PRARTHANA EDUCATION SOCIETY,BANGALORE vs. DY.DIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘B’ BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ITA No.730 (Bang)/2015 (Assessment year:2011-2012) PpppppppPrarthana Education Society 17/17A, Near Petrol Bunk, Kadirenahalli, Banashankari II Stage, Padmanabhanagar, Appellant Bangalore-560 070 PAN No.AAAAP2322D Vs The Deputy Director of Income-tax (Exemptns.) Circle-17(2), Bangal Bangalore Respondent

Date of hearing : 12-10-2015 Date of pronouncement : 16-10-2015

Appellant by Shri Shri Narayana Murthy, CA Dr. P.K.Srihari, Addl.CIT Respondent by O R D E R PER SHRI G. MANJUNATHA, AM :

This appeal filed by the assessee is directed against the order of

Commissioner of Income –tax (Appeals) -14, LTU Bangalore dated 23-02-

2015 for the A.Y.2011-12.

evolved from these grounds are that (i) Whether the CIT(A) is right in law

and facts of the case upholding the accumulation of income at 15% of net

income. (ii) Whether the CIT(A) is right in upholding the disallowance of

depreciation on assets, the cost of which is allowed as application of

income in earlier years. (iii) Whether the CIT(A) is right in confirming the

charging of interest u/s 234B & 234C.

ITA No.730(B)/2015] Page 2 of 16 3. The brief facts of the case are that the assessee is a education

Society, engaged in imparting education and registered u/s 12A and

recognised u/s 80G of the Income –tax Act, 1961, filed its return of

income for the A.Y. 2011-12 declaring total income of Rs. NIL. The case

was processed u/s 143(1). Subsequently, the case was selected for

scrutiny by issuing statutory notice u/s 143(2). In response to notices,

the AR of the assessee appeared and filed the details. The Assessing

Officer completed the assessment u/s 143(3) vide his order dated

30.01.2014 and determined total income of Rs. 1,31,19,459/-.

whether the CIT(A) is right in confirming the accumulation u/s 11(1)(a) at

15% of net income.

4.1. The brief facts relating to the issue is that the assessee has

filed its return of income declaring NIL income after claiming exemption

u/s 11 of the Income tax Act 1961. While filing the return of income, it

has considered the gross receipts/income from property held under trust

and claimed 15% accumulation from the gross income and spent the

remaining amount for the objects of the trust. During the assessment

proceedings u/s143, the AO allowed the accumulation u/s 11(1)(a) at

15% on net income (Excess of income over expenditure).

ITA No.730(B)/2015] Page 3 of 16 5. Aggrieved by the assessment order, the assessee preferred

an appeal before the CIT(A) and contended that the word ‘income’ in

section 11 refers to gross income/receipts and not the commercial

meaning of income, i.e. net income after all expenses. The assessee

further contended that it is enjoying the benefit of 12A exemption and

once, it is registered u/s 12A the whole of the income from property held

under trust is eligible for exemption after certain conditions set out in

section 11. In support of its contention it has relied upon the Hon’ble

Supreme Court judgment in the case of CIT. vs Programme for

Community Organisation, 248 ITR 1 (SC). The CIT(A) rejected the

assessee contentions and held that in the case of trusts, where income

generating activity are involved, then only net income after deducting all

revenue expenditure shall only be available for application of income.

5.1. At the time of hearing, the authorised representative

brought to our notice that the issue involved in this case is covered by the

decision of ITAT, Bangalore Bench in ITA No. 240/B/2015 and

241/B/2015 and furnished a copy of judgment which is marked as

annexure A in paper book page No. 18 to 28. He also drew our attention

to the Hon’ble Supreme Court judgment in the case of CIT. vs Programme

for Community Organisation, (2011) 248 ITR 1 (SC) and argued that the

issue is squarely covered by the Hon’ble Supreme Court judgment. On the

other hand, the DR heavily relied upon the order of CIT(A).

ITA No.730(B)/2015] Page 4 of 16 6. We have heard both the parties and perused the materials

available on record. We also considered the case laws relied upon by the

learned counsels. Admittedly, the assessee Society claiming the benefit of

exemption u/s 11 for the whole of income from property held under trust

subject to certain conditions, being 85% of the income should be applied

for the objects and remaining 15% can be set apart for future purposes

subject to certain conditions. There is no dispute regarding the objects of

the trust and genuineness of its activities but, the only dispute with

regard to accumulation income u/s 11(1)(a), whether it is on gross income

of the trust or net income (excess of income over expenditure). The AO

was of the opinion that income that is available for charitable trust for

application u/s 11 is the net income after all expenditure to earn income

and the CIT(A) was concurred with the AO stand. We have considered the

case laws cited by the assessee in the light of the facts of the present

case. The Hon’ble Supreme Court in the case of CIT. vs Programme for

Community Development Organisation, (2011) 248 ITR 1, while dealing

with the issue held as under:

“2. The question that really requires consideration is whether, for the purpose of s. 11(1)(a) of the IT Act, 1961, the amount for the grant of exemption of twenty-five per cent should be the income of the trust or it should be its total income as determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts : The assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the

ITA No.730(B)/2015] Page 5 of 16 assessee is entitled to accumulate twenty-five per cent of Rs. 2,57,376 as it contends, or twenty-five per cent of Rs. 87,010, as the Revenue appeared to contend.

Sec. 11(1)(a) reads thus :

"11. (1)(a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property." 3. Having regard to the plain language of the above provisions it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty-five per cent of Rs. 87,010/-”.

Tribunal in the case of Mary Immaculate Society vs. DDIT (E), in ITA No.

240 & 241/B/2015 and the Co-ordinate bench of this tribunal while

dealing with the issue is held as under.

“The issue to be decided is therefore as to whether for the purpose of computing accumulation of income of 15% under Sec.11(1)((a) of the Act, one has to take the gross receipts or gross receipts after expenditure for charitable purpose i.e., the net

ITA No.730(B)/2015] Page 6 of 16 receipts. This is issue is no longer res integra and has been decided by the Special Bench Mumbai in the case of Bai Sonabai Hirji Agiary Trust Vs. ITO, 93 ITD 0070 (SB). The facts in the aforesaid case were that the assessee was a public charitable trust enjoying exemption under s. 11 of the IT Act. As per the requirement of s. 11(1) of the IT Act, as it prevailed at that point of time, the assessee had to apply 75 per cent of its income for the objects and purposes of the trust and the assessee was permitted to accumulate or set apart up to 25 per cent of its income, which was subject to fulfillment of other conditions. While calculating the aforesaid 25 per cent, the important question which arose was as to whether for this purpose, the gross income earned by the assessee is relevant or the income as computed in accordance with the provisions of IT Act. In other words, whether outgoings from out of gross income which are in the nature of application of income, should be first deducted from the gross income and 25 per cent of only the remaining amount should be allowed to be accumulated or set apart. The Special Bench of the ITAT on the issue held as follows:-

“9. Coming to the merits of the issue, we are of the view that the same is clearly covered by the decision of the Hon’ble Supreme Court in the case of CIT vs. Programme for Community ITA Nos.240 & 241/Bang/2015 Page 9 of 11 Organization (supra). In the decision, their Lordships, after taking note of provisions of s. 11(1)(a), have held as under :

ITA No.730(B)/2015] Page 7 of 16 "Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty five per cent of Rs. 87,010. For the aforesaid reasons, the civil appeal is dismissed."

It is clear from the above that deduction of twenty-five per cent was held to be allowable not on total income as computed under the IT Act. Any amount or expenditure, which was application of income, is not to be considered for determining twenty five per cent to be accumulated. Their Lordships, as noted earlier, affirmed the decision of Kerala High Court in (1997) 141 CTR (Ker) 502 : (1997) 228 ITR 620 (Ker) (supra) wherein it is held as under :

"At the outset, the statutory language of s. 11(1)(a) of the IT Act, 1961, relates to the income derived by the trust from property. The trust is required to be wholly for charitable or religious purposes, and the income is expected to have relation to the extent to which such income is applied to such purposes in India. It is thereafter the statutory provision proceeds further that such income is not to be understood to be in excess of 25 per cent of the income from such properties. In

ITA No.730(B)/2015] Page 8 of 16 other words, the very language of the statutory provision under consideration sets apart 25 per cent of the income from the source of property with reference to the extent to which such income is applied for such purposes, charitable or religious. In other words, for the purpose of s. 11(1)(a) of the Act, the income in terms of relevance would be the income of the trust from and out of which 25 per cent is set apart in accordance with the spirit of the statutory provision."

