RAMA NAICK CHARITABLE TRUST,CHENNAI vs. DDIT, CHENNAI

आदेश /O R D E R

This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-VII, Chennai, dated 18.08.2014 and pertains to assessment year 2009-10.

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submitted that the assessee, a charitable institution registered

under Section 12AA of the Income-tax Act, 1961 (in short 'the Act'),

claimed exemption in respect of its income on application under

Section 11 of the Act. The assessee has also claimed depreciation

on the capital asset. According to the Ld. representative, though

the income was allowed as application of income under Section 11

of the Act, the income of the Trust has to be computed on

commercial sense and depreciation has to be allowed under

Section 32 of the Act. According to the Ld. representative, the

Assessing Officer disallowed the claim of the assessee on the

ground that allowing depreciation would amount to double

depreciation, by placing reliance on the judgment of the Apex Court

in Escorts Ltd. and Another v. Union of India and Others (1993) 199

ITR 43. The Ld. representative placed his reliance on the decision

of his Bench of the Tribunal in DDIT(Exemptions) v. Sri

Rangalatchumi Educational Trust in I.T.A. No.1930/Mds/2014 dated

31.10.2014 and submitted that on identical circumstances, this

Tribunal allowed depreciation.

further submitted that the next ground of appeal is with regard to

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adjustment of excess amount spent towards charitable purposes.

According to the Ld. representative, the assessee has applied

excess amount over and above the income, the same has to be

allowed during the year under consideration. According to the Ld.

representative, the expenditure incurred in the earlier year has to be

allowed as application of income for the year under consideration.

Representative also. Admittedly, the assessee is a charitable

institution and the assessee is not doing any business. If the

assessee engaged itself in business activity, then it would not be

eligible for exemption under Section 11 of the Act. It is not the case

of the assessee that any business undertaking was held under the

assessee-Trust. In other words, the depreciation claimed by the

assessee is not in respect of any asset which was used for business

purpose. The asset on which depreciation was claimed is

admittedly used for assessee’s charitable activity. We have

carefully gone through the provisions of Section 32 of the Act, which

reads as follows:-

“(1) In respect of depreciation of-- (i) buildings, machinery, plant or furniture being tangible assets ;

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(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession the following deductions shall be allowed-- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed. (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction shall be allowed under this clause in respect of--(a) any motor car manufactured outside India, where such motor car is acqired by the assessee after the 28th day of February, 1975 5but before the 1st day of April, 2001, unless it is used--(i) in a business of running it on hire for tourists; or(ii) outside India in his business or profession in another country ; and(b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42: Provided further that where any asset referred to in clause (i) 6or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) 6or clause (ii) or clause (iia), as the case may be: Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998, but before the 1st day of April, 1999, and is put to use before the 1st day of April, 1999, for the

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purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation — For the purposes of this proviso,-- (a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi cab", "motor-cab", "tractor" and "road-roller" ; (b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988). Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent. of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991. Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned

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between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation — 1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation — 2. For the purposes of this sub-section "written down value of the block of assets" shall have the same meaning as in clause (c) of sub-section (6) of section 43; Explanation — 3. For the purposes of this sub-section, 10the expressions "assets" shall mean-- (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Explanation — 4. For the purposes of this sub-section, the expression "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto) ; Explanation — 5. For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income ;

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(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that no deduction shall be allowed in respect of-(A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person ; or(B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ; or(C) any office appliances or road transport vehicles ; or(D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year ; (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof : Provided that such deficiency is actually written off in the books of the assessee. Explanation — For the purposes of this clause,-- (1) "moneys payable" in respect of any building, machinery, plant or furniture includes— (a) any insurance, salvage or compensation moneys payable in respect thereof ; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso

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to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty- five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso ; (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is 8an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. (2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub- section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”

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Section 32 of the Act is applicable only in respect of the asset which

is used for the purpose of business. Therefore, this Tribunal is of

the considered opinion that Section 32 is not applicable if the

assessee is not carrying on any business activity. In this case, it is

not in dispute that the assessee is not carrying on any business

activity. Therefore, Section 32 of the Act is not applicable. Apart

from that, a Division Bench of this Tribunal in The Anjuman-E-

Himayath-E-Islam v. ADIT in I.T.A. No.2271/Mds/2014 by order dated 2nd July, 2015 considered this issue elaborately and observed

as follows:-

“5.2 We find this issue is elaborately discussed in the case of Lissie Medical Institution Vs. CIT reported in [2012] 348 ITR 344(Ker.) and held the issue against the assessee. While doing so, the Hon’ble Kerala High Court had considered the Circular No.5P(LLX-6) dated 19.06.1968 which has not been considered by the other decisions. The Circular No. 5P(LLX-6) is reproduced herein below for reference:- 1. Circular No. 5-P (LXX-6) of 1968, dated 19-6-1968.

Subject : Section 11—Charitable trusts—Income required to be applied for charitable purpose—Instructions regarding.

In Board's Circular No. 2-P(LXX-5) of 1963, dated the 15th May, 1963, it was explained that a religious or charitable trust claiming exemption under section 11(1) of the Income- tax Act, 1961, must spend at least 75 per cent of its total income, for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question

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has been reconsidered by the Board and the correct legal position is explained below.

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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 under section 11(1).

After considering the Circular, the Hon’ble Kerala High Court held as follows:- “Held, that after writing off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claimed the same amount in the form of depreciation, such notional claim became a cash surplus available with the assessee, which was outside the books of account of the trust unless it was written back which was not done by the assessee. It was not permissible for a charitable institution to generate income outside the books in this fashion and there would be violation of section 11(1)(a). It was for the assessee to write back the depreciation and if that was done, the Assessing Officer would modify the assessment determining higher income and allow recomputed income with the depreciation written back by the assessee to be carried forward for subsequent years for application for charitable purposes.” Further Hon’ble Calcutta High Court has held in the case DCIT VS. Girdharilal Shewnarain Tantia Trust reported in [1993] 199 ITR 15(Cal.) that “The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Respectfully following the decision of the Hon’ble Kerala High Court and taking cue from the decision of the Hon’ble Calcutta High Court, we do not find any hesitation to confirm the order of the Ld. CIT(A) and also the views expressed by him in his order. Accordingly this appeal is held in favour of the Revenue.”

Tribunal in Sri Rangalatchumi Educational Trust (supra) may not be

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applicable in the facts of the case. By following the order of this

Tribunal in the case of The Anjuman-E-Himayath-E-Islam (supra)

and the reason stated therein, the orders of the lower authorities are

upheld.

situation was considered by the Division Bench of this Tribunal in

The Anjuman-E-Himayath-E-Islam (supra). This Tribunal found that

excess application of income cannot be allowed since it is not the

case of the assessee that the money was generated in the course

of charitable activity. In fact, this Tribunal observed as follows:-

“4.5. Application of fund by any charitable institution is possible only from the following sources:- i) Voluntary contributions received by the Trust towards its corpus, ii) Other voluntary contributions, iii) Accumulated fund, iv) Amount received by way of loan, v) Sundry creditors, vi) “Income” derived from the “Property” held under the Trust. [Hon’ble Calcutta High Court has held in the case DCIT VS. Girdharilal Shewnarain Tantia Trust reported in [1993] 199 ITR 15(Cal.) that “The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable”. Further, Hon’ble Apex High Court has held in the case of J.K.Trust Vs. Ld. CIT /CEPT reported in [1957] 32 ITR 535(SC) that “Property” is a term of the widest import, and subject any limitation or qualification which the

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context might require, it signifies every possible interest which a person can acquire, hold and enjoy. Business would undoubtedly be property unless there is something to the contrary in the enactment. ] When the Trust applies its funds from its Corpus, accumulated fund, Sundry creditors or from the loan obtained by the Trust, then such funds which are applied cannot be said to be funds applied from the income of the Trust. Therefore, there cannot be a case where the trust can apply its income more than the income received by it for the purpose of Section-11(1)(a)&(b) of the Act. Thus excess application of fund over and above the income of the Trust can arise only when funds are applied from the Corpus of the Trust, accumulated fund, Loan obtained by the Trust or goods and services received from Sundry Creditors. It can be logical to deduce that when funds are applied from borrowed funds or by way of Sundry creditors the same can be treated as application of fund in the year in which such Loan/Sundry creditors are repaid from the income of the Trust. However when amount is applied from the corpus fund or accumulated fund the same cannot be treated as application of fund for the purpose of Section 11 of the Act, because such fund have already been exempt from the income of the Trust in the year in which it is received or such amount is set aside and therefore once again treating the same as application of fund will amount to double deduction. Similarly voluntary contribution received toward Corpus is exempt from income of the trust in the year in which it is received and therefore when it is utilized for the objects of the Trust it cannot be considered as application of fund otherwise it will amount to double deduction. From the above factual and mathematical matrix it is evident that carry forward of excess application of fund in the commercial principles cannot be allowed as per the provisions of the Act because it would result in notional application of income in the subsequent year. These aspects have not been considered by the Mumbai Bench of the Tribunal, and the unreported decision of the Hon’ble Bombay High Court is also not placed before us.

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4.6 Now analyzing the facts of the case before us, it appears that the assessee trust’s gross receipts is ` 5,11,60,794/- and the assessee trust have spent ` 5,35,57,149/- which shows that the assessee trust has spent ` 23,96,355/- more than its income received during the relevant year. This amount of ` 23,96,355/- may have been taken out from the ‘corpus funds’, ‘accumulated funds’, ‘loan’ obtained by the assessee trust or arising out of ‘Sundry Creditors’. Therefore it is obvious that there is no excess application of income over and above the income received by the trust, hence the question of carry forward of excess application of income does not arise. However the amount applied from the ‘Loan’ or ‘Sundry Creditors’ will be allowed as application of fund in the year in which such ‘Loan’ or ‘Sundry Creditors’ are repaid. It is pertinent to mention that if the amount is applied from the ‘Corpus fund’ or ‘accumulated fund’ it will not be treated as application of fund because ‘Corpus fund’ and ‘accumulate fund’ are already exempt from the income of the Trust and once again if it is treated as application of fund it would amount to double deduction. Therefore the claim of the assessee to carry forward the excess application of fund cannot be entertained applying the commercial principles. However if the excess amount of ` 23,96,355/- is applied from the borrowed fund or from Sundry Creditors, the same shall be allowed as application in the year in which such Loan or Sundry Creditors are repaid from the income of the Trust as discussed herein above. Needless to mention that the income of the Trust refers to ‘income derived from the property held under the Trust’ and any ‘voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust’ i.e., item Nos.(ii) and (vi) mentioned hereinabove. This ground raised by the assessee is accordingly disposed off.”

application/expenditure as application of income. In view of the

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above discussion, this Tribunal do not find any infirmity in the order of the lower authority and accordingly, the same is confirmed.

Order pronounced on 21st August, 2015 at Chennai.

sd/- (एन.आर.एस. गणेशन) (N.R.S. Ganesan) �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 21st August, 2015.

Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-VII, Chennai-34 4. DIT (Exemptions), Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.