Sanghamithra Rural Financial Services, Bangalore V. DDIT, Bangalore

ITA 1205/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0212 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 13-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 03-09-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUNIL KUMAR AGARWALA JCITD R
• Assessee Lawyers: RAVISHANKAR S V
• Keywords: Capital asset; Depreciation; Charitable institution; Opportunity of being heard; Bad and doubtful debts
• Section: 12A; 32; 6; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH C SMC BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO.1205/BANG/2015 (ASST. YEAR 2009-10) SANGHAMITHRA RURAL FINANCIAL SERVICES, 612, 1 C MAIN ROAD, DOMLUR LAYOUT, BANGALORE-560 071. .. APPELLANT PAN: AAECS 0038H VS. THE DY. DIRECTOR OF INCOME-TAX(EXEMPTIONS), CIRCLE-17(1), BANGALORE. .. RESPONDENT APPELLANT BY : SHRI RAVISHANKAR S.V, ADVOCATE RESPONDENT BY : SHRI SUNIL KUMAR AGARWALA, JCIT(D R) DATE OF HEARING : 13-06-2016 DATE OF PRONOUNCEMENT : 13-07-2016 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS) 14, BANGALOR E DATED 12.06.2015 FOR THE ASSESSMENT YEAR 2009-10. PAGE 2 OF 11 2. THE ASSESSEE, SANGHAMITHRA RURAL FINANCIAL SERVI CES, IS A TRUST REGISTERED U/S 25 OF THE COMPANIES ACT, 1956 AND AL SO REGISTERED U/S. 12A OF THE INCOME-TAX ACT, 1961 [THE ACT]. IT I S ENGAGED IN PROVIDING FINANCING THROUGH INTEREST BASED CREDIT T O THE DISADVANTAGED SECTIONS OF THE SOCIETY BASED ON THE CONCEPT OF SE LF HELP GROUPS. IT IS REGISTERED UNDER THE FOREIGN CONTRIBUTION REGULA TION ACT, 1976 TO RECEIVE DONATION FROM ABROAD. 3. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AS SESSING OFFICER NOTED THAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS .2,35,69,115 AS APPLICATION OF INCOME EXEMPT U/S. 11 OF THE ACT, IN CLUSIVE OF DEPRECIATION CLAIM OF RS.3,27,216. THE AO HELD TH AT DEPRECIATION IS NOT ALLOWABLE AS APPLICATION AS IT IS ONLY A NOTION AL EXPENDITURE. HE FURTHER OBSERVED THAT NO INCOME/RECEIPT IS ACTUALLY SPENT OR UTILIZED OR APPLIED AND HENCE CANNOT BE CONSIDERED AS APPLICATI ON OF INCOME. THE ASSESSEE HAD CLAIMED A 100% EXEMPTION OF CAPITAL EX PENDITURE IN THE PRECEDING ASSESSMENT YEAR AND THE CLAIM OF DEPRECIA TION ON THE ALREADY EXEMPTED CAPITAL ASSETS AMOUNTS TO DOUBLE DEDUCTION . RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F ESCORTS LTD. V. PAGE 3 OF 11 UOI (1993) 199 ITR 43 (SC) , THE AO DISALLOWED THE CLAIM OF DEPRECIATION OF RS.3,27,216 AS NON-APPLICATION U/S 11. 4. BEFORE THE CIT(APPEALS), THE ASSESSEE RELIED ON THE DECISION OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COU RT IN THE CASE OF CIT V. SOCIETY OF SISTERS OF ST. ANNE, 146 ITR 28, WHICH WAS DISTINGUISHED BY THE LD. CIT(APPEALS). HE PLACED RELIANCE UPON THE DECISION OF ESCORTS LTD. (SUPRA) AND UPHELD THE ACTION OF THE AO ON THE DISALLOWANCE OF DEPRECIATION. 5. THE ASSESSEE IS IN APPEAL BEFORE ME AND HAS RAIS ED GROUND NOS.3 & 4. IT IS SUBMITTED THAT THE DECISION RENDERED IN THE CASE OF ESCORTS LTD. (SUPRA) RELATED TO THE CLAIM OF DEPRECIATION IN RESPECT OF SCIENTIFIC RESEARCH AND A CLAIM U/S 35(2)(IV) OF THE IT ACT. IT WAS FURTHER SUBMITTED THAT THE SAID DECISION HAS NO APPLICATION TO THE FACTS OF THE ASSESSEES CASE. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWING DECISIONS ARE DIRECTLY APPLICABLE TO CHAR ITABLE INSTITUTIONS: (I) 135 ITR 485 MADRAS (II) (II) 113 ITR 84 SC PAGE 4 OF 11 (III) KARNATAKA HIGH COURT IN THE CASE OF SOCIETY OF THE SISTERS OF ST. ANNE (1984), 146 ITCL 28, & (IV) 36 ITCL 537, DELHI HIGH COURT. 6. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITT ED THAT THE BANGALORE TRIBUNAL HAS BEEN CONSISTENTLY ALLOWING D EDUCTION ON DEPRECIATION AND ALSO ADDITIONS TO FIXED ASSETS IN THE YEAR OF PURCHASE/USE FOLLOWING THE VARIOUS HIGH COURT DECIS IONS INCLUDING THE HON'BLE JURISDICTIONAL HIGH COURT. 7. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIAL ON RECORD. I FIND THAT THE ACT OF CHARITY OF THE ASSESSEE IS P ROVIDING FUNDS TO THE POORER SECTIONS OF THE SOCIETY BY WAY OF LOAN. THE INCOME OF THE ASSESSEE IS MAINLY BY WAY OF INTEREST BY USING THE FUNDS OF THE TRUST. THE INCOME OF THE TRUST IS TO BE COMPUTED UNDER THE NORMAL COMMERCIAL PRINCIPLES. THE COORDINATE BENCH OF THI S TRIBUNAL IN THE CASE OF DDIT V. CUTCHI MEMON UNION (2013) 60 SOT 260, HAS HELD AT PARA 20 AS UNDER:- PAGE 5 OF 11 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 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 PAGE 6 OF 11 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. 8. FURTHER, THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF JYOTHI CHARITABLE TRUST IN ITA NO.662/BANG/2015 BY ORDER DATED 14.08.2015 HAS HELD AS UNDER:- 8. WE MAY ALSO ADD THAT THE LEGAL POSITION HAS SI NCE 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 APPLICAT ION, THEN, FOR SUCH PURPOSES THE INCOME SHALL BE DETERMI NED WITHOUT ANY DEDUCTION OR ALLOWANCE BY WAY OF DEPRECIATION OR OTHERWISE IN RESPECT OF ANY ASSET, ACQUISITION OF WHICH HAS BEEN CLAIMED AS AN APPLICA TION OF INCOME UNDER THIS SECTION IN THE SAME OR ANY OTH ER PREVIOUS YEAR. AS ALREADY STATED, THE AFORESAID AMENDMENT IS PROS PECTIVE 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) HAS TO BE REVERSED. CONSEQUENTLY GROUND NO.2 RAISED BY THE ASSESSEE IS ALLOWED. 9. FURTHER, IN THE CONTEXT OF ALLOWING DEPRECIATION IN COMPUTING THE INCOME TO BE APPLIED BY A CHARITABLE INSTITUTION, I T HAS BEEN HELD THAT PAGE 7 OF 11 DEPRECIATION IS NOTHING BUT DECREASE IN VALUE OF TH E ASSET OF THE TRUST DUE TO WEAR AND TEAR. IF DEPRECIATION IS NOT ALLOW ED AS A DEDUCTION FROM INCOME TO BE APPLIED FOR CHARITABLE PURPOSES, THEN THERE IS NO WAY TO PRESERVE THE CORPUS OF THE TRUST FROM WHICH THE INCOME OF THE TRUST IS DERIVED. 10. RESPECTFULLY FOLLOWING THE DECISIONS OF THE COO RDINATE BENCH OF THE TRIBUNAL IN THE CASE OF CUTCHI MEMON UNION (SUPRA) AND JYOTHI CHARITABLE TRUST (SUPRA) , I SET ASIDE THE ORDER OF THE CIT(APPEALS) AND ALLOW GROUND NOS.3 & 4 RAISED BY THE ASSESSEE. 11. THE NEXT ISSUE VIDE GROUND NOS.1 & 2 IS REGARD ING DISALLOWANCE OF BAD DEBTS WRITTEN OFF TREATED AS AP PLICATION OF INCOME. THE ASSESSEE CLAIMED BAD DEBTS WRITTEN OFF AMOUNTIN G TO RS.13,33,370 AS APPLICATION OF INCOME. THE AO WAS OF THE VIEW T HAT WRITE OFF OF BAD DEBTS DOES NOT AMOUNT TO SPENDING OF INCOME/RECEIPT S WHICH IS ONLY NOTIONAL APPLICATION. HE DISALLOWED THE SAME. 12. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED THAT THE MAIN OBJECTIVES OF THE ASSESSEE WAS TO ADVANCE MONEY TO ECONOMICALLY PAGE 8 OF 11 HANDICAPPED PERSONS AS A FORM OF SOCIAL SERVICE AT LOW RATES OF INTEREST SO THAT THE ECONOMICALLY BACKWARD PEOPLE COULD COME UP IN LIFE. IN THE COURSE OF SUCH LENDING, IT HAPPENS THAT THE PERSONS BORROWING FROM THE ASSESSEE FAIL TO RETURN THE MONEYS ADVANCED AFTER MAKING SOME EFFORTS AND WHEN IT IS FOUND THAT SOME SUMS ARE NOT RECOVER ABLE, THESE SUMS ARE WRITTEN OFF AS NOT RECOVERABLE AND CLAIMED THA T AS OUTGO AND IN THIS CASE AS PART OF APPLICATION OF INCOME. THIS SYSTEM HAS BEEN CONSISTENTLY FOLLOWED YEAR AFTER YEAR. IN CONFORMI TY WITH THIS SYSTEM, AS AND WHEN RECOVERY TAKES PLACE THE SUMS RECOVERE D ARE TAKEN AS INCOME AND SO IT HAD IN THE PAST FORMED PART AND PA RCEL OF THE APPLICATION OF INCOME. 13. THE CIT(A) HAS DISMISSED THE CLAIM OF THE ASSES SEE TREATING THE BAD DEBTS WRITTEN OFF AS APPLICATION OF INCOME, ON THE GROUND THAT SUCH WRITE OFF IS NOTIONAL AND THAT THERE IS NO TANGIBLE OUT FLOW OF FUNDS FOR CHARITABLE OBJECTIVES. HE OBSERVED THAT THE ASSESS EE HAS ACCEPTED THE DISALLOWANCE IN THE EARLIER YEARS AND HENCE CANNOT AGITATE THE ISSUE THIS YEAR. 14. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE ME. PAGE 9 OF 11 15. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. THERE IS NO CONCEPT OF RES JUDICATA IN THE INCOME TAX ASSESSMENTS. IF THE CLAIM OF THE ASSESSEE IS OTHERWISE ALLOWABLE AS PER LAW, THE CLAIM CANNOT BE REJECTED MERELY BECAUSE OF SIMILAR DISALL OWANCES IN THE EARLIER YEARS. I AM OF THE VIEW THAT THE RATIO OF THE COORDINATE BENCH DECISION IN THE CASE OF DDIT V. CUTCHI MEMON UNION (2013) 60 SOT 260 APPLIES WITH EQUAL FORCE TO THE PRESENT CASE FOR C LAIM OF DEDUCTION OF BAD DEBTS WRITTEN OFF. THE INCOME OF THE TRUST IS MAINLY BY UTILIZING THE CORPUS FUNDS OF THE TRUST AND EARNING INTEREST. WHEN SOME OF THE AMOUNTS ADVANCED BY THE TRUST IS NOT RECOVERABLE, T HEN THE CORPUS OF THE TRUST GETS DIMINISHED. TO THAT EXTENT, THE TRU ST IS DEPRIVED OF ITS CAPITAL TO EARN THE INCOME. DEDUCTION OF IRRECOVER ABLE ADVANCES FROM INCOME IS NOTHING BUT RECOUPMENT OF THE CORPUS, INS TEAD OF REQUIRING THE ASSESSEE TO SPEND THAT AMOUNT OF INCOME FOR THE OBJECTS OF THE TRUST IN THE CURRENT YEAR. THEREFORE, I AM OF THE OPINIO N THAT IN COMPUTING THE INCOME OF THE CHARITABLE INSTITUTION, THE IRREC OVERABLE DEBT SHOULD BE REDUCED FROM THE INCOME WHICH IS REQUIRED TO BE APPLIED DURING THE YEAR. I DIRECT ACCORDINGLY. THE APPEAL OF THE ASS ESSEE ON THESE GROUNDS IS ALLOWED. PAGE 10 OF 11 16. GROUND NO.5 RAISED BY THE ASSESSEE IS THAT THE CIT(A) ERRED IN NOT CONSIDERING THE CLAIM FOR ALLOWING TRAINING AND DEVELOPMENT EXPENDITURE DIRECTLY DEBITED TO TRAINING FUND AS AP PLICATION OF INCOME. BEFORE THE CIT(APPEALS), THE ASSESSEE VIDE ADDITION AL WRITTEN SUBMISSIONS (COPY FILED ON RECORD) SUBMITTED THAT T RAINING EXPENDITURE DEBITED TO TRAINING & DEVELOPMENT FUND DIRECTLY IS CLAIMED AS APPLICATION OF FUNDS U/S. 11, 12 & 13 AND THAT THE SAME HAS BEEN WRONGLY ADDED IN THE ASSESSMENT ORDER INSTEAD OF DE DUCTION AND THERE IS NO DISCUSSION IN THE ASSESSMENT ORDER TO DISALLO W SUCH EXPENDITURE. WE FIND THAT THE CIT(APPEALS) HAS NOT GIVEN A FINDI NG ON THIS ISSUE. WE THEREFORE REMIT THIS ISSUE TO THE FILE OF THE AS SESSING OFFICER TO EXAMINE THE EXPENDITURE TOWARDS TRAINING & DEVELOPM ENT AND DECIDE WHETHER IT WOULD AMOUNT TO APPLICATION OF FOUND OF THE TRUST, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. PAGE 11 OF 11 17. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH JULY, 2016 . SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL M EMBER BANGALORE DATED : 13 TH JULY, 2016 VMS / DS COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.