ITO, BANGALORE vs. STRACEY MEMORIAL EDUCATIONAL SOCIETY, BANGALORE

Briefly facts of the case are as under: The respondent- assessee is a public charitable trust registered under the provisions of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] formed for the purpose of providing education. Return of income for the assessment year 2010-11 was filed on 28/07/2010. After processing the return of income under the provisions of section 143(1) of the Act, assessment was completed u/s 143(3) of the Act vide order dated 01/03/2013 at total income of Rs.21,89,190/-. While doing so, the AO has not allowed depreciation of Rs.19,97,523/- as application of income and after allowing accumulation at 15% of the gross receipts, determined total income at Rs.21,89,120/-. & 854/Bang/2016 Page 4 of 17 4. Being aggrieved, an appeal was filed before the CIT(A), who vide impugned order, had allowed depreciation as application of income following the ratio laid down by the jurisdictional High Court in the case of CIT vs.Society of the Sisters of St.Anne (146 ITR 28) and the decision of the Tribunal in the case of Jyothi Charitable Trust (60 taxmann.com 165)(Bang-Trib.). Repayment of hand loan of Rs.64,21,028/- and vehicle loan of Rs.9,07,657/- was allowed as application of income following the law laid down by the Hon’ble Karnataka High Court in the case of CIT vs. Janmabhoomi Press Trust (242 ITR 703) and Hon’ble Madras High Court in the case of DIT(E) vs. Govindu Naicker Estate (315 ITR 237).

Being aggrieved by this order, the revenue is in appeal before us in the present appeals.

Ground Nos.1 to 4 challenge the direction of the CIT(A) allowing depreciation as part of application of income of the trust. This issue is no more res integra as the Hon’ble jurisdictional High Court, in the case of CIT vs. Karnataka Reddy Janasangha (389 ITR 229)(Kar) considering several precedents on the issue, held that the same does not amount to double deduction and the same is allowable and the amended provisions of section 11(6) of the Act are prospective in nature and operative effective from 01/04/2015. The relevant paragraph of the judgment is reproduced below: & 854/Bang/2016 Page 5 of 17 “15. The question involved in this case is no more res integra. This question was considered by this Court as far back as in the year 1984, in the case of Society of the Sister's of St.Anne (supra) wherein the Division Bench of this Court has held thus: '9. It is clear from the above provisions that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression "total income" has been defined under s. 2(45) of the Act to mean "the 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) Commissioner of Income-tax, v. Framjee Cawasjee Institute, 109 CTR 463 [Guj.]; (2) Commissioner of Income-tax, v. Raipur Pallottine Society,. [1989] 180 ITR 579 [MP] & 854/Bang/2016 Page 6 of 17 (3) Commissioner of Income-tax, v. Seth Manilal Ranchoddas Vishram Bhavan Trust 198 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.)] (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 & 854/Bang/2016 Page 7 of 17 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 Limited (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 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 & 854/Bang/2016 Page 8 of 17 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.' 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 & 854/Bang/2016 Page 9 of 17 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, 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'. & 854/Bang/2016 Page 10 of 17 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 retrospectivity 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 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: & 854/Bang/2016 Page 11 of 17 (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. 27. In the result, all the appeals are dismissed." 5. In view of the above, as the questions are already covered by the decision of this Court as conceded by the learned Counsel for the appellants-Revenue, it cannot be said that any substantial question of law would arise for consideration.”

As regards other grounds of appeal, whether repayment of loan can form part of application of income of the trust, we do not find any quarrel on the proposition that repayment of loan constitutes part of application of income of the trust, as held by the Hon’ble jurisdictional High Court in the case of Janmabhoomi Press Trust (supra) wherein the Hon’ble jurisdictional High Court held as follows: & 854/Bang/2016 Page 12 of 17 "It is plain that when the assessee is a trust entitled to benefit under section 11 of the Income-tax Act, the only question that arises for consideration is whether that income or the accumulated income thereof is applied for charitable purpose. If investments have been made in the construction of a building which in turn would augment its income, it should also be held that the application of the funds is for the purpose of the trust. On this principle, we do not think there can be any quarrel. We are fortified in our view by the decision of the Kerala High Court in CIT v. St. George Forana Church [1988] 170 ITR 62, which in turn relied upon a decision of the Madras High Court in CIT v. Kannika Parameswari Devasthanam & Charities [1982] 133 ITR 779 . . . ." (p. 458)

In view of the above observation, the reference is answered in favour of the assessee and against the revenue and it is held that the Tribunal is right in holding that the repayment of debt incurred by the assessee for the construction of the commercial building taken up by the assessee for the purpose of augmenting its funds, should be treated as ‘application’ of the income of the assessee-trust for charitable purposes. ”

The revenue raised the following grounds of appeal:

Ground Nos.1 to 4 are with regard to allowability of depreciation as application of income. This issue has been dealt by us in the appeal for assessment year 2010-11 in wherein we had held that depreciation is allowable as application of income. Hence, following the law laid down by the jurisdictional High Court in the case of Karnataka Reddy Janasangha (supra), grounds of appeal No.1 to 4 are dismissed.

The other grounds of appeal relates to Whether accumulation of income should be on gross receipt or net income after deducting the expenditure, is covered by the decision of the Hon’ble Supreme Court in the case of CIT vs. Programme for Community Organisation (248 ITR 1)(SC) wherein it was held that 25% should be calculated on the gross receipts of income and not on the net income. Therefore, these grounds of appeal raised by the revenue are dismissed.

In the result, the appeal filed by the revenue for the assessment year 2011-12 is treated as partly allowed for statistical purposes.