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Income Tax Appellate Tribunal, CHANDIGARH
Before: SHRI A.D.JAIN & SHRI VIKRAM SINGH YADAV
आदेश/ORDER
PER A.D.JAIN, VICE PRESIDENT
This is an appeal filed by the assessee against the order of the Ld. CIT(A) Patiala dated 05.03.2019 pertaining to assessment year 2015-16.
The assessee has raised the following revised grounds of appeal :
“1.That the order passed by the Commissioner of Income Tax (Appeals) is illegal, arbitrary, bad in law and against the facts of the case.
ITA 870/CHD/2019 A.Y. 2015-16 2 2. That the Commissioner of Income Tax (Appeals) erred on facts and law in upholding the addition (amounting to Rs 2,47,58,982/-) made by the Assessing Officer by invoking the provisions of section 11 & 12 in case of appellant being an educational institution approved u/s 10(23C)(vi) of the Income Tax Act, 1961.
3. That the Commissioner of Income Tax (Appeals) erred on facts and law in upholding the order of the Assessing Officer treating tied up grants received from the government as income of the appellant.
That the Commissioner of Income Tax (Appeals) erred on facts & in law in upholding the order of the Assessing Officer disallowing depreciation as application of income disregarding/ overlooking the fact that the appellant had not claimed cost of the fixed assets as application in the preceding years.
The facts as per record are that the appellant/assessee is a Society registered under the Societies Registration Act (XXI of I860). It has been established by the Government of Punjab to impart education both under degree and certificate level courses. It is a charitable institution whose sole objective is to impart education without any profit motive and it functions under the control of Government of Punjab; that the appellant is 100 percent financed by the Government of Punjab in terms of infrastructure, i.e., land and buildings, machinery and equipment, furniture and fixtures, library books, vehicles and other assets; that the return of income for the F.Y. 14-
ITA 870/CHD/2019 A.Y. 2015-16 3 15 was e-filed by the appellant on dt. 31.01.16 vide acknowledgment no 941720210310116 declaring Nil income. The said return was revised by the appellant vide acknowledgement no. 949635070100216 on dt. 10-02-2016 declaring Nil Income and claiming a refund of Rs. 13,45,871.00; that the appellant had claimed exemption for the excess of receipts over expenditure u/s 10(23C)(vi), though in the return filed by the appellant, the section under which exemption had been claimed had inadvertently been mentioned as section 10(23C)(iiiab). Exemption was claimed by the appellant u/s 10(23C)(vi) on account of approval by the Chief Commissioner of Income Tax, Ludhiana granted vide order no. CCIT/Ldh/JB/10(23C)/ll/2015-16/2729 dt. 18.09.2015.
The case of the appellant assessee was selected for scrutiny through CASS. During the course of assessment proceedings, notice u/ s 143(2), 142(1) along with detailed questionnaires was issued, which were duly compiled with.
The Assessing Officer vide assessment order dated 21.12.17, made an addition of Rs 2,47,58,982/- in the returned income and assessed the total income of the appellant at Rs 2,47,58,982/-, alleging that the appellant
ITA 870/CHD/2019 A.Y. 2015-16 4 had failed to utilize 85 percent of the alleged receipts towards the objects for which it has been incorporated. In arriving at the said conclusion, the Assessing Officer treated the amounts collected as per the instructions issued by the Government of Punjab and the Punjab Technical University from the students as income of the appellant.
The assessee-appellant filed appeal before the CIT(A), contending that the Assessing Officer treated the above as income of the appellant, ignoring the fact that the amounts collected by the appellant from the students never vested with it and that further, the Assessing Officer, in making the above addition, also disallowed depreciation as application of income ignoring the facts of the case.
3.1 The ld. Commissioner of Income Tax (Appeals) accepted the fact that the excess of income over expenditure belonged to the consolidated fund of the State of Punjab (tied up grant in aid) & that this being so, it did not vest with the appellant.
3.2 The grievance of the assessee by way of the present appeal is that accepting, as above, the Commissioner (Appeals) still goes on to uphold the order of the Assessing
ITA 870/CHD/2019 A.Y. 2015-16 5 Officer, who had treated the said excess as income of the appellant and that further, the Commissioner of Income Tax (Appeals) also wrongly upheld the disallowance of the claim of depreciation towards application of income, disregarding/ overlooking the fact that the appellant had not claimed cost of the fixed assets as application of income.
