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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ
PER SHRI VIJAY PAL RAO, JM:
This appeal by the revenue is directed against the order dated 17-
03-2014 of CIT(A), Mysore for the assessment year 2011-12.
The revenue has raised the following grounds;
“1. The order of the ld.CIT(A) is against law and facts of the case.
2 ITA No.658(B)14
Depreciation:
2.1. The ld.CIT(A) erred in allowing the assessee’s claim for depreciation on assets put into use during the accounting year relevant to this asst. year even though the entire cost of these assets have been claimed by the assessee as application of income for charitable activities.
2.2 The ld.,CIT(A) erred in not following the ratio laid down by the Hon’ble Apex Court in the case of Escorts Ltd and another Vs Union of India 199 ITR 43 – wherein it is held that a double deduction cannot be presumed in the absence of a clear statutory indication.
2.3 The ld,CIT(A) failed to take cognizance of the fact that allowing of total cost of the asset as an application of income and allowing of depreciation on the value of such assets in the same year results in do8uble deduction and is not admissible in the absence of clear statutory indication.
2.4 The ld,CIT(A) erred in not following the ratio laid down by the Hon’ble Karnataka High Court in the case of Lissie Medical Institution ITA No.42of 2011 dated 17-02-2012 wherein it is held that in order to reflect the true income to be available for application for charitable purposes, the assessee should write back in the accounts the depreciation amount to form part of Income to be accounted for applications for charitable purposes.
2.5 The ld.CIT(A) failed to consider that the decision in the case of IT Vs Institute of Banking 264 ITR 110(Bom.) is regarding allowing of depreciation on assets hose value was
3 ITA No.658(B)14
allowed in the preceding years as an application of income, and not on allowing of depreciation in the same assessment year in which the cost was allowed as an application of income and, therefore, is distinguishable.
2.6 The order of the CIT(A) may be set aside and that of AO be restored by placing reliance on the recent judgment of Hon’ble High Court of Delhi in the case of DIT(Exemption) Vs Charanjiv Charitable Trust dated 18.3.2014 in ITA No.321 to 323/2013 wherein it is held that Tribunal was not justified in directing the allowance of depreciation in respect of assets, the cost of which has been allowed as deduction as application of income of the Trust.
Carry forward of deficit
3.1 The ld. CIT(A) erred in directing the AO to allow carry forward of deficit of assessment years 201-02 and onwards for set off against the surplus of asst.year 2006-07, when there is no provision in the IT Act to allow carry forward of such deficit, and the number of years for which such carry forward of deficit for set off can be allowed. The ld.CIT(A) erred in not specifying the provisions of the IT Act, while directing the AO to allow carry forward of deficit.
3.2 The ld.CIT(A) erred in placing reliance on the decision in the case of CIT Vs Institute of Banking 264 ITR 110(Bom.) for allowing carry forward and set off of deficit of earlier years, even though the said decision was not pursued in further appeal in view of nil tax effect involved, and as per sec.268A the said decision is not binding in respect of this assessee. The ld.CIT(A) also erred in failing to take
4 ITA No.658(B)14
congnizance of the decision of Hon’ble Apex Court in the case of Union of India Vs Dharmendra Textiles Processors (2008) 306 ITR 277(SC) wherein the Apex Court held that the Hon’ble High Courts can only interpret the law and not legislate, and legislative casus omissus cannot be supplied by judicial interpretative process.
Gain on revaluation of investments
4.1 The ld. CIT(A) erred in not considering the fact that during the year the assessee has gained an amount of Rs.71,46,120/- on revaluation of investments which is credited to the Income and expenditure account.
4.2 The ld.CIT(A) erred in not taking cognizance of the fact that assessee cannot adopt dual method of valuation of investments i.e one for computing the income and expenditure account and other for arriving at the income for income tax purpose.
4.3 The ld.CIT(A) erred in not taking cognizance of the fact that in the AY: 2001-02 the provision debited in the Income and Expenditure account was disallowed, provision being not an allowable expenditure whereas the fact in the assessee’s case for the year under consideration is that gain on revaluation of investments is accounted for in the books of accounts but reduced from the computation of income for income tax purpose.
For these and other grounds that may be urged at the time of hearing the orders of CIT(A) may be set aside on these points and that of AO be restored.
5 ITA No.658(B)14
The applicant craves leave, to add delete, amend or modify any of the grounds of appeal”
Ground no.1 is general in nature and does not require any
specific finding for adjudication.
Ground no.2 is regarding claim of depreciation on the asset put
into use.
4.1 The assessee is a registered charitable trust with the object of
promoting education and advanced studies in medicine, science etc. The
assessee trust was granted registration u/s 12AA of the IT Act, 1961 and
also received approval for exemption u/s 10(23C)(vi) of the IT Act, 1961.
The assessee filed its return of income showing NIL income and excess of
expenditure over the income. The AO completed the assessment u/s
143(3). During the course of assessment proceedings, the AO noted the
assessee claimed depreciation on the assets, even though the entire cost
of the assets were claimed by the assessee application of income and
exempt u/s 11 of the IT Act, 1961. Thus, the AO was of the view that
claiming capital expenditure as application of income and again claiming
depreciation on the same amount results in double deduction. The AO
placed reliance on the judgments of the Hon’ble Supreme Court in case of
M/s Escorts Ltd and Another 199 ITR 43 as well as the decision of the
Hon’ble Kerala High Court in case of Lissie Medical Institutions Vs CIT,
Cochin 348 ITR 344 and held that double deduction cannot be allowed.
6 ITA No.658(B)14
Accordingly, the AO disallowed the claim of depreciation to the tune of
Rs.70,40,56,376/-.
On appeal, the CIT(A) has allowed the claim of the assessee by
following the order of this Tribunal in case of ACIT Vs Shri
Adichunchunagiri Shikshana Trust 19 ITR(Trib.) 828.
Before us, the learned DR has strongly supported the order of the
AO and placed reliance on the judgments of the Hon’ble Kerala High
Court in case of Lissie Medical Institutions, (Supra. The learned DR has
pointed out that the Hon’ble Kerala High Court has decided this issue
against the assessee by considering all the decisions which were relied
upon by this Tribunal in case of ACIT Vs Adichunchunagiri Shikshana
Trust (Supra).
The learned DR submitted that the Hon’ble High Court has
observed that when the expenditure incurred for acquisition of
depreciable assets itself is treated as application of income for charitable
purpose u/s 11(1)(a) of the IT Act, 1961 than, the cost of such asset
should be treated as NIL.
The learned DR has thus, contended that while the income of the
trust has to be computed in commercial sense and the capital
expenditure was allowed as application of income for charitable purpose,
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than, the claim of depreciation on such expenditure is not permissible
being a double deduction.
On the other hand, learned AR has submitted that the decision
of Hon’ble Supreme Court in case of M/s Escorts Ltd (Supra) is not
applicable in case of a trust because the said decision was on the issue of
allowability of claim of depreciation on an expenditure on which the claim
u/s 35 was also made and allowed. In the case in hand, there is no
double claim of depreciation. Therefore, there is no bar in allowing the
depreciation on the capital expenditure for acquiring the assets which
were put to use for charitable purposes. The learned AR has submitted
that an identical issue has been considered and decided by various
decisions of the Hon’ble High Courts as well as by this Tribunal. He has
relied upon the following decisions;
CIT Vs Institute of Banking 264 ITR 110.(Bom.)
CIT Vs Manav Mangal Society 328 ITR 421(P&H)
CIT Vs Society of the Sistersof St.Anne 146 ITR 28
4.ACIT Vs Shri Adichunchunagiri Shikshana Trust 19 ITR (Trib.)828
CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust 198 ITR 598 (Guj.)
CIT Vs Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj.)
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CIT Vs Rao Bahadur Calavala Cunnan Chetty Charities 135 ITR 485(Mad.)
