DDIT, CHENNAI V. M/s. Apollo Hospital Educational Trust, CHENNAI

ITA 2172/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0795 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 30-11-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Depreciation; Charitable institution; Cost of acquisition; Reasonable cause; Revised return; Revenue expenditure; Capital expenditure
• Section: 12AA; 12; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 2090/MDS/2012 (ASSESSMENT YEAR : 2008-09) M/S APOLLO HOSPITALS EDUCATIONAL TRUST, NO.21, GREAMS LANE, OFF GREAMS ROAD, CHENNAI 600 006. PAN : AAATA 7077 M (APPELLANT) V. THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTIONS I), CHENNAI - 600 034. (RESPONDENT) I.T.A. NO. 2172/MDS/2012 (ASSESSMENT YEAR : 2008-09) THE DEPUTY DIRECTOR OF INCOME TAX (EXEMPTIONS I), CHENNAI - 600 034. (APPELLANT) V. M/S APOLLO HOSPITALS EDUCATIONAL TRUST, NO.21, GREAMS LANE, OFF GREAMS ROAD, CHENNAI 600 006. (RESPONDENT) ASSESSEE BY : SHRI T. BANUSEKAR, CA REVENUE BY : DR. S. MOHARANA, C IT-DR DATE OF HEARING : 05.02.2013 DATE OF PRONOUNCEMENT : 21.02.2013 I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 2 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE ASSESSEE AND REVEN UE RESPECTIVELY, DIRECTED AGAINST AN ORDER DATED 22.8. 2012 OF COMMISSIONER OF INCOME TAX (APPEALS)-XII, CHENNAI. 2. ASSESSEES APPEAL IS DELAYED BY ONE DAY. ASSESS EE HAS FILED A CONDONATION PETITION. REASONABLE CAUSE HAS BEEN SH OWN IN THE SAID PETITION. HENCE, DELAY IS CONDONED AND APPEAL OF T HE ASSESSEE ADMITTED. 3. ASSESSEE HAS RAISED THREE ISSUES IN ITS APPEAL. FIRST ONE IS THAT CAPITAL EXPENDITURE INCURRED OUT OF BORROWED FUNDS WAS HELD NOT TO BE AN APPLICATION OF INCOME. SECOND IS THAT DEPRECIAT ION WAS NOT CONSIDERED AS APPLICATION OF INCOME. THIRD ONE IS THAT EXCESS APPLICATION OF EARLIER YEARS WERE NOT ALLOWED FOR S ET OFF AGAINST INCOME OF THE IMPUGNED ASSESSMENT YEAR. THERE IS O NE OTHER GROUND WHICH IS AGAINST LEVY OF INTEREST UNDER SECTION 234 B OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). ON THE OTHER HAND, REVENUE IN ITS CROSS-APPEAL IS AGGRIEVED ON THE DIRECTIONS OF THE CIT(APPEALS) TO CONSIDER INVESTMENT OF ` 4 CRORES BY WAY OF SECURITY WITH UNIVERSITY I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 3 OF HEALTH SCIENCES, AS AN APPLICATION OF INCOME. A S PER THE REVENUE, FRESH EVIDENCE WERE ADMITTED BY THE CIT(AP PEALS) ON THIS ISSUE WITHOUT GRANTING THE ASSESSING OFFICER AN OPP ORTUNITY TO OFFER HIS COMMENTS. 4. FACTS APROPOS ARE THAT ASSESSEE IS A TRUST REGIS TERED UNDER SECTION 12AA OF THE ACT. IT HAD FILED ITS RETURN F OR THE IMPUGNED ASSESSMENT YEAR ADMITTING NIL INCOME AGAINST GROSS RECEIPTS OF ` 6,82,56,876/-, WHICH WAS CLAIMED AS EXEMPT UNDER SE CTION 11 OF THE ACT. ASSESSEE HAD CLAIMED ACQUISITION OF FIXED ASS ETS TO BE APPLICATION OF INCOME. NEVERTHELESS, ASSESSEE DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS WITHDREW ITS CLAIM FOR DEPRE CIATION ON FIXED ASSETS. 5. ASSESSING OFFICER FOUND THAT ASSESSEE HAD TAKEN A LOAN OF ` 11,76,70,801/- FROM M/S APOLLO HOSPITALS ENTERPRISE S LTD. AND ` 3.27 LAKHS FROM M/S INDIAN BANK AGGREGATING TO ` 15,03,70,801/-. AS PER THE ASSESSING OFFICER, ASSESSEE HAD CLAIMED AS APPL ICATION COST OF FIXED ASSETS ` 12,85,43,524/- PURCHASED DURING THE RELEVANT PREVI OUS YEAR. ASSESSING OFFICER WAS OF THE OPINION THAT TH E SAID PURCHASES WERE ONLY OUT OF THE LOANS MENTIONED ABOVE. ACCORD ING TO A.O., I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 4 ASSESSEE WAS REQUIRED TO SPEND 85% OF THE INCOME OF THE TRUST FOR CHARITABLE ACTIVITIES. AS PER THE A.O., SPENDING F ROM LOAN COULD NOT BE CONSIDERED AS APPLICATION OF INCOME. 6. ASSESSEE WAS PUT ON NOTICE, WHEREUPON IT REPLIED THAT HONBLE GUJARAT HIGH COURT IN THE CASE OF SATYA VIJAY PATEL HINDU DHARAMSHALA TRUST V. CIT (86 ITR 683) HAD HELD COST OF ASSETS PURCHASED, OUT OF EXCESS INCOME OF EARLIER YEARS AN D LOAN OBTAINED DURING THE CURRENT YEAR, TO BE APPLICATION OF INCOM E. RELIANCE WAS ALSO PLACED ON THE DECISION OF HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF CIT V. KANNIKA PARAMESWARI DEVASTHANAM AND CHARITIES (133 ITR 779) FOR ITS SUBMISSION THAT EXPENDITURE, EVEN IF INCURRED FOR CAPITAL PURPOSES, IF IT WAS FOR OBJECTS OF THE TRUS T, WOULD STILL BE EXEMPT. 7. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED. A CCORDING TO HIM, LOAN OBTAINED BY THE ASSESSEE COULD NOT BE EQU ATED WITH INCOME RECEIVED FROM PROPERTY HELD UNDER TRUST. HE, THERE FORE, HELD THAT PURCHASE OF ASSET FOR ` 12,85,43,524/- COULD NOT BE CONSIDERED AS APPLICATION OF INCOME. AT THIS POINT, ASSESSEE RAI SED AN ALTERNATIVE CONTENTION THAT EXCESS OF APPLICATION OVER INCOME O F THE EARLIER YEARS I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 5 HAD TO BE ALLOWED FOR SET OFF AGAINST INCOME OF THE CURRENT YEAR. THIS PLEA ALSO WAS NOT ACCEPTED BY THE ASSESSING OFFICER FOR A REASON THAT IT WAS NOT MADE THROUGH A REVISED RETURN. ACCORDIN G TO HIM, A FRESH CLAIM COULD NOT BE ENTERTAINED IN VIEW OF THE DECIS ION OF HON'BLE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD. V. CIT (28 4 ITR 323). HE, THEREFORE, COMPUTED THE INCOME OF THE ASSESSEE BY T AKING REVENUE EXPENDITURE ALONE AS APPLICATION OF INCOME. SHORTF ALL IN APPLICATION WAS CONSIDERED AS INCOME OF THE ASSESSEE AND TAXED ACCORDINGLY. 8. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT ITS INCOME WAS TOTALLY APPLIED FOR THE OBJ ECTS AND AT LEAST A PART OF THE CAPITAL EXPENDITURE WAS NOT MET OUT OF BORROWED FUNDS. AS PER THE ASSESSEE, A SUM OF ` 4 CRORES OUT OF BORROWED FUNDS, WAS USED FOR MAKING A FIXED DEPOSIT WHICH WAS GIVEN AS SECURITY TO UNIVERSITY OF HEALTH SCIENCES FOR OPENING NEW COLLE GES. WITH REGARD TO THE DISALLOWANCE OF DEPRECIATION, CLAIM OF THE A SSESSEE WAS THAT DEPRECIATION ON FIXED ASSETS HAD TO BE CONSIDERED W HILE WORKING OUT THE APPLICATION OF INCOME, IN VIEW OF THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. RAO BAHADUR CALAVALA CUNNAN CHETTY CHARITIES (135 ITR 485), THAT OF HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. SHETH MANILAL RANCHONDA S (198 ITR 598) I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 6 AND THAT OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT V. SOCIETY OF THE SISTERS OF ST. ANNE (146 ITR 28). A GROUND WAS ALSO RAISED BY THE ASSESSEE WITH REGARD TO DISALLOWANCE OF CLAIM OF SET OFF OF EXCESS EXPENDITURE OF EARLIER YEARS. 9. LD. CIT(APPEALS), AFTER CONSIDERING THE SUBMISSI ON OF THE ASSESSEE HELD THAT ` 4 CRORES, OUT OF BORROWED FUNDS OF ` 11,76,70,801/- WAS STRAIGHT AWAY USED FOR GIVING SE CURITY DEPOSIT TO UNIVERSITY OF HEALTH SCIENCES. AS PER LD. CIT(APPE ALS), SUCH AMOUNT WAS THEREFORE NOT USED FOR ANY CAPITAL EXPENDITURE. HE, THEREFORE, HELD THAT THE SAID SUM COULD BE CONSIDERED AS APPLI CATION OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR, BEING NOT IN THE NATURE OF CAPITAL EXPENDITURE. LD. CIT(APPEALS) FURTHER HELD THAT ON CE THE SAID SUM OF ` 4 CRORES WAS EXCLUDED FROM TOTAL LOAN OF ` 15,03,70,801/-, THE BALANCE OF LOAN, WHICH COULD BE CONSIDERED AS DEPLO YED FOR ACQUIRING FIXED ASSETS, WAS ONLY ` 11,03,70,801/-. ONCE THIS SUM WAS DEDUCTED FROM TOTAL CAPITAL EXPENDITURE OF ` 12,85,43,524/-, AS PER LD. CIT(APPEALS), RESULTANT FIGURE OF ` 1,81,72,723/- WOULD HAVE GONE OUT OF THE INCOME OF THE TRUST ONLY AND NOT OUT OF LOAN . THE SAID AMOUNT, AS PER LD. CIT(APPEALS), COULD BE CONSIDERED AS APP LICATION OF INCOME OF RELEVANT PREVIOUS YEAR AND IF THIS SUM WAS AGGRE GATED WITH THE I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 7 REVENUE EXPENDITURE OF ` 4,38,35,499/- CONSIDERED BY THE ASSESSING OFFICER, TOTAL APPLICATION EXCEEDED 85% OF THE GROS S RECEIPTS. SINCE ON EXCLUSION OF ` 4 CRORES FROM THE TOTAL BORROWED FUNDS, ITS UTILIZ ATION WENT BY 85% OF GROSS RECEIPTS AS PER THE LD. CIT(AP PEALS), ASSESSEE COMPLIED WITH CONDITION SET OUT IN SECTION 11(1)(A) . IN THIS VIEW OF THE MATTER, AS PER THE LD. CIT(APPEALS), ASSESSEE COULD CLAIM EXEMPTION UNDER SECTIONS 11 AND 12 OF THE ACT. HAVING GIVEN A FINDING THAT ASSESSEE HAD SATISFIED CONDITIONS SET OUT IN SECTIO N 11(1), LD. CIT(APPEALS) CHOSE NOT TO DECIDE ON THE CLAIM OF TH E ASSESSEE THAT EXCESS EXPENDITURE OF EARLIER YEARS HAD TO BE BROUG HT FORWARD AND ALLOWED FOR SET OFF. NEVERTHELESS, WITH REGARD TO ISSUE OF DEPRECIATION, LD. CIT(APPEALS) UPHELD THE VIEW TAKEN BY THE A.O. 10. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT EVEN IF FIXED ASSETS W ERE ACQUIRED OUT OF LOAN FUNDS, THE COST OF ACQUISITION COULD STILL BE CONSIDERED AS APPLICATION OF INCOME. ACCORDING TO HIM, LOAN FUND S WERE NOT DIRECTLY USED FOR ACQUISITION OF CAPITAL ASSETS. LOAN FUNDS HAD GONE OUT OF A COMMON KITTY AND IT WAS FROM SUCH COMMON KITTY, PAY MENTS WERE MADE FOR ACQUIRING CAPITAL ASSETS. AS PER LEARNED A.R., ONCE THE AMOUNTS HAD GONE OUT OF A COMMON KITTY, IT COULD NO T BE STATED THAT I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 8 LOAN FUNDS ALONE WERE USED FOR ACQUIRING CAPITAL AS SETS. ON THE OTHER HAND, THE PRESUMPTION THAT OUGHT BE TAKEN IS THAT A SSESSEES OWN FUNDS WERE FIRST USED FOR ACQUIRING CAPITAL ASSET A ND LOAN FUNDS WERE UTILIZED FOR MEETING THE DEFICIENCY ONLY. ONCE THE SUM OF ` 4 CRORES USED FOR MAKING SECURITY DEPOSIT WAS EXCLUDED, THEN IT WAS OBVIOUS THAT LOAN FUNDS WERE NOT SUFFICIENT TO MEET THE CAP ITAL EXPENDITURE. AT LEAST A SUM OF ` 1,81,72,723/- USED FOR ACQUIRING FIXED ASSETS CAME OUT OF THE RECEIPTS OF THE IMPUGNED ASSESSMENT YEAR , AND THEREFORE, WAS A PART OF APPLICATION. 11. CONTINUING HIS ARGUMENTS, LEARNED A.R. SUBMITTE D THAT WHETHER MONEY WHICH WAS UTILIZED HAD COME OUT OF BORROWED O R OWN FUNDS WAS IRRELEVANT. ONLY RELEVANT QUESTION WAS WHETHER UTILIZATION WAS FOR THE PURPOSE OF OBJECTIVES OF THE TRUST. NONE OF TH E AUTHORITIES BELOW HAD DISPUTED THIS. ACQUISITION OF FIXED ASSETS WAS ONLY FOR THE PURPOSE OF TRUST. IN ANY CASE, ACCORDING TO HIM, T HE DEFICIT OF EARLIER YEARS OUGHT HAVE BEEN ALLOWED FOR SET OFF WITH CURR ENT YEARS INCOME, IF ANY. FOR HIS ARGUMENT THAT LOAN FUNDS UTILIZED FOR ACQUIRING FIXED ASSETS COULD ALSO BE CONSIDERED FOR WORKING OUT APP LICATION OF INCOME, LEARNED A.R. RELIED ON THE DECISION OF HON' BLE GUJARAT HIGH COURT IN THE CASE OF SATYA VIJAY PATEL HINDU DHARAM SHALA TRUST I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 9 (SUPRA). ACCORDING TO HIM, IN THE SAID CASE, THER E WAS AN EXPENDITURE OF ` 61,141.53 FOR CONSTRUCTING A NEW DHARMASALA, WHICH WAS MET OUT OF AN INTEREST-FREE LOAN OF ` 17,000/-, SURPLUS INCOME OF ` 31,541.26, REALIZATION OF OUTSTANDING LOAN OF ` 8000/-, RECOVERY OF SOME OUTSTANDING RENT AND A PART FROM CASH AND BANK BALANCE. DESPITE THIS, HONBLE GUJARAT HIGH COURT HAD HELD T HAT THE EXPENDITURE INCURRED IN CONSTRUCTING DHARMASHALA WA S APPLICATION FOR THE PURPOSE OF TRUST, AND HAD TO BE CONSIDERED AS P ART OF ITS UTILIZATION. FOR HIS CONTENTION THAT EXCESS OF EXP ENDITURE INCURRED IN EARLIