DDIT, Bangalore V. M/s Accion Technical Advisors India, Bangalore

ITA 1040/BANG/2014

• Counselvise Citation: 104021114 RSA 2014
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 23-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 05-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Keywords: Capital asset; Depreciation; Charitable institution; Source of fund; Cost of acquisition; Bad and doubtful debts; Capital expenditure
• Section: 12A; 32; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO.907/BANG/2014 ASSESSMENT YEAR : 2009- 10 ACCION TECHNICAL ADVISORS INDIA, NO.9/3, 1 ST FLOOR, KAISER-E-HIND, RICHMOND ROAD, BANGALORE-560 025 PAN : AAFCA 8834L VS. THE ASSISTANT DIRECTOR OF INCOME-TAX (EXEMPTIONS), CIRCLE 17(1), BANGALORE - 560 001. APPELLANT RESPONDENT ITA NO.1040/BANG/2014 ASSESSMENT YEAR : 2009- 10 THE DEPUTY DIRECTOR OF INCOME-TAX (EXEMPTIONS), CIRCLE 17(1), BANGALORE - 560 001. VS. ACCION TECHNICAL ADVISORS INDIA, BANGALORE-560 025. PAN NO. AAFCA 8834L APPELLANT RESPONDENT ASSESSEE BY : SHRI CHAVALI NARAYANAN, C.A. REVENUE BY : DR. P.K. SRIHARI, ADDL.CIT(DR) DATE OF HEARING : 23.09.2015 DATE OF PRONOUNCEMENT : 30.09.2015 ITA NOS.907 & 1040/BANG/2014 PAGE 2 OF 16 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO. 907/BANG/14 IS AN APPEAL BY THE ASSESSEE WHILE ITA NO.1040/BANG/2014 IS AN APPEAL BY THE REVENUE. BOT H THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24.12.2013 OF CIT( APPEALS)-V, BANGALORE, RELATING TO ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IS A CHARITABLE INSTITUTION SET UP UNDER SECTION 25 OF THE COMPANIES ACT, 1956. IT WAS ESTABLISHED AS A N ON-PROFIT ORGANIZATION BASED IN THE UNITED STATES OF AMERICA. THE OBJECTS FOR WHICH THE ASSESSEE WAS ESTABLISHED IS TO GIVE PEOPLE FINANCIAL TOOLS T HEY NEED TO WORK THEIR WAY OUT OF POVERTY. THE ASSESSEE WORKS TO EXPAND MICRO FINANCE TO REACH MILLIONS OF POOR PEOPLE WHO LACK ACCESS TO BASIC FI NANCIAL SERVICES. THE ASSESSEE IS NOT ENGAGED IN MICROFINANCE LENDING AS SUCH. HOWEVER, THE ASSESSEE WORKS WITH ENTITIES ENGAGED IN MICROFINANC E, TO HELP THEM DESIGN AND LAUNCH PROGRAMS WHICH HAVE MAXIMUM SOCIAL IMPAC T. THE ASSESSEE ENJOYS REGISTRATION U/S.12AA OF THE INCOME TAX ACT, 1961 (ACT) AND IS ENTITLED TO CLAIM EXEMPTION OF ITS TOTAL INCOME U/S .11 OF THE ACT. 3. THE ASSESSEE FILED RETURN OF INCOME FOR AY 2009- 10 DECLARING TOTAL INCOME OF NIL. THE FOLLOWING WAS THE COMPUTATION O F TOTAL INCOME FILED BY THE ASSESSEE :- ITA NOS.907 & 1040/BANG/2014 PAGE 3 OF 16 PARTICULARS AMOUNT RS. AMOUNT RS. INCOME: GAINS/DONATIONS INCOME FROM WORKSHOPS, TRAINING AND TECHNICAL AND MANAGEMENT SERVICES LESS: INCOME APPLIED FOR CHARITABLE PURPOSES ELIGIBLE FOR EXEMPTION U/S.11 OPERATING & OTHER EXPENSES INTEREST EXPENSES DEPRECIATION INVESTMENT IN FIXED ASSETS LESS: DEFICIT BROUGHT FORWARD FROM AY 2008-09 FROM AY 2007-08 TOTAL INCOME 