ASST. COMMISSIONER OF INCOME-TAX, BANGALORE vs. M/S. THE NEW CAMBRIDGE EDUCATIONAL TRUST, BANGALORE

Per Shri Vijay Pal Rao, J.M. :

These two appeals by the revenue are directed against two separate orders dt.18.05.2016 & 17.05.2016 of Commissioner of Income Tax (Appeals)-14, Bangalore for the Assessment Year 2009-10 & 2012-13 respectively.

2 ITA Nos.1388 & 1389/Bang/2016 2. The revenue has raised common grounds. The grounds raised for

the Assessment Year 2009-10 are as under :

3 ITA Nos.1388 & 1389/Bang/2016

4 ITA Nos.1388 & 1389/Bang/2016

5 ITA Nos.1388 & 1389/Bang/2016 disallowed the claim of depreciation on the ground that when the cost of the asset was allowed as application of income then allowing the claim of depreciation would amount to double deduction. The learned Authorised Representative has relied upon the decisions dt.31.3.2017 of the co-ordinate bench of this Tribunal in the case of DCIT (Exemptions) Vs. M/s. Maharani Lakshmi Ammani College Trust in ITA Nos.391 & 392/Bang/2016. The learned Departmental Representative has relied upon the order of the Assessing Officer as well as the decision of Hon'ble Karnataka High Court in the case of Lisse Medical Institutions Vs. CIT 348 ITR 344 as well as the decision of Hon'ble Supreme Court in the case of Escorts Limited & Another Vs. Union of India 199 ITR 43 (SC). At the outset, we note that the co-ordinate bench of this Tribunal nthe case of DCIT (Exemptions) Vs. M/s. Maharani Lakshmi Ammani College Trust (supra) has considered and decided this issue in paras 7 & 8 as under : “ 7. Ground No.2 is regarding disallowance of depreciation.

6 ITA Nos.1388 & 1389/Bang/2016 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. [1] DIT (Exemption) v. Framjee Cawasjee Institute, [1993] 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 Trust198 ITR 598 [GUJ];

[4] Commissioner of Income-Tax v. Bhoruka Public Welfare Trust[1999] 240 ITR 513 [CAL];

[5] Commissioner of Income-Tax v. Rao Bahadur Calavala Cunnan Chetty Charities 135 ITR 485 (MAD)]

7 ITA Nos.1388 & 1389/Bang/2016 [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 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 Ltd. (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

8 ITA Nos.1388 & 1389/Bang/2016 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 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."

9 ITA Nos.1388 & 1389/Bang/2016 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, 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,

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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". 23. Paragraphs 7.5, 7.5.1, 7.6 of Central Board of Direct Taxes Circular reported in 371 ITR 22 makes it clear that the said amendment shall take effect from 1.4.2015 and will accordingly apply in relation to the assessment year 2015-16 and subsequent assessment years. 24. The Constitution Bench of the Apex Court in Vatika Township [P] Ltd.,'s case (supra), had laid down general principles concerning retrospectively in Paragraphs 33 and 34, and the same is extracted hereunder: "33. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India & Ors. v. Indian Tobacco Association, the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of

11 ITA Nos.1388 & 1389/Bang/2016 fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra & Ors. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are confronted with any such situation here. 34. In such cases, retrospectively is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity. In the instant case, the proviso added to Section 113 of the Act is not beneficial to the assessee. On the contrary, it is a provision which is onerous to the assessee. Therefore, in a case like this, we have to proceed with the normal rule of presumption against retrospective operation. Thus, the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. Dogmatically framed, the rule is no more than a presumption, and thus could be displaced by outweighing factors". 25. The Apex Court in the said judgment, while interpreting the proviso, whether to be applied retrospectively or prospectively, has considered the Notes on Clauses appended, the Finance Bill and the understanding of the Central Board of Direct Taxes in this regard. The Apex Court has also taken cognizance of the fact that the legislature is fully aware of 3 concepts insofar as amendments made to a statute: (i) prospective amendments with effect 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. 26. For the foregoing reasons, we answer the question of law in favour of the Assessee and against the Revenue.”

Though the learned Departmental Representative has contended that the Hon'ble Supreme Court has admitted the SLP filed by the revenue against the decision of the Hon'ble High Court however, since the

12 ITA Nos.1388 & 1389/Bang/2016 Hon'ble Supreme Court has neither stayed nor reversed the said order therefore the said judgment of the Hon'ble High Court is binding on us. Accordingly, following the decision of Hon'ble jurisdictional High Court (supra), we uphold the order of the CIT (Appeals) on this issue.”

Thus it is clear that this issue is now covered by the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Bangalore Baptist Hospital Society 240 Taxmann 567 which is a binding precedent for the Tribunal. Accordingly, we do not find any error or illegality in the impugned orders of CIT (Appeals) qua this issue. 5. The next issue raised by the revenue is regarding carry forward of set off of excess expenditure / excess application of income. The learned Departmental Representative has contended that there is no provision under Section 11 of the Income Tax Act, 1961 (in short 'the Act') to allow the setting off the excess expenditure against the receipts of the subsequent year or carry forward and set off the losses of the current year against the subsequent year. He has relied upon the order of the Assessing Officer. 6. On the other hand, the learned Authorised Representative has submitted that this issue is covered by various decisions of Hon'ble High Courts. He has relied upon the decision dt.31.3.2017 in the case of DCIT (Exemptions) Vs. M/s. Maharani Lakshmi Ammani College Trust (supra). 7. Having considered the rival submissions as well as relevant material on record, at the outset we note that an identical issue has been

13 ITA Nos.1388 & 1389/Bang/2016 considered by the co-ordinate bench of this Tribunal in the case of DCIT (Exemptions) Vs. M/s. Maharani Lakshmi Ammani College Trust (supra) in para 6 as under : “ 6. Having considered the rival submissions as well as the relevant material on record, at the outset, we note that this issue of allowing excess expenditure to be carry forward for setting off in future years has been considered by the co-ordinate bench of this Tribunal in the case of St. Augustin Social Service Society Vs. DDIT(E) (supra) in paras 5 & 6 as under :

“ 5. Having regard to the rival contentions and the material on record, we find that similar issue had arisen before the Tribunal in the case of Baldwin Methodist Educational Society in ITA No.523/Bang/2014 for assessment year 2009-10 and ‘C’ bench of this Tribunal to which both of us are signatories, had considered the issue at length and at para.5 of the order had held as under:

“We also find that ‘A’ bench of this Tribunal in the case of Academy of Liberal Education in ITA No.687/Bang/2014 dated 20/2/2015, to which one of us i.e. the Accountant Member is the signatory, has considered this issue and in para.8 of its order, held as under:

“8. We are of the view that pendency of an appeal before the Hon'ble High Court of Karnataka cannot be the basis not to follow the decision on the issue already rendered in identical cases. Section 11(1)(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 11(1)(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 Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj) CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj.). In CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), 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 VS. ADIT 248 ITR 368 (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 principles,

14 ITA Nos.1388 & 1389/Bang/2016 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 loss 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 books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be 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 CIT Vs. Society of Sisters of ST. Anne 146 ITR 28 (Kar).”

We find that the order of the CIT(A) is in consonance with the judicial precedents reproduced above. Therefore, we see no reason to interfere with the order of the CIT(A). The revenue’s appeal is, accordingly, dismissed”.

“Now coming to question No.3 the point which arises for consideration is whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilisation of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a charitable trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income-tax Act and that the income of the charitable trust was not assessable under the head ‘Profits and gains of business’ under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which

15 ITA Nos.1388 & 1389/Bang/2016 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 vs. 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.” Respectfully following the judgment of the Hon’ble Bombay High Court, we direct the AO to allow the assessee to carry forward the deficit of the income arising on account of excess application of income during the relevant financial year to the subsequent assessment years.”

Following the earlier order of this tribunal, we do not find any error or illegality in the order of the CIT (Appeals) qua this issue.”

As it is clear that this issue has been consistently decided by this Tribunal in favour of the assessee by following the decisions of various High Courts including the decision of Hon'ble Bombay High Court in the case of CIT Vs. Institute of Banking (2003) 264 ITR 110 (Bom). Accordingly by following the earlier order of co-ordinate bench of this Tribunal in the case of DCIT (Exemptions) Vs. M/s. Maharani Lakshmi Ammani College Trust (supra), we decide this issue in favour of the assessee and against the revenue & consequently, the orders of the CIT (Appeals) for this issue is upheld. 8. In the result, both the appeals of revenue are dismissed. Order pronounced in the open court on 20th Sept., 2017.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt.20.09.2017.

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