4. The ld. Counsel for the assessee has contended that the order passed by the Commissioner of Income Tax (Appeals) is illegal, arbitrary, bad in law and against the facts of the case; that the Commissioner of Income Tax (Appeals) erred on facts and law in upholding the addition (amounting to Rs 2,47,58,982/-) made by the Assessing Officer by invoking the provisions of section 11 & 12 in case of appellant being an educational institution approved u/s 10(23C)(vi) of the Income Tax Act, 1961; that the Commissioner of Income Tax (Appeals) erred on facts and law in upholding the order of the Assessing Officer treating tied up grants received from the government as income of the appellant; that the Commissioner of Income Tax (Appeals) erred on facts & in law in upholding the order of the Assessing Officer disallowing depreciation as application of income disregarding/ overlooking the fact that the ITA 870/CHD/2019 A.Y. 2015-16 6 appellant had not claimed cost of the fixed assets as application in the preceding years.
The ld. DR, on the other hand has placed strong reliance on the impugned order.
Heard. The first issue is as to whether the ld. CIT(A) is correct in upholding the addition of Rs.2,47,58,982/- made by the Assessing Officer by invoking the provisions of Sections 11 & 12 of the Income Tax Act.
The Assessing Officer held, while making the addition, that as per the provisions of Sections 11 & 12, all receipts collected from the students, in whatever form, are to be considered as income of the Trust/Society; that the funds so collected should be specifically incurred for the purpose for which it is collected and the same should be included in the receipts as per the Income Tax Act; that if the assessee treats expenditure on acquisition of assets as application of income for charitable purposes u/s 11(1)(a) and if the assessee claims depreciation on the value of such assets, then, 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
ITA 870/CHD/2019 A.Y. 2015-16 7 part of the income to be accounted for application for charitable purposes; that this has not been done by the assessee and even the income which should be available for application for charitable purposes gets reduced by the depreciation amount, which is not permissible under the Act; that in fact, the net effect is that after writing off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes, when the assessee again claims the same amount in the form of depreciation, such notional claim becomes cash surplus available with the assessee i.e. statutorily required to be applied for its aims and objects; that this is true even if the assessee is assessed as an AOP, the assessee claims depreciation on the assets whose cost was allowed in the previous years; and that therefore, even if the assessee is assessed as an AOP for a particular year, it cannot claim the notional depreciation on the assets whose value has already been shown as written off.
While upholding the addition made by the AO, the ld. CIT(A) held, following the CIT(A)’s order for the earlier years, that in those years, the ld. CIT(A) had upheld a part of the assessee's submission, to the extent that the excess
ITA 870/CHD/2019 A.Y. 2015-16 8 of income over expenditure is in the nature of Grain-in-Aid and it belongs to the consolidated fund of the State and that the assessee cannot incur any expenditure without the express approval of the State Government and the University; that he was relying on the said decision of the CIT(A), to that extent as judicial discipline. It was held that the assessee Society collects Development Fund, Hostel Fund, Student Activity Fund and other similar funds from the students, as per the express Notification of the State Government; that as per the Rules and the Notifications/Circulars of the State Government, these funds can be spent only on the specific approval of the State Government and till such time, they are in the nature of Grant-in-Aid, which would be in consonance with the findings of the ld. CIT(A) in the earlier years; that the fact that these payments are charged separately from the annual fees is also a matter of record and not in dispute; that however, the fact that the donations are voluntary, is not established; that the CIT(A)’s order that in case the surplus left under these funds belongs to the consolidated funds of the State and can be spent for specified purposes as per the approval of the State Government, relates to the utilization
ITA 870/CHD/2019 A.Y. 2015-16 9 of the funds and not to their treatment, either as receipts, or as corpus donation; that to be Corpus Donation, the receipt should, in the first instance, by a donation and voluntary contribution; that in the instant case, the funds are charged indiscriminately to all the students and are in the nature of fees, notwithstanding their utilization being controlled by the State Government; and that they are required to form part of the Receipt and Expenditure Account of the assessee.
The stand taken by the assessee is that the assessee was approved u/s 10(23C)(vi) and had claimed exemption thereunder, has not been disputed by the authorities below, that therefore, the ld. CIT(A) went wrong in upholding the disallowance made by invoking the provisions of Sections 11 and 12 of the Act; that since the assessee Society is approved u/s 10(23C)(vi) of the Act, no disallowance, whatsoever could have been made by applying the provisions of Sections 11 and 12 of the Act. In this regard reliance has been placed on CBDT Circular No.14 of 2015, dated 17.08.2015 (copy at pages 54-56 of the assessee's case laws Paper Book Volume II). The ld. Counsel for the assessee has also sought to place reliance on the decision of ITA 870/CHD/2019 A.Y. 2015-16 10 the Hon'ble Allahabad High Court in the case of “CIT Vs Jeevan Deep Charitable Trust”, 2012 (12) TMI 818 )copy at ACL PB-II, pages 57-59) and the decision of the Hon'ble Allahabad High Court in the case of “the Commissioner of Income Tax Vs Sunbeam English School”, 2013 (7) TMI 812 (copy at ACL PB-II, pages 60-64).
The Department, on the other hand, by way of its written submissions dated 17.05.2023, has reiteration in her arguments by the ld. DR, has contended, inter-alia, that the comments of the concerned AO, i.e., the DCIT, Circle-I (Exemptions) Chandigarh were called for; that in his comments dated 10.05.2023 (reproduced at pages 3-4 of the department’s written submissions), has submitted that the AO was aware that the assessee had claimed exemption u/s 10(23C)(vi) of the Income Tax Act and the same was mentioned in the third para of the assessment order passed on 21.12.2017, but in para 7.0, at page 5 of the assessment order, Section 11 & 12 was written inadvertently, which may be treated as a typing mistake and such inadvertent mentioning of Sections 11 & 12 should not be the basis for deciding the substance and merits in the order, that that this mistake may be considered u/s 292B of the Act. The ITA 870/CHD/2019 A.Y. 2015-16 11 DCIT has also stated in his comments that after the assessment, the CIT (Exemption) Chandigarh passed order dated 20.03.2021 u/s 263 of the Income Tax Act, setting aside the assessment order passed u/s 143(3) read with Section 263 read with Section 144B of the Act, at an assessed income of Rs.4,14,42,640/-. A copy of the said comments dated 10.05.2023, of the DCIT, Circle-I (Exemptions), Chandigarh have been enclosed with the Department’s written submissions before us. Further, copies of the aforesaid order dated 20.03.2021 passed u/s 263 of the Act by the CIT (Exemption), Chandigarh and a copy of the aforesaid assessment order dated 20.03.2022, passed u/s 143(3) read with Section 263 read with Section 144B of the Act, by the DCIT, Circle-I, Chandigarh, have also been enclosed.
It has been contended on behalf of the Department that in view of the above developments, i.e., after the issuance of the order dated 20.03.2021 u/s 263 of the Act and the consequential assessment order dated 30.03.2022, u/s 143(3) read with Section 263 and Section 144B of the Act, the original assessment order dated 21.12.2017, which forms the genesis of the present dispute has now become
ITA 870/CHD/2019 A.Y. 2015-16 12 null and void and as such, the appeal of the assessee may also be treated as null and void and be dismissed as such.
On the other hand, in its counter filed to the aforesaid written submissions of the Department, the assessee has, as also reiterated by the ld. Counsel for the assessee in his arguments, submitted that the fact that the original assessment in the case of the assessee had been made in reference to the provisions of Sections 11 and 12 of the Act, stands duly accepted by the Department even in its written submissions; that this being so, the plea that in the original assessment order, reference to Sections 11 and 12 was written inadvertently, does not carry any merit; that also, such plea of the Department of mention of Sections 11 and 12 having inadvertently been made in the assessment order seems to be an afterthought, especially when the said plea has been raised by the successor AO who had not himself framed the original assessment. It has further been contended that the Department’s reliance on the provisions of Section 292B of the Act is also misplaced, as since the assessment was proceeded with and framed as per the provisions contained in Sections 11 and 12 in the case of the assessee, who had claimed exemption u/s 10(23C)(vi),
ITA 870/CHD/2019 A.Y. 2015-16 13 the same does not tantamount to any mistake, defect or omission so as to fall within the ambit of the provisions of Section 292B of the Act. It has been submitted that because fresh assessment has since been framed pursuant to the revisional order passed by the CIT (Exemptions), the original assessment has become null and void and as such, the appeal of the assessee be dismissed. The submissions are that;
(a) the assessee has filed the present appeal against the CIT(A)’s order and not against that passed by the AO, this plea of the Department carries no merit;
(b) The CIT (A) has not set aside the original assessment order completely, but has set it aside merely on the computation of taxable income, which is clear from the contents of para 5 of the said revisional order;
(c) Without prejudice, it is not correct to say that in view of the fresh assessment framed, consequent to the revisional order, the original assessment order has become null and void, since that original assessment order has been merged in the order of the ld. CIT(A),
ITA 870/CHD/2019 A.Y. 2015-16 14 which is under appeal at the hands of the assessee before this Tribunal. Reliance in this regard has been placed on the decision of the Hon'ble Supreme Court in the case of “Kunhayammed & others Vs State of Kerala
& another” [2000] 245 ITR 360 (S.C). Reliance has also been placed on the decision of the Hon'ble Bombay
High Court in the case of “CIT Vs Tejaji Farasram
Kharawa” [1953] 23 ITR 412 (Bom). Reliance has further been placed on the decision of the Supreme
Court in the case of “CIT Vs Amrit Lal Bhogilal & Co”,
[1958] 34 ITR 130 (S.C.) Reliance has also been placed on the decision of the Hon'ble Supreme Court in the case of “Gojer Bros (P) Ltd. Vs Ratan Lal Singh” [1974]
AIR 1938 (copy placed at ACL PB-II, paged 43-53 alongwith copies of the aforesaid decisions).
It has been stated that in the present case, the issue of receipts/surplus, i.e., grants received from the Government, not being income of the assessee and, consequently, the provisions in respect of application of income not being attracted to such receipts/surplus was challenged by the assessee before the ld. CIT(A); that similarly, the action of the AO in disallowing depreciation as application of income
ITA 870/CHD/2019 A.Y. 2015-16 15 also stood challenged before the ld. CIT(A); that these issues were duly considered by the ld. CIT(A); that on the passing of the CIT’s order, which is presently under appeal, the order passed by the AO cease to exist, has it got merged in the order of the CIT(A) and it is only the order of the ld. CIT(A) that remains operative and capable of being enforced as on date; that it is this order of the ld. CIT(A) which is under challenge by way of the present appeal; that also, the CIT(A)’s order upholding the original assessment order is dated 05.03.2019 and it was passed prior to the revisional order passed by the CIT (E) on 20.03.2021; that if the legally unsustainable request of the department to dismiss the appeal of the assessee as void abi-nitio, since the original assessment order has itself, as per the department, been rendered void abi-nitio pursuant to the passing of the fresh assessment order dated 30.03.2022, were to be accepted, the settled principle of merger, as enunciated by the Hon'ble Supreme Court in the decisions cited by the assessee, amongst others, would stand infracted and violated to the utter prejudice of the assessee. It has been, in this manner requested that the appeal of the assessee be decided on merit in accordance with law.
ITA 870/CHD/2019 A.Y. 2015-16 16 14. Having considered the rival contentions in this respect, we are at one with the contentions raised on behalf of the assessee. It is not at all in dispute and rather it is a matter of record that the fact that the original assessment in this case was proceeded consciously with reference to the provisions of Sections 11 and 12 of the Act is at one apparent from the original assessment order itself, wherein in para 5, reference has been made to order sheet notings dated 10.11.2017 and24.11.2017, whereby the assessee was show caused for making addition of the funds collected by the assessee, as income for the year. In para 7.0 onwards of the assessment order, as has also been accepted by the department itself in para 3 of its written submissions filed before us and also the comments dated 10.05.2023, of the DCIT (Exemptions), Circle-1, Chandigarh, assessment was proceeded with in reference to the provisions of Sections 11 and 12 of the Act. It is only in the said comments of the DCIT, Circle-1 (Exemption), Chandigarh that for the first time, a case has been tried to be made out, that the reference to Sections 11 and 12 of the Act was inadvertently made in the assessment order, which may be treated as a typing mistake. Such methodology, in our considered
ITA 870/CHD/2019 A.Y. 2015-16 17 opinion, is unheard of. Firstly, the flow of the assessment order itself makes it amply clear and apparent that the AO was fully aware and conscious of invocation of the provisions of Sections 11 and 12 of the Act. This would be evident from a perusal of the second sub para of para 7.0 of the assessment order, where the AO states that “………..as
per the provisions of Section 11 and 12, all the receipts collected from the students in whatever form are to be considered as income of the Trust/Society. The funds so collected should be included in the receipts as per Income Tax Act. The assessee has failed to consider the Development and Student Activity Fund so received in the receipts of the year under consideration and claimed the expenses for its activities which is not allowable. Therefore, the amount received under these funds during the year is added back to the income of the assessee and taxable income is computed as under…………..” It has further been observed that “………Thus an amount of Rs.2,56,40,102/- should be added to the receipts of the assessee and then application of income needs to be considered as discussed in the last para………..”
ITA 870/CHD/2019 A.Y. 2015-16 18 14.1 From this last observation also, it is evident that the AO was fully conscious of the invocation of the provisions of Sections 11 and 12 of the Act while making the assessment.
14.2 Likewise, the issue of depreciation was also dealt with accordingly.
14.3 Further, in case the AO, after passing of the order, felt it so necessary, he would have invoked the provisions of Section 154 in order to rectify, if he so felt it necessary to do so.
Still further, it was only and only the AO passing the order originally who could have taken remedial measures, if so advised, and none else. Here, it is the DCIT, Circle-1 (Exemption), Chandigarh, who, in his comments dated 10.05.2023, has sought to raise the issue of the alleged inadvertence in mention being made of Sections 11 and 12 in the original assessment order. It is not at all, under law, the purview of the said officer to raise these issues, and more particularly when the original assessment order has been the subject matter of appeal before the ld. CIT(A), who, vide order dated 05.03.2019, i.e., the order impugned in the present appeal, has upheld the original assessment order.
ITA 870/CHD/2019 A.Y. 2015-16 19 16. By virtue of the passing of the CIT(A)’s aforesaid order under appeal, the original assessment order got merged therein. The law is very clear in this regard. It was way back in 1958 that the Hon'ble Supreme Court in “CIT Vs Amrit Lal Bhogilal & Co” (supra), held that if an appeal is provided against an order passed by a Tribunal, the decision of the appellate authority is the operative decision in law; that if the appellate authority implies or reversed the decision of the Tribunal, it is obvious that it is the appellate decision that is effective and can be enforced; in law, the position would be just the same even if the appellate decision merely confirms the decision of the Tribunal. As a result of the confirmation or affirmation of the decision of the Tribunal by the appellate authority, the original decision merges in the appellate decision and it is the appellate decision alone which subsists and is operative and capable of enforcement.
16.1 In keeping with “Amrit Lal Bhogilal” (supra), it is only and only the order dated 05.03.2019 passed by the ld. CIT(A), which rules the roost and which alone is operative, and not the original assessment order, which stands merged in the said order passed by the CIT(A).
ITA 870/CHD/2019 A.Y. 2015-16 20 16.2 Likewise, in the case of “Kunhayammed & others”
(supra), the Hon'ble Supreme Court has held, inter-alia that where the appeal or revision is provided against the order passed by a Court, Tribunal or any other authority before the superior forum and, such superior forum modifies, reverses or affirms the decision put in issue before it, the decision by the Sub-ordinate Forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement in the eye of law; that the doctrine of merger is not a doctrine of universal or unlimited application; that it will depend on the nature of jurisdiction exercise by the superior forum and the contents or subject matter of challenge laid or capable of being laid would be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it.
16.3 In the present case, indubitably, the superior jurisdiction of the ld. CIT(A) was capable of reversing, modifying or affirming the original assessment order, which was put in issue before the ld. CIT(A) and the ld. CIT(A), in fact, has affirmed the original assessment order. Therefore,
ITA 870/CHD/2019 A.Y. 2015-16 21 the doctrine of merger is squarely applicable and the assessment order originally passed stands fully merged in the order passed by the ld. CIT(A).
16.4 Also, in ““Gojer Bros (P) Ltd.” (supra), the Hon'ble Supreme Court has reiterated that there is no distinction in terms of application of the doctrine of merger, an appellate judgement simplister dismissing an appeal and an appellate judgement modifying or reversing the decree of the lower Court. In the present case as stated, the appellate order passed by the ld. CIT(A) has confirmed the original assessment order. Therefore, the assessment order stands merged in the order of the ld. CIT(A).
It was, in fact, way back in 1953, that the Hon'ble Bombay High Court in “Tejaji Farasram Kharawa” (supra) held that it is a well established principle of law that when an appeal is provided from a decision of a Tribunal and the Appeal Court after hearing the appeal passes an order, the order of the original Court ceases to exist and is merged in the order of the Appeal Court and although the Appeal Court may merely confirm the order of the Trial Court, the order that stands and is operative is not the order of the ITA 870/CHD/2019 A.Y. 2015-16 22 Trial Court but the order of the Appeal Court. In the case at hand, the Appeal Court, i.e. the ld. CIT(A) has affirmed/confirmed the order of the Trial Court, i.e., the AO and that too, by a speaking order. Therefore, it is the CIT(A)’s order that the AO’s order stands merged.
No decision contrary to the above case laws has been cited by the Department before us, nor has it been pleaded that the law laid down therein is either not a law of the land or is not the law applicable to the facts of the present case.
In view of the above, there is no force in the Department’s contention that the original order dated 05.03.2017 is void abi-nitio and that accordingly, the appeal of the assessee is also void abi-nitio and it be dismissed as such. This argument of the Department is, accordingly, rejected.
On merits, it is a fact that accepted on record that the assessee was approved u/s 10(23C)(vi) and that it had claimed exemption under the said provision. It was, accordingly, due to an inadvertent error that the provision was mentioned as Section 10(23C)(iiiab). The exemption claimed u/s 10(23C)(vi) was pursuant to the approval
ITA 870/CHD/2019 A.Y. 2015-16 23 granted by the Chief Commissioner of Income Tax, Ludhiana, granted vide order No.CCIT/LDH/JB/10(23C)(11/2015-16/2729 dated 18.09.2015. This remains undisputed and it finds mention in para 3 of the assessment order wherein the reply of the assessee, to notices u/s 143(2) and 142(1) of the Act has been reproduced, wherein, it has been specifically mentioned that “…………But while filing the Income Tax Return, the Section under which exemption was claimed as inadvertently been written as “Section 10(23C)(iiiab) instead of 10(23C)(vi)”.
It remains undisputed, as cannot be disputed, that since the assessee stands approved under the provisions of Section 10(23C)(vi) of the Act, no disallowance could have been made by applying the provisions of Section 11 and 12 of the Income Tax Act. In this regard, reliance has correctly been placed on behalf of the assessee, on CBDT Circular No.14 of 2015, dated 17.08.2015, which recognizes that Section 10(23C)(vi) of the Act prescribes that income of any University or other educational Institution, existing solely for educational purposes and not for purposes of profit, shall be exempt from tax if such entities are approved by ITA 870/CHD/2019 A.Y. 2015-16 24 the prescribed authorities, which is the case of the assessee also. Herein, the receipts/surplus, i.e., grants received from the Government, is not the income of the assessee and, consequently, the provisions in respect of application of income are not attracted to such receipts or surplus.
21.1 Therefore, we find ourselves to be in agreement with the assessee that the ld. CIT(A) went wrong in upholding the addition of Rs.2,47,58,982/- made by the AO by invoking the provisions of Sections 11 and 12 when the assessee is an educational institution duly approved u/s 10(23C)(vi) of the Income Tax Act. Accordingly, Ground No.2 is accepted and the addition is deleted.
As per Ground No.3, the ld. CIT(A) erred in upholding the assessment order treating tied up grants received by the assessee from the Government as income of the assessee.
The AO observed that the assessee has shown the expenses incurred on its activities in the Income & Expenditure Account, but the funds received in the Development Funds, Student Activity Fund and Hostel Fund are not shown as receipts/income; that the Development and Student Activity Fund is collected from the students
ITA 870/CHD/2019 A.Y. 2015-16 25 and forms part of the fees; that the assessee has shown annual repair and maintenance of hostel expenses etc., which are nothing but expenses on student activities, development activities and hostel maintenance; that the funds are the receipts of the assessee which are charged from students as part of their fees every year, which should have been ideally been used for the objects/purposes for which they are taken from the students, that assessee is accumulating these funds in its Balance Sheet to avoid showing it in its Income & Expenditure Account and then having to spend over; that further, it is peculiar that the assessee is booking expenses on development, hostel and student activity in its Income and Expenditure Account without routing the receipts of these funds through its Income and Expenditure Account.
The ld. CIT(A) has observed, following the CIT(A)’s order for the earlier years, that in those years, the ld. CIT(A) has upheld part of the assessee's submissions to the extent that the excess income over expenditure is of the nature of grant-in-aid and belongs to the consolidated fund of the State and the assessee cannot incur any expenditure without the express approval of the State Government and ITA 870/CHD/2019 A.Y. 2015-16 26 the University; and that in the interest of judicial discipline and consistency, he was relying on the decision of his predecessor to the said extent. The ld. CIT(A) observed that the assessee Society collects Development Fund, Hostel Fund, Student Activity Fund and other similar funds from the students as per express Notifications of the State Government, which is a matter of record and not in dispute.
He observed that as per the Rules and Notifications/Circulars of the State Government, these funds can be spent only on the specific approval of the State Government and till such time, they are in the nature of grant-in-aid and would be in consonance with the findings of the ld. CIT(A) in the earlier years; that in such order, the ld. CIT(A) has held that in case surplus is left under these funds, it belongs to the consolidated fund of the State and can be spent for specified purpose as per the approval of the State Government. It was observed that this finding relates to the utilization of the funds and not to their treatment, either as receipts, or as corpus donation.
The assessee has contended that the ld. CIT(A) has followed the decision of his predecessor for assessment year 2006-07 to 2012-13 and has accepted the fact that the ITA 870/CHD/2019 A.Y. 2015-16 27 assessee's excess of income over expenditure was in the nature of grant-in-aid and that the same belonged to the Consolidated Fund of the State of Punjab; that it stands accepted by the ld. CIT(A) that the assessee collects various funds from its students as per the express Notification issued by the Government; that the ld. CIT(A) further accepts that till such time such funds are spent as per the directions of the Government, the same are in the nature of grant-in-aid. It has been contended that the fact that the funds/surplus vests with the consolidated fund of the Government of Punjab and that they were allowed to be retained by the assessee as yearly grant also stands approved by this Bench of the Tribunal in the case of the assessee itself, in the preceding years. Attention in this regard has been drawn to copy of order dated 21.10.2016, passed by this Bench in the assessee's own case, in to 1116/CHD/2014 for assessment years 2006-07 to 2012-13 (ACL PB -1, pages 1 and 2) and copy of order dated 17.01.2018 passed by this Bench in the assessee's own case in ITA Nos. 1391 to 1397/CHD/2017, for assessment years 2006-07 to 2012-13 (ACL PB -1, pages 3- 5) and copy of order dated 21.10.2016 passed by this Bench
ITA 870/CHD/2019 A.Y. 2015-16 28 in the assessee's own case in for assessment year 2013-14 (ACL PB-II, pages 72-78).
25.1 It has been contended that the ld. CIT(A) accepted the fact that funds/surplus of receipts over expenditure were in the nature of grants-in-aid in the hands of the assessee, they could neither be considered as income of the assessee under the Income Tax Act, nor for ascertaining the amount to be expended or the amount to be accumulated under the provisions thereof. Reliance has been placed on the following case laws ; i) Commissioner of Income Tax, Chandigarh Vs The Punjab State e-governance Society” [2011] 4 TMI
1332 (P&H) (ACL PB-1, pages 6-9), ii) Commissioner of Income Tax, Panchkula Vs M/s
State Urban Development Society [2011] 11 taxmann.com 458 (P&H) (ACL PB -1, pages 10-11), and iii) DIT Vs Society for Development Alternatives
[2012] 18 taxmann.com 364 (Del) (ACL PB-1, pages 12-15)
ITA 870/CHD/2019 A.Y. 2015-16 29 26. The ld. DR, on the other hand, has placed strong reliance on the impugned order, contending that the ld. CIT(A) has rightly upheld the treatment of the grants received by the assessee from the Government, as income of the assessee; that as rightly held by the ld. CIT(A), to be corpus donation, in the first instance, the receipt should be a donation and voluntary contribution; that in the present case, the funds are charged indiscriminately from all the students and are in the nature of fees; their utilization being controlled by the State Government notwithstanding; and that they are required to form part of the Receipt & Expenditure Account of the assessee.
We find that it is undisputed that the funds/surplus of receipts over expenditure were in the nature of grant-in-aid, which facts stand expressly accepted by the ld. CIT(A) himself. As such, this grant-in-aid cannot be considered as income of the assessee under the Act, either for ascertaining the amount to be expended or for ascertaining the amount to be accumulated. The grants-in-aid made available to the assessee by the Government of Punjab, being not the income of the assessee, are exempt from tax.
ITA 870/CHD/2019 A.Y. 2015-16 30 28. Accordingly, finding the grievance of the assessee by way of Ground No.3 to be justified, the same is accepted.
Ground No.4 pertains to and challenges the action of the ld. CIT(A) in upholding the disallowance of depreciation as application of income. As per the assessee, while doing so, the ld. CIT(A) has illegally disregarded the fact that the assessee had not claimed cost of the fixed assets as application in the earlier years.
The AO observed that the assessee's Income & Expenditure Account showed that the assessee had claimed depreciation amounting to Rs.51,69,258/- as application of income; that in the course of its activity, the assessee had acquired different assets, which were purchased with the surplus funds available; that the entire expenditure incurred for the acquisition of capital assets was treated as application of income for charitable purposes u/s 11(1)(a) of the Act in the respective years in which such assets were procured; that if the assessee treats the expenditure of acquisition of assets as application of income for charitable purposes u/s 11(1)(a) and if the assessee claims depreciation on the value of such assets, then, in order to ITA 870/CHD/2019 A.Y. 2015-16 31 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, which had not been done by the assessee; that the income which should be available for application for charitable purposes gets reduced by the depreciation amount, which is not permissible under the Act; that the net effect is that after writing of the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes, when the assessee again claims the same amount in the form of depreciation, such notional claim becomes cash surplus available with the assessee that was statutorily required to be applied for its Aims and Objects; that this is true even if the assessee is assessed as an AOP and the assessee claims depreciation on the assets whose cost was allowed in the previous years; and that therefore, even if the assessee is assessed as an AOP for a particular year, it cannot claim the notional depreciation on the assets whose value has already been shown written off. In this way, the AO disallowed the ITA 870/CHD/2019 A.Y. 2015-16 32 depreciation claimed as expense and the amount of Rs.51,69,258/- was added back.
The ld. CIT(A) observed, while confirming the AO’s order that with the insertion of sub-section (6) to Section 11 of the Act, no depreciation is allowable on any item of income, regardless of whether it is applied, accumulated or set apart for application; that thus, it is irrelevant whether the purchase was considered towards application in the earlier years.
In this regard, it is the case of the assessee that in the years prior to the year in question, it had claimed exemption u/s 10(23C)(iiiab), which fact is not in dispute; that this being so, no question arises of the assessee having claimed cost incurred on acquisition of fixed assets as application of income; that even otherwise, the assessee has not claimed expenditure incurred on acquisition of fixed assets as revenue expenditure in its Receipt & Expenditure Account in any preceding year; and that this being the factual position, the ld. CIT(A) has clearly erred in upholding the disallowance of depreciation as application of income.
ITA 870/CHD/2019 A.Y. 2015-16 33 33. The ld. DR on the other hand has placed reliance on the CIT(A)’s order in this regard also.
As noted above, while dealing with Ground No.3, order (supra) dated 21.10.2016 stands passed by this Bench in the assessee's case for assessment years 2006-07 to 2012- 13, in to 1116/CHD/2014. A copy of the said order has been placed at ACL PB -1, pages 1-2. Order (supra) (dated 17.01.2018 has been passed by this Bench in the assessee's case, in the second round, for assessment years 2006-07 to 2012-13, in ITA Nos. 1391 to 1397/CHD/2017. A copy thereof has been placed at ACL PB -1, pages 3-5. Copy of order (supra) dated 21.10.2016 stands passed by this Bench (authored by one of us – ld. A.M.) in the assessee's own case, for assessment year 2013- 14, in ITA No. 214/CHD/2020. Copy has been placed at ACL PB –II pages 72-78.
A bare perusal of these orders shows that in all these earlier years (the year under consideration is A.Y. 2015-16), the assessee had claimed exemption u/s 10(23C)(iiiab) and not u/s 10(23C)(vi), as has been done in the year under consideration. As such, as rightly contended, there is no ITA 870/CHD/2019 A.Y. 2015-16 34 question of the assessee having claimed cost incurred on acquisition of fixed assets as application of income.
35.1 Otherwise too, we do not find the ld. CIT(A) to be correct when he observes that since with the insertion of sub-section (6) in Section 11 of the Act, no depreciation is allowable on any item of income, regardless of whether it is applied, accumulated or set apart for application, it is relevant whether the purchase was considered towards application in the earlier years. In our humble view, this proposition, rather, is clearly opposite to what has been stated in the provisions contained in Section 11(6) of the Act, where it has been provided that, “Where u/s 11, any income is required to be applied or accumulated or set apart for any application, then, for such purposes, 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 Section 11 in the same or any other previous year. Simply put, as per the provisions of Section 11(6), if acquisition of an asset has been claimed as application of income u/s 11 by the assessee in the concerned assessment year or in any other previous year, depreciation would not ITA 870/CHD/2019 A.Y. 2015-16 35 be allowed. In the present case, as observed from the record and as not disputed before us, no such claim was made by the assessee regarding application of income u/s 11 either in the year under consideration or in any of the earlier years.
35.2 Still otherwise, again, as rightly contended on behalf of the assessee and not disputed by the Department, the assessee had not claimed expenditure incurred on acquisition of fixed assets as revenue expenditure in the Receipt & Expenditure Account, in any of the earlier years.