ASST.C.I.T., MANGALORE vs. VISHWACHETAN FOUNDATION, HUBLI

Per Shri Vijay Pal Rao, J.M. : This appeal by the revenue is directed against the order dt.27.2.2015

of the Commissioner of Income Tax (Appeals) for the Assessment Year

2010-11.

2 ITA No.1040/Bang/2015 “ (i) Whether on facts and in circumstances of the case, the Hon'ble CIT(A) was correct in not following the decision of the Hon'ble Supreme Court in the case of Escorts Limited & another vs. Union of India 199 ITR 43 wherein the Hon'ble Supreme Court has categorically held when deduction U / s.35(2)(iv) is allowed in respect of capital expenditure on scientific research no depreciation is allowable U / s 32 on the same asset and in the absence of clear statutory indication to the contrary, the statute should not be read as to permit an assessee two deductions? (ii) Whether the Hon’ble ClT(A) was correct in not following the decision of Kerala High Court in the case of Lissie Medical Institutions Vs CIT, Kochi in ITA No.42 of 2011 wherein the other judicial pronouncements by various high courts were held to be not applicable holding that the issue of double deduction was not before them? iii) Whether the !TAT was right in not appreciating the intention of legislature not to allow double deduction I at any point of time and therefore, for bringing clarity on the issue, the law has been amended w.e.f. AY 2015·16. iv) Whether the Hon'ble CIT(A) was correct in holding that depreciation is allowable in cases of trust on normal commercial principles, where the assessment of trusts are covered u/s 11, 12 and 13 of the I T Act, 1961 and the provisions of section 28 to 44 of the Act are not applicable to charitable trust as only application of income during the year is allowable U/s 11 of the Act and depreciation being a notional expenditure is not allowable. v) Whether the Hon'ble CIT(AI was correct in holding that the commercial principles are applicable and depreciation is allowable to charitable trust, when in cases of trust which are covered by provisions of section 11,12, and 13, only application of income during the year is allowable U/s 11 of the Act and depreciation being a notional expenditure is not allowable.

3 ITA No.1040/Bang/2015 vi) Whether the Hon'ble CIT(A) was correct in allowing the ground of the assessee and dismissing the disallowance made by the AO in respect of the interest free loans made by the trust to another trust having common trustees, which is in violation of Sec. 13(1)(e) of the I T Act, 1961. vii) Whether the CIT(A) was correct in deleting the addition w.r.t. disallowance of loan treating the same as donations, when the AO had already allowed the donation claim of Rs.69 lakhs and only added Rs.3S,3B,144/- which is the loan paid to Vidyabharati Foundation without charging any interest, which is in violation of Sec. 13(2)(a) of the I T Act. viii) The appellant craves leave to add, alter or amend all or any of the grounds of appeal before or at the time of hearing of the appeal.”

learned Departmental Representative and considered the relevant

material on record. The assessee is a charitable trust and running

educational institutions. During the assessment proceedings the

Assessing Officer noted that the assessee has claimed depreciation of

Rs.45,36,382. The Assessing Officer disallowed the claim of the assessee

on the ground that the investment in the asset on which the depreciation

has been claimed is allowed as deduction being application of income

towards the objectives of the trust. Therefore the claim of the

depreciation would be double deduction which is not admissible. On

appeal, the CIT (Appeals) has allowed the claim of the assessee by

4 ITA No.1040/Bang/2015 following the various decisions including the decision of Hon'ble Bombay

High Court in the case of CIT Vs. Institute of Banking Personnel

Selections 264 ITR 110 (Bom) as well as the decision of Hon'ble

jurisdictional High Court in the case of CIT Vs. Society of the Sisters of St.

Anne 146 ITR 28. We find that this issue is now settled in favour of the

assessee by a series of decisions by the High Courts as well as this

Tribunal. In a recent decision in the case of M/s. Moogambigai

Charitable and Educational Trust Vs. Addl. DIT (Exemptions) in ITA

No.1224/Bang/2015 Dt.13.7.2016 the Tribunal held in para 11 as under :

“ 11. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that this issue has been considered by this Tribunal in a series of decisions. In the case of M/s. CMR Janardhana Trust (supra), the Tribunal has again considered and decided this issue in paras 15 to 17 as under :

“ 15. We have heard the submissions of the ld. DR, who relied on the order of CIT(A) and the decision of the Hon’ble Delhi High Court in the case of DIT(E) Vs. Charanjiv Charitable Trust (2014) 43 taxmann.com 300 (Delhi). We have considered the order of the CIT(A). Identical issue came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union (2013) 60 SOT 260 Bangalore ITAT, wherein similar issue has been dealt with by this Tribunal. In the aforesaid case, the assessee claimed depreciation and the AO denied depreciation on the ground that at the time of acquiring the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The AO took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of Hon'ble Supreme Court in Escorts Ltd. (supra). The CIT(A), however, allowed the claim of assessee. On further appeal by the Revenue, the Tribunal held as follows:-

5 ITA No.1040/Bang/2015 “20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable instituitions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon’ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H) , following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon’ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon’ble Court in the aforesaid decisions.

6 ITA No.1040/Bang/2015 Karnataka High Court in the case of Society of Sisters of Anne (supra). The interpretation to the contrary given by the CIT(A) on the decision of the Hon’ble Karnataka High Court in the case of Society of Sisters of Anne (supra) cannot therefore be accepted. We may also add that the legal position has since been amended by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f. 1.4.2015 by insertion of subsection (6) to section 11 of the Act, which 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.” 17. As already stated, the aforesaid amendment is prospective and will apply only from A.Y. 2015-16. In view of the above legal position, we are of the view that the order of the CIT(A) has to be reversed. Consequently grounds No.4 & 5 raised by the Assessee are allowed.” There is no dispute that the amendment of section 11(6) of the Act by the Finance Act, 2014 is prospective w.e.f. 1.4.2015 and therefore the said amended provision is not applicable for the assessment year under consideration. Following the earlier decisions of this Tribunal, we decide this issue in favour of the assessee and against the revenue.”

In view of the above decision, we do not find any error or illegality in the

order of the CIT (Appeals).

charitable trust. The Assessing Officer has noted that the assessee has

made a donation of Rs.35,38,144 to Vidya Bharti Foundation wherein

one of the trustee namely B.N.Mahendrakal of the assessee is also a

trustee and one of the trustee of Vidya Bharati Foundation is also author

of assessee-trust. Thus the ld. Assessing Officer has concluded that the

interest free loan given to the Vidya Bharati Foundation amounts to

7 ITA No.1040/Bang/2015 indirect benefit to the trustee of the assessee who is also trustee in the

Vidya Bharati Foundation as well as the trustee who is an author of the

assessee-trust. Accordingly, the Assessing Officer applied the provisions

of section 13(1)(c) of the Act and assessed the said amount to tax at

maximum rate provided under the Act. On appeal, the CIT (Appeals) has

held that giving donation or contribution to other education trust or

public charitable institution which are run on non-profit business and

achieve the objective of the trust similar to or consistent with the

assessee's trust for fulfilling the objectives of the assessee-trust and

therefore no addition can be made in respect of the amount advanced to

the Vidya Bharati Foundation without charging interest.

learned Departmental Representative and considered the relevant

material on record. The learned Departmental Representative has

placed reliance on the provisions of section 13(1)(c) and 13(3) of the Act

wherein the persons specified as directly or indirectly benefitted by use

or applied of the income or any property of the trust or institution. The

learned Departmental Representative has submitted that there is no

8 ITA No.1040/Bang/2015 dispute that one of the trustee of both the trusts is common and further

the trustee of the Vidya Bharati Foundation is the author of the assessee

trust therefore the amount given to the Vidya Bharati Foundation

without charging interest amounts to application of the income or

property of the trust directly or indirectly for the benefit of the trustee of

the assessee. He has relied upon the order of the Assessing Officer.

submitted that this amount was given to another trust which is

undisputedly is running educational institutions therefore the assessee

trust as well as Vidya Bharati Foundation are similar and therefore this

amount is applied by the assessee towards the objective of the assessee

trust. He has further submitted that even otherwise it cannot be

regarded as a direct or indirect benefit to the persons as specified under

section 13(3) of the Act as there is no benefit to the trustee directly or

indirectly because of this amount given to another trust. He has relied

upon the decision of the Hon'ble Delhi High Court in the case of DIT Vs.

Acme Education Society 326 ITR 146.

9 ITA No.1040/Bang/2015 8. We have considered the rival submissions as well as the relevant

material on record. There is no dispute that the loan was given by the

assessee trust to another trust running and engaged in the similar

activity of educational institution. It is also not disputed that none of the

trustees of these two trusts is getting any benefit from the affairs of the

trust. Therefore providing the interest free loan/advance to another

trust cannot be regarded as applying the income or asset or property of

the trust for direct or indirect benefit of these trustees as alleged by the

Assessing Officer. As per the provisions of Section 13(1)(c)(ii) benefit of

section 11 is not available in respect of an income or any property of the

trust/institution which is used or applied directly or indirectly for the

benefit of any person referred to sub-section (3) of Section 13 of the Act.

For ready reference, we quote sub-section (3) of Section 13 as under :

“ 13(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;

10 ITA No.1040/Bang/2015 (e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest.”

Thus for attracting the provisions of section 13(1)(c)(ii), the beneficiary of

income or property has to be the author trust, any person who has made

substantial contribution to the trust in case HUF is the author of the

trust, a member of the family or any trustee of the trust or manager, any

relative of any such author, founder trustee or manager. Any concern in

which any of the persons referred in clause (a) to (d) has a substantial

interest. Thus in the case of the assessee, the interest free loan was

given to another trust and the common trustee have no substantial

interest in any of the trust. Therefore in the absence of any direct or

indirect benefit to the trustees or author of assessee trust or to the

trustees of the resident trust the provisions of section 13(1)(c) cannot be

attracted. The Hon'ble Delhi High Court while dealing with an identical

issue in case of DIT Vs. Acne Education Society (supra) in para 13 held as

under :

“ 13. In Baidya Nath Plastic Industries (P) Ltd. & Ors. vs. K.L. Anand, ITO (1998) 146 CTR (Del) 421 : (1998) 230 ITR 522 (Del) a learned Single Judge of this Court pointed out that the distinction between "loan" and "deposit" is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement, while in the case of the

11 ITA No.1040/Bang/2015 latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it.” In view of the above facts and circumstances of the case as well as the

decision of the Hon’ble Delhi High Court in the case of Acne Education

Society (supra), we do not find any error or illegality in the order of the

CIT (Appeals) on this issue.

Order pronounced in the open court on the 11th day of Aug., 2016.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member

*Reddy gp

Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.

By Order

Asst. Registrar, ITAT, Bangalore