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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member No.1040/Bang/2014 is an appeal by the Revenue. Both these appeals are directed against the order dated 24.12.2013 of CIT(Appeals)-V, Bangalore, relating to assessment year 2009-10.
The assessee is a charitable institution set up under Section 25 of the Companies Act, 1956. It was established as a non-profit organization based in the United States of America. The objects for which the Assessee was established is to give people financial tools they need to work their way out of poverty. The Assessee works to expand microfinance to reach millions of poor people who lack access to basic financial services. The Assessee is not engaged in microfinance lending as such. However, the Assessee works with entities engaged in microfinance, to help them design and launch programs which have maximum social impact. The Assessee enjoys registration u/s.12AA of the Income Tax Act, 1961 (Act) and is entitled to claim exemption of its total income u/s.11 of the Act.
The Assessee filed return of income for AY 2009-10 declaring total income of nil. The following was the computation of total income filed by the Assessee :-
Particulars Amount Rs. Amount Rs. Income: Gains/donations 4,18,00,000 Income from workshops, training and technical and management services 84,23,491 5,02,23,491 Less: Income applied for charitable purposes eligible for exemption u/s.11 Operating & other expenses 3,33,69,319 Interest expenses 51,52,306 Depreciation 13,49,000 Investment in fixed assets 3,25,411 (4,01,96,037) Less: Deficit brought forward 1,00,27,454 From AY 2008-09 (2,66,04,960) From AY 2007-08 . (8,92,281) (2,74,97,241) (1,00,27,454) Total Income -----
The AO computed total income of the Assessee by disallowing Depreciation, disallowing bad debts of Rs.6,17,865 which is part of the Operating and Revenue expenses claimed as expenditure by the Assessee and further rejecting the claim of deficit of brought forward for AY 08-09 & 07-08. The CIT(A) directed the AO to disallow depreciation only on the opening WDV of the block of assets as against the claim of the Assessee for allowing depreciation on closing WDV of the block of assets which would also include additions to the block of assets during the previous year.
The CIT(A) deleted disallowance of deduction on account of bad debts which has not been challenged by the revenue in its appeal. The CIT(A) deleted the addition made consequent to disallowance of set off of brought forward deficit for AY 07-08. The CIT(A) however confirmed the addition made consequent to disallowance of set off of brought forward deficit for AY 08-09. Aggrieved by the relief allowed to the Assessee, the Revenue is in appeal before the Tribunal. Aggrieved by the relief not allowed by the CIT(A), the Assessee is in appeal before the Tribunal.
We shall now deal with the issue with regard to disallowance of deprecation. In the course of assessment u/s. 143(3) of the Act, the AO noticed from the details of depreciation claimed, that the depreciation was claimed on assets, the cost of acquisition of the said assets had been claimed by the assessee as capital expenditure towards application of funds towards the objects of the trust and allowed as such. According to the AO, allowing such a claim would amount to allowing double deduction.
On the facts of the present case, he was of the view that the decision of the Hon’ble Supreme Court in the case of Escorts Limited & another Vs. Union of India 199 ITR 43 is squarely applicable, wherein it has been categorically held that when deduction u/s 35(2)(iv) is allowed in respect of capital expenditure on scientific research, no depreciation is allowable u/s 32 on the same asset.
The assessee pointed out that Hon'ble High Court of Karnataka in the case of All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of St. Ann, 146 ITR 28 (Kar) has taken the view that where capital expenditure on acquisition of depreciable asset is considered as application of income for charitable purpose, allowing depreciation on the very same capital asset would not amount to double allowance. The assessee also pointed out that the decision of Escorts Ltd. (supra) will not be applicable as it was rendered on a different set of facts.
The AO however, held that allowance of depreciation when the cost has already been recovered by way of exemption as application of income amounts to double deduction and double benefit on the same asset. The AO referred to the decision of the of Hon'ble High Court of Kerala in the case of DDIT(E) v. Lissie Medical Institutions, 348 ITR 344 (Ker) wherein it was held that allowing depreciation of a depreciable asset when the cost of acquisition of depreciable asset was allowed as application of income for charitable purpose amounts to double depreciation and therefore depreciation cannot be allowed. The AO also distinguished the cases cited by the Assessee.
On appeal by the Assessee, the CIT(A), held that the claim of the Assessee for depreciation has to be allowed but only on the opening WDV of the block of assets. The Assessee’s claim was to allow depreciation on the closing WDV of the assets including the addition made to the block of assets during the previous year.
Aggrieved by the order of the CIT(A), the Revenue has preferred ground No.1 in its appeal and the Assessee has preferred ground no.2 in its appeal before the Tribunal.
We have heard the submissions of the ld. DR, who relied on the order of AO. 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:-
“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. 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 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.”
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) in so far as it relates to allowing depreciation on opening WDV has to be confirmed but has to be reversed in so far as it relates to not allowing depreciation on the closing WDV of the block of assets. In other words, the Assessee should be entitled to depreciation as claimed by it. Consequently ground No.1 raised by the Revenue is dismissed while ground no.2 raised by the Assessee is allowed.
The other issue that arises for consideration in the appeal by the Revenue is Grounds No.2 and that raised by the Assessee in its ground of appeal
No.3 is as to whether the CIT(Appeals) was justified in holding that assessee, a trust, is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? The assessee is a trust registered u/s. 12A of the Act. For the A.Y. 2009-10, the assessee filed a return of income claiming carry forward of excess expenditure incurred during the AY 08-09 & 07-08 totalling Rs.2,74,97,241 which comprises of brought forward deficit of Rs.2,66,04,960 pertaining to AY 08-09 and Rs.8,92,281 pertaining to brought forward deficit of AY 07-
08. The assessee sought setting off of excess expenditure over income in the earlier AYs as application of income in the subsequent assessment year i.e., in AY 2009-10. According to the AO there was no provision in the Act for carry forward of excess expenditure of earlier year to be adjusted against income of the subsequent year and he therefore denied the claim of the Assessee.
14. On appeal by the assessee, the CIT(A) directed the AO to allow claim of the assessee for set off in so far as it relates to deficit of AY 07-08 but denied the claim in so far as it relates to AY 08-09. The following were the reasons given by the CIT(A) in this regard:-
“16. Ground No. 4 & 5 relate to claim of loss/deficit of earlier years against income of the current year: As per details filed by the Ld. AR, such deficit or excess expenditure over income related to AY 2007-08 (Rs.892,281/-) and AY 2008-09 (Rs. 26,604,960/-), which were to be carried forward and set off against current year’s income. It has also been explained that the major source of income of the appellant is the donation received from parent company, and expenditure in AY 2007-08, and AY 2008-09 were met primarily from the bank loan guaranteed by the parent company and/or the share capital/application money, pending the FCRA approval and receipt of donation from the parent company. Same amounts represent creditors or unpaid bills. It is important to know the nature of deficit and the source of funding of such expenses. The deficit may arise in a given year only when expenses in excess of income are met out of loans/borrowings or by way of unpaid bills, drawn from, the corpus or accumulations made u/s 11(1)(a). 16.2 Depending on the nature and type of deficit, it would have to be examined, as to whether it could be set off against the income of a subsequent year. For example, in case of unpaid bills, or drawings from corpus, the amount of such expenses in an earlier year will have to be owed to be set off or adjusted against the income of a subsequent year, before arriving at the ‘income’ of such subsequent year for examining its application/accumulation. In case of excess expenses being met out from loan in an earlier year, as is the case of the appellant repayment being application of income, the same would be allowed only when the loan is repaid and not other-wise. In the present case, the assessee has incurred interest expenses and claimed as application in its accounts and the same has been allowed by the Assessing Officer. However, the loan amount of Rs.317,13,071/- as on 313.2008 has remained unpaid even on 31.3.2009. Thus set off of deficit in AY 2008-09 on account of loan funds, against current year’s income without actual repayment of such loans and liabilities, cannot be allowed either as deduction from gross income or application of income. Such action involves risk of double deduction as and when repayment of loan is made in a future year, say AY 2011-12, and claimed as application of income of that year. 16.3 It may be relevant to refer to the Hon’ble Bombay Tribunal decision in case of Income-tax Officer v. Trustees of Sri Sathya Sai Trust reported in [19901 33 lTD 320 (BOM.), which held as under: Provisions of section 11 will show that the exemption that is contemplated is in respect of the income mentioned in that section and which is otherwise includible in the total income. The scheme contemplates a Computation of the total income by the ITO as the first step. Income applied for charitable purpose is thereafter made exempt. If there is a loss or deficit in the computation of the total income, that alone, therefore, can be carried forward. Where the deficit arises as a result of excess spending for charitable purposes, such excess would not form part of the total income or loss and the same, therefore, cannot be carried forward. The claim of the assessee that the advance received by it in regard to the sale of property was in the nature of income, had also to be rejected for the simple reason that such advance could not go into the computation of the total income. If would be so even if the income’ of the trust for the purpose of the Act could not be regarded in a commercial sense. Thus, in the present case, there was no loss in the computation of the total income of the trust which was entitled to be carried forward. The deficit arose out of the application of sums not in the nature of income and such deficit was not capable of being carried forward. Accordingly, the order passed by the ITO in which he did not allow the carry forward of the deficit was to be restored and that of the AAC was to be set aside. 16.4 Thus deficit arising from application of sums (loans/advances) which are not in the nature of income, or unpaid liabilities cannot be carried forward. They could be allowed in the year of payment or repayment. Similarly excess expenditure met out of accumulations u/s 11(1)(a) of earlier or current year’s income could not be carried forward for set off, as such part of income are meant to be applied for the charitable purpose in any case. 16.5 To conclude, in the appellant case, the deficit of AY 2007- 08 (Rs.892,281/-) was met from share capital application money etc. which shall be allowed to be set off against the-gross-income of the assessee. The deficit of AY 2008-09 (Rs. 26,604,960/-), having been met from the bank loan cannot be set off or adjusted against current year’s income and the same shall be allowed as application of income in the year of repayment, or payment of unpaid bills as the case may be. Thus, the Assessing Officer is directed to allow following deductions from the gross income of the appellant to arrive at the ‘income’ before application/accumulation: (a) Bad debts written off (b) Depreciation on the opening value of the assets (c) Deficit or excess of expenditure of AY 2O07-08_ 17.2 The appellant has filed intimation before the Assessing Officer, under Explanation 2 to section 11(1) for accumulation of unutilized income in excess of 85% of income after deductions as above. The Assessing Officer is directed to compute such surplus amount permissible to be accumulated for application within the stipulated period or as stipulated u/s 11(2) of the IT Act.”
Aggrieved by the relief allowed to the Assessee in the order of CIT(A), the Revenue has raised ground No.2 before the Tribunal. Aggrieved by the denial of claim of set off of brought forward deficit of AY 2008-09, the Assessee has raised grounds 3 & 4 in its appeal.
In ground No.2, the Revenue has reiterated the stand of the AO that there is no provision in the Act to allow carry forward of excess application of income for set off as application of income in subsequent years. The ld. DR reiterated the stand of the Revenue as contained in the grounds of appeal.
We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj), CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj.). In CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom) it was held that in case of charitable trust whose income is exempt under s. 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be application of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under s. 11 in past years. In Govindu Naicker Estate VS. ADIT 248 ITR 368 (Mad), the Hon’ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that s. 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other.
The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 146 ITR 28 (Kar.).
We are therefore of the view that there is no merit in ground No.3 raised by the Revenue. Accordingly, the same is dismissed.
As far as ground Nos.3 & 4 raised by the Assessee in its appeal are concerned, the learned counsel for the Assessee submitted before us that the apprehension of the revenue that when the loan is repaid the Assessee would again claim deduction and hence the Assessee would get double deduction is without any sound basis. We are of the view that the claim of the Assessee for set off has to be allowed but with a rider that the Assessee in the year when the loan is repaid should not claim deduction of the sums repaid as loan as application of income. The above direction, to which the learned counsel for the Assessee had no objection, in our view, will sufficiently safeguard the interest of the Revenue. Accordingly, ground No.3 & 4 raised by the Assessee is allowed and the AO is directed to allow the set off of brought forward deficit as deduction.
In ground No.3 the Revenue has challenged the direction of the CIT(A) to allow accumulation u/s.11(2) of the Act. In our view the aforesaid ground is no academic in view of the conclusions that the Assessee will be entitled to set off of brought forward deficit for AY 2008-09 & 2007-08. There would be unutilized surplus and therefore there is no necessity to adjudicate Ground No.3 raised by the revenue.
In the result, the appeal by the revenue is dismissed, while the appeal by the Assessee is allowed.
Pronounced in the open court on this 30th day of September, 2015.