DCIT, UDUPI vs. M/S MANIPAL ACADEMY OF HIGHER EDUCATION, MANIPAL

Aggrieved by the order of the CIT (Appeals), Mysore dt.21.1.2014 for Assessment Year 2010-11,Revenue is now in appeal before the Tribunal raising the following grounds :- “1. The order of learned CIT (Appeals) is against law and facts of the case. DEPRECIATION 2.1 The learned CIT (Appeals) erred in allowing assessee's claim for depreciation on assets put into use during the accounting year relevant to this assessment year, even though the entire cost of these assets have been claimed by the assessee as an application of income for charitable activities. 2.2 The learned CIT (Appeals) 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 learned CIT (Appeals) 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 double deduction and is not admissible in the absence of clear statutory indication. 2.4 The learned CIT (Appeals) erred in not following the rtio laid down by the Hon'ble Kerala High Court in the case of Lissie Medical Institution of 2011 dt.17.2.2012 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 the income to be accounted for application for charitable purposes. 2.5 The learned CIT (Appeals) failed to consider that the decision in the case of CIT Vs. Institute of Banking 264 ITR 110 (Bom) is regarding allowing of depreciation on assets whose value was 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 CIT (Appeals) may be set aside and that of Assessing Officer 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 dt.18.3.2014 in ITA No.321 to 323/2013 wherein it is held tht 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 learned CIT (Appeals) erred in directing the Assessing Officer to allow carry forward of current year’s along with brought forward excess application / deficit amounting to Rs.746,58,02,350 be carried forward to the subsequent assessment years to set off the same as application of income, when there is no provision in the I T 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 learned CIT (Appeals) erred in not specifying the provisions of the IT Act while directing the Assessing Officer to allow carry forward of deficit. 3.2 The learned CIT (Appeals) erred in placing reliance on the decision in the case of CIT V Institute of Banking – 264 ITR 110 (Bom) for allowing carry forward and set off of deficit of earlier years, even though said decision was not pursued in further appeal in view of nil tax effect involved, and as per section 268A the said decision is not binding in respect of this assessee. The learned CIT (Appeals) also erred in failing to take cognizance 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.

4. For these and other grounds that may be urged at the time of hearing the Orders of CIT (Appeals) may be set aside on these points and that of Assessing Officer be restored.

.”

5. The Grounds raised at S.Nos.1, 4 and 5 being general in nature, no adjudication is called for thereon.

6. Grounds at S.Nos.2.1 to2.6 – Depreciation – Rs.47,23,82,365. 6.1.1 In the course of assessment proceedings, the Assessing Officer observed from the details of depreciation claimed, that the depreciation was claimed on assets, the cost of acquisition of which had been claimed by the assessee as capital expenditure towards application of funds for attainment of the objects of the trust and which were allowed as such. The Assessing Officer was of the view that allowing such claim of depreciation would amount to allowing double deduction. The Assessing Officer was of the opinion that, in the facts and circumstances of the case on hand, the decision of the Hon'ble Apex Court in the case of Escorts Limited and Another V Union of India 199 ITR 43 is squarely applicable, wherein it has been held that a double deduction cannot be presumed unless specifically provided for by law as being in addition to the normal deduction. It was held Section 35(2)(iv) is allowed in respect of capital expenditure on scientific research, no depreciation is allowable under Section 32 of the Act on the same asset. 6.1.2 The assessee submitted that the Hon'ble High Court of Karnataka in its decision in the case of Society of St. Anns 146 ITR 28 (Kar), has taken the view that where capital expenditure on acquisition of a depreciable asset is considered as application of income for charitable purposes, allowing depreciation on the very same capital asset would not amount to double allowance. The assessee also contended that the decision of Escorts Ltd. & Another (supra) would not be applicable in its case since it was rendered in the context of a different set of facts. 6.1.3 The Assessing Officer, however, did not concur with the assessee’s view, distinguished the judicial pronouncement relied on by the assessee and held that the allowing of depreciation when the cost had already been recovered by way of application of income amounts to double deduction and double benefit on the same asset. The Assessing Officer relied on the decision of the Hon'ble High Court of Kerala in the case of Lissie Medical Institution reported in 348 ITR 344 (Ker) wherein it was held that allowing depreciation on a depreciable asset when the cost of acquisition of the depreciable asset was allowed as application of income amounts to double deduction and therefore depreciation cannot allowed.

6.2 On appeal, the learned CIT (Appeals) held that the assessee's claim for depreciation is to be allowed. In doing so the learned CIT (Appeals),followed the decision of the co- ordinate bench of this Tribunal in the case of ACIT V Adichunchunagiri Shikshana Trust reported in 19 ITR (Trib) 828. The learned CIT (Appeals) also followed the decisions rendered by him in the cases listed hereunder :- i. Academy of General Education Trust in MNG/12-13 dt.14.3.2013. ii. Manipal Hotel & Restaurant Management College Trust in ITA No.187/UDP/CIT(A) MNG/10-11 dt.14.2.2013 and iii. Dr.TMA Pai Foundation, Manipal in ITA No.76/UDP/CIT(A) MNG/12-13 dt.14.3.2013.

6.3 The learned Departmental Representative was heard in support of the grounds raised and relied on the order of the Assessing Officer. 6.4 Per contra, the learned Authorised Representative contended that the impugned order of the learned CIT (Appeals), on the issue of allowing the assessee's claim for depreciation on addition to fixed assets, during the year even after the cost of acquisition of the depreciable asset was allowed as application of income for charitable purposes, was in order. It is submitted that the issue in question was considered/adjudicated in favour of the assessee by a co-ordinate bench of this Tribunal in the case of ACIT V City Hospital Charitable Trust in dt.20.3.2015. The learned Authorised Representative submitted that in view of the above, Revenue’s appeal on this ground is liable to be dismissed. 6.5.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions cited and relied on by both parties. We find that, as contended by the learned Authorised Representative, a co-ordinate bench of this Tribunal in the case of City Hospital Charitable Trust (supra) has dealt with an identical issue and decided the issue in question, in favour of the assessee in its order; the relevant portions of the order at paras 7 to 9 thereof are extracted hereunder :-

“ 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 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.”

8. 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.”

9. 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 CIT(A) does not call for any interference. Consequently ground No.2 to 2.5 raised by the Revenue is dismissed.” 6.5.2 Following the decision of the co-ordinate bench of this Tribunal in the case of City Hospital Charitable Trust (supra), we are of the view that in the facts and circumstances of the case, the decision of the learned CIT (Appeals) allowing the assessee's claim of depreciation on addition to fixed assets during the year, the investment in which has already been allowed as application of income for charitable purposes is in order and does not call for any interference. Consequently, the Ground Nos. 2 to 2.6 raised by Revenue are dismissed.

7. Ground Nos. 3.1 & 3.2 – Carry forward of deficit – Rs.746,58,02,350. 7.1 In these grounds raised by Revenue, the issue for consideration is whether the learned CIT (Appeals) was justified in holding that the assessee trust is entitled to the carry forward of excess / deficit of its income for setting off against income of subsequent years as application of income ? In the revised return of income for Assessment Year 2010-11, the assessee claimed that the current year’s unabsorbed deficit along with brought forward deficit of earlier years aggregating to Rs.746,58,02,350 be allowed to be carried forward to the subsequent assessment years as application of income in subsequent assessment years. In support of this claim, the assessee placed reliance on various judicial decisions, including the decisions of the co-ordinate bench of this Tribunal in the case of ACIT V Medical Relief Society of South Kanara in dt.26.6.2008 and ITA Nos.1239 to 1243/Bang/2007 dt.25.4.2008 and Dr. TMA Pai Foundation (supra) wherein the co-ordinate bench of the Tribunal had allowed carry forward excess application of income for set off as application of income in subsequent assessment years. The Assessing Officer observed that in both the cases of Medical Relief Society of South Kanara (supra) and Dr. TMA Pai Foundation (supra), the Department had not accepted the Tribunal’s order on this issue and had filed appeals before the Hon'ble High Court of Karnataka which are pending. In that view of the matter, the Assessing Officer decided the assessee's claim. 7.2 On appeal, the learned CIT (Appeals) directed the Assessing Officer to allow the assessee's claim following the decision of the Hon'ble Bombay High Court in the case of Institute of Banking (supra) and the above mentioned decisions of the co-ordinate benches of this Tribunal (supra). 7.3 In the grounds raised, Revenue has reiterated and supported the view of the Assessing Officer that there is no provision in the Act for allowing the carry forward of excess / deficit application of income for set off as application of income in subsequent years. The learned Departmental Representative was heard in support of the grounds raised. 7.4 Per contra, the learned Authorised Representative of the assessee supported the order of the learned CIT (Appeals) on this issue. It was submitted that the issue in question was held in favour of the assessee by a co-ordinate bench of this Tribunal in the case of City Hospital Charitable Trust (supra). The learned Authorised Representative CIT (Appeals) on this issue.

7.5.1 We have heard the rival contentions of both parties and perused and carefully considered the material on record; including the judicial pronouncements cited and relied on. We find that, as contended by the learned Authorised Representative, a co-ordinate bench of this Tribunal in the case of City Hospital Charitable Trust (supra) has dealt with an identical issue and decided the matter in favour of the assessee; holding as under at paras 14 and 15 thereof :-

“ 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 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.).

7.5.2 Following the above mentioned decision of the co-ordinate bench of this Tribunal in the case of City Hospital Charitable Trust (supra), we are of the view that, in the facts and circumstances of the case, the decision of the learned CIT (Appeals) in allowing the assessee's claim for brought forward excess application / deficit to be carried forward for set off as application of income in subsequent assessment years is in order and does not call for any interference. Consequently, the grounds raised by Revenue at 3.1 and 3.2 are dismissed.

8. In the result, Revenue’s appeal for Assessment Year 2010-11 is dismissed. Order pronounced in the open court on 24th July, 2015.