4,18,00,000 84,23,491 3,33,69,319 51,52,306 13,49,000 3,25,411 (2,66,04,960) . (8,92,281) (2,74,97,241) 5,02,23,491 (4,01,96,037) 1,00,27,454 (1,00,27,454) ----- 4. THE AO COMPUTED TOTAL INCOME OF THE ASSESSEE BY DISALLOWING DEPRECIATION, DISALLOWING BAD DEBTS OF RS.6,17,865 WHICH IS PART OF THE OPERATING AND REVENUE EXPENSES CLAIMED AS EXPENDITU RE BY THE ASSESSEE AND FURTHER REJECTING THE CLAIM OF DEFICIT OF BROUG HT FORWARD FOR AY 08-09 & 07-08. THE CIT(A) DIRECTED THE AO TO DISALLOW DEPR ECIATION ONLY ON THE OPENING WDV OF THE BLOCK OF ASSETS AS AGAINST THE C LAIM OF THE ASSESSEE FOR ALLOWING DEPRECIATION ON CLOSING WDV OF THE BLO CK OF ASSETS WHICH WOULD ALSO INCLUDE ADDITIONS TO THE BLOCK OF ASSETS DURING THE PREVIOUS YEAR. THE CIT(A) DELETED DISALLOWANCE OF DEDUCTION ON ACC OUNT OF BAD DEBTS WHICH HAS NOT BEEN CHALLENGED BY THE REVENUE IN ITS APPEAL. THE CIT(A) DELETED THE ADDITION MADE CONSEQUENT TO DISALLOWANC E OF SET OFF OF BROUGHT ITA NOS.907 & 1040/BANG/2014 PAGE 4 OF 16 FORWARD DEFICIT FOR AY 07-08. THE CIT(A) HOWEVER C ONFIRMED THE ADDITION MADE CONSEQUENT TO DISALLOWANCE OF SET OFF OF BROUG HT FORWARD DEFICIT FOR AY 08-09. AGGRIEVED BY THE RELIEF ALLOWED TO THE A SSESSEE, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. AGGRIEVED BY THE RE LIEF NOT ALLOWED BY THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. 5. WE SHALL NOW DEAL WITH THE ISSUE WITH REGARD TO DISALLOWANCE OF DEPRECATION. IN THE COURSE OF ASSESSMENT U/S. 143( 3) OF THE ACT, THE AO NOTICED FROM THE DETAILS OF DEPRECIATION CLAIMED, T HAT THE DEPRECIATION WAS CLAIMED ON ASSETS, THE COST OF ACQUISITION OF THE S AID ASSETS HAD BEEN CLAIMED BY THE ASSESSEE AS CAPITAL EXPENDITURE TOWA RDS APPLICATION OF FUNDS TOWARDS THE OBJECTS OF THE TRUST AND ALLOWED AS SUCH. ACCORDING TO THE AO, ALLOWING SUCH A CLAIM WOULD AMOUNT TO ALLOW ING DOUBLE DEDUCTION. ON THE FACTS OF THE PRESENT CASE, HE WAS OF THE VIE W THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ESCORTS LIMITED & ANOTHER VS. UNION OF INDIA 199 ITR 43 IS SQUARELY APPLICABLE, WHEREIN IT HAS BEEN CATEGO RICALLY HELD THAT WHEN DEDUCTION U/S 35(2)(IV) IS ALLOWED I N RESPECT OF CAPITAL EXPENDITURE ON SCIENTIFIC RESEARCH, NO DEPRECIATION IS ALLOWABLE U/S 32 ON THE SAME ASSET. 6. THE ASSESSEE POINTED OUT THAT HON'BLE HIGH COUR T 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 ITA NOS.907 & 1040/BANG/2014 PAGE 5 OF 16 OF INCOME FOR CHARITABLE PURPOSE, ALLOWING DEPRECIA TION 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. 7. THE AO HOWEVER, HELD THAT ALLOWANCE OF DEPRECIA TION WHEN THE COST HAS ALREADY BEEN RECOVERED BY WAY OF EXEMPTION AS A PPLICATION OF INCOME AMOUNTS TO DOUBLE DEDUCTION AND DOUBLE BENEFIT ON T HE 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 DEPRECIABL E ASSET WHEN THE COST OF ACQUISITION OF DEPRECIABLE ASSET WAS ALLOWED AS APP LICATION OF INCOME FOR CHARITABLE PURPOSE AMOUNTS TO DOUBLE DEPRECIATION A ND THEREFORE DEPRECIATION CANNOT BE ALLOWED. THE AO ALSO DISTING UISHED THE CASES CITED BY THE ASSESSEE. 8. ON APPEAL BY THE ASSESSEE, THE CIT(A), HELD THAT THE CLAIM OF THE ASSESSEE FOR DEPRECIATION HAS TO BE ALLOWED BUT ONL Y ON THE OPENING WDV OF THE BLOCK OF ASSETS. THE ASSESSEES CLAIM WAS T O ALLOW DEPRECIATION ON THE CLOSING WDV OF THE ASSETS INCLUDING THE ADDITIO N MADE TO THE BLOCK OF ASSETS DURING THE PREVIOUS YEAR. 9. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE HAS PREFERRED GROUND NO.1 IN ITS APPEAL AND THE ASSESSEE HAS PREF ERRED GROUND NO.2 IN ITS APPEAL BEFORE THE TRIBUNAL. ITA NOS.907 & 1040/BANG/2014 PAGE 6 OF 16 10. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, W HO RELIED ON THE ORDER OF AO. WE HAVE CONSIDERED THE ORDER OF THE A O. IDENTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE ITAT BANGALORE BEN CH IN THE CASE OF DDIT(E) V. CUTCHI MEMON UNION (2013) 60 SOT 260 BAN GALORE ITAT , WHEREIN SIMILAR ISSUE HAS BEEN DEALT WITH BY THIS T RIBUNAL. IN THE AFORESAID CASE, THE ASSESSEE CLAIMED DEPRECIATION AND THE AO DENIED DEPRECIATION ON THE GROUND THAT AT THE TIME OF ACQUIRING THE REL EVANT CAPITAL ASSET, COST OF ACQUISITION WAS CONSIDERED AS APPLICATION OF INCOME IN THE YEAR OF ITS ACQUISITION. THE AO TOOK THE VIEW THAT ALLOWING DE PRECIATION 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 REVENU E, THE TRIBUNAL HELD AS FOLLOWS:- 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IF DEPRECIATION IS NOT ALLOWED AS A NECESSARY DEDUCTION FOR COMPUTI NG INCOME OF CHARITABLE INSTITUTIONS, THEN THERE IS NO WAY TO PR ESERVE THE CORPUS OF THE TRUST FOR DERIVING THE INCOME AS IT IS NOTHI NG BUT A DECREASE IN THE VALUE OF PROPERTY THROUGH WEAR, DETERIORATIO N, OR OBSOLESCENCE. SINCE INCOME FOR THE PURPOSES OF SECT ION 11(1) HAS TO BE COMPUTED IN NORMAL COMMERCIAL MANNER, THE AMO UNT OF DEPRECIATION DEBITED IN THE BOOKS IS DEDUCTIBLE WHI LE COMPUTING SUCH INCOME. IT WAS SO HELD BY THE HONBLE KARNATA KA 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 E DUCATION SOCIETY (2011) 330 ITR 21 (P&H) , FOLLOWING CIT VS. MARKET COMMITTEE, PIPLI (2011) 330 ITR 16 (P&H) : (2011) 2 38 CTR (P&H) 103 THAT DEPRECIATION CAN BE CLAIMED BY A CHA RITABLE INSTITUTION IN DETERMINING PERCENTAGE OF FUNDS APPL IED FOR THE PURPOSE OF CHARITABLE OBJECTS. CLAIM FOR DEPRECIATI ON WILL NOT AMOUNT TO DOUBLE BENEFIT. THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF ESCORTS LTD. 199 ITR 43 (SC) H AVE BEEN ITA NOS.907 & 1040/BANG/2014 PAGE 7 OF 16 REFERRED TO AND DISTINGUISHED BY THE HONBLE 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 HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. M ARKET COMMITTEE, PIPLI, 330 ITR 16 (P&H). THE HONBLE P UNJAB & HARYANA HIGH COURT AFTER CONSIDERING SEVERAL DECISI ONS ON THAT ISSUE AND