ACIT, CHENNAI vs. VALLIAMMAI SOCIETY, CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

These are appeal and cross objection of the Revenue and

assessee respectively directed against an order dated 21.11.2016 of

ld. Commissioner of Income Tax (Appeals)-18, Chennai.

Revenue has altogether taken four grounds of which ground No.1 & 4

are general in nature needing no specific adjudication.

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Commissioner of Income Tax (Appeals) deleted a disallowance of

�8,27,35,673/- made by the ld. Assessing Officer against repairs and

maintenance claimed by the assessee.

of the Income Tax Act, 1961 (in short ‘’the Act’’), running a number of

educational institutions, had filed its return for the impugned

assessment year declaring ‘’Nil’’ income after claiming exemption

under Section 11 & 12 of the Act. During the course of assessment, it

was noted by the ld. Assessing Officer that assessee had claimed

repairs and maintenance aggregating to �12,56,16,869/- as under:-

Name of the institution Amount

Head Office �8,27,35,673/-

Hostel �2,36,15,792/-

Others Valliammai Engineering College �31,05,392

Valliammai Polytechnic �4,26,460/- SRM Polytechnic �94,739/- SRM Arts & Science College �7,83,283/- Eswari Engineering College �93,20,468/- Institute of Hotel Management �43,80,744/-

IHM HMC Tech �1,91,368/-

SRM Nightingale School �9,62,950/-

Total �12,56,16,869/-

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Assessee was required to produce proof for the above expenditure.

Assessee thereupon produced bills/invoices/vouchers which were

verified by the ld. Assessing Officer, with the books of accounts of the

assessee. He found that there were following sub-categories of repairs

and maintenance work in various institutions run by the assessee :-

Annual Maintenance Contract (AMC) R & M Air conditioner R & M Furniture R & M Computers R & M Electrical R & M Building R & M Lift R & M Equipments R & M Office R & M Others

Similar categories were there in the accounts of hostel as well.

the assessee for its claim of repairs and maintenance for hostel and

institutions run by it, noted that such expenditure claimed in the head

office book consisted of the following items:-

Party Amount SRM Engineering Construction Corp Ltd 7,21,95,731/- (SRMECC) SRM Infrastructures 85,76,518/- Others 19,60,424/-

Total 8,27,35,673/-

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As per the Ld. Assessing Officer for the sum of �,7,21,95,731/- out of

Rs.8,27,35,673/- claimed as repairs and maintenance in the books of

the head office, assessee had submitted invoices raised by one M/s.

SRMECC. According to him, such invoices did not show the nature of

the repairs carried out by the said M/s. SRMECC. A notice u/s.133(6)

of the Act was issued by the Ld.AO to the M/s. SRMECC, requiring

them to file copies of the work orders, invoices, agreements etc. In

response to this, one Shri. K. Ramadoss from the said entity appeared

and filed copies of invoices as well as an MOU dated 02.06.2008. Ld.

Assessing Officer found the invoices produced by M/s. SRMECC were

tallying with what were produced by the assessee before him.

However, according to the ld. Assessing Officer agreement dated

02.06.2008 produced by M/s. SRMECC was entered with one M/s. SRM

University and not with the assessee.

From the bill of quantity produced by SRMECC, ld. Assessing 6.

Officer categorized the work done by them into three heads namely (i)

Campus development (ii) Maintenance and (iii) Repairs. Of these,

campus development related to campus cleaning, parking and

maintenance of garden. Maintenance was for water supply, sanitary

and roads. Repairs pertained to painting, flooring, false ceiling etc., As

per the ld. Assessing Officer, similar expenditure were booked by the

assessee in the books of the hostel run by it. According to the ld.

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Assessing Officer, expenditure incurred by the head office was also

related to the institutions run by the assessee and therefore there

were duplication of claim of expenditure between what was booked in

the books of the hostel and what was booked in the books of the head

office. He summarized such duplication as under:-

Sub Category of Repairs As per Annexure As per & Maintenance A to the Annexure B to Assessment order the Assessment order (Hostel Buildings)

Repairs & Maintenance 12,28,491/- �42,33,272/- Painting Repairs & Maintenance 18,52,134/- �19,65,000/- Furniture (�10,75,545/- + �7,76,589/- ) Repairs & Maintenance �18,15,995/- �62,35,000/- Building House Keeping Services - �54,09,315/- �91,39,932/- Hostel

The expenditure relating to hostel was compiled from the group

summaries available in the books of the accounts, which had specific

heads for annual maintenance, housekeeping services and repairs and

maintenance. According to him, the bill of quantity produced by M/s.

SRMECC also carried similar items. Thus, as per the Ld.AO,

expenditure for repairs and maintenance claimed by the assessee,

based on the invoices raised by M/s. SRMECC were sham. He

disallowed the claim of such expenditure made in the books of the

head office aggregating to �8,27,35,673/-.

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Tax (Appeals) on this issue was successful. Ld. Commissioner of

Income Tax (Appeals) held that nothing stopped the assessee from

booking its expenditure for repairs and maintenance both in its Head

Office account as well as in the accounts of the institutions run by it.

According to the ld. Commissioner of Income Tax (Appeals), just

because expenditure for repairs and maintenance were both claimed in

the head office account as well in the accounts of the institutions, it

would not mean that there were any duplication of such expenditure.

He deleted the disallowance made by the ld. Assessing Officer.

assailing the order of the ld. Commissioner of Income Tax (Appeals)

submitted that assessee had made excessive claim for repairs and

maintenance. According to her, annexures to the assessment order

clearly indicate that assessee had booked repairs and maintenance

expenditure incurred in its institutions, both in the accounts of such

institutions as well as in the accounts of head office. Thus according

to her, there could have been duplication of such expenditure. As per

the ld. Departmental Representative, when repairs and maintenance

were directly met by the institutions, there was no reason why similar

expenditure was incurred from the head office also, that too for the

very same institutions. As per the ld. Departmental Representative,

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M/s. SRMECC was a related party and agreement entered with the

said party was sham. Contention of the ld. Departmental

Representative was that ld. Commissioner of Income Tax (Appeals)

fell in error in allowing a claim arising from sham transactions.

the order of the ld. Commissioner of Income Tax (Appeals).

orders of the authorities below. Annexures A and B of the Assessment

Order depicts the repairs and maintenance expenditure booked by the

assessee under the head repairs and maintenance in its hostel and in

its head office. No doubt it is true that the repairs and maintenance

claimed at head office included therein expenditure for cleaning the

building, approach roads, maintenance of water supply, sanitary

arrangement, maintenance of treatment plant, painting, patch work,

pavement flooring, repairs of false ceiling, furniture and also supply of

items like cots, staff table, fabrication and fixing of aluminum

partition. These work which were done by M/s. SRMEEC was for the

various institutions run by the assessee. Major part of the work was

incurred for the hostel. Ld. AO had considered invoices raised by M/s.

SRMEEC for the above work to be bogus stating that the latter was a

related party. Section 13 of the Act denies exemption under Section

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11 & 12 of the Act, to a trust if any income thereof directly or

indirectly benefits any person referred in Sub Section (3) of the said

Section. Sub Section (3) of Section 13 is reproduced hereunder:-

‘’(3) The persons referred to in clause (c) of sub- section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution ; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds fifty thousand rupees ; (c) where such author, founder or person is a Hindu undivided family, a member of the family ; (cc) any trustee of the trust or manager (by whatever name called) of the institution ; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid ; (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest’’.

In our opinion the ld. Assessing Officer before coming to a conclusion

that M/s. SRMEEC was a related party, should have pointed the

provision, under which it could be considered so. Explanation 3 to

Section 13 of the Act sets out the conditions under which a person

can be deemed to have substantial interest in a concern. Said

Explanation 3 is also reproduced hereunder:-

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‘’Explanation 3.— For the purposes of this section, a person shall be deemed to have a substantial interest in a concern,-

(i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than twenty per cent. of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of the other persons referred to in sub-section (3) ;

(ii) in the case of any other concern, if such person is entitled, or such person and one or more of the other persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent. of the profits of such concern’’.

