Madras Chamber of Commerce and Industry, CHENNAI V. ITO (Exemptions) III, CHENNAI

ITA 1538/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5910 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 15-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B SAGADEVAN JCIT D R
• Assessee Lawyers: NANDITA S DAS
• Keywords: Capital asset; Business income; Depreciation; Charitable institution
• Section: 6; 10; 11

Judgement Text

, C/ SMC , IN THE INCOME TAX APPELLATE TRIBUNAL C/SMC BENCH, CHENNAI . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER I.T.A.NO.1538 /MDS./2017 ( ASSESSMENT YEAR : 2012-13) MADRAS CHAMBER OF COMMERCE AND INDUSTRY KARUMUTHU CENTRE 1 ST FLOOR NO.634(OLD NO.498), ANNA SALAI, NANDANAM CHENNAI 600 035 VS. THE INCOME - TAX OFFICER (EXEMPTIONS)-III, CHENNAI [PAN AAAAT 0095 R] ( / APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR.NANDITA S.DAS, ADVOCATE /RESPONDENT BY : MR.B.SAGADEVAN, JCIT, DR ! ' / DATE OF HEARING : 31.10.2017 #$%& ! ' /DATE OF PRONOUNCEMENT : 31.10.2017 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-17, CHENN AI DATED 10.03.2017 PERTAINING TO ASSESSMENT YEAR 2012-13. ITA NO.1538 /MDS/2017 2 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS FOR AD JUDICATION. 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APP EALS) IS ERRONEOUS, ARBITRARY AND AGAINST THE SETTLED PRINCIPLES OF LAW . 2. THE COMMISSIONER OF INCOME TAX (APPEALS) DISMISS ED THE APPEAL ON AN ASSUMPTION THAT THE APPELLANT CLAIMED THE COST OF C APITAL ASSETS AS APPLICATION OF INCOME AND ALSO CLAIMED DEPRECIATION WHICH WOULD AMOUNT TO DOUBLE DEDUCTION. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THAT THE ASSESSING AUTHORITY ALLOWED THE DEPRECIATION IN RESPECT OF ADDITION OF CAPITAL ASSETS WITHOUT CONSIDERING THE RATE OF APPR ECIATION APPLICABLE TO A TRUST THAT TOO ON A WRONG ASSUMPTION THAT THE ADDIT ION WAS MADE LESS THAN 180 DAYS. HOWEVER, DISALLOWED THE CLAIM OF DEP RECIATION IN RESPECT OF ORIGINAL COST OF CAPITAL ASSETS. 4. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N NOT CONSIDERING THE FACTUAL ASPECT OF THE TRANSACTION. THE PROCEDURE AD OPTED BY THE APPELLANT IS AS UNDER; (A) THE APPELLANT FOR ACCOUNTING PURPOSE CLAIMED DE PRECIATION AS PER THE RATE APPLICABLE TO THEM BEING A CHARITABLE TRUST. (B) WHILE CALCULATING THE APPLICATION OF INCOME THE ENTIRE DEPRECIATION CALCULATED IS DEDUCTED FROM THE TOTAL EXPENDITURE. (C) IN OTHER WORDS, THE APPELLANT HAS NOT CONSIDERE D THE ELEMENT OF DEPRECIATION FOR THE PURPOSE OF APPLICATION OF INCO ME. IN FACT, THE APPELLANT HAS TAKEN ONLY THE COST OF CAPITAL ASSETS AS APPLICATION OF INCOME WITHOUT DEPRECIATION. (D) THE QUESTION OF DOUBLE DEDUCTION, IF AT ALL LEG ALLY APPLICABLE, SHALL NOT APPLY SINCE WHILE CALCULATING APPLICATION OF INCOME , THE ELEMENT OF DEPRECIATION DEDUCTED FROM THE EXPENDITURE. 5. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT CONSIDERED THIS FACT AND PROCEEDED TO DECIDE THE ISSUE RELYING UPON VARI OUS DECISIONS OF THE ITA NO.1538 /MDS/2017 3 TRIBUNAL WHEREIN IT WAS HELD THAT THE ASSESSEE IS N OT ENTITLED TO CLAIM DEPRECIATION AND THE COST OF CAPITAL GOODS AS APPLI CATION OF INCOME. 6. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT T O HAVE APPRECIATED THE FACT THAT THE DISALLOWANCE WILL RESULT IN EXCESS IN COME SINCE THE APPELLANT HAS ALREADY DEDUCTED THE DEPRECIATION FROM THE EXPE NDITURE WHILE CALCULATING THE APPLICATION OF INCOME. WITHOUT PREJUDICE TO OUR SUBMISSION THAT THERE IS N O DOUBLE DEDUCTION, THE APPELLANT HAD ALREADY DEDUCTION DEPRECIATION FROM T HE EXPENDITURE FOR THE PURPOSE OF APPLICATION OF INCOME, THE APPELLANT IS ENTITLED FOR DEPRECIATION FOR THE FOLLOWING GROUNDS: 7. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE SCHEME OF TAXATION OF THE CHARITABLE TRUST ARE QUIT E DIFFERENT FROM THAT OF OTHER ENTITIES. 8. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE CONCEPT OF TOTAL INCOME, IS NOT APPLICABLE IN CAS E OF CHARITABLE / RELIGIOUS TRUSTS. FROM THE PROVISIONS OF SECTION 11(1 )(A) OF THE ACT, IT MAY BE SEEN THAT THE TERM USED THEREIN IS INCOME AND NOT TOT AL INCOME, WHICH IS APPLICABLE FOR THE PURPOSES OF TAXATION OF OTHER TA XABLE ENTITIES UNDER THE ACT. 9. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO NOTE THAT THE BOARD CIRCULAR NO.5-P(LXX-6) OF 1968, DATED 19.6.1968 HAS CLARIFIED AS UNDER: THE BUSINESS INCOME OF THE TRUST, AS DISCLOSED BY T HE ACCOUNTS PLUS ITS OTHER INCOME COMPUTED AS ABOVE, WILL BE THE INCOME OF T HE TRUST FOR THE PURPOSES OF SECTION 11(1). FURTHER, THE TRUST MUST SPEND AT LEAST 75 PER CENT OF THIS INCOME AND NOT ACCUMULATE MORE THAN 25 PER CENT THEREOF THE EXCESS ACCUMULATION, IF ANY, WILL BECOME TAXABL E UNDER SECTION 11(1). PARA (2) OF THE CIRCULAR ASSIGNS TO THE WORD INCOM E , USED IN SECTION 11(1)(A), THE SAME MEANING AS HAS BEEN SPECIFICALLY ASSIGNED TO THE ITA NO.1538 /MDS/2017 4 EXPRESSION TOTAL INCOME , VIDE SECTION 2(45) OF T HE ACT. FURTHER, IN PARA (4) OF THE AFORESAID CIRCULAR, IT HAS BEEN LAID DOW N THAT IN CASE OF A CHARITABLE / RELIGIOUS TRUST, UNDERSTOOD IN ITS COM MERCIAL SENSE, I.E., BOOK INCOME. THEREAFTER, IN PARA (5) OF THE AFORESAID CI RCULAR, IT HAS BEEN LAID DOWN THAT FOR THE PURPOSES OF SECTION 11(1), THE I NCOME OF THE TRUST WILL BE THE BUSINESS INCOME OF THE TRUST, AS DISCLOSED I N THE ACCOUNTS PLUS ITS OTHER INCOME FROM HOUSE PROPERTY, INTEREST, CAPITAL GAINS OR OTHER SOURCES, ETC. IN THE LIGHT OF THE AFORESAID CIRCULA R OF THE CBDT, THE INCOME OF A CHARITABLE / RELIGIOUS TRUST HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THE CONCEPT OF COMMERCIAL INC OME NECESSARILY ENVISAGES DEDUCTION OF DEPRECIATION ON THE ASSETS O F THE TRUST. 10. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT IN THE CASE OF CIT VS. MARKET COMMITTEE, PIPLI (2011) 330 ITR 16 HELD THAT THE INCOME OF THE ASSESSEE BEING EXEMPT, THE ASSESS EE WAS ONLY CLAIMING THAT DEPRECIATION SHOULD BE REDUCED FROM T HE INCOME FOR DETERMINING THE PERCENTAGE OF FUNDS WHICH HAD TO BE APPLIED FOR THE PURPOSES OF THE TRUST. THERE WAS NO DOUBLE DEDUCTIO N CLAIMED BY THE ASSESSEE. IT COULD NOT BE HELD THAT DOUBLE BENEFIT WAS GIVEN IN ALLOWING THE CLAIM FOR DEPRECIATION FOR COMPUTING INCOME FOR PURPOSES OF SECTION 11. 11. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT IN THE CASE OF CIT VS. INSTITUTE OF BANKING (2003) 264 ITR 110 HIGH COURT HELD THAT THE TRIBUNAL WAS RIGHT IN LAW IN DIRECTIN G THE AO TO ALLOW DEPRECIATION ON THE ASSETS, THE COST OF WHICH HAD B EEN FULLY ALLOWED AS APPLICATION OF INCOME UNDER SECTION 11 IN THE PAST YEARS. 12. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT IN THE CASE OF CIT VS SOCIETY OF THE SISTERS OF SL ANN E (1984) 146 ITR 28 IT WAS HELD IN THIS CASE THAT DEPRECIATION ON THE ASSE TS OF THE TRUST IS A NECESSARY DEDUCTION IN ORDER TO ARRIVE AT THE INCOM E AVAILABLE FOR ITA NO.1538 /MDS/2017 5 APPLICATION TO CHARITABLE AND RELIGIOUS PURPOSES. I F DEPRECIATION IS NOT ALLOWED AS A NECESSARY DEDUCTION FOR COMPUTING THE INCOME OF A CHARITABLE INSTITUTION, THEN THERE CAN BE NO WAY TO PRESERVE THE CORPUS OF THE TRUST FOR DERIVING THE INCOME. THEREFORE, THE A MOUNT OF DEPRECIATION DEBITED TO THE ACCOUNTS OF A CHARITABLE INSTITUTION IS TO BE DEDUCTED TO ARRIVE AT THE INCOME AVAILABLE FOR APPLICATION TO C HARITABLE AND RELIGIOUS PURPOSES. 13. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT IN THE CASE OF CIT VS. TINY TORTS EDUCATION SOCIETY (2 011) 330 ITR 21 HELD THAT THE ASSESSEE WAS NOT CLAIMING DOUBLE DEDUCTION ON ACCOUNT OF DEPRECIATION. THE INCOME OF THE ASSESSEE BEING EXEM PT, THE ASSESSEE WAS ONLY CLAIMING THAT DEPRECIATION SHOULD BE REDUC ED FROM THE INCOME FOR DETERMINING THE PERCENTAGE OF FUNDS WHICH HAD T O BE APPLIED FOR THE PURPOSES OF THE TRUST. IT COULD NOT BE HELD THAT DO UBLE BENEFIT WAS GIVEN IN ALLOWING THE CLAIM FOR DEPRECIATION FOR COMPUTING I NCOME FOR PURPOSES OF SECTION 11. 14. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE NOTED THAT THE ASSESSMENT YEAR INVOLVED IS 2012-13. ONLY FINANCE A CT (NO.2) 2014 HAD AMENDED THE LAW TO PROVIDE THAT DEPRECIATION CANNOT BE CLAIMED. THE AMENDMENT TO SECTION 11 AND SECTION 10(23C) BY INSE RTING SUB-SECTION 6 IS ONLY WITH EFFECT FROM ASSESSMENT YEAR 2015-16. T HIS AMENDMENT IS PROSPECTIVE AND HENCE THE DENIAL OF BENEFIT IS NOT JUSTIFIED FOR THE EARLIER YEARS. 15. T THE COMMISSIONER OF INCOME TAX (APPEALS) FAIL ED TO APPRECIATE THAT THE ADDITIONS TO FIXED ASSETS OF RS.5,0L,051/- AS STATE D IN PARA 2.4 OF THE ORDER IS INCORRECT AS THE TOTAL ADDITIONS DURING THE YEAR WAS RS.5,25,471/- 16. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING ONLY 50% OF THE DEPRECIATION ASSUMING THAT THE ASSETS WERE USED FOR LESS THAN 1 ITA NO.1538 /MDS/2017 6 80DAYS WHICH IS NOT CORRECT. THE APPELLANT HAD PUT TO USE THE ASSETS FOR THE ENTIRE YEAR. 3. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IT IS NOTICED THAT SIMILAR ISSUE CAME FOR C ONSIDERATION BEFORE THE JURISDICTIONAL HIGH COURT IN THE CASE OF DIT(EX EMPTION)-III, CHENNAI VS. M/S.MEDICAL TRUST OF THE SEVENTH DAY AD VENTISTS, CHENNAI IN TCA NO.949 OF 2015 AND 771 OF 2016 ASSE SSEES APPEAL & TAX CASE (APPEAL) NO.844 OF 2010 DEPARTMENTAL AP PEAL VIDE ORDER DATED 08.08.2017 WHEREIN IT WAS HELD THAT:- 34.THE SHORT POINT THAT ARISES FOR DECISION IS WHE THER THE PROVISIONS OF SECTION 11(6) INSERTED BY FINANCE (NO.2) ACT, 2014 W.E.F. 1.4.2015, OPERATE PROSPECTIVELY WITH EFFECT FROM ASSESSMENT Y EAR 2015-16 OR RETROSPECTIVELY WITH RESPECT TO EARLIER YEARS AS WE LL. IN THIS REGARD, M/S.PUSHYA SITARAMAN, LEARNED SENIOR COUNSEL AND OT HER LEARNED COUNSELS APPEARING FOR THE ASSESSES REFER TO THE PR OVISIONS OF CIRCULAR 1 OF 2015 DATED 21.1.2015 (371 ITR (ST) 0022) CONTAIN ING EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE (NO 2) ACT, 2014 THE RELEVANT PORTION OF THE CIRCULAR READS AS FOLLOWS: 7 3. SEVERAL ISSUES HAD ARISEN IN RESPECT OF THE AP PLICATION OF EXEMPTION REGIME TO TRUSTS OR INSTITUTIONS IN RESPE CT OF WHICH CLARITY IN LAW WAS REQUIRED. 7.4 THE FIRST ISSUE WAS REGARDING THE INTERPLAY OF THE GENERAL PROVISION OF EXEMPTIONS WHICH ARE CONTAINED IN SECT ION 10 OF THE INCOME-TAX ACT VIS-A-VIS THE SPECIFIC AND SPECIAL E XEMPTION REGIME ITA NO.1538 /MDS/2017 7 PROVIDED IN SECTIONS 11 TO 13 OF THE SAID ACT. AS I NDICATED ABOVE, THE PRIMARY OBJECTIVE OF PROVIDING EXEMPTION IN CAS E OF CHARITABLE INSTITUTION IS THAT INCOME DERIVED FROM THE PROPERT Y HELD UNDER TRUST SHOULD BE APPLIED AND UTILIZED FOR THE OBJECT OR PU RPOSE FOR WHICH THE INSTITUTION OR TRUST HAS BEEN ESTABLISHED. IN M ANY CASES IT HAD BEEN NOTED THAT TRUSTS OR INSTITUTIONS WHICH ARE RE GISTERED AND HAVE BEEN AVAILING BENEFITS OF THE EXEMPTION REGIME TO N OT APPLY THEIR INCOME, WHICH IS DERIVED FROM PROPERTY HELD UNDER T RUST, FOR CHARITABLE PURPOSES. IN SUCH CIRCUMSTANCES, WHEN TH E INCOME BECOMES TAXABLE, A CLAIM OF EXEMPTION UNDER GENERAL PROVISIONS OF SECTION 10 IN RESPECT OF SUCH INCOME IS PREFERRE D AND TAX ON SUCH INCOME IS AVOIDED. THIS DEFEATS THE VERY OBJEC TIVE AND PURPOSE OF PLACING THE CONDITIONS OF APPLICATION OF INCOME, ETC., IN RESPECT OF INCOME DERIVED FROM PROPERTY HELD UNDER TRUST IN THE FIRST PLACE. 7.4.1 SECTIONS 11,12 AND 13 OF THE INCOME-TAX ACT ARE SPECIAL PROVISIONS GOVERNING INSTITUTIONS WHICH ARE BEING G IVEN BENEFIT OF TAX EXEMPTION. IT IS THEREFORE IMPERATIVE THAT ONCE A PERSON VOLUNTARILY OPTS FOR THE SPECIAL DISPENSATION IT SH OULD BE GOVERNED BY THESE SPECIFIC PROVISIONS AND SHOULD NOT BE ALLO WED FLEXIBILITY OF BEING GOVERNED BY OTHER GENERAL PROVISIONS OR SPECI FIC PROVISIONS AT WILL. ALLOWING SUCH FLEXIBILITY HAS UNDESIRABLE EFFECTS ON THE OBJECTS OF THE REGULATIONS AND LEADS TO LITIGATION. 