This means that, when it is established that trust is entitled to full benefit of exemption under s. 11(1), the said trust is to get the benefit of twenty-five per cent and this twenty-five per cent has to be understood as income of the trust under the relevant head of s. 11(1). In other words, income that is not to be included for the purpose of computing the total income would be the amount expended for purposes of trust in India. Their Lordships in the above case have emphasized on the clear and unambiguous language of s. 11(1)(a) and decided the matter on the basis of the same. It has been held that as per the statutory language of the above section the income which is to be taken for purpose of accumulation is the income derived by the trust from property. If both the decisions are carefully read, it becomes evident that any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof and take into account 25 per cent of such income. Their Lordships

ITA No.730(B)/2015] Page 9 of 16 have pointed that the same has to be taken on "commercial" basis and not "total income" as computed under the IT Act. Their Lordships in the decided case rejected the contention of the Revenue that the sum of Rs 1,70,369 which was spent and applied by the assessee for charitable purposes was required to be excluded for purpose of taking amount to be accumulated.

Having regard to the clear pronouncement of their Lordships of the Supreme Court, it is difficult to accept that outgoings which are in the nature of application of income are to be excluded. The income available to the assessee before it was applied is directed to be taken and the same in the present case is Rs. 3,42,174. Twenty five per cent of the above income is to be allowed as a deduction. Similar view has also been taken by the Hon’ble Madhya Pradesh High Court in Parsi Zorastrian Anjuman Trust vs. CIT (supra). No reason whatsoever has been given by the Revenue authorities for deducting Rs. 2,17,126 in this case for purposes of s. 11(1)(a). The decision cited on behalf of the Revenue did not take into account the decision of the Supreme Court referred to above. The circular of CBDT has also been considered by the Hon’ble Kerala High Court in its decision referred to above. Accordingly the question referred to is answered in the affirmative and in favour of the assessee.”

The aforesaid decision clearly supports the plea of the Assessee.

Following the same, we hold that the accumulation u/s 11(1)(a) of the

Act, should be allowed as claimed by the Assessee.

ITA No.730(B)/2015] Page 10 of 16

case mentioned supra, we are of the opinion that the accumulation u/s

11(1)(a) of the act should be allowed as claimed by the assessee.

Therefore, the ground raised by the assessee on this issue is allowed.

is whether the CIT(A) is right is upholding the disallowance of

depreciation on assets, the cost of which is allowed as application of

income u/s 11 of the Act. The assessee is a Society, registered u/s 12A of

the Income –tax Act, 1961 filed its return of income admitting NIL income

after claiming exemption u/s 11 of the Act. During the course of

assessment proceedings, the AO noticed that the assessee has claimed

depreciation on assets, the cost of which was allowed as application of

income in earlier years. Therefore, the AO disallowed the claim of

depreciation on the ground that claiming depreciation on assets, the cost

of which was already allowed as application in earlier years amounts to

double deduction. In support of his stand, the AO relied upon the Hon’ble

Supreme Court judgment in Escorts Ltd. Vs UOI (1993) 199 ITR 43(SC).

an appeal before the CIT(A) and contended that, the issue of depreciation

is settled now by the decision of Hon’ble Karnataka High Court decision

in the case of CIT vs Society of Sisters of St. Anne (1984) 146 ITR 28

ITA No.730(B)/2015] Page 11 of 16 (Kar), wherein the Hon’ble Court held that depreciation on capital assets,

the cost of which was allowed as application income in earlier years is to

be deducted to arrive at the income available for application for charitable

purpose. The assessee further, contended that the income of trust

claiming exemption u/s 11 should be computed by applying commercial

principles, therefore, depreciation being a permissible deduction while

computing the income under the commercial principles should be allowed

as deduction. The assessee contended that the decision of Escorts Ltd.