ALSO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ESCORTS LTD. (SUPRA), CAME TO THE CONCLUSIO N THAT DEPRECIATION IS ALLOWABLE ON CAPITAL ASSETS ON THE INCOME OF THE CHARITABLE TRUST FOR DETERMINING THE QUANTUM OF FUN DS WHICH HAVE TO BE APPLIED FOR THE PURPOSE OF TRUSTS IN TERMS OF SECTION 11 OF THE ACT. THE HONBLE PUNJAB & HARYANA HIGH COURT MADE A REFERENCE TO THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF ESCORTS LTD. (SUPRA) AND OBSERVED THAT THE HONBLE SUPREME COURT WAS DEALING WITH A CASE OF TWO DEDUCT IONS UNDER DIFFERENT PROVISIONS OF THE ACT, ONE U/S. 32 FOR DE PRECIATION AND THE OTHER ON ACCOUNT OF EXPENDITURE OF A CAPITAL NA TURE INCURRED ON SCIENTIFIC RESEARCH U/S. 35(1)(IV) OF THE ACT. THE HONBLE COURT THEREAFTER HELD THAT A TRUST CLAIMING DEPRECI ATION CANNOT BE EQUATED WITH A CLAIM FOR DOUBLE DEDUCTION. THE HON BLE PUNJAB & HARYANA HIGH COURT HAS ALSO MADE A REFERENCE TO T HE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SOCIETY OF SISTERS OF ANNE, 146 ITR 28 (KAR), WHERE IN IT WAS HELD THAT U/S. 11(1) OF THE ACT, INCOME HAS TO BE COMPUT ED IN NORMAL COMMERCIAL MANNER AND THE AMOUNT OF DEPRECIATION DE BITED IN THE BOOKS IS DEDUCTIBLE WHILE COMPUTING SUCH INCOME. I N 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 REVENU E IS DISMISSED. 11. WE MAY ALSO ADD THAT THE LEGAL POSITION HAS SI NCE BEEN AMENDED BY A PROSPECTIVE AMENDMENT BY THE FINANCE (NO.2) AC T, 2014 W.E.F. 1.4.2015 BY INSERTION OF SUB-SECTION (6) TO SECTION 11 OF THE ACT, WHICH READS AS UNDER:- ITA NOS.907 & 1040/BANG/2014 PAGE 8 OF 16 (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 OTH ER PREVIOUS YEAR. 12. 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) IN SO FAR AS IT RELATES TO ALLOWING DEPRECIATION ON OPENING WDV HAS TO BE CONFIRMED BUT HAS TO BE REVERSED IN SO FAR AS IT RELATES TO NOT ALLOWING DEPRECIATIO N ON THE CLOSING WDV OF THE BLOCK OF ASSETS. IN OTHER WORDS, THE ASSESSEE SHOU LD BE ENTITLED TO DEPRECIATION AS CLAIMED BY IT. CONSEQUENTLY GROUN D NO.1 RAISED BY THE REVENUE IS DISMISSED WHILE GROUND NO.2 RAISED BY TH E ASSESSEE IS ALLOWED. 13. THE OTHER ISSUE THAT ARISES FOR CONSIDERATION IN THE APPEAL BY THE REVENUE IS GROUNDS NO.2 AND THAT RAISED BY THE ASS ESSEE IN ITS GROUND OF APPEAL NO.3 IS AS TO WHETHER THE CIT(APPEALS) WAS JUSTIFIED IN HOLDING THAT ASSESSEE, A TRUST, IS ENTITLED TO CARRY FORWARD EXP ENDITURE INCURRED IN EXCESS OF ITS INCOME FOR SETTING OFF AGAINST INCOME OF THE SUCCEEDING YEARS? THE ASSESSEE IS A TRUST REGISTERED U/S. 12A OF THE ACT. FOR THE A.Y. 2009-10, THE ASSESSEE FILED A RETURN OF INCOME CLAIMING CARR Y FORWARD OF EXCESS EXPENDITURE INCURRED DURING THE AY 08-09 & 07-08 TO TALLING RS.2,74,97,241 WHICH COMPRISES OF BROUGHT FORWARD DEFICIT OF RS.2, 66,04,960 PERTAINING TO ITA NOS.907 & 1040/BANG/2014 PAGE 9 OF 16 AY 08-09 AND RS.8,92,281 PERTAINING TO BROUGHT FORW ARD DEFICIT OF AY 07- 08. THE ASSESSEE SOUGHT SETTING OFF OF EXCESS EXPE NDITURE OVER INCOME IN THE EARLIER AYS AS APPLICATION OF INCOME IN THE SUB SEQUENT ASSESSMENT YEAR I.E., IN AY 2009-10. ACCORDING TO THE AO THER E WAS NO PROVISION IN THE ACT FOR CARRY FORWARD OF EXCESS EXPENDITURE OF EARL IER YEAR TO BE ADJUSTED AGAINST INCOME OF THE SUBSEQUENT YEAR AND HE THEREF ORE DENIED THE CLAIM OF THE ASSESSEE. 14. ON APPEAL BY THE ASSESSEE, THE CIT(A) DIRECTED THE AO TO ALLOW CLAIM OF THE ASSESSEE FOR SET OFF IN SO FAR AS IT R ELATES TO DEFICIT OF AY 07-08 BUT DENIED THE CLAIM IN SO FAR AS IT RELATES TO AY 08-09. THE FOLLOWING WERE THE REASONS GIVEN BY THE CIT(A) IN THIS REGARD:- 16. GROUND NO. 4 & 5 RELATE TO CLAIM OF LOSS/DEFIC IT OF EARLIER YEARS AGAINST INCOME OF THE CURRENT YEAR : AS PER DETAILS FILED BY THE LD. AR, SUCH DEFICIT OR EXCESS EXPENDITURE OVER INCOME RELATED TO AY 2007-08 (RS.8 92,281/-) AND AY 2008-09 (RS. 26,604,960/-), WHICH WERE TO BE CARRIED FORWARD AND SET OFF AGAINST CURRENT YEARS INCOME. IT HAS ALSO BEEN EXPLAINED THAT THE MAJOR SOURCE OF INCOME OF THE AP PELLANT IS THE DONATION RECEIVED FROM PARENT COMPANY, AND EXPENDIT URE IN AY 2007-08, AND AY 2008-09 WERE MET PRIMARILY FROM THE BANK LOAN GUARANTEED BY THE PARENT COMPANY AND/OR THE SHARE CAPITAL/APPLICATION MONEY, PENDING THE FCRA APPROVA L AND RECEIPT OF DONATION FROM THE PARENT COMPANY. SAME A MOUNTS REPRESENT CREDITORS OR UNPAID BILLS. IT IS IMPORTAN T TO KNOW THE NATURE OF DEFICIT AND THE SOURCE OF FUNDING OF SUCH EXPENSES. THE DEFICIT MAY ARISE IN A GIVEN YEAR ONLY WHEN EXPENSE S IN EXCESS OF INCOME ARE MET OUT OF LOANS/BORROWINGS OR BY WAY OF UNPAID BILLS, DRAWN FROM, THE CORPUS OR ACCUMULATIONS MADE U/S 11(1)(A). 16.2 DEPENDING ON THE NATURE AND TYPE OF DEFICIT, IT WOULD HAVE TO BE EXAMINED, AS TO WHETHER IT COULD BE SET OFF A GAINST THE ITA NOS.907 & 1040/BANG/2014 PAGE 10 OF 16 INCOME OF A SUBSEQUENT YEAR. FOR EXAMPLE, IN CASE O F UNPAID BILLS, OR DRAWINGS FROM CORPUS, THE AMOUNT OF SUCH EXPENSES IN AN EARLIER YEAR WILL HAVE TO BE OWED TO BE SET OFF OR ADJUSTED AGAINST THE INCOME OF A SUBSEQUENT YEAR, BEFORE ARRIVING AT THE INCOME OF SUCH SUBSEQUENT YEAR FOR EXAMINING ITS APPLICATION/ACCUMULATION. IN CASE OF EXCESS EXPENSES BEING MET OUT FROM LOA N IN AN EARLIER YEAR, AS IS THE CASE OF THE APPELLANT REPAY MENT BEING APPLICATION OF INCOME, THE SAME WOULD BE ALLOWED ON LY WHEN THE LOAN IS REPAID AND NOT OTHER-WISE. IN THE PRESENT C ASE, THE ASSESSEE HAS INCURRED INTEREST EXPENSES AND CLAIMED AS APPLI CATION IN ITS ACCOUNTS AND THE SAME HAS BEEN ALLOWED BY THE ASSES SING OFFICER. HOWEVER, THE LOAN AMOUNT OF RS.317,13,071/ - AS ON 313.2008 HAS REMAINED UNPAID EVEN ON 31.3.2009. THU S SET OFF OF DEFICIT IN AY 2008-09 ON ACCOUNT OF LOAN FUNDS, AGA INST CURRENT YEARS INCOME WITHOUT ACTUAL REPAYMENT OF SUCH LOAN S AND LIABILITIES, CANNOT BE ALLOWED EITHER AS DEDUCTION FROM GROSS INCOME OR APPLICATION OF INCOME. SUCH ACTION INVOLV ES RISK OF DOUBLE DEDUCTION AS AND WHEN REPAYMENT OF LOAN IS M ADE IN A FUTURE YEAR, SAY AY 2011-12, AND CLAIMED AS APPLICA TION OF INCOME OF THAT YEAR. 16.3 IT MAY BE RELEVANT TO REFER TO THE HONBLE BO MBAY TRIBUNAL DECISION IN CASE OF INCOME-TAX OFFICER V. TRUSTEES OF SRI SATHYA SAI TRUST REPORTED IN [19901 33 LTD 320 (BOM .), WHICH HELD AS UNDER: PROVISIONS OF SECTION 11 WILL SHOW THAT THE EXEMPTI ON THAT IS CONTEMPLATED IS IN RESPECT OF THE INCOME MENTION ED IN THAT SECTION AND WHICH IS OTHERWISE INCLUDIBLE IN T HE TOTAL INCOME. THE SCHEME CONTEMPLATES A COMPUTATION OF TH E TOTAL INCOME BY THE ITO AS THE FIRST STEP. INCOME A PPLIED FOR CHARITABLE PURPOSE IS THEREAFTER MADE EXEMPT. I F THERE IS A LOSS OR DEFICIT IN THE COMPUTATION OF THE TOTA L INCOME, THAT ALONE, THEREFORE, CAN BE CARRIED FORWARD. WHERE THE DEFICIT ARISES AS A RESULT OF EXCESS SPENDING FOR CHARITABLE PURPOSES, SUCH EXCESS WOULD NOT FORM PART OF THE TOTAL INCOME OR LOSS AND THE SAME, THEREFORE, CANNOT BE CARRIED FORWARD . THE CLAIM OF THE ASSESSEE THAT THE ADVANCE RECEIVED BY IT IN REGARD TO THE SALE OF PROPERTY WAS IN THE NATURE OF INCOME, HAD ALSO TO BE REJECTED FOR THE SIMPLE REASON THAT SUCH ADVANCE COULD NOT GO INTO THE ITA NOS.907 & 1040/BANG/2014 PAGE 11 OF 16 COMPUTATION OF THE TOTAL INCOME . IF WOULD BE SO EVEN IF THE INCOME OF THE TRUST FOR THE PURPOSE OF THE ACT COULD NOT BE REGARDED IN A COMMERCIAL SENSE. THUS, IN THE PRESENT CASE, THERE WAS NO LOSS IN THE COMPUTATION OF THE TOTAL INCOME OF THE TRUST WHICH WAS ENTITLED TO BE CARRIED FORWARD. THE DEFICIT AROSE OUT OF THE APPLICATION OF SUMS NOT IN THE NATURE OF INCOME AND SUCH DEFICIT WAS NOT CAPABLE OF BEING CARRIED FORWARD . ACCORDINGLY, THE ORDER PASSED BY THE ITO IN WHICH H E DID NOT ALLOW THE CARRY FORWARD OF THE DEFICIT WAS TO B E RESTORED AND THAT OF THE AAC WAS TO BE SET ASIDE. 16.4 THUS DEFICIT ARISING FROM APPLICATION OF SUMS (LOANS/ADVANCES) WHICH ARE NOT IN THE NATURE OF INC OME, OR UNPAID LIABILITIES CANNOT BE CARRIED FORWARD. THEY COULD B E ALLOWED IN THE YEAR OF PAYMENT OR REPAYMENT. SIMILARLY EXCESS EXPE NDITURE MET OUT OF ACCUMULATIONS U/S 11(1)(A) OF EARLIER OR CUR RENT YEARS INCOME COULD NOT BE CARRIED FORWARD FOR SET OFF, AS SUCH PART OF INCOME ARE MEANT TO BE APPLIED FOR THE CHARITABLE P URPOSE IN ANY CASE. 16.5 TO CONCLUDE, IN THE APPELLANT CASE, THE DEFIC IT OF AY 2007- 08 (RS.892,281/-) WAS MET FROM SHARE CAPITAL APPLIC ATION MONEY ETC. WHICH SHALL BE ALLOWED TO BE SET OFF AGAINST T HE-GROSS-INCOME OF THE ASSESSEE. THE DEFICIT OF AY 2008-09 (RS. 26, 604,960/-), HAVING BEEN MET FROM THE BANK LOAN CANNOT BE SET OF F OR ADJUSTED AGAINST CURRENT YEARS INCOME AND THE SAME SHALL BE ALLOWED AS APPLICATION OF INCOME IN THE YEAR OF REPAYMENT, OR PAYMENT OF UNPAID BILLS AS THE CASE MAY BE. THUS, THE ASSESSIN G OFFICER IS DIRECTED TO ALLOW FOLLOWING DEDUCTIONS FROM THE GRO SS INCOME OF THE APPELLANT TO ARRIVE AT THE INCOME BEFORE APPLICATION/ACCUMULATION: (A) BAD DEBTS WRITTEN OFF (B) DEPRECIATION ON THE OPENING VALUE OF THE ASSETS (C) DEFICIT OR EXCESS OF EXPENDITURE OF AY 2O07-08_ 17.2 THE APPELLANT HAS FILED INTIMATION BEFORE THE ASSESSING OFFICER, UNDER EXPLANATION 2 TO SECTION 11(1) FOR A CCUMULATION OF UNUTILIZED INCOME IN EXCESS OF 85% OF INCOME AFTER DEDUCTIONS AS ABOVE. THE ASSESSING OFFICER IS DIRECTED TO COMP UTE SUCH SURPLUS AMOUNT PERMISSIBLE TO BE ACCUMULATED FOR AP PLICATION ITA NOS.907 & 1040/BANG/2014 PAGE 12 OF 16 WITHIN THE STIPULATED PERIOD OR AS STIPULATED U/S 1 1(2) OF THE IT ACT. 15. AGGRIEVED BY THE RELIEF ALLOWED TO THE ASSESSEE IN THE ORDER OF CIT(A), THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. AGGRIEVED BY THE DENIAL OF CLAIM OF SET OFF OF BROU GHT FORWARD DEFICIT OF AY 2008-09, THE ASSESSEE HAS RAISED GROUNDS 3 & 4 IN I TS APPEAL. 16. IN GROUND NO.2, THE REVENUE HAS REITERATED THE STAND OF THE AO THAT THERE IS NO PROVISION IN THE ACT TO ALLOW CARRY FOR WARD OF EXCESS APPLICATION OF INCOME FOR SET OFF AS APPLICATION OF INCOME IN S UBSEQUENT YEARS. THE LD. DR REITERATED THE STAND OF THE REVENUE AS CONTAINED IN THE GROUNDS OF APPEAL. 17. 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 ON LY IN THE YEAR IN WHICH THE INCOME HAS ARISEN. THE APPLICATION FOR CHARITAB LE PURPOSES AS CONTEMPLATED IN SECTION 11(1)(A) TAKES PLACE IN THE YEAR IN WHICH THE INCOME IS ADJUSTED TO MEET THE EXPENSES INCURRED FO R CHARITABLE OR RELIGIOUS PURPOSES. HENCE, EVEN IF THE EXPENSES FOR SUCH PURP OSES HAVE BEEN INCURRED IN THE EARLIER YEARS AND THE SAID EXPENSES ARE ADJUSTED AGAINST THE INCOME OF A SUBSEQUENT YEAR, THE INCOME OF SUCH SUB SEQUENT YEAR CAN BE SAID TO BE APPLIED FOR CHARITABLE OR RELIGIOUS PURP OSES IN THE YEAR IN WHICH SUCH ADJUSTMENT TAKES PLACE. IN OTHER WORDS, THE SE T-OFF OF EXCESS OF ITA NOS.907 & 1040/BANG/2014 PAGE 13 OF 16 EXPENDITURE INCURRED OVER THE INCOME OF EARLIER YEA RS AGAINST THE INCOME OF A LATER YEAR WILL AMOUNT TO APPLICATION OF INCOME O F 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 11 0 (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 AG AINST INCOME OF SUBSEQUENT YEARS AND SUCH ADJUSTMENT WOULD BE APPLI CATION OF INCOME FOR SUBSEQUENT YEARS AND THAT DEPRECIATION IS ALLOWABLE ON THE ASSETS THE COST OF WHICH HAS BEEN FULLY ALLOWED AS APPLICATION OF I NCOME UNDER S. 11 IN PAST YEARS. IN GOVINDU NAICKER ESTATE VS. ADIT 248 ITR 368 (MAD) , THE HONBLE MADRAS HIGH COURT HELD THAT THE INCOME OF T HE TRUST HAS TO BE ARRIVED AT HAVING DUE REGARD TO THE COMMERCIAL PRIN CIPLES, THAT S. 11 IS A BENEVOLENT PROVISION, AND THAT THE EXPENDITURE INCU RRED ON RELIGIOUS OR CHARITABLE PURPOSES IN EARLIER YEAR OR YEARS CAN BE ADJUSTED AGAINST THE INCOME OF THE SUBSEQUENT YEAR. THE PRINCIPLE THAT T HE LOSS INCURRED UNDER ONE HEAD CAN ONLY BE SET OFF AGAINST THE INCOME FRO M THE SAME HEAD IS NOT OF ANY RELEVANCE, IF THE EXPENDITURE INCURRED WAS F OR RELIGIOUS OR CHARITABLE PURPOSES, AND THE EXPENDITURE ADJUSTED AGAINST THE INCOME OF THE TRUST IN A SUBSEQUENT YEAR, WOULD NOT AMOUNT TO AN INCIDENCE O F LOSS OF AN EARLIER YEAR BEING SET OFF AGAINST THE PROFIT OF A SUBSEQUE NT YEAR. THE OBJECT OF THE RELIGIOUS AND CHARITABLE TRUST CAN ONLY BE ACHIEVED BY INCURRING EXPENDITURE ITA NOS.907 & 1040/BANG/2014 PAGE 14 OF 16 AND IN ORDER TO INCUR THAT EXPENDITURE, THE TRUST S HOULD 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 LI ABLE TO TAX. THE EXPENDITURE, IF INCURRED IN AN EARLIER YEAR IS ADJU STED 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 O F THE SUBSEQUENT YEAR, EVEN THOUGH THE ACTUAL EXPENDITURE WAS IN THE EARLI ER YEARS, IF IN THE BOOKS OF ACCOUNT OF THE TRUST SUCH EARLIER EXPENDITURE HA D 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 O F CIT VS. SOCIETY OF SISTERS OF ST. ANNE 146 ITR 28 (KAR.) . 18. WE ARE THEREFORE OF THE VIEW THAT THERE IS NO M ERIT IN GROUND NO.3 RAISED BY THE REVENUE. ACCORDINGLY, THE SAME IS DIS MISSED. 19. AS FAR AS GROUND NOS.3 & 4 RAISED BY THE ASSESS EE IN ITS APPEAL ARE CONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED BEFORE US THAT THE APPREHENSION OF THE REVENUE THAT WHEN THE LOAN IS REPAID THE ASSESSEE WOULD AGAIN CLAIM DEDUCTION AND HENCE THE ASSESSEE WOULD GET DOUBLE DEDUCTION IS WITHOUT ANY SOUND BASIS. WE ARE OF TH E VIEW THAT THE CLAIM OF THE ASSESSEE FOR SET OFF HAS TO BE ALLOWED BUT WITH A RIDER THAT THE ASSESSEE IN THE YEAR WHEN THE LOAN IS REPAID SHOULD NOT CLAIM DEDUCTION OF ITA NOS.907 & 1040/BANG/2014 PAGE 15 OF 16 THE SUMS REPAID AS LOAN AS APPLICATION OF INCOME. THE ABOVE DIRECTION, TO WHICH THE LEARNED COUNSEL FOR THE ASSESSEE HAD NO O BJECTION, IN OUR VIEW, WILL SUFFICIENTLY SAFEGUARD THE INTEREST OF THE REV ENUE. ACCORDINGLY, GROUND NO.3 & 4 RAISED BY THE ASSESSEE IS ALLOWED AND THE AO IS DIRECTED TO ALLOW THE SET OFF OF BROUGHT FORWARD DEFICIT AS DEDUCTION . 20. IN GROUND NO.3 THE REVENUE HAS CHALLENGED THE D IRECTION OF THE CIT(A) TO ALLOW ACCUMULATION U/S.11(2) OF THE ACT. IN OUR VIEW THE AFORESAID GROUND IS NO ACADEMIC IN VIEW OF THE CONCLUSIONS TH AT THE ASSESSEE WILL BE ENTITLED TO SET OFF OF BROUGHT FORWARD DEFICIT FOR AY 2008-09 & 2007-08. THERE WOULD BE UNUTILIZED SURPLUS AND THEREFORE THE RE IS NO NECESSITY TO ADJUDICATE GROUND NO.3 RAISED BY THE REVENUE. 21. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED, WHILE THE APPEAL BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF SEPTEMBER, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 30 TH SEPTEMBER, 2015. /D S/ ITA NOS.907 & 1040/BANG/2014 PAGE 16 OF 16 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.