7.6 APPLICABILITY. THESE AMENDMENTS TAKE EFFECT FROM 1 ST APRIL, 2015 AND WILL, ACCORDINGLY, APPLY IN RELATION TO TH E ASSESSMENT YEAR 2015-2016 AND SUBSEQUENT ASSESSMENT YEARS. ITA NO.1538 /MDS/2017 8 35. PARA 7.6 OF THE CIRCULAR STATES THAT THE AMENDM ENT WOULD APPLY TO ASSESSMENT YEAR 2015-16 AND SUBSEQUENT ASSESSMENT YEARS. RELIANCE WAS PLACED ONTHEJUDGMENT OF THE SUPREME CO URT IN CIT VS.ALOMEXTRUSIONS LTD., (2009) AND CIT VS. VATIKA T OWNSHIPS (367 1TR 466) FOR THE PROPOSITION THAT AN AMENDMENT THAT INC REASES THE LIABILITY OF AN ASSESSEE IS LIABLE TO BE APPLIED ONLY PROSPECTIV ELY. MR. NARAYANASWAMY WOULD OBJECT STATING THAT THE AMENDME NT HAD BEEN INSERTED TO A CORRECT AN EXISTING ANOMALY AND THUS WAS CLEARLY CLARIFICATORY, AND CONSEQUENTLY RETROSPECTIVE IN OP ERATION. 36. WE DO NOT AGREE WITH THE REVENUE. THE AMENDMENT , INSERTED SPECIFICALLY WITH EFFECT FROM ASSESSMENT YEAR 2015- 2016 SEEKS TO DISTURB A VESTED RIGHT THAT HAS ACCRUED TO THE ASSE SSEE. THE AMENDMENT DOES NOT PURPORT TO BE CLARIFICATORY, ON THE OTHER HAND THE EXPLANATORY MEMORANDUM MAKES IT APPLICABLE ONLY W. E.F. A Y 2015-16 AND APPLICATION OF THE AMENDMENT RETROSPECTIVELY WO ULDCERTAINLY LEAD TO A GREAT DEAL OF HARDSHIP TO THE ASSESSEE. WE AR E THUS OF THE VIEW THAT THE PROVISIONS OF SECTION 11(6) OF THE ACT IN SERTED WITH EFFECT FROM 1.4.2015 SHALL OPERATE PROSPECTIVELY WITH RESPECT T O ASSESSMENT YEAR 2015-2016 ONLY. 5. IN VIEW OF THE ABOVE JUDGEMENT OF JURISDICTIONA L HIGH COURT, WE ARE OF THE OPINION THAT THE LOWER AUTHORITIES IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF DEPRECIATION AS APPLICATIO N OF INCOME WHILE GRANTING EXEMPTION U/S.11 OF THE ACT AND IT CANNOT BE SAID THAT WHEN THE EXPENDITURE IS ALLOWED IN ITS EN TIRETY ON THE ITA NO.1538 /MDS/2017 9 ACQUISITION OF THE FIXED ASSETS AS APPLICATION, THE GRANTING OF DEPRECIATION AS AN APPLICATION WHILE ALLOWING EXEMP TION U/S.11 OF THE ACT, WILL NOT AMOUNT TO DOUBLE DEDUCTION. HENCE, TH E GROUNDS NOS. 2 TO 6 OF THE APPEALS RAISED BY THE ASSESSEE ARE ALLO WED. 6. SINCE THE MAIN GROUNDS NOS. 2 TO 6 OF THE APPEA LS OF THE ASSESSEE ARE ALLOWED, THE OTHER GROUNDS NOS.7 TO 16 RAISED BY ASSESSEE IN THIS APPEAL WITHOUT PREJUDICE TO THE GR OUND NOS.2 TO 6 DOES NOT REQUIRE SEPARATE ADJUDICATION. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUS ION OF HEARING ON 31 ST OCTOBER, 2017. SD/- ( ) ( CHANDRA POOJARI ) /ACCOUNTANT MEMBER CHENNAI, DATED THE 31 ST OCTOBER, 2017 . K S SUNDARAM. ' ( )!*+ ,+%! / COPY TO: 1 . / APPELLANT 3. ' ' -! () / CIT(A) 5. +0 1 )!)23 / DR 2. / RESPONDENT 4. ' ' -! / CIT 6. 1 45 6 / GF