Supra is not applicable to the facts of the present case, as it was rendered

on a different set of facts. In support of its contention, the assessee relied

upon the plethora of case laws. The CIT(A) however, rejected the

contentions raised by the assessee and held that the allowance of

depreciation on the assets, the cost of which was already allowed as

application of income amounts to double deduction in view of the Escorts

Ltd case supra. The CIT(A) also referred to the decision of Hon’ble Kerala

High Court in the case of DDIT( E) vs. Lissie Medical Institutions, 348 ITR

344 (Ker) wherein, it was held that allowing depreciation on the same

assets, when the cost of such assets is allowed as application of income

amounts to double deduction. Aggrieved by the CIT(A) order, the assessee

is in appeal before us.

involved in this appeal on depreciation is squarely covered by the

decisions of ITAT in the case of Mary Immaculate Society vs. DDIT( E) in

ITA No.730(B)/2015] Page 12 of 16 ITA. No. 240 & 241/B/2015 and submitted a copy of the order dated

23.06.2015. The AR also drew our attention to the jurisdictional High

Court of Karnataka in the case of CIT Vs Society of Sisters of St. Anne

(1984) 146 ITR 28 (Kar) wherein the identical issue has been decided by

the Hon’ble Court in favour of the assessee. The AR further relied upon

the plethora of case laws. On the other hand, the DR strongly supported

the CIT(A) order.

available on record. An identical issue came up for consideration before

the co-ordinate bench of this Tribunal in ITAT in ITA.No. 240 &

241/B/2015 in the case of Mary Immaculate Society vs. DDIT( E)

wherein, the Tribunal held the issue in favour of the assessee as under.

“We have considered the order of the AO. 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:-

ITA No.730(B)/2015] Page 13 of 16

“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 ITA Nos.240 & 241/Bang/2015 Page 5 of 11 referred to and distinguished by the Hon’ble Court in the aforesaid decisions. 21. 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

ITA No.730(B)/2015] Page 14 of 16 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.”

The decision of the Hon’ble Delhi High Court in the case of Charanjiv Charitable Trust (supra) is contrary to the decision of the Hon’ble Karnataka High Court in the case of Society of Sisters of Anne ITA Nos.240 & 241/Bang/2015 Page 6 of 11 (supra). We are bound to

ITA No.730(B)/2015] Page 15 of 16 follow the view of the Hon’ble Karnataka High Court which is the jurisdictional High Court as far as the Bangalore Bench of ITAT is concerned. We therefore prefer to follow the decision of the Hon’ble Karnataka High Court.

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) is not just and proper. The claim of the Assessee for deduction on account of depreciation is therefore directed to be allowed. Consequently the first issue is decided in favour of the Assessee.

following the Co-ordinate Bench decision in ITA.No. 240 & 241/B/2015

supra, we are of the opinion that depreciation on assets, the cost of which

ITA No.730(B)/2015] Page 16 of 16 was allowed as application of income is to be allowed while computing the

income available for application for charitable purpose. Therefore, we set

aside the order of CIT(A) and direct the AO to allow the depreciation.

Hence, the ground raised by the assessee on this issue is allowed.

CIT(A) is right in upholding the charging of interest u/s 234B & 234C.

Charging interest u/s 234B & 234C is mandatory and consequential,

wherever there is a tax incidence and AO has no discretionary power on

this issue. Therefore, we do not find any error in the order of the CIT(A)

on this issue and the same is upheld. Hence, the ground raised by the

assessee on this issue is dismissed.

allowed.

Order pronounced in the open Court on the 16th October, 2015.

Sd/- Sd/- (VIJAY PAL RAO) (G. MANJUNATHA) ACCOUN JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore: D a t e d : 16-10-2015 am* Copy to : 1. The Assessee 2. The Revenue 3. CIT(A) 4. CIT 5. DR

By Order AR, ITAT, Bangalore