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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’ SMC
PER SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
This appeal of the assessee is directed against the order of Commissioner of Income-tax (Appeals) – 14, Bangalore dated 12.06.2015 for the assessment year 2009-10.
The assessee, Sanghamithra Rural Financial Services, is a trust registered u/s 25 of the Companies Act, 1956 and also registered u/s. 12A of the Income-tax Act, 1961 [“the Act”]. It is engaged in providing financing through interest based credit to the disadvantaged sections of the society based on the concept of ‘Self Help Groups’. It is registered under the Foreign Contribution Regulation Act, 1976 to receive donation from abroad.
During the course of scrutiny assessment, the Assessing Officer noted that the assessee had claimed an amount of Rs.2,35,69,115 as application of income exempt u/s. 11 of the Act, inclusive of depreciation claim of Rs.3,27,216. The AO held that depreciation is not allowable as application as it is only a notional expenditure. He further observed that no income/receipt is actually spent or utilized or applied and hence cannot be considered as application of income. The assessee had claimed a 100% exemption of capital expenditure in the preceding assessment year and the claim of depreciation on the already exempted capital assets amounts to double deduction. Relying on the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. v.
UOI (1993) 199 ITR 43 (SC), the AO disallowed the claim of depreciation of Rs.3,27,216 as non-application u/s 11.
Before the CIT(Appeals), the assessee relied on the decision of the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Society of Sisters of St. Anne, 146 ITR 28, which was distinguished by the ld. CIT(Appeals). He placed reliance upon the decision of Escorts Ltd. (supra) and upheld the action of the AO on the disallowance of depreciation.
The assessee is in appeal before me and has raised ground Nos.3 & 4. It is submitted that the decision rendered in the case of Escorts Ltd. (supra) related to the claim of depreciation in respect of scientific research and a claim u/s 35(2)(iv) of the IT Act. It was further submitted that the said decision has no application to the facts of the assessee’s case. The ld. counsel for the assessee submitted that the following decisions are directly applicable to charitable institutions: (i) 135 ITR 485 Madras (ii) (ii) 113 ITR 84 SC (iii) Karnataka High Court in the case of Society of the Sisters of St.
Anne (1984), 146 ITCL 28, & (iv) 36 ITCL 537, Delhi High Court.
The ld. counsel for the assessee further submitted that the Bangalore Tribunal has been consistently allowing deduction on depreciation and also additions to fixed assets in the year of purchase/use following the various High Court decisions including the Hon'ble jurisdictional High Court.
I have heard both the parties and perused the material on record. I find that the act of charity of the assessee is providing funds to the poorer sections of the society by way of loan. The income of the assessee is mainly by way of interest by using the funds of the trust.
The income of the trust is to be computed under the normal commercial principles. The coordinate Bench of this Tribunal in the case of DDIT v. Cutchi Memon Union (2013) 60 SOT 260, has held at para 20 as under:-
“20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, 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.
The issue raised by the revenue in the ground of appeal
is thus no longer res integra and has been decided by the Hon’ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR
16. (P&H). The Hon’ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon’ble Punjab & Haryana High Court made a reference to the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon’ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon’ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon’ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR
28. (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference. 22. Consequently, ground No.5 raised by the revenue is dismissed.”
Further, the coordinate Bench of the Tribunal in the case of Jyothi Charitable Trust in by order dated 14.08.2015 has held as under:-
“8. 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 sub-section (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.” 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 ground No.2 raised by the Assessee is allowed.”
Further, in the context of allowing depreciation in computing the income to be applied by a charitable institution, it has been held that depreciation is nothing but decrease in value of the asset of the trust due to wear and tear. If depreciation is not allowed as a deduction from income to be applied for charitable purposes, then there is no way to preserve the corpus of the trust from which the income of the trust is derived.
Respectfully following the decisions of the coordinate Bench of the Tribunal in the case of Cutchi Memon Union (supra) and Jyothi Charitable Trust (supra), I set aside the order of the CIT(Appeals) and allow ground Nos.3 & 4 raised by the assessee.
The next issue vide ground Nos.1 & 2 is regarding disallowance of bad debts written off treated as application of income. The assessee claimed bad debts written off amounting to Rs.13,33,370 as application of income. The AO was of the view that write off of bad debts does not amount to spending of income/receipts which is only notional application. He disallowed the same.
Before the CIT(Appeals), the assessee submitted that the main objectives of the assessee was to advance money to economically handicapped persons as a form of social service at low rates of interest so that the economically backward people could come up in life. In the course of such lending, it happens that the persons borrowing from the assessee fail to return the moneys advanced after making some efforts and when it is found that some sums are not recoverable, these sums are written off as not recoverable and claimed that as outgo and in this case as part of application of income. This system has been consistently followed year after year. In conformity with this system, as and when recovery takes place the sums recovered are taken as income and so it had in the past formed part and parcel of the application of income.
The CIT(A) has dismissed the claim of the assessee treating the bad debts written off as application of income, on the ground that such write off is notional and that there is no tangible out flow of funds for charitable objectives. He observed that the assessee has accepted the disallowance in the earlier years and hence cannot agitate the issue this year.
Aggrieved, the assessee is in appeal before me.
I have heard both the parties and perused the material on record. There is no concept of res judicata in the income tax assessments. If the claim of the assessee is otherwise allowable as per law, the claim cannot be rejected merely because of similar disallowances in the earlier years. I am of the view that the ratio of the coordinate Bench decision in the case of DDIT v. Cutchi Memon Union (2013) 60 SOT 260 applies with equal force to the present case for claim of deduction of bad debts written off. The income of the trust is mainly by utilizing the corpus funds of the trust and earning interest. When some of the amounts advanced by the trust is not recoverable, then the corpus of the trust gets diminished. To that extent, the trust is deprived of its capital to earn the income. Deduction of irrecoverable advances from income is nothing but recoupment of the corpus, instead of requiring the assessee to spend that amount of income for the objects of the trust in the current year. Therefore, I am of the opinion that in computing the income of the charitable institution, the irrecoverable debt should be reduced from the income which is required to be applied during the year. I direct accordingly. The appeal of the assessee on these grounds is allowed.
Ground No.5 raised by the assessee is that the CIT(A) erred in not considering the claim for allowing training and development expenditure directly debited to training fund as application of income.
Before the CIT(Appeals), the assessee vide additional written submissions (copy filed on record) submitted that training expenditure debited to training & development fund directly is claimed as application of funds u/s. 11, 12 & 13 and that the same has been wrongly added in the assessment order instead of deduction and there is no discussion in the assessment order to disallow such expenditure.
We find that the CIT(Appeals) has not given a finding on this issue.
We therefore remit this issue to the file of the Assessing Officer to examine the expenditure towards training & development and decide whether it would amount to application of found of the trust, after affording opportunity of being heard to the assessee.
In the result, the appeal by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 13th July, 2016.