the income of the future asst.year without appreciating the fact that as per the scheme of taxation of charitable or religious trust/ institution as codified u/s 11, 12 and 13, there is no provision for computing loss from property held under trust/ institution on account of excess application of income/funds of the trust. b) The CIT (A) has failed to appreciate 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 sec. 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 set-off of loss against the income of subsequent

Page 4 of 5 years as envisaged u/s 70 to 79 are also not applicable to the charitable trusts/institutions. c) The CIT (A) has failed to discuss the issue in detail bringing out the facts and applying the relevant provisions of the Act, but came to a conclusion that excess expenditure/excess application shall be allowed to be carried forward and set-off against the income of the future assessment years and, thereby, rendering the order perverse.”

“8.7 However, jurisdictional ITAT order in the case of ACIT Vs City Hospital charitable trust (2015) 42 ITR(Trib)583 (Bangalore) and DCIT Vs Manipal Academy of Higher Education (2015) 44 ITR(Trib)18 (Bangalore) has considered the issue in favour of the Page 5 of 5 assessee. However, the Department filed appeal on similar issue in Karnataka High Court and is pending. Respectfully following the jurisdictional ITAT order in the above cases, this ground of appeal is allowed.”

7. From the above para reproduced from the order of CIT(A), it is seen that the decision of CIT(A) is by following various tribunal orders and therefore, there is no infirmity in the order of CIT(A) on this issue also.

Order pronounced in the open court on the date mentioned on the caption page.