DEPUTY DIRECTOR OF INCOME TAX (EXEMPTION), BANGALORE vs. OHIO UNIVERSITY CHRIST COLLEGE ACADEMY FOR MANAGEMENT EDUCATION, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ B ’ BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. Nos.1075 & 1076/Bang/2014 (Assessment Years : 2008-09 & 2009-10) Dy. Director of Income Tax (Exemptions), Circle 17(2), Bangalore. …. Appellant. Vs. Ohio University Christ College, Academy for Management Education, 4th Floor, Christ University Campus, Hosur Road, Bangalore. ….. Respondent. PAN AAATO 1522D Appellant By : Dr.P.K. Srihari, Addl. CIT (D.R.) Respondent By : Shri K.R. Vasudevan, Advocate. Date of Hearing : 06.08.2015. Date of Pronouncement : 9.10.2015. O R D E R Per Shri Jason P. Boaz, A.M. : These appeals by the Revenue are directed against the order of the Commissioner of Income Tax (Appeals), Mysore dt.20.09.2013 for Assessment Years 2008-09 and 2009-10. These appeals being heard together and having certain common issues are disposed off by way of this common order. 2. The facts of the case, briefly, are as under :-

2 ITA Nos.1075 & 1076/Bang/2014 2.1 The assessee, is a public charitable trust registered under Section 12A of the Income Tax Act, 1961 (in short 'the Act'), established for the purpose of promoting education without any profit motive. The assessee reportedly conducts MBA programmes in India in collaboration with Ohio University, USA. For the Assessment Years 2008-09 & 2009-10, the assessee had filed the returns of income declaring NIL income after application of income under Section 11 of the Act. The returns were processed under Section 143(1) of the Act and subsequently the case was selected for scrutiny. The assessments were concluded under Section 143(3) of the Act vide orders dt.22.12.2010 for Assessment Year 2008-09 and dt.15.12.2011 for Assessment Year 2009-10, wherein additions/disallowances under various heads were made. 2.2 Aggrieved by the orders of assessment for Assessment Years 2008-09 and 2009-10, the assessee preferred appeals before the CIT (Appeals), Mysore. The learned CIT (Appeals) disposed off the appeals by way of a common order dt.20.9.2013 allowing the assessee's appeals. 3. Revenue is aggrieved by the orders of the CIT (Appeals), Mysore for Assessment Years 2008-09 and 2009-10 dt.20.9.2013 and has preferred these appeals, raising the following grounds :- “ A.Y. 2008-09 :

A) Disallowance of faculty teaching charges payable to Ohio University amounting to Rs.2,66,72,407 :- 1) The CIT (A) has erred in directing the assessing officer to allow deduction towards faculty teaching charges payable to Ohio University, Athens, USA, on the ground that the expendlture incurred outside India for the charitable purposes in India can be considered as application of income in India, but without observing the fact that the assessee has not utilized or spent any amount during the year under consideration and only made a book entry crediting the amount to Ohio University's account by following mercantile method of accounting and the actual payment of the same has happened in the subsequent asst. year

3 ITA Nos.1075 & 1076/Bang/2014 implying that there was no real application of income within the meaning of section l1{l){a) during the F.Y. 2007-08 relevant to A.Y. 2008-09.

2l The CIT (A) has failed to appreciate the fact that the group of words "such Income IS applied to such purposes in India" as appearing u/s l1(l)(a) connotes the actual utilisation or payment or remittance of the money in the year in which such income is generated/received irrespective of the method of accounting followed by the assessee.

3) The CIT (A) has failed to appreciate the fact that in order to claim application of Income within the meaning of Sec.ll{l)(a), the assessee is required to prove not only that it has already incurred the expenditure and liability to pay the amount has accrued, but also it has already paid/remitted the amount to the party concerned towards the discharge of such accrued liability.

4) The CIT (Al has failed to appreciate the fact that the method of accounting followed by the assessee has no relevance for the purpose of arriving at the income applied towards the objects u/s l1{l)(a) and such application of income is with reference to actual utilisation or expending of the Income in real sense rather than on the basis of entries made in the books of account. 5) The CIT (A) has erred in not following the decision of the Hon'ble Supreme Court In the case of Nachimuttu Industrial Association vs. CIT (235 ITR 190) wherein it was held that entries made in the books of accounts cannot be construed as payment made out of the income of the year under consideration and, also, faded to notice the fact that the earlier decision of the Hon'ble Supreme Court in the case of H.E.H. Nizams Religious Endowment Trust v. CIT {1996} 59 ITR 582 (SCj was overruled in the case of Nachimuttu Industrial Association. 6) The CIT (A) has failed to appreciate the fact that in view of non- utilisation/non- application of income to the extent of Rs.2,66J2,407/-, being faculty teaching charges payable to Ohio University, Athens, USA, in the year under consideration, it is not relevant to discuss the second ground i.e., whether such amount is allowable as deduction on the ground that the same has been incurred outside India or in India.

B) Set-off brought forward excess application of income/loss of earlier years :-

1) The CIT (A) has erred in directing the assessing officer to allow set-off of excess expenditure/application/deficit/loss pertaining to earlier asst. years against the income of the A.Y. 2008-09 and carry forward of excess application/expenditure/deficit/loss of the A.Y. 2008-09 to subsequent asst. years without appreciating the fact that as per the scheme of taxation of charitable

4 ITA Nos.1075 & 1076/Bang/2014 and religious trust/institution as codified u/s 11, 12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust. 2) The CIT (A) has failed to appreciate the fact that the normal computation of income under respective heads as envisaged u/s 14 r.w.S. 15 to 59 are not applicable to the computation of income in respect of charitable and religious trust/institution for the purpose of claiming exemption under section 11, 12 and 13 and, therefore, the provisions relating to set-off of loss from one source against the income from another source, set-off of loss from one head against income from another head and carry forward and set-off of loss against the income of subsequent years as envisaged u/s 70 to 79 are also not applicable to the chantable and religious trusts/institutions.

3) The CIT (A) has failed to appreciate the fact that the concept of application of income is embedded in the statute u/s 11 only to ensure that the income earned by the assessee by way of voluntary contributions as well as conducting some income generating activities such as running hospitals/ educational institutions is applied/utilized/expended towards the objects in order to allow exemption of such income from tax.

4) The CIT (A) has failed to appreciate the fact that application/ utilization towards the charitable or religious purposes is with reference to income quantified by applying the commercial principles which is otherwise taxable and therefore, such application / utilization shall be restricted to the income quantified. Once the assessee has applied/ utilized the entire amount of income, then by virtue of Sec.ll(l)(a) the income is exempt from tax. Accordingly, the purpose and scope of Sec.l1(1)(a) is to allow tax exemption after ensuring the application/utilization norms. Hence, in accordance with the provisions of Sec.ll(l)(a) there is no concept of recognizing application/ utilization over and above the income of the assessee and such application/ utilization is beyond the purview of Section 11 and 12. In each assessment year, the assessee is required to prove that it has applied or utilized the entire amount of income towards charitable or religious purposes so as to avail the benefit of tax exemption on such income and, therefore, excess application of income would not come Into picture and the same shall be treated as Nil. 5) The CIT (A) has failed to appreciate the fact that whenever the assessee incurs revenue expenditure over and above the gross receipts out of the loan funds, corpus fund donations, 15% of income accumulated in the earlier assessment years u/s l1(l)(a), advance received, share capital or share application money received etc., then, the taxable income of the assessee shall be considered as NIL. Further, the excess amount of expenditure over and above the gross receipts cannot be considered as loss incurred eligible for carry forward and set off against the income of subsequent assessment years. Similarly, any capital expenditure incurred over and above the net surplus eligible for application, cannot be carried forward

5 ITA Nos.1075 & 1076/Bang/2014 and set off against the income of subsequent assessment years.

6) The CIT (A) has failed to follow the decision of the Hon'ble ITAT, Bombay in the case of Income-tax Officer vs. Trustees of Sri Sathya Sai Trust (33 ITO 320) wherein it was held that the deficit arising on account of application of funds/sums which are not in the nature of income is not capable of being carried forward. Similarly, Hon'ble ITAT, Delhi, in the case of Pushpavati Singhania Resaerch Institute for Lever, Renal and Digestive Diseases Vs. DDIT{E), New Delhi (29 SOT 316) has held that any excess expenditure incurred by a trust/ charitable institution in earlier years cannot be allowed to be carried forward and set off against the income of subsequent assessment years. On the other hand, the CIT (Al has placed reliance on the decision of Hon'ble Jurisdictional High Court in the case of CIT v. SOCiety of the Sisters of St. Anne (146 ITR 28) which is totally misplaced inasmuch as the issue involved in that case was relating to allowability of depreciation as deduction while computing the income of the assessee for the purpose of section l1(l)(a). A.Y.2009-10: A) Disallowance of faculty teaching charges payable to Ohio University amounting to Rs.2,OS,58,120/-:-

Please refer to the grounds of appeal on the same issue for the A.Y. 2008-09. B) L oss on account of foreign exchange fluctuation of Rs.70,58,026/-:-

1) The CIT (A) has erred in directing the AO to allow exchange fluctuation loss in respect of amounts due to Ohio University towards faculty teaching charges outstanding as on 31.03.2009 without appreciating the fact that the assessee had not really incurred any loss on account of exchange fluctuation but made entries in the books of accounts at the end of the financial year on the basis of prevailing value of rupee in terms of US dollar. 2) The CIT (A) has failed to appreciate the fact that the assessee did not pay the faculty teaching charges to Ohio University to the extent of Rs.2,OS,58,120/- during the year under consideration and the same is reflected under current liabilities as on 31.03.2009, but created provision towards loss on account of exchange fluctuation as on 30.03.2009 based on the difference between dollar rate as on the date of billing and as on 31.03.2009 and the same has been accounted in the books as expenditure by following the accounting principles. In reality, the assessee had not incurred any loss on account of exchange fluctuation. It is only a notional loss computed on the basis of restatement of the accounts at the end of the financial year. 3) The CIT (A) has failed to observe that as per the taxation of charitable

6 ITA Nos.1075 & 1076/Bang/2014 and religious trust or institution as codified u/s 11, 12 and 13, any notional expenditure incurred including exchange fluctuation loss cannot be allowed as expenditure or application of income. Further, any expenditure or application of income shall be allowed by following real income method of accounting and accordingly, there should be real application/ expenditure by way of actual payment to the parties concerned.

C) Disallowance of preliminary expenses of Rs.l,08,292/-:

Please refer to the grounds of appeal for the A.Y. 2008-09 on the issue of set- off of brought forward excess application of income/loss of earlier years which are applicable to the issue under reference.

D) Disallowance of accumulation of income u/s 11(2) of Rs.26,72,071:- 1) The CIT(A) has erred in holding that the purchase of fixed assets & equipments, besides, fulfillment of objects of the trust can be construed as specific purposes as envisaged u/s 11(2) without appreciating the fact that the assessee had failed to declare specific purposes for which the income is being accumulated u/s 11(2) except stating that 'purchase of fixed assets and equipments and used as per the objectives of the trust' and such general purposes cannot be construed as specific purposes as envisaged u/s 11(2). 2) The CIT (A) has failed to appreciate the fact that the assessee has not identified the specific amount with purpose meant for accumulation u/s 11(2) giving the particulars of mode of investment/deposit of the same such as, amount of Income invested in fixed deposits with FD No., name and address of the bank & branch etc., and amount of income invested in other modes, such as; mutual funds, shares, bonds etc. and, therefore, the assessee has violated the conditions stipulated u/s 11(2) r.w.s. 11(5). 3) The CIT (A) has erred in not observing the statutory requirement that declaration of assessee's intention to accumulate/ set-apart certain amount of Income which could not be applied in the same assessment year as provided u/s 11(2) is mandatory and absolute and the same should be spelt out in clear terms in the statutory Form No.10 filed along with the return of income. In this regard, the assessee should furnish the specific details of amount of income accumulated, the purpose for which the specified amount is accumulated and the period of accumulation or the year (s) in which the accumulated income will be utilized for the intended purposes. Also, the assessee is required to Invest or deposit such accumulated income in the forms or modes specified in section 11(5).

7 ITA Nos.1075 & 1076/Bang/2014 4) The CIT(A) has failed to appreciate that there is no decision of jurisdictional High Court on this issue and majority of the decisions of other High Courts are in favour of the revenue including the decisions of Hon'ble High Court of Calcutta in the case of DIT(E) Vs. Trustees of Singhania Charitable Trust (199 ITR 819) and Hon'ble High Court of Madras in the case of CIT Vs. Muttaiah Chettiar Family Trust (245 ITR 400).” 4. A. Disallowance of Faculty Teaching Charges payable to Ohio University (for both A.Ys. 2008-09 & 2009-10). 4.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income under Section 11 of the Act which included the faculty teaching charges to Ohio University towards academic expenses. The Assessing Officer disallowed the assessee's claim for the following reasons :- (i) Merely making an entry in the books of accounts cannot be considered as application of income for charitable purposes as contemplated in section 11 of the Act. The word ‘applied’ in section 11 of the Act implied ‘spending or utilization of income.’ This principle has been affirmed by the Hon'ble Apex Court in Nachimuthu Industrial Association V CIT (1999) 235 ITR 190 (SC). (ii) The assessee has to apply the income for charitable purposes only in India. If the income of the Trust is applied outside India, the income is exigible to tax. After 31.3.1952, the income applied outside India by Trusts is exempt only under a general or special order of CBDT; (iii) The assessee did not prove that the payments made to Ohio University resulted in charitable purposes in India. 4.2 On appeal by the assessee, the learned CIT (Appeals) upheld the assessee's claim and deleted the disallowances made by the Assessing Officer by relying on the decision rendered by

8 ITA Nos.1075 & 1076/Bang/2014 the CIT (Appeals) in the assessee's own case for Assessment Year 2007-08. The learned CIT (Appeals), while allowing the assessee's claim, observed that the application should be for charitable purposes in India and if the payment is made outside the country in furtherance of charitable purpose in India, it can be counted as application for charitable purposes in India. The learned CIT (Appeals) also noted that the Permanent Establishment (‘PE’) of Ohio University in India has offered these payments as income in India and has paid taxes thereon in India. 4.3 The learned Departmental Representative assailed the impugned orders of the learned CIT (Appeals) on this issue and supported the order of the Assessing Officer. It was submitted that the assessee has only made entries in the books of accounts in the relevant periods and had not utilized or spent the amount during the year and the actual payment of the same had happened in the subsequent year only and as such there was no application of income during the relevant year under consideration. It was submitted that the phrase “such income is applied to such purposes in India” appearing in Section 11(1)(a) of the Act connoted “actual payment” and since it has not happened, the assessee is not entitled for application of income. In support of Revenue’s contentions, the learned Departmental Representative placed reliance on the decision of the Hon'ble Apex Court in the case of Nachimuthu Industrial Association (235 ITR 190) (SC). 4.4.1 Per contra, the learned Authorised Representative for the assessee supported the impugned orders of the learned CIT (Appeals). It was submitted that the assessee has actually incurred the said expenditure towards factulty teaching charges payable to Ohio University, USA and therefore it should be considered as having been applied under Section 11(1)(a) of the

9 ITA Nos.1075 & 1076/Bang/2014 Act. In support of its contention, reliance was placed on the decision in the case of CIT Vs. Trustees of HEH Nizam’s Charitable Trust (1981) 131 ITR 497 (A.P.) wherein it was held that the term ‘applied’ does not mean ‘spent’. It was also submitted that the decision rendered in the case of CIT V Trustees of HEH Nizam’s Religious Endowment Trust (1977) 108 ITR 229 is distinguishable on facts and is not applicable to the assessee. 4.4.2 The learned Authorised Representative also submitted that the Assessing Officer had misdirected himself in holding that the amounts have to be actually spent in the year under consideration, to be considered for application of income. It was submitted that even if the payment is ear-marked and allocated for charitable purpose, it should be taken to be applied for charitable purpose. In support of the assessee's contention, the learned Authorised Representative for the assessee placed reliance on the decisions in the case of CIT V. Radhaswami Satsang Sabha (1954) 25 ITR 472 (All) and CIT V. Thanthi Trust (1999) 239 ITR 502 (SC). 4.4.3 The learned Authorised Representative further submitted that merely because the payment was made outside India, this does not mean that the charitabale purpose was outside India. It was submitted that the charitable activities were rendered in India and just because the payment was made to parties outside India, it does not change the fact that the charitable activities were carried out in India. In support of this contention, the learned Authorised Representative placed reliance on the decision of the various Tribunals in the cases of Gem and Jewellery Export Promotion Council V ITO in (1999) 69 ITD 95 (Mum) and National Association of Software and Services Companies (‘NASSCOM’) V DDIT, reported in 130 TTJ 377 (Del).

10 ITA Nos.1075 & 1076/Bang/2014 4.5.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements relied upon by both parties. The basic facts, not in dispute, are that the assessee has entered into an agreement with Ohio University, USA, whereby Ohio University sends its faculty to the assessee's premises in India for teaching purposes, for which the assessee makes payment to Ohio University for providing the faculty and other support services. In terms of the agreement, the assessee is required to pay a sum of USD 9,000 per student for the 18 month duration of the course (i.e. USD 3,000 per student for 6 months period.) At the end of the year, as the payments had not yet been made, the assessee had accrued the amount in its books of account and the actual remittance was made in the subsequent year. The assessee had deducted tax at source on the amounts so credited towards faculty teaching charges on the basis of income accruing/arising to Ohio University in India by virtue of a PE in India. Further Ohio University had filed returns of income in India offering this income to tax and paid taxes accordingly. 4.5.2 It is also not disputed that the services have been rendered by the faculty members from Ohio University as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust’s objectives in India, viz. of imparting higher education in India. Ohio University has also offered the income earned by it from the assessee trust to tax in India. In the light of the above mentioned facts, it is clear that the activities of the assessee trust were conducted in India in accordance with its objects. 4.5.3 As regards the payments being made out of India, we concur with the view of the learned CIT (Appeals) that merely because the payments are made outside India, it cannot be

11 ITA Nos.1075 & 1076/Bang/2014 said that the charitable activities were also conducted outside the country. In this regard, the judicial decisions of the ITAT, Mumbai and Delhi Benches, cited by the assessee, squarely apply to the case on hand. In the case of Gem and Jewellery Export Promotion Council V. ITO, reported in 68 ITD 95 (Mum), the Mumbai Bench of the Tribunal at para 33 thereof held as under :-

“ 33. A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the Trade Delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the Delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a).” In the case of NASSCOM V DDIT in 130 TTJ 377 (Del), the Delhi Bench of the Tribunal at para 11 thereof has held as under :- “ 11. We have considered the rival submissions. A perusal of the provisions of s. 11(1)(a) of the Act clearly shows that the words used are "is applied to such purpose in India". The words are not "is applied in India". The fact that the legislature has put the words "to such purpose" between ‘is applied’ and ‘in India’ shows that the application of income need not be in India, but the application should result and should be for the purpose of charitable and religious purpose in India. Undisputedly, the assessee is registered under s. 12A as a charitable institution. It is also not disputed that the activities of the assessee are charitable. It is also not the case of the Revenue that the expenditure incurred by the assessee in Hanover, Germany has not resulted in the benefit being derived in India. In these circumstances, it cannot be said that the expenditure incurred by the assessee in Hanover, Germany, which resulted in and which was for the purpose of attaining the charitable object in India, is not application of income. This view is also supported by the decision of a Co-ordinate Bench of this Tribunal in the case of Gem & Jewellery Export Promotion Council (supra), wherein, it has been held as follows : "A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the trade delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a)."

12 ITA Nos.1075 & 1076/Bang/2014 In the case of NASSCOM V DDIT in 130 TTJ 377 (Del), the Delhi Bench of the Tribunal at para 11 thereof has held as under :-

“ 11. ……. A perusal of the provisions of s. 11(1)(a) of the Act clearly shows that the words used are "is applied to such purpose in India". The words are not "is applied in India". The fact that the legislature has put the words "to such purpose" between ‘is applied’ and ‘in India’ shows that the application of income need not be in India, but the application should result and should be for the purpose of charitable and religious purpose in India. Undisputedly, the assessee is registered under s. 12A as a charitable institution. It is also not disputed that the activities of the assessee are charitable. It is also not the case of the Revenue that the expenditure incurred by the assessee in Hanover, Germany has not resulted in the benefit being derived in India. In these circumstances, it cannot be said that the expenditure incurred by the assessee in Hanover, Germany, which resulted in and which was for the purpose of attaining the charitable object in India, is not application of income. This view is also supported by the decision of a Co-ordinate Bench of this Tribunal in the case of Gem & Jewellery Export Promotion Council (supra), wherein, it has been held as follows : "A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the trade delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a)." 4.5.4 We also do not concur with the Assessing Officer’s view that a specific exemption is required from CBDT for making claim of application of income. This requirement has been specified only for those trusts that have as its objects, the promotion of international welfare. In the case of the assessee in the case on hand, the objects of charitable activities for imparting higher education in India, has already been approved by the Department while granting the assessee trust registration.

4.5.5 We are also unable to concur with the view of the Assessing Officer that mere credit entries in favour of Ohio University in the assessee's books of account cannot be taken by the assessee as being for charitable purposes as contemplated in Section 11 of the Act. In this

13 ITA Nos.1075 & 1076/Bang/2014 regard, the decision in the case of Trustees of HEH Nizam’s Charitable Trust (supra) cited by the assessee squarely applies to the assessee's case. In the cited case, the trust had debited certain amounts to the income and expenditure account and claimed the same as application of income for the purposes of Section 11 of the Act even though the amounts were disbursed by the Trust after the accounting year. Further, the amounts debited to the income and expenditure account but which were not actually disbursed were shown as liabilities in the balance sheet. The Hon'ble Andhra Pradesh High Court which upholding the decision of the Hyderabad Bench of the Tribunal held as under :- “ ……………… We agree with the Tribunal that it is not correct to equate the word "applied" with the word "spent". If the legislature intended that the amounts should actually be spent, there was nothing preventing it from using that word. There cannot be any doubt that the money which was sanctioned was applied for a specific purpose as there was nothing else to be done except the actual payment. The Tribunal was right in holding that the actual payment is irrelevant for purposes of finding out whether there has been an application of the funds….” 4.5.6 We also find in the cases of CIT V Radhaswami Satsang Sabha (supra) and CIT Vs. Thanthi Trust (supra), it has been held that the word ‘applied’ does not mean ‘spent’ and even if the income has been earmarked and allocated for the purpose of carrying out the objects of the institution, it might be deemed to be applied for that purpose. In view of the facts and circumstances and the legal matrix of the case on hand, as discussed above, we uphold the decision of the learned CIT (Appeals) in deleting the addition/disallowance made in respect of faculty teaching charges. Consequently, the grounds raised by Revenue at A (1 to 5) for both A.Ys 2008-09 and 2009-10 are dismissed.

14 ITA Nos.1075 & 1076/Bang/2014 5. B & C : Set off of brought forward excess application of income/loss of income/loss of earlier years ( B for A.Y. 2008-09 and C for A.Y. 2009-10). 5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of expenditure of earlier years, which has been brought forward and set off in the year under consideration. The Assessing Officer disallowed the same on the ground that there is no express provision in the Act permitting the adjustment of earlier years brought forward expenses as application of income in the current year. According to the Assessing Officer, the application of income for charitable purposes must be during the relevant previous year. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85% of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee's claim of expenditure of earlier years being brought forward and set off during the year. 5.2 On appeal, the learned CIT (Appeals) allowed the amortization of the expenditure as claimed by the assessee and deleted the disallowance made by the Assessing Officer by placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Society of the Sisters of St. Anne reported in 146 ITR 28 (1984) and CBDT Circular No.5-P(LXX)-6 of 1968. 5.3.1 We have heard the rival contentions of both the learned Departmental Representative for Revenue and the learned Authorised Representative for the assessee and perused and

15 ITA Nos.1075 & 1076/Bang/2014 carefully considered the material on record, including the judicial pronouncements cited. The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 1/5 th of the expenditure. The un-amortised expenditure has been brought forward and set off as application of income in subsequent years, including the to assessment years, 2008-09 and 2009-10 which are under consideration. 5.3.2 We find that the issue before us is directly related to the issue decided by the Hon'ble Karnataka High Court in the case of Sisters of St. Anne (supra)cited by the assessee. In the said case, the Hon'ble Karnataka High Court at paras 8 to 10 thereof has held as under :-

“ 8. .... But still the contention for the Revenue is that the depreciation allowance being a notional income (expenditure ?) cannot be allowed to be debited to the expenditure account of the trust. This contention appears to proceed on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In Spicer & Pegler's Book-Keeping and Accounts, 17th Edn., pp. 44, 45 & 46, it has been noted as follows: "Depreciation is the exhaustion of the effective life of a fixed asset owing to ‘use' or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period is intended to represent the proportion of such expenditure, which has expired during that period." "At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the Revenue of an accounting period, the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned."

16 ITA Nos.1075 & 1076/Bang/2014 "If depreciation is not provided for, the books will not contain a record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance sheet will not present a true and the fair view of the state of affairs; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired." 9. In CIT vs. Indian Jute Mills Association (1982) 134 ITR 68 (Cal), the Calcutta High Court, while construing the expression "expenditure" incurred in s. 44A of the Act, observed: "Depreciation claimed shall include the expenditure incurred." 10. There are only two recognised methods of accounting : (i) cash basis, (ii) mercantile basis. Under the cash basis only cash transactions are recorded. It is only cash receipts and cash payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 at 230 (SC) in the following words : "The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book-keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." It is not in dispute that if the mercantile system is followed, the depreciation allowance in respect of the trust property should be allowed.” 5.3.3 Further, the CBDT Circular No.5-P (LXX) – 6 of 1968 cited by the assessee makes it clear that income should be understood in its commercial sense; in the case of trusts also and therefore the commercial principle enunciated by the Hon'ble Karnataka High Court in the above referred case of Sisters of St. Anne (supra) applies to trusts as well. In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses. Consequently, Ground No. B (1 to 6) of the Revenue’s appeal for Assessment Year 2008-09 and Ground No.C for Assessment Year 2009-10 are dismissed.

17 ITA Nos.1075 & 1076/Bang/2014 6. B. Loss on account of foreign exchange fluctuation – A.Y. 2009-10. 6.1 This issue is related only to Revenue’s appeal for Assessment Year 2009-10. In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income on account of foreign exchange fluctuation of an amount of Rs.70,58,026. The Assessing Officer was of the view that when the application of programme fee itself was denied exemption under Section 11 of the Act, the exchange fluctuation expenditure cannot be allowed and disallowed the assessee's claim. 6.2 On appeal, the learned CIT (Appeals) held that since programme fee payments by the assessee to Ohio University, USA has been allowed as application of income, the connected exchange fluctuations are also to be allowed and consequently deleted the disallowance made by the Assessing Officer. 6.3 Before us, the learned Departmental Representative was heard in respect of the Grounds raised, assailed the impugned order of the learned CIT (Appeals). The learned Departmental Representative supported the order of the Assessing Officer on this issue. 6.4 Per contra, the learned Authorised Representative for the assessee supported the impugned order of the learned CIT (Appeals). It was contended that the trust income has to be understood in its commercial sense and foreign exchange loss has to be allowed for computation of trust income. In support of the assessee's contentions, the learned Authorised Representative placed reliance on the decision of the Hon'ble Apex Court in the case of CIT Vs. Woodward Governor India (P) Ltd. reported in 312 ITR 254 (2009) (SC).

18 ITA Nos.1075 & 1076/Bang/2014 6.5 We have heard the rival contentions and perused and carefully considered the material on record. The basic facts of the matter on this issue are not in dispute. In the year under consideration, the assessee had incurred expenditure towards programme fees payable to Ohio University, USA We have already held at paras 4 to 4.5.6 of this order (supra) that these payments come under the purview of application of income for charitable purpose in India. Having held so, we have no hesitation in holding that foreign exchange fluctuation expenses related to the programme fee is also a deductible expenditure as held by the Hon'ble Apex Court in the case of Woodward Governor India (P) Ltd. (supra). In this view of the matter, we uphold the decision of the learned CIT (Appeals) in the impugned order on this issue and consequently dismiss Revenue’s grounds at B for Assessment Year 2009-10. 7. D. Disallowance of Accumulation of Income (for A.Y. 2009-10) 7.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has shown accumulation of income under Section 11(2) of the Act. According to the Assessing Officer, the purpose of accumulation of income as declared in Form No.10 is not specific since the assessee has only stated that these were for fulfillment of the objectives of the Trust. The Assessing Officer disallowed the said accumulation on the ground that the assessee did not mention the specific purpose of the accumulation. 7.2 On appeal, the learned CIT (Appeals) deleted / cancelled the disallowance made by the Assessing Officer in respect of accumulation of income and allowed the assessee's claim. While doing so, the learned CIT (Appeals) observed that there are conflicting decisions in this regard and therefore the view in favour of the assessee is held to be applicable.

19 ITA Nos.1075 & 1076/Bang/2014 7.3 The learned Departmental Representative was heard in support of the grounds raised and while assailing the impugned order of the learned CIT (Appeals), placed reliance on finding in the order of the Assessing Officer on this issue. 7.4 Per contra, the learned Authorised Representative for the assessee submitted that the assessee had disclosed the purpose of accumulation of income in Form No.10, as purchase of fixed assets and fulfillment of the objects of the trust. It was also submitted that the Hon'ble High Court of Karnataka in the case of DIT V Envisions (2015) 58 taxmann.com 184 (Kar) has held that as long as the objects of the trust are charitable in character and purposes mentioned in Form No.10 are for achieving the objects of the Trust, merely because the details about plan of such expenditure has not been given, the same would not be sufficient to deny the assessee benefit under Section 11(2) of the Act. It was submitted by the learned Authorised Representative that the cited decision of the Hon'ble Karnataka High Court (supra) is squarely applicable to the assessee in the case on hand. 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. The purposes mentioned by the assessee trust in Form No.10 were ‘for use in purchase of fixed assets’ and for use in other purposes, ‘for fulfillment of the objects of the trust.’ The Assessing Officer disallowed the assessee's claim for accumulation of income on the grounds that the purposes mentioned in Form NO.10 was not specific. As pointed out by the learned CIT (Appeals), there are divergent decisions by various High Courts in the matter. While the Assessing Officer has relied on the decision of the Hon'ble Kerala High Court, the assessee has relied on the decision of the Hon'ble Delhi High

20 ITA Nos.1075 & 1076/Bang/2014 Court. The learned CIT (Appeals) after noting the divergent views taken by different High Courts has decided the issue in favour of the assessee by observing that there is no decision of the jurisdictional High Court in the matter, the decision favourable to the assessee should be followed. 7.5.1 In the proceedings before us, the learned Authorised Representative for the assessee submitted that the Hon'ble High Court of Karnataka, the jurisdictional High Court, has since decided the issue in the case of DIT (E) V Envisions in ITA No.752/2009 dt.13.3.2015 (reported in 58 taxmann.com 184) (Kar) is squarely on the subject. In the said decision, the Hon'ble Court at para 10 of its order has held as under :- “10. In the present case, we find tht the revenue does not dispute the fact that all the three purposes specified by the assessee in Form 10 are for achieving the objects of the trust, and that the purposes as well as objects, are both charitable. Merely because more than one purpose has been specified and details about the plan of such expenditure has not beengiven, the same would not, in our view, be sufficient to deny the benefit under Section 11(2) of the Act to the assessee. As long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because of non-furnishing of the details, as how the said amount is proposed to be spent in future, the assessee cannot be denied the exemption as is admissible under sub-section 2 of section 11 of the I.T. Act, 1961.” Respectfully following the aforesaid decision of the Hon'ble High Court of Karnataka in the case of DIT (Exemptions), Bangalore V. Envisions (supra), we decide the issue in favour of the

21 ITA Nos.1075 & 1076/Bang/2014 assessee. Consequently, Ground D of the Revenue’s appeal for Assessment Year 2009-10 is dismissed. 8. In the result, Revenue’s appeals for both Assessment Years 2008-09 and 2009-10 are dismissed. Order pronounced in the open court on 9th October, 2015. Sd/- Sd/- (GEORGE GEORGE K) (JASON P BOAZ) Judicial Member Accountant Member

*Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore