UMMEED CHILD DEVELOPMENT CENTER, MUMBAI V. ITO (EXEM)-2(4), MUMBAI

ITA 1838/MUM/2023

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 0177 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 09-08-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 21-05-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Capital expenditure; Set aside
• Section: 11; 12A; 10B; 250; 73

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “F”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 1838/Mum/2023 (A.Y. 2015-16) & ITA No. 1839/Mum/2023 (A.Y. 2016-17) Ummeed Child Development Centre, Gr. Floor, 1-B, 1/62 Mantri Pride, N. M. Joshi Marg, Lower Parel, Mumbai-400 011 ...... Appellant Vs. ITO (Exe.) – 2 (4), R. No. 503, 5 th floor, Piramal Chambers, Lal Baug, Parel, PAN – AAATU0678E ..... Respondent Appellant by : Shri Saurabh Bhat, Ld. AR Respondent by : Shri Ujjawal Kumar, Ld. DR Date of hearing : 10/08/2023 Date of pronouncement : 06/11/2023 ORDER PER GAGAN GOYAL, A.M: These appeals by assessee are directed against the order of National Faceless Appeal Centre (NFAC), Delhi dated 23.03.2023 u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2015-16 and 2016-17 respectively. The 2 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre assessee has raised the following grounds in ITA No. 1838/Mum/2023 for AY 2015-16:- (A) CLAIM OF DEPRECIATION ON ASSETS AS APPLICATION OF INCOME-Rs. 19,69,709/- 1. The learned Commissioner of Income-tax (Appeals) National Faceless Appeal Centre, New Delhi ['CITA'], erred on facts and in circumstances of the case and in law, in confirming the disallowance of Rs. 19,69,709/- out of application of income being depreciation claimed on fixed assets; 2. The CITA failed to appreciate that the appellant had never claimed the cost of assets as application of income and therefore, the depreciation ought to be allowed on the cost of asset as application; 3. The CITA further failed to appreciate that the restriction u/s. 11(6) of the Income-tax Act, 1961 only applies in cases where cost of capital asset has been claimed as application of income by the assessee trust, which is not the case in your appellant's circumstances; 4. The appellant prays to your Honours to direct the ld. AO to allow application of income on account of depreciation claimed Rs. 19,69,709/-; (B) DISALLOWANCE OF APPLICATION OF INCOME RS. 51.489 BEING LOSS ON SALE OF ASSETS: 1. the CITA erred on facts and in circumstances of the case and in law, in confirming the disallowance of Rs. 51,489/- out of application of income being loss claimed on sale of fixed assets; 2. The appellant prays that your Honors direct the Id. AO to allow the claim of Rs. 51,489/- being loss on sale of assets during the year; (C) GENERAL The above grounds of appeal are without prejudice to one another and the appellant craves leave to add, alter, amend, delete or modify any of the above grounds of appeal. 2. The brief facts of the case are that assessee is a trust and registered with Charity Commissioner of Maharashtra and section 12A of the Act with Director of 3 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre Income Tax (Exem.) vides registration no. INS/36034, dated: 04.09.2001. Assessee filed its return of Income on 30.09.2015 along with Income & Expenditure Account, Balance Sheet and Audit Report in Form No. 10B declaring total income at Rs. NIL. 3. Case of the assessee was selected for scrutiny and relevant notices were issued along with questionnaire. During the course of assessment proceedings AO made certain additions/disallowances to the income of the assessee, against which assessee preferred an appeal before the Ld. CIT (A), who in turn partly allowed the appeal of the assessee. Assessee being further aggrieved with this order of Ld. CIT (A) preferred this present appeal before us. 4. We have gone through the order of AO, Order of the Ld. CIT (A) and submissions of the assessee along with grounds of appeal raised before us. Ground wise discussion of facts and adjudication thereon is as under: Ground No. A pertains to disallowance of Rs. 19, 69,709/- out of the application of income being depreciation claimed on fixed assets. On this issue we have gone through the Income & Expenditure account and Balance-Sheet of the assessee to ascertain the claim of assessee that “They never claimed purchase of assets as application of income and only depreciation is being claimed as application since inception”. We have gone through Page Nos. 41 to 55 of the paper book, comprising computation of total income from A.Y. 2002-03 To 2016-17. In none of these A.Y.’s assessee trust claimed purchase of assets as application of income and only depreciation as per the rate prescribed in Income Tax Rules, 1962 were claimed as application of income. We further verified this claim of assessee referring its Income & Expenditure account and Balance-Sheet vide Page Nos. 73 4 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre and 74 of the paper book, wherein only depreciation has been claimed in Income & Expenditure account and in Balance-Sheet also Fixed Assets account adjusted after claiming depreciation. 5. Now for sake of clarity and better understanding of the issue under consideration, the relevant provisions of newly inserted section 11(6) of the Act are reproduced herein-below for ready reference: “11(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 other previous year.” This newly inserted section 11(6) of the Act w.e.f. A.Y. 2015-16 restricts allowance of depreciation for the purposes of application of income, as this section assumes that assessee must have taken purchase of asset itself as application of income in the year, the asset was acquired. So, it will tantamount to double claim by the assessee i.e., once on the purchase itself and then depreciation thereon. 6. In our observation, the entire relevant facts can be summarized as under: i. The Appellant has incurred expenses towards purchase of fixed assets which has been capitalized during the year. The said amount is shown under the head "Fixed Assets and depreciation on the same has been claimed as an expense in the Income & Expenditure Account; ii. The amount spent on purchase of fixed assets has not been shown as application of income of the trust, which is evident from the Income & Expenditure Account and also the Computation of Total Income; 5 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre iii. Further, all the expenses incurred on purchase of fixed assets in current year and earlier years is always capitalized as "Fixed Assets" and never treated as application of income; iv. Depreciation has been claimed on the wear & tear of the assets as per the provisions of the Act which is valid in law. 7. It is established on record that assessee never claimed purchase of asset as application of income. Assessee only claimed depreciation on assets as application of income. In view of this, we observed that assessee never claimed double deduction. The insertion of section 11(6) of the Act w.e.f. A.Y. 2015-16 is done to curb the practice where assessee claimed deprecation of income on purchase of assets as well as depreciation thereon. The introduction of section 11(6) was intended to overrule certain judicial pronouncements in favour of assessee wherein it was held that assessee is entitled to claim application of income on purchase of assets and deprecation also on the ground of commerciality. 8. In the instant case, assessee already following the sprit and intentions of section 11(6) of the Act by not claiming purchase of asset as application of income. Section 11(6) of the Act is applicable only in those cases where assessee has already claimed purchase of asset as application of income in any of the previous years and simultaneously claiming depreciation also as application of income relying on various judicial pronouncements in their favour. We found the interpretation taken by AO as wrong and found the practice being adopted by assessee consistently as correct even after the insertion of section 11(6) of the Act. In view of this Ground A with its sub grounds is allowed and AO is directed 6 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre to allow the claim of depreciation amounting to Rs. 19, 69,709/- as claimed by the assessee. 9. Next Ground of appeal pertains to claim of assessee being loss on sale of assets amounting to Rs. 51,489/-. As discussed, (supra), assessee is not claiming purchase of assets as application; consequently all the commercial principles of accounting will be applied, including loss on sale of assets, if any. It is an undisputed fact that the loss that assessee had incurred on sale of fixed assets and the same has been debited to the income and expenditure account of the assessee. We find that the CBDT in Circular No. 5- P(LXX-6) dated 19th June, 1968 has taken a view that the income of the trust should be computed on the basis of commercial principles and should be understood in its commercial sense. 10. The relevant extract of the Circular reads as under: “Section 11(1) provides that subject to the provisions of sections 60 to 63, "the following income shall not be included in the total income of the previous year. . ....” The reference in clause (a) is invariably to "Income" and not to "total income". The expression "total income has been specifically defined in section 2(45) as "the total amount of income computed in the manner laid down in this Act". It would, accordingly, be incorrect to assign to the word "income", used in section 11(1)(a), the same meaning as has been specifically assigned to the expression "total income" vide section 2(45). In the case of a business undertaking, held under trust, its "income" will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any 7 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).” We further find that in the following decisions, it has been held that the income of the charitable assessees needs to be computed on the basis of commercial principles: • CIT vs. Programme for Community Organisation (1997) 228 ITR 620 (Ker.) since approved by the apex court (reported at (2001) 248 ITR 1 (SC) • CIT v. Rao Bahadur CalavalaCunnan Chetty Charities (135 ITR 485)(Mad); • CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust (70 taxman 228) (Guj) • CIT v. Institute of Banking Personnel Selection (131 taxman 386)(Bom). 11. We further find that Clause (6) has been inserted in Section 11 of the Act w.e.f. 01.04.2015 which inter alia mandated that income which is required to be applied or accumulated or set apart for application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset the acquisition of which has been claimed as an application of income in any previous year. The aforesaid clause has been inserted for the purposes as discussed (supra) that in case purchase itself has been claimed as application, no depreciation or other charge can be claimed. But in matter before us as observed (supra), assessee has never claimed purchase of assets as application, hence depreciation as well as loss on sale of assets is to be allowed as application for the purposes of income tax computation. In view of this, claim of the assessee is allowed and order of AO is set aside and ground is allowed. 12. In the result, appeal of the assessee is allowed. 8 ITA No. 1838 & 1839/Mum/2023 Ummeed Child Development Centre ITA No. 1839/Mum/2023 for AY 2016-17 13. Since we have already decided the similar ground of appeal raised by the assessee vide ground no. A with its sub-grounds in ITA No. 1838/Mum/2023 for AY 2015-16 and the facts of this appeal are exactly similar and are applicable mutatis mutandis. Hence, this appeal of assessee is also allowed. 14. In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on 6 th day of November, 2023. Sd/- Sd/- (KULDIP SINGH) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 06/11/2023 Sr. PS (Dhananjay) Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकर आयुक्त CIT 4. दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्ड फ इल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar) ITAT, Mumbai