THE COMMISSIONER OF vs. THE KARNATAKA STATE

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 1 - IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 27TH DAY OF SEPTEMBER, 2018

PRESENT

HON’BLE MR.JUSTICE DINESH MAHESHWARI, CHIEF JUSTICE AND HON’BLE MR.JUSTICE S.G.PANDIT

I.T.A. NO.106 OF 2016 AND I.T.A. NO.107 OF 2016

IN I.T.A. NO.106 OF 2016:

BETWEEN:

AND:

THE KARNATAKA STATE CRICKET ASSOCIATION CHINNASWAMY STADIUM M.G.ROAD BANGALORE-560 001 PAN NO.AAATT2540E

… RESPONDENT (BY SRI A.SHANKAR, ADVOCATE)

THIS ITA IS FILED UNDER SECTION 260-A OF INCOME- TAX ACT, 1961, PRAYING TO DECIDE THE FOREGOING

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 2 - QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 29.05.2015 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN ITA NO.71/BANG/2015 FOR A.Y. 2008-09.

IN I.T.A. NO.107 OF 2016: BETWEEN:

AND:

THE KARNATAKA STATE CRICKET ASSOCIATION CHINNASWAMY STADIUM M.G.ROAD BANGALORE-560 001 PAN NO.AAATT2540E

… RESPONDENT (BY SRI A.SHANKAR, ADVOCATE)

THIS ITA IS FILED UNDER SECTION 260-A OF INCOME- TAX ACT, 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 29.05.2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN ITA NO.72/BANG/2015 FOR A.Y. 2009-10.

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 3 - THESE ITAs COMING ON FOR ADMISSION, S.G.PANDIT J., DELIVERED THE FOLLOWING:

COMMON JUDGMENT

As the relief sought for and the facts and questions of law to be decided are common, both these appeals are taken up together for disposal by this common judgment.

The Revenue is in appeal, challenging the orders dated 29.05.2015 in ITA Nos.71 & 72/Bang/2015 for the assessment year 2008-2009 and 2009-2010 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bangalore (hereinafter referred to as ‘the Tribunal’ for short), allowing the benefit of depreciation and accumulation of income to the respondent.

The respondent-assessee, Karnataka State Cricket Association, registered as a Trust under Section 12-A of the Income-Tax Act, 1961 (‘the Act’ for brevity), filed return of income for the assessment years 2008-2009 declaring a surplus income; and for the assessment year 2009-2010 declaring the taxable income as NIL after accumulating income under Section 11(2) of the Act. The return was processed under Section 143(1) and later on, the case was

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- 4 - selected for scrutiny under Section 143(2) of the Act, for both the assessment years 2008-2009 and 2009-2010. The respondent-assessee made available necessary information before the Assessing Officer. The Assessing Officer, based on the material on record, disallowed the claim of depreciation, as per the provisions of Section 11 of the Act. Further, he held that claim of depreciation amounted to double deduction, as the respondent-Trust had availed 100% exemption of Capital Expenditure in the previous year as application of income. Further, more specifically for the assessment year 2009-10, the Assessing Officer also held that the respondent-Trust is not entitled for the benefit of accumulation of income under Section 11(2) of the Act and the same was brought to tax, even though the respondent- Trust had filed Form No.10 towards the utilization of surplus funds towards achieving the primary object of the respondent- Trust. The assessing officer passed the order dated 27.12.2010 in respect of assessment year 2008-2009 and order dated 09.12.2011 in respect of assessment year 2009- 2010.

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- 5 - Aggrieved by the said orders, the respondent-Trust preferred appeals before the Commissioner of Income Tax (Appeals), Mysore (hereinafter referred to as ‘the Appellate Authority’ for short) in ITA No.267/Trust/CIT(A) V/10-11 and ITA No.838/Trust/CIT(A) V/11-12, contending that under Section 11(1) of the Act, depreciation is allowable as application of income. Further relying upon the Finance (No.2) Act, 2014, it was contended in the appeals that sub- Section (6) was inserted to Section 11 of the Act, wherein from the assessment year 2015-2016, the depreciation cannot be claimed as an application of income under Section 11 of the Act, in case, if the same was claimed in the earlier years. Moreover, specifically for assessment year 2009-10, the respondent-Trust contended before the Appellate Authority that it is entitled for claim accumulation of income under Section 11(2) of the Act as made in Form No.10. The Appellate Authority, on consideration of the appeals, passed two separate orders dated 15.10.2014 and 15.12.2014, and held that the respondent-Trust is entitled for benefit of depreciation and allowed the claim of respondent-Trust for

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 6 - accumulation of surplus income under Section 11(2) of the Act.

Aggrieved by the aforesaid orders of the Appellate Authority, in respect of assessment years 2008-2009 and 2009-2010 respectively, the Revenue filed appeals before the Income Tax Appellate Tribunal, ‘B’ Bench Bangalore in respect of allowing depreciation on the assets in ITA No.71/Bang/2015 and in respect of allowing claim for accumulation of income under Section 11(2) of the Act along with the similar issue concerning depreciation, but for assessment year 2009-10, in ITA No.72/Bang/2015. The Tribunal, on consideration of the appeals, dismissed the appeals filed by the Revenue by its common order dated 29.05.2015.

The Revenue is before this Court in ITA No.106/2016 against the order passed in ITA No.71/Bang/2015 dated 29.05.2015 insofar as allowing the benefit of depreciation, on the ground that the assessing officer had rightly disallowed the depreciation claimed by the assessee on the ground that the assessee had already claimed depreciation in revenue

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- 7 - expenditure and also as application of income in the year of investment itself and, therefore, allowing depreciation on the same assets would amount to double deduction.

The Revenue is also before this Court in the connected appeal i.e., ITA No.107/2016 against the order passed in ITA No.72/Bang/2015 dated 29.05.2015 insofar as allowing depreciation, being similar to the issue in the first appeal, but for assessment year 2009-10; and for the accumulation of income under Section 11(2) of the Act contending that the Tribunal without considering the fact that in the original Form No.10, the assessee had failed to indicate the specific purposes for which income was accumulated; though it is mandatory to file Form No.10 before completing scrutiny assessment by Assessing Authority for claiming accumulation of income under Section 11(2) of the Act. Further it is contended that the Assessing Authority had rightly disallowed the accumulation of income claimed by the respondent-Trust as the respondent-assessee had filed revised Form No.10 subsequently, which do not satisfy the requirements of law.

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 8 -

The present appeals are filed suggesting several substantial questions of law. But, we are clearly of the view that the issues involved in the appeals i.e., allowing of depreciation to a Trust and accumulation of income under Section 11(2) of the Act stand settled by the decision of the Hon'ble Supreme Court reported in (2018) 402 ITR 441 (SC) (COMMISSIONER OF INCOME-TAX vs. RAJASTHAN AND GUJARATI CHARITABLE FOUNDATION) and the decision of this Court in ITA No.551/2017 decided on 14.08.2018.

Insofar as depreciation allowable to a Trust, the Hon'ble Supreme Court in the decision cited supra, considered the question as to “Whether on the facts and in the circumstances of the case and in law, the Income-Tax Appellate Tribunal is justified in holding that the depreciation in respect of cost of the assets allowed to the assessee as expenditure is allowable as it gives rise to double deduction though such deduction is not specifically provided in the Income-tax Act, 1961”; and while answering the said question of law, held as follows:

I.T.A.No.106/2016 & I.T.A.No.107/2016

- 9 - “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-assesses. It is a matter of record that all the assesses are charitable institutions registered under section 12A of the Income-tax Act, 1961 (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 once the capital expenditure is treated as application of income for charitable purposes, the assesses 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 Commissioner of Income- tax(Appeals) had affirmed the view, but the Income-tax Appellate Tribunal reversed the same and the High Courts have accepted the decision of the Income-tax Appellate Tribunal 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 CIT v. Institute of Banking [2003] 131 Taxman 386 (Bom). In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner:

"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

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- 10 - application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain [1994] Tax LR 1084 (Bom) 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 at 2 1/2 per cent. and they also claimed depreciation on furniture at 5 per cent. 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 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 shall be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for the 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

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- 11 - 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 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 Hig Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department.

Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of DIT (Exemption) v. Framjee Cawasjee Institute (1993) 109 CTR (Bom) 463. In that case, the facts were as follows: The assessee was a 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 Income- tax Officer held that depreciation could not be taken into account because, full capital expenditure had 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 Income-tax Officer stated that full expenditure had

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- 12 - 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.”

The aforesaid decision of the Hon'ble Supreme Court has been followed by this Court in I.T.A.No.551/2017 decided on 14.08.2018. Thus, when the issue regarding the claim of depreciation in the hands of the Trust registered under Section 12-A of the Act is no more res integra, no substantial question of law in this regard would arise in these appeals.

Insofar as question of carry forward of income or loss of Charitable Trust, this Court, in ITA No.551/2017 disposed of on 14-08-2018 has held as under:

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- 13 - "17. In our opinion, the matter is squarely covered by a decision of the cognate Bench of this Court in the case of CIT vs. Society of the Sisters of St. Anne (1984) 16 Taxman 400 (Kar.) and (1984) 146 ITR 28, wherein the congnate Bench of this Court held that even the depreciation not involving any cash outflow is also in the character of expenditure and therefore such depreciation is nothing but decrease in the value of property through wear and tear, deterioration or obsolescence and the allowance made for that purpose in the books of accounts were deemed to be the application of funds for the purpose of Sec. 11 of the Act. The relevant portion of the said judgment is also quoted below for ready reference:

“11. Mr. Srinivasan, however, urged that there are enough indications in Section 11 to exclude the mercantile system of accounting. The learned counsel relied upon sections 11(1)(a) and 11(4) in support of his contention. We do not think that there is anything in these sub-sections to support the contention of Mr. Srinivasan. Explanation to section 11(1)(a) on the contrary takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not only be on cash basis. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the Act in respect of business undertaking.

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- 14 - no way to preserve the corpus of the trust for deriving the income. The Board also appears to have understood the `income’ under section 11(1) in its commercial sense. The relevant portion of the Circular No.5XX-6 of 1968, dated 19-6-1968 (See Taxmann’s Direct Taxes Circulars, Vol. 1, 1980 edn. P.85) reads:

“Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word `income’ should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should not be less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).”

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- 15 - purposes of determining the income derived from the property held in trust.”

“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 Inome-tax Act, 1961. Income of a charitable trust derived from building, plant and machinery and furniture is liable to be computed in a 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 Act providing for depreciation, for

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- 16 - 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 the gross income of the trust.

Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied, then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a).”

In view of the controversy covered by the above decisions of this Court, we are of the opinion that the substantial questions of law as suggested by the appellant do not now arise for our further consideration in the present appeals.

The appeal filed by the Revenue is accordingly disposed of in terms of the aforesaid judgments of this Court. No costs."

In view of the above decisions, none of the substantial questions of law suggested by the appellants would

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- 17 - survive for consideration and, according1ly, the appeals filed by the revenue are dismissed .

Sd/- CHIEF JUSTICE

Sd/- JUDGE

mpk/-* CT:SK