CIT Vs Trustee of H.E.H The Nizam’s Supplemental Religious Endowment Trust 127 ITR 378.(A.P)
The learned AR than referred the recent decisions of the co-
ordinate bench of this Tribunal dated 20-03-2015 in case of ACIT Vs City
Hospital Charitable Trust, Bangalore in ITA No.676(B)/2014 and
submitted that the Tribunal after considering the judgment of the Hon’ble
Kerala High Court in case of Lissie Medical Institutions (Supra) has
decided this issue in favour of assessee.
We have heard the rival submissions as well as relevant
material on record. So far as the facts relating to this issue of claim of
depreciation are concerned, there is no dispute that the assessee incurred
an expenditure for acquisition of the asset to the tune of
Rs.411,14,20,599/- and claimed the same as application of income.
There is no dispute before us on the said claim of application of income.
Since the assessee also claimed depreciation of Rs.70,40,56,376/-on such
capital asset the AO disallowed the claim of depreciation on the ground
that it would amount to double deduction. We find that the Hon’ble
Kerala High Court in case of Lissie Medical Institute (Supra) held that the
claim of depreciation on capital expenditure for acquiring of the asset
would amount to double deduction when the assessee has already
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claimed the said capital expenditure as application of income. We find
that in a series of other judgments including the judgments of the Hon’ble
Bombay High Court and Hon’ble Punjab & Haryana High Court as well as
the other decisions as relied upon by the learned AR, a contrary view has
been taken by holding that the claim of depreciation on the capital
expenditure would not amount to double deduction even if the said
capital expenditure was claimed as deduction on account of application of
income. Thus, it is clear that there are divergent views by different High
Courts on this issue however, the judgment and rulings of the
jurisdictional High Court is binding on this Tribunal. In case of CIT Vs
Society of the Sisters of St. Anne 146 ITR 28 (Supra) the Hon’ble
jurisdictional High Court while dealing with the issue of allowability of
claim of depreciation has held as under;
“13. It is clear from the above provisions that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the perosn in receipt of the income. The expression "total income" has been defined under s. 2(45) of the Act to mean "the total amount of income referred to in s. 5 computed in the manner laid down in this Act". The word "income" is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word "income", therefore, is a much wider term than the expression
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"profits and gains of business or profession". Net receipt after deducting all the necessary expenditure of the trust (sic).
There is a broad agreement on this proposition. 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,
11 ITA No.658(B)14
and should, therefore, be charged against those profits as they are earned."
"If depreciation is not provided for, the books will not contain a true 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 provisin is made for depreciation, the balance sheet will not present a true and 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."
In CIT v. Indian Jute Mills Association [1982] 134 ITR 68, the Calcutta High Court, while construing the expression "expenditure incurred" in s. 44A of the Act, observed :
"depreciation claimed shall include the expenditure incurred."
There are only two recognised methods of accounting : (i) cash basis, and (ii) merecantile 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. v. CIT [1953] 23 ITR 230 at 230 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
12 ITA No.658(B)14
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.
Mr. Srinivasan, however, urged that there are enough indications in s. 11 to exclude the mercantile system of accounting. The learned counsel relied upon s. 11(1)(a) and s. 11(4) in support of his contention. We do not think that there is anything in these sub-sections to support the contention of Mr. Srinivasan. Explanation to s. 11(1)(a), on the contrary, takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not be on cash basis only. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the I.T.Act in respect of business undertaking.
The depreciation if it is not allowed as a necessary deduction for computing the income from the charitable insitutions, then there is no way to preserve the corpus of the trust for deriving the income. The Board also appears to have understood the "income" u/s. 11(1) in its commercial sense. The relevant portion of the Circular No. 5-P (LXX-6) of 1968, dated July 19, 1968, reads :
"Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word 'income' should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof
13 ITA No.658(B)14
towards the purpose of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax u/s. 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption u/s. 11(1)."
In CIT v. Trustee of H. E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378, the Andhra Pradesh High Court has accepted the accounts maintained in respect of the trust in conformity with the principles of accountancy for the purpose of determining the income derived from the property held in trust.
In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 at 495, the Madras High Court observed :
"The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by s. 14."
In the result, we answer the question in the affirmative and against the Revenue”.
A similar view has been taken by the Hon’ble Bombay High
Court in the case of Institute of Banking 264 ITR 110(Supra) as well as by
14 ITA No.658(B)14
the Hon’ble P&H High Court and in case of CIT Vs Manav Mangal Society
328 ITR 421 (Supra). The view taken in the case of Institute of Banking
(Supra) has been re-affirmed by the Hon’ble Bombay High Court in the
recent decision dated 23-03-015 in case of DIT(Exemption), Mumbai Vs
Ville Parle Kelavani Mandal, Mumbai by observing inpara-6 as under;
“6. 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 latter 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 110/131 Taxman.386(Bom.) is enough”.
12.1 Therefore, in view of the judgment of the Hon’ble
jurisdictional High Court in case of Society of the Sisters of St. Anne
(Supra) as well as various decisions as relied upon by the learned AR, we
have no reason to take a divergent view from the view taken by the co-
ordinate bench of this Tribunal in case of Shri Adichunchunagiri
15 ITA No.658(B)14
Shikshana Trust (Supra) as well as in case of City Hospital Charitable
Trust (Supra), wherein the co-ordinate bench of this Tribunal has decided
an identical issue in para-7 to 9 as under;
“7. 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 ITA No.676/Bang/2014 Page 4 of 11 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
16 ITA No.658(B)14
(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.
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
17 ITA No.658(B)14
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.
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) does not call for any interference. Consequently grounds No.2 to 2.5 raised by the Revenue are dismissed”.
Following the judgment of the Hon’ble jurisdictional High Court in
case of Society of the Sisters of St. Anne as well as the decision of the co-
ordinate bench of this Tribunal, we do not find any error or any illegality in
the order of the CIT(A), qua this issue.
18 ITA No.658(B)14
Ground no.3 regarding carry forward of deficit. The assessee
claimed a total deficit of Rs.933,27,87,598/- inclusive of current year
deficit to be carry forward for setting up of the same as application of
income in subsequent assessment years. The AO rejected the claim of the
assessee on the ground that in the Income Tax Act, there is no provision of
carry forward of excess of expenditure over income.
On appeal, the CIT(A) has allowed the claim of the assessee by
following the decision of this Tribunal dated 16- 02-2010 in case of Dr.
T.M.A Pai Foundation in ITA No.486 to 491(B)/2009. The CIT(A) has also
taken note of the fact that in assessee’s own case for the assessment year
2010-11 this issue was decided by the CIT(A) in favour of the assessee.
We have heard the learned DR as well as the learned AR and
considered the relevant material on record. There is no dispute that an
identical issue was considered and decided by this Tribunal in favour of
the assessee in case of Dr.T.M.A Pai Foundation, Manipal. The learned
AR of the assessee also relied upon the decision of this Tribunal in case of
CIT Vs City Hospital Charitable Trust, Bangalore (Supra). We note that
the Tribunal in case of City Hospital Charitable Trust, while dealing with
the issue of carry forward of excess expenditure over income has held that
in para-14 as under;
19 ITA No.658(B)14
“ 14. 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 ITA No.676/Bang/2014 Page 9 of 11 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
20 ITA No.658(B)14
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, ITA No.676/Bang/2014 Page 10 of 11 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.).
21 ITA No.658(B)14
15.1 As it is clear from the above decision that the co-ordinate
bench of this Tribunal has followed the decision of the Hon’ble Rajasthan
High Court in case of CT Vs Maharana of Mewar Charitable Foundation
164 ITR 439(Raj.) as well as the decision of the Hon’ble Bombay High
Court in case of CIT Vs Institute of Banking - 264 ITR 110 (Supra).
Accordingly, following the decision of the co-ordinate bench in the case of
City Hospital Charitable Trust, Bangalore(Supra), we uphold the order of
the CIT(A) on this issue.
Ground no.4 regarding gain on revaluation of investments
treated as income of the assessee. During the course of assessment
proceedings the AO noted that the assessee has deducted a sum of
Rs.71,46,120/- from its gross income. On query, the assessee explained
that the gain on revaluation of investments as per the market value as on
31-03-2011 was accounted however, it was not actually realized. The
assessee claimed that it is only a book adjustment and no real income was
realized and hence, the same was reduced from the gross receipts. The AO
did not accept the explanation of the assessee and added back the said
amount to the assessee’s returned income.
On appeal, the CIT(A) deleted the addition made by the AO.
22 ITA No.658(B)14
17.1 We have heard the learned DR as well as learned AR and
considered the relevant material on record. The learned AR has relied
upon the judgment of the Hon’ble Supreme Court in case of Indo Rama
Synthetics (I) Ltd Vs CIT 330 ITR 363 (SC) and submitted that it is only a
notional gain on revaluation of the asset without actual realization. We
find that though, the judgment of the Hon’ble Supreme Court is in relation
to book profit u/s 115JB and an adjustment on account of increase in the
reserves due to revaluation of the asset, however, the observations of the
Hon’ble Supreme Court are relevant on the point of actual increase in the
income. The relevant observation and conclusion of the Hon’ble Supreme
Court are in paras -20-25 are as under;
“20. Book profit is not defined in the Act. It is income computed under the company law. By virtue of the MAT provisions, in the case of a company whose total income as computed under the normal provisions of the Act is less than 30% of the book profit, the total income chargeable to tax will be 30% of the book profit as computed. For the purposes of Section 115J, book profit will be the net profit as shown in the P & L Account prepared in accordance with the provisions of Schedule VI to Companies Act, 1956 after certain adjustments. The net profit will be increased by income tax paid or payable, amount carried to any reserve, provision made for liabilities etc. provided the amount(s) is debited to the P & L Account. The amount so arrived at is to
23 ITA No.658(B)14
be reduced by item (i) to item (vii) including amounts withdrawn from reserves, if any such amount is credited to P & L Account. Clauses (i) to (vii) of the explanation to Section 115JB(2) represent items of reduction from the net profits. Clause (i) mandates reduction for the amount(s) withdrawn from the reserves earlier created, provided such amount(s) is credited to P & L Account. Such credit is mandated so that the true working result gets reflected in the financial statement of the assessee-company. The said clause (i) contemplates only those reserves which actually affect the net profits as shown in the P & L Account (see also clause (ii) for comparison). The object of various clauses (i) to clause (vii) is to find out the true working result of the assessee- company.
In the present case, the adjustment made in the P & L Account was as per Accounting Standards 6 and 10 read with Guidance Note issued by Institute of Chartered Accountants of India which is in conformity with Section 211 of the Companies Act. The said adjustment was primarily in the nature of contra adjustment in the P & L Account and not a case of effective credit in the P & L Account (as contemplated in clause (i) of explanation). The credit in the P & L Account implies that the P & L Account per se has been effectively credited by the said amount. Thus, the amount withdrawn from any reserve must in effect impact the net profit as shown in the P & L Account. As per accounting principles, the contra adjustment does not at all affect any particular account to which it has been carried.
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Unless an adjustment has the effect of increasing the net profit as shown in the P & L Account, that entry cannot be said to be a credit to the P & L Account and, therefore, though the amount has been literally credited to the P & L Account, however, in substance there is no credit to P & L Account. MAT provisions were introduced as number of zero tax companies had grown. It was found that companies had earned substantial book profits and had paid huge dividends but paid no tax. In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending 31.3.2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that MAT provisions had been introduced. The object of MAT provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the explanation toSection 115JB(2) in respect of depreciation has been rightly rejected by the AO.
Take the facts of the present case. As stated above, the revaluation reserve of Rs.288,58,19,000/- was created during earlier assessment year 2000-01. During the accounting year ending 31.3.2001 (assessment year 2001-
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02), the profits of assessee stood at Rs.120,18,97,000/- whereas depreciation stood at Rs.127,57,06,000/-. Depreciation is a no-cash charge against the profits. Thus, company had a loss of Rs.7,38,09,000/- (i.e. Rs.127,57,06,000/- of depreciation as against profit of Rs.120,18,97,000/-). However, by withdrawing Rs.26,11,74,000/-, being the differential depreciation, from the revaluation reserve of Rs.288,58,19,000/-(which is only a notional adjustment entry to balance both sides of the balance sheet) and reducing it from the depreciation of Rs.127,57,06,000/-, the assessee artificially brings down the depreciation only to Rs.101,45,32,000/- which is then deducted from the profits before depreciation amounting to Rs.120,18,97,000/- so that there is a profit of Rs.18,73,65,000/-. This is how the loss of Rs.7,38,09,000 got converted to profit of Rs.18,73,65,000/-. Thus, the financial statement for the year ending 31.3.2001 is made to look healthy.
The reasons given hereinabove are in addition to the reasons given by the Authorities below while rejecting the claim of the assessee.
The matter could be examined from another angle. To recapitulate the facts, the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending 31.3.2000) and amount of enhancement in valuation was Rs.288,58,19,000/- which was credited to the revaluation reserve. In other words, at
26 ITA No.658(B)14
the time of revaluation of assets, the said figure of Rs.288,58,19,000/- was added to the historical cost of assets on the asset side of the balance sheet and in order to equalize both sides of the balance sheet the revaluation reserve to that extent was created on the liability side. Thus, the figure of profit remained untouched so far as the revaluation of assets to the tune of Rs.288,58,19,000/- is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., assessment year 2001-02, an amount of Rs.26,11,74,000/-, being the differential depreciation, was transferred out of the said revaluation reserve of Rs.288,58,19,000/- and credited to the P & L Account which the A.O. disallowed by placing reliance on the proviso to clause (i) of the explanation to Section 115JB(2). Consequently, the A.O. added back the saidamount of Rs.26,11,74,000/- to the net profits. We agree with the A.O. Under the provisions, as they then existed, certain adjustments were required to be made to the net profit as shown in the P & L Account. One such adjustment stipulated that the net profit shall be reduced by the amount(s) withdrawn from any reserves, if any such amount is credited to the P & L Account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of Section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to P & L Account. Now, from the above facts, it is clear that neither the said
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amount of Rs.288,58,19,000/- nor Rs.26,11,74,000/- had ever gone to increase the book profits in the said year ending 31.3.2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the P & L Account. Thus, the proviso to clause (i) of the explanation to Section 115JB(2) comes in the way of the claim for reduction made by the assessee. In our view, the reduction under clause (i) to the explanation could have been availed only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. One more fact needs to be highlighted. In this case, as indicated above, the revaluation reserve stood created during the earlier assessment year 2000-01. It has been vehemently argued on behalf of the assessee that creation of such reserve did not impact the profits of that year. The facts enumerated hereinabove shows that though the profit was not impacted, depreciation as the head of A/c. was impacted. By inter play of the balance sheet items with Profit & Loss A/c. items the assessee, as stated above, has sought to project the loss of Rs.7,38,09,000/- as profit of Rs.18,73,65,000/-.
Thus, it is clear that mere revaluation of asset would not increase
income or receipt of the assessee, until and unless the said gain of
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revaluation is realized. Therefore, the gain on revaluation of the
asset/investments without actual realization cannot be treated as income
of the assessee. Accordingly, this ground of revenues appeal is dismissed.
In the result, the appeal of the revenue is dismissed.
Pronounced in the open Court on this 24th day of July, 2015.
Sd/- Sd/- (JASON P BOAZ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER D a t e d : 24-07-2015 Place: Bangalore am* Copy to : 1 Appellant 2 Respondent 3 CIT(A) Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order
AR, ITAT, Bangalore