DCIT (E) 2(1), MUMBAI vs. SOCIETY OF THE SERVANT OF THE HOLY SPIRIT, MUMBAI

“This reference is made at the instance of the Revenue under section 256(1) of the Income-tax Act, 1961, under which the following three questions have been referred to us for our opinion:

"1 Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Assessing Officer to allow depreciation on the assets the cost of which has been fully allowed as application of income under section 11 in the past years?

2 Without prejudice to the ground No 1, whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Assessing Officer to allow depreciation of Rs 49,453 on assets received on transfer, when the assessee had not incurred the cost of acquiring the assets?

3 Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the assessee to carry forward the deficit of earlier year and set it off against the surplus of subsequent years when the same was not allowable in the case of the assessee- trust in whose case income exempted under section 11 of the Income-tax Act, 1961?"

Facts:

Society of the Servant of the Holy Spirit The assessee is a charitable trust For the accounting year ending December 31, 1984 (assessment year 1984-85) a return of income was filed on June 28, 1985, by the assessee declaring a deficit of Rs 7497 lakhs In the revised return filed by the assessee on April 3, 1986, the deficit was increased to Rs 8918 lakhs This revision of accounts was authorised by the Bombay Public Trust Registration Office The assessee is a charitable trust registered under the Bombay Public Trust Act It is also registered under section 12A of the Income-tax Act The assessee-institute is governed by a board consisting of Executive Officers of RBI, Central Recruitment Board, Banking Services Recruitment Board, etc The object of the assessee is charitable in nature The income of the assessee is exempt under section 11 of the Income-tax Act The assessee had claimed depreciation which was rejected by the Assessing Officer on the ground that capital expenditure incurred during the accounting year was allowed as a deduction from the income of the assessee and, therefore, the claim of the assessee for depreciation on buildings was disallowed Further, the assessee had claimed depreciation on furniture and fixtures to the tune of Rs 49,453 at 10 per cent of the written down value which was disallowed by the Assessing Officer on the ground that the said assets have been received by the assessee on transfer from_National Institute of Bank Management That institute was also a charitable trust Its income was also exempt under section 11 of the Income-tax Act The Assessing Officer did not allow depreciation on fixtures and furnitures on the ground that full deduction had been allowed in respect of capital cost of furniture and fixtures and if the depreciation is allowed, as claimed by the assessee, it would result in double deduction Further, during the assessment year in question the assessee had carried forward the deficit of the earlier years and had adjusted the deficit of the earlier years against the surplus of the subsequent years which was disallowed by the Assessing Officer on the ground that such carry forward was applicable only to income assessable under the head "Profits and gains of business" and such carry forward and adjustment was not permissible in case of income assessable under section 11 to section 13 of the Income-tax Act as the income of the charitable trust was not assessable under the head "Profits and gains of business"

Society of the Servant of the Holy Spirit Therefore, the assessee carried the matter in appeal on all the three points which are interrelated to the appellate authority which decided the matter in favour of the assessee The decision of the appellate authority was confirmed by the Tribunal Hence, this reference has come before the court at the instance of the Department Findings:

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 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 temple property which was a trust property During the course of assessment proceedings for the 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 a provision in respect of computation of income of the trust from 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 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 of the Society of the Servant of the Holy Spirit 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 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 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 High Court, we answer question No 1 in the affirmative, ie, 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 Director of Income-tax (Exemption) v Framjee Cawasjee Institute [1993] 109 CTR 463 In that case, the facts were as follows: The assessee was the 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 Appellate Assistant Commissioner The appeal was rejected The Tribunal, however, took the view that when the Income-tax Officer stated that full expenditure had 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 Society of the Servant of the Holy Spirit affirmative, ie, in favour of the assessee and against the Department Now coming to question No 3, the point which arises for consideration is : whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilisation of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a charitable trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income-tax Act and that the income of the charitable trust was not assessable under the head "Profits and gains of business" under section 28 in which the provision for carry forward of losses was relevant That, in the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years We do not find any merit in this argument of the Department 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 has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the trust under section 11(1)(a) of the Act Our view is also supported by the judgment of the Gujarat High Court in the case of CIT v Shri Plot Swetamber Murti Pujak Jain Mandai [1995] 211 ITR 293 Accordingly, we answer question No 3 in the affirmative, ie, in favour of the assessee and against the Department Accordingly, reference is disposed of with no order as to costs.”

Society of the Servant of the Holy Spirit In the light of the above decision, the judicial discipline demands that the Tribunal is expected to follow the decision from Hon’ble Jurisdictional High Court. So far as, the contention of the ld. DR that the Ld. Commissioner of Income Tax (Appeal) ignored the decision from Hon’ble Apex Court (Supra), is concerned, we are of the view that if the Department is aggrieved by any decision from Hon’ble High Court then the remedy lies somewhere else, as available under the law. It is worth mentioning that while coming to a particular conclusion by the Hon’ble High Court, the decision from Hon’ble Apex Court was very much available. However, in view of the decision from Hon’ble jurisdictional High Court, wherein, another decision from Hon’ble Gujarat High Court in (1995) 211 ITR 293(Guj.) was also considered, holding that income derived from the trust property also has to be computed on commercial principle and if “commercial principles” are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in earlier years against the income earned by the trust in subsequent years will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions, contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the trust u/s 11(1)(a) of the Act. Even otherwise, in a later decision in DIT (E) vs Shri Vile Parle Kelavani Mandal (2015) 58 taxman.com 288, the Hon’ble jurisdictional High Court held as under:-

Society of the Servant of the Holy Spirit “As far as question no.4 is concerned, this Court has repeatedly held that there is nothing like double deduction. When the assessee has acquired an asset from the income of the trust and thereafter the amount that is claimed is the depreciation on the use of the assets, such depreciation claim does not mean double deduction. The deduction earlier claimed is towards application of funds of the trust for acquiring assets. The later is depreciation and it is permissible deduction considering the use of the assets. This has been clarified repeatedly by this Court. If any reference is required then the case of CIT vs Institution of Banking Personnel Selection (IBPS) (2003) 264 ITR 110/113 Taxman 386 (Bom.) is enough.”

Respectfully following the decision from Hon’ble jurisdictional High Court, we find no infirmity in the conclusion drawn by the Ld. Commissioner of Income Tax (Appeal). We affirm the same.

Finally, the appeal of the Revenue is dismissed.

This order was pronounced in the open in the presence of ld. DR at the conclusion of the hearing on 13/06/2016.