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Income Tax Appellate Tribunal, C/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal is filed by the assessee, aggrieved by the order of
the Learned Commissioner of Income Tax(A)-17, Chennai dated
10.03.2017 pertaining to assessment year 2012-13.
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The assessee raised the following grounds for adjudication.
The order of the Commissioner of Income Tax (Appeals) is erroneous, arbitrary and against the settled principles of law. 2. The Commissioner of Income Tax (Appeals) dismissed the appeal on an assumption that the Appellant claimed the cost of capital assets as application of income and also claimed depreciation which would amount to double deduction. 3. The Commissioner of Income Tax (Appeals) ought to have appreciated that the assessing authority allowed the depreciation in respect of addition of capital assets without considering the rate of appreciation applicable to a Trust that too on a wrong assumption that the addition was made less than 180 days. However, disallowed the claim of depreciation in respect of original cost of capital assets. 4. The Commissioner of Income Tax (Appeals) erred in not considering the factual aspect of the transaction. The procedure adopted by the Appellant is as under; (a) The Appellant for accounting purpose claimed depreciation as per the rate applicable to them being a charitable trust. (b) While calculating the application of income the entire depreciation calculated is deducted from the total expenditure. (c) In other words, the Appellant has not considered the element of depreciation for the purpose of application of income. In fact, the Appellant has taken only the cost of capital assets as application of income without depreciation. (d) The question of double deduction, if at all legally applicable, shall not apply since while calculating application of income, the element of depreciation deducted from the expenditure. 5. The Commissioner of Income Tax (Appeals) has not considered this fact and proceeded to decide the issue relying upon various decisions of the
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Tribunal wherein it was held that the assessee is not entitled to claim depreciation and the cost of capital goods as application of income. 6. The Commissioner of Income Tax (Appeals) ought to have appreciated the fact that the disallowance will result in excess income since the Appellant has already deducted the depreciation from the expenditure while calculating the application of income. Without prejudice to our submission that there is no double deduction, the Appellant had already deduction depreciation from the expenditure for the purpose of application of income, the Appellant is entitled for depreciation for the following grounds: 7. The Commissioner of Income Tax (Appeals) failed to appreciate that the scheme of taxation of the charitable trust are quite different from that of other entities. 8. The Commissioner of Income Tax (Appeals) failed to appreciate that the concept of “total income”, is not applicable in case of charitable / religious trusts. From the provisions of section 11(1 )(a) of the Act, it may be seen that the term used therein is “income” and not “total income”, which is applicable for the purposes of taxation of other taxable entities under the Act. 9. The Commissioner of Income Tax (Appeals) failed to note that the Board Circular No.5-P(LXX-6) of 1968, dated 19.6.1968 has clarified as under: The business income of the trust, as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof The excess accumulation, if any, will become taxable under section 11(1). Para (2) of the Circular assigns to the word “income “, used in section 11(1)(a), the same meaning as has been specifically assigned to the
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expression “total income “, vide section 2(45) of the Act. Further, in para (4) of the aforesaid Circular, it has been laid down that in case of a charitable / religious trust, understood in its commercial sense, i.e., book income. Thereafter, in para (5) of the aforesaid Circular, it has been laid down that for the purposes of section 11(1), the “income” of the trust will be the business income of the trust, as disclosed in the accounts plus its other income from house property, interest, capital gains or other sources, etc. In the light of the aforesaid Circular of the CBDT, the income of a charitable / religious trust has to be understood in its commercial sense and the concept of “commercial income” necessarily envisages deduction of depreciation on the assets of the trust. 10. The Commissioner of Income Tax (Appeals) failed to appreciate that in the case of CIT Vs. Market Committee, Pipli (2011) 330 ITR 16 held that the income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. There was no double deduction claimed by the assessee. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11. 11. The Commissioner of Income Tax (Appeals) failed to appreciate that in the case of CIT Vs. Institute of Banking (2003) 264 ITR 110 High Court held that the Tribunal was right in law in directing the AO to allow depreciation on the assets, the cost of which had been fully allowed as application of income under section 11 in the past years. 12. The Commissioner of Income Tax (Appeals) failed to appreciate that in the case of CIT Vs Society of the Sisters of SL Anne (1984) 146 ITR 28 It was held in this case that depreciation on the assets of the trust is a necessary deduction in order to arrive at the income available for
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application to charitable and religious purposes. If depreciation is not allowed as a necessary deduction for computing the income of a charitable institution, then there can be no way to preserve the corpus of the trust for deriving the income. Therefore, the amount of depreciation debited to the accounts of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes. 13. The Commissioner of Income Tax (Appeals) failed to appreciate that in the case of CIT Vs. Tiny Torts Education Society (2011) 330 ITR 21 held that the assessee was not claiming double deduction on account of depreciation. The income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11. 14. The Commissioner of Income Tax (Appeals) ought to have noted that the Assessment Year involved is 2012-13. Only Finance Act (No.2) 2014 had amended the law to provide that depreciation cannot be claimed. The amendment to Section 11 and Section 10(23C) by inserting sub-section 6 is only with effect from Assessment Year 2015-16. This amendment is prospective and hence the denial of benefit is not justified for the earlier years. 15. T The Commissioner of Income Tax (Appeals) failed to appreciate that the additions to fixed assets of Rs.5,0l,051/- as stated in para 2.4 of the order is incorrect as the total additions during the year was Rs.5,25,471/- 16. The Commissioner of Income Tax (Appeals) erred in allowing only 50% of the depreciation assuming that the assets were used for less than 1
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80days which is not correct. The Appellant had put to use the assets for the entire year.
I have heard both the parties and perused the material on
record. It is noticed that similar issue came for consideration before
the jurisdictional High Court in the case of DIT(Exemption)-III,
Chennai Vs. M/s.Medical Trust of the Seventh Day Adventists,
Chennai in TCA No.949 of 2015 and 771 of 2016 –Assessee’s appeal
& Tax case (Appeal) No.844 of 2010 –Departmental Appeal vide
order dated 08.08.2017 wherein it was held that:-
“34.The short point that arises for decision is whether the provisions of Section 11(6) inserted by Finance (No.2) Act, 2014 w.e.f. 1.4.2015, operate prospectively with effect from assessment year 2015-16 or retrospectively with respect to earlier years as well. In this regard, M/s.Pushya Sitaraman, learned senior counsel and other learned counsels appearing for the assesses refer to the provisions of Circular 1 of 2015 dated 21.1.2015 (371 ITR (St) 0022) containing explanatory notes to the provisions of Finance (No 2) Act, 2014 The relevant portion of the circular reads as follows:
7 3. Several issues had arisen in respect of the application of exemption regime to trusts or institutions in respect of which clarity in law was required. 7.4 The first issue was regarding the interplay of the general provision of exemptions which are contained in section 10 of the Income-tax Act vis-a-vis the specific and special exemption regime
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provided in sections 11 to 13 of the said Act. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilized for the object or purpose for which the institution or trust has been established. In many cases it had been noted that trusts or institutions which are registered and have been availing benefits of the exemption regime to not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, a claim of exemption under general provisions of section 10 in respect of such Income is preferred and tax on such Income is avoided. This defeats the very objective and purpose of placing the conditions of application of Income, etc., in respect of income derived from property held under trust in the first place. 7.4.1 Sections 11,12 and 13 of the income-tax Act are special provisions governing institutions which are being given benefit of tax exemption. It is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigation. … 7.6 Applicability. – These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-2016 and subsequent assessment years.
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Para 7.6 of the Circular states that the amendment would apply to assessment year 2015-16 and subsequent assessment years. Reliance was placed onthejudgment of the Supreme Court in CIT vs.AlomExtrusions Ltd., (2009) and CIT Vs. Vatika Townships (367 1TR 466) for the proposition that an amendment that increases the liability of an assessee is liable to be applied only prospectively. Mr. Narayanaswamy would object stating that the amendment had been inserted to a correct an existing anomaly and thus was clearly clarificatory, and consequently retrospective in operation.”
We do not agree with the Revenue. The amendment, inserted specifically with effect from Assessment Year 2015-2016 seeks to disturb a vested right that has accrued to the assessee. The amendment does not purport to be clarificatory, on the other hand the Explanatory Memorandum makes it applicable only w.e.f. A Y 2015-16 and application of the amendment retrospectively would—certainly lead to a great deal of hardship to the assessee. We are thus of the view that the provisions of section 11(6) of the Act inserted with effect from 1.4.2015 shall operate prospectively with respect to assessment year 2015-2016 only.”
In view of the above judgement of jurisdictional High Court,
we are of the opinion that the lower authorities is not justified in
disallowing the claim of depreciation as application of income while
granting exemption u/s.11 of the Act and it cannot be
said that when the expenditure is allowed in its entirety on the
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acquisition of the fixed assets as application, the granting of depreciation as an application while allowing exemption u/s.11 of the Act, will not amount to double deduction. Hence, the grounds Nos. 2 to 6 of the appeals raised by the assessee are allowed. 6. Since the main grounds Nos. 2 to 6 of the appeals of the assessee are allowed, the other grounds Nos.7 to 16 raised by assessee in this appeal without prejudice to the ground Nos.2 to 6 does not require separate adjudication. 7. In the result, the appeal of the assessee is allowed. Order pronounced in the open court after conclusion of hearing on 31st October, 2017. Sd/- (चं� पूजार�) (CHANDRA POOJARI) लेखा सद�य /ACCOUNTANT MEMBER
Chennai, Dated the 31st October, 2017. K s sundaram. 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