Ld. Assessing Officer has not established how the above the

explanation applied to M/s. SRMEEC for it to be considered a related

party. Authorised Representative of M/s. SRMEEC had appeared

before the ld. Assessing Officer and produced the invoices raised by

them on the assessee for repairs and maintenance. Ld. Assessing

Officer made a verification of invoices and found it to be the same as

those produced by the assessee. In such a situation, in our opinion

there was nothing which would show that claim of repairs and

maintenance made by the assessee through books of its head office,

based on invoices raised by the M/s. SRMEEC was sham. Even the bills

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of quantity were produced by M/s. SRMEEC, and no entries therein

were found to be artificial or inflated.

that there could have been duplication of expenditure in the books of

the assessee, in our opinion, nothing stopped the assessee from

carrying out the repairs and maintenance of various institutions run by

it, from the head office, though some part of such repairs were done

directly by such institutions. It is not the case of the Revenue that the

same bills were accounted by the assessee both in the books of the

hostel as well as in the books of the head office. Just because a part

of the expenditure for repairs and maintenance was met by the head

office and a part met by the institutions run by the assessee, would

not ipso facto mean that there were duplication of expenditure as

such. Bills produced by the assessee in support of its claim for repairs

and maintenance for expenditure booked in hostel were verified by the

ld. Assessing Officer and were found satisfactory. Relevant para of the

assessment order is reproduced hereunder:-

‘’The bills/ invoices/ vouchers relevant to ‘’Hostels’’ and ‘’Others’’ were completely submitted by the assessee trust for verification. The same were verified and found that the said expenses were incurred for repairs & maintenance relevant to college (institution) and hostel buildings through various parties’’.

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There is no finding by the ld. Assessing Officer, that there were any

duplication in the bills raised by the M/s. SRMEEC. In such a situation,

we are of the opinion that ld. Commissioner of Income Tax (Appeals)

was justified in deleting the disallowance made by the ld. Assessing

Officer. We do not find any reason to interfere with the order of the ld.

Commissioner of Income Tax (Appeals). Ground No. 2 raised by the

Revenue is dismissed.

Commissioner of Income Tax (Appeals) directed the AO to allow

depreciation of �24,00,58,318/- on cost of assets which were earlier

claimed as application of income.

assessee by virtue of judgment of Hon’ble Apex Court in the case of

CIT vs. Rajasthan and Gujarati Charitable Foundation Poona (Civil

Appeal No.7186 of 2014, dated 13.12.2017). Their lordships had held

as under:-

‘’These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as 'Act'). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that

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once the capital expenditure is treated as application of income for C.A. No. 7186/ 2014 etc. charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in 'Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)' [(2003) 131 Taxman 386 (Bombay)].In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner: 3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property.During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of C.A. No. 7186/ 2014 etc. computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of

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building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department. 4. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had C.A. No. 7186/ 2014 etc. been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full

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expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department.”

After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in 'Lissie Medical Institutions v. Commissioner of Income Tax'. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well. For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters‘’. The view taken by the ld. Commissioner of Income Tax (Appeals)

being in consonance with the judgment of Hon’ble Apex Court, we are

not inclined to interfere with the order of the ld. Commissioner of

Income Tax (Appeals). Ground No.3 of the Revenue stands dismissed.

ITA No. 440/2017 :- 15 -: & CO 48/2017 14. Cross objection of the assessee supports the order of the ld. Commissioner of Income Tax (Appeals) in so far as it went in its favour.

Order pronounced on Thursday, the 5th day of April, 2018, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (अ�ाहम पी. जॉज�) (N.R.S. GANESAN) (ABRAHAM P. GEORGE) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER चे�नई/Chennai �दनांक/Dated:5th April, 2018. KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF