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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Per N.V. Vasudevan, Judicial Member These are appeals by the Revenue against the two orders dated 15.10.2014 of the CIT(Appeals), Mysore relating to A.Y. 2008-09 & 2009- 10.
ITA Nos.71 & 72/Bang/2015 Page 2 of 15
The only issue that arises for consideration in ITA No.17/Bang/2015 is as to whether the CIT(Appeals) was right in directing the AO to allow depreciation on the capital assets, despite the fact that at the time when the capital assets were acquired, the same were treated as application of income in those years. According to the Revenue, allowing capital expenditure at the time of acquisition of capital asset as application of income for charitable purpose and further allowing depreciation on the very same capital assets would amount to conferring double deduction in respect of the same expenditure. According to the Revenue, doing so would be contrary to the principles laid down by the Hon’ble Supreme Court in the case of Escorts Ltd., 199 ITR 43.
The CIT(Appeals), on the above issue, following the decision of the Hon’ble High Court of Karnataka in CIT v. Society of Sisters of St. Anns,
146 ITR 28, held that deduction claimed by the assessee had to be
allowed. Aggrieved by the order of CIT(Appeals), the Revenue has preferred the present appeal before the Tribunal.
The assessee is a charitable trust. In the course of assessment u/s. 143(3) of the Act for AY 2008-09 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
ITA Nos.71 & 72/Bang/2015 Page 3 of 15
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
ITA Nos.71 & 72/Bang/2015 Page 4 of 15
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. Aggrieved by the order of the CIT(A), the Revenue has filed the present 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
ITA Nos.71 & 72/Bang/2015 Page 5 of 15
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.
ITA Nos.71 & 72/Bang/2015 Page 6 of 15
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 the appeal by the Revenue is dismissed.
ITA No.72/Bang/2015 (AY 2009-10)
As far as this appeal is concerned, the first ground of appeal is identical to the only ground of appeal raised in ITA No.71/Bang/2015. For the reasons stated therein while deciding similar grounds for AY 2008-09, we hold that there is no merit in these grounds raised by the Revenue.
Grounds No. 2 & 3 raised by the Revenue are as follows:-
ITA Nos.71 & 72/Bang/2015 Page 7 of 15
“(2) Disallowance of accumulation of income u/s 11(2):- i) The CIT(A) has erred in allowing accumulation of income u/s 11(2) without considering the fact that though the original Form no. 10 was filed within the due date but such Form no. 10 is not valid as the assessee had failed to declare the specific purposes for which income was accumulated. ii) The CIT(A) has erred in considering the revised Form no. 10 dated 11.01.2012 filed by the assessee for allowing accumulation u/s 11(2), but without appreciating the fact that such revised Form no. 10 was filed after completing the scrutiny assessment by the AO u/s 143(3) dated 09.12.2011 iii) The CIT(A) has erred in ignoring the settled legal position as per the law laid down by the Hon’ble Supreme Court in the case of CIT vs Nagpur Hotel Owners’ Association (247 ITR 201) that it is mandatory on the part of the assessee to file the Form no. 10 before completing the scrutiny assessment by the AO for the purpose of claiming accumulation of income u/s 11(2). iv) The CIT(A) has erred in ignoring the fact that the Form no. 10, including revised Form no. 10, filed beyond the due date for filing return of income u/s 139(1) shall not be considered as valid one without obtaining the approval of CIT/DIT concerned for condonation of such delay. 3. Disallowance of set apart /accumulation of income u/s 11(1)(a) i) The CIT(A) has erred in allowing exemption u/s 11(1)(a) @ 15% of the income for set apart/accumulation without considering the fact that the assessee has failed to fulfil the conditions for accumulation of 85% of income as stipulated u/s 11(2) read with section 11(3). ii) The CIT(A) has erred in not considering the Board Circular on this issue i.e Board Circular no. 12-(PXX-7 of 1968) dated 26.11.1968, on which the AO placed reliance for disallowance of accumulation /set apart of income u/s 11(1)(a), wherein it is clearly explained that if a trust fails to comply with accumulation provisions u/s 11(2), then the entire income accumulated would be liable to assessment u/s 11(3), including 15% of income set apart or accumulated u/s 11(1)(a), and, therefore, rendered a perverse decision.
ITA Nos.71 & 72/Bang/2015 Page 8 of 15
iii) The CIT(A) has erred in law in holding that the provisions of sub-section (1) and (2) of section 11 operate independently, and, therefore, disallowance of accumulation u/s 11(2) has no effect on allowance of set apart/accumulation u/s 11(1)(a).
During the year the assessee had accounted a surplus of Rs.19,33,54,169 u/s 11(2) of the IT Act. On verification of the Form-10 filed by the assessee, the AO found that the purpose of the accumulation was submitted as under:-
“(1) Stadium Infrastructure Development (2) Promotion of Cricketing Activities and”
According to the AO, the purpose appeared to be inconclusive since it ended with “and”. Thereupon the Assessee filed copy of the resolution of the association verified and it was found therein that the purpose of the accumulation was as under:-
“1) Stadium infrastructure 2) Promotion/ Development of cricket”
According to the AO, the specific purpose of accumulation is worded differently in Form 10 and resolution. Secondly the specification in Form-10 as “Infrastructure Development” or “Promotion/ Development of Cricket” or “Promotion of Cricket Activities” was very general in nature. Hence the AO disallowed the claim of the Assessee for accumulation of income claimed by the assessee u/s 11(2) of the IT Act for an amount of Rs. 19,33,54,169 and brought the same to tax.
ITA Nos.71 & 72/Bang/2015 Page 9 of 15
The assessee had also claimed accumulation of income u/s 11(1)(a) at the rate of 15% of the gross receipts i.e Rs 7,31,25,661/-. The AO referred to CBDT in the Circular No. 12 P,XX-7 dated 26/11/1968. CBDT wherein it has been clarified that if a trust fails to apply 85% of its income in the previous year, then the entire income accumulated would be liable to assessment under Sec.11(3). In other words the circular states that the entire accumulation and not merely the excess 15% of the income would be subject to tax. This circular was issued as an explanatory note to the circular No. 5P (LXX-6) of 1968. It read as under:-
“Attention is invited to the Board’s Circular No 5p (LXX-6) of 1968, dated 19/6/1968(TC 235 1620) on the above mentioned subject. It has been brought to the Boards notices that para 5 of the above Circular created the impression that where a trust accumulates more than 25% percent will be taxable under section 11(1) of the Income Tax Act 1961. It is hereby clarified that the corrected position in this regard is that if a trust desires to accumulated income in excess of the limits laid down in the Sec. 11(2) of the Act have to be fulfilled in respect of the entire accumulation and not merely in respect of the accumulation in excess of 25% of the income. Further if the trust does not comply with the conditions laid down in Sec 11(2), the amount which becomes liable to assessment under Sec. 11(1) of the Income-tax Act 1961. In other words, such an assessee loses the benefit of the accumulated permitted u/s 11(1)”.
Because the Assessee’s claim for accumulation based on Form No.10 was rejected, and in view of the CBDT circular referred to above, the AO was of the view that even the accumulation of 15% of the income u/s.
ITA Nos.71 & 72/Bang/2015 Page 10 of 15
11(1)(a) should not be allowed and brought to tax the said accumulation also.
On appeal by the assessee, the CIT(Appeals) held as follows on the aforesaid two disallowances:-
“9.5 I have carefully considered the submissions of the appellant and perused the records and also the original form No 10 and revised Form No. 10 filed by the appellant dated 11.01.2012. These forms in my view satisfies the requirement of the law and the appellant has to be given the benefit. It is also relevant to note that the appellant has for several years filed similar forms which has been accepted. During the appellate proceedings it is brought to my notice by the appellant that it has filed a revised Form No. 10 dated 11.01.2012 before the A.O. with abundant caution and requested to consider the same in the interest of justice. I have gone through the revised Form No. 10 filed by the appellant in which the appellant has exhaustively specified for the purpose for which the accumulation of surplus is sought by it and given a detailed list of activities for which the accumulation is sought under the object Stadium Infrastructure there are about 16 specific proposes and as regard to the object of Promotion / Development of Cricket there are about 9 specific purposes the accumulation is sought and the intention of the appellant is very specific in the revised form No. 10 is concerned. It is settled law that an application can be made at any time before the completion of assessment. There are several instances when audit report and certificate have been held to be not directory and could be filed even at the appellate stage. It is well settled law by the decision of the apex court in the case of CIT Vs. Kanpur Coal Syndicate, 53 ITR 225 that the powers of the appellate authority are coextensive with that of the assessing authority. The appellant in the instant case has filed the form No 10 as a matter of abundant caution before me and the same is in detail and the claim of Rs 19,33,54,169 is to be allowed. The reasons given by the assessing officer that there is and after the two purposes in the resolution and not in the Form 10 is not of much significance. The same has been explained as typo error by the appellants. Taking into account the totality of the situation the
ITA Nos.71 & 72/Bang/2015 Page 11 of 15
assessing authority was not correct in denying the appellant the right to accumulate and the same is hereby granted. 9.6 It is also relevant to further notice that as submitted by the appellant the Hon’ble Delhi High Court in the following cases i.e. Bharat Krishik Samaj v DDlT [2008] 306 ITR 153 (Delhi); Bharat Kalyan Pratisthan v DIT (Exemption) [2008] 299 ITR 406 (Delhi); DIT v Mamta Health Institute [2007] 293 ITR 380 (Delhi); DIT (Exemption) v Daulat Ram Education Society [2005] 278 ITR 260 (Delhi) & CIT v Hotel & Restaurant Association [2003] 261 ITR 190 (Delhi) has held that that purpose mentioned in Form 10 for accumulation of income need not be specific and was held that accumulation of income under section 11(2) cannot be denied even if purpose/objects mentioned in Form 10 are general. Though there are divergent views on the subject of various courts on this issue, considering the fact that the appellant having filed a revised Form No. 10 dated 11.01.2012 and keeping in view the argument of the appellant that when divergent decisions are then and further in the absence of decision from the Hon’ble Jurisdictional High Court, I agree with the appellant that the decisions most favouable to the appellant should be considered and accordingly I hereby direct the AO to allow the claim of the appellant for accumulation under section 11(2) of an amount of Rs.19,33,54,169 as be sought by the appellant. This ground is accordingly allowed. 10.3 I have carefully considered the submissions and arguments canvassed by the appellant and also the observations made by the A.O. in the assessment order. I find strength in the argument of the appellant that what is referred to in sub section (2) is 85 % of the income referred to clause (a) and (b) of subsection (1) which clearly means that 15% is out of the ambit of sub section 2, the words either in whole or in part further indicates that there is no requirement in law to accumulate the whole of the income and any appellant can in fact accumulate part of 85% of Income which is very clear from the language of the Act. What is to be seen the intention of the legislature the provisions as envisaged in sub-section (1) of section 11 is independent to that of the provisions of sub-section (2) to section 11 of the Act. The Explanation to clauses (a) & (b) to section 11(1) of the Act is very clear as to how the computation of l5% of the income to be accumulated of the income of the Trust and there is no specification as regard to the filing of any form for such
ITA Nos.71 & 72/Bang/2015 Page 12 of 15
accumulation of l5% of surplus. Whereas, as per the provisions of section 11(2) of the Act is concerned if any income referred to in clause (a) or (b) of sub-section (1) read with Explanation to that sub-section is not applied during the previous year but the same can be accumulated and set apart, either in whole or in part in the future period then the appellant as per Rule 17 can set apart and thereby it has to file Form No. 10 for such unutilized income which has not spent 85% of such income. 10.4 From the above it is clear that the sub-sections contained in the provisions of section 11 of the Act is concerned operate independently and consequently the provisions of sub-section (1) and (2) of section 11 are to be worked out separately. The A.O. is not correct in denying the benefit under section 11(1)(a) of l5% amounting to Rs. 7,31,25,661/- of the Act. I hereby direct the A.O. to allow the claim of accumulation or set apart of 15% of income of Rs.7,31,25,661/-. In the result this ground of appeal is allowed.”
Aggrieved by the order of CIT(Appeals), the Revenue has preferred grounds No.2 & 3 before the Tribunal.
We have heard the submissions of the ld. counsel for the assessee and the ld. DR. As far as the issue raised in ground No.2 by the Revenue is concerned, this Tribunal had on occasion to consider identical issue in the case of DDIT(E) v. Gokula Education Foundation, ITA
No.1091/Bang/2014 by order dated 30.12.2014 and this Tribunal held
as follows:-
“7. As for the second issue, it is necessary to reproduce section 11(2) of the Act and Rule 17 which are on accumulation; “ Where(eighty five) percent of the Income referred to in clause(a) or clause(b) of sub-section (1) read
ITA Nos.71 & 72/Bang/2015 Page 13 of 15
with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely a) such person specifies, by notice in writing given to the AO in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years. b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub- section(5)”. Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded; Provided further that in respect of any income accumulated or set apart on or after the 1st day of April,2001, the provisions of this sub-section shall have effect as if for the words ten years at both the places where they occur, the words ’five years’ had been substituted”. Rule 17….. The notice to be given to the AO or the prescribed authority under sub-section(2) of section 11 or under the said provision as applicable under clause(2) or clause(23) of section 10shall b in Form No.10 and shall be delivered before the expiry of the time allowed under sub-section (1) of section 139, for furnishing the return of income’.
ITA Nos.71 & 72/Bang/2015 Page 14 of 15
The requirement in the Act are (i) specification by notice in writing to the AO(ii) such specification should be in prescribed manner and (iii) and such specification should give the purpose of accumulation. The time limit has been mentioned in the Rules alone. The delegated power of rule making given in section 11(2) is only for prescribing the manner of filing the application. The power does not include fixation of time limits. Delegated legislative powers are circumscribed by the statute delegating such powers and transgression thereof can render the rules beyond the scope of such delegation. Hence, we cannot fault the learned CIT(A) taking cognizance of the revised Form No.10A filed by the assessee. In any case, as observed by learned CIT(A), Hon’ble Delhi High Court in the case of Bharath Kalyan Pratisthan as well as Bharat Krishak Samaj(supra) had held that details of purpose of accumulation was not a requirement that can be read into section 11(2). Revenue has not been able to bring before us any decision of Hon’ble jurisdictional High Court on this issue, and therefore, assessee has to be given the benefit of the decision in its favour, in preference to the decisions going against it.”
In view of the aforesaid decision, we do not find any merits in the grounds raised by the Revenue.
As far as ground No.3 is concerned, we are of the view that in view of the acceptance of the claim for accumulation of claim based on Form No.10 and in view of the fact that 15% accumulation was disallowed by the AO only for the reason of rejection of accumulation of funds based on Form No.10, we are of the view that the CIT(A) was fully justified in allowing the claim of the Assessee for accumulation of 15% of the receipts. Consequently ground No.2 & 3 raised by the Revenue are also dismissed.
ITA Nos.71 & 72/Bang/2015 Page 15 of 15
In the result, both the appeals by the Revenue are dismissed.
Pronounced in the open court on this 29th day of May, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 29th May, 2015.
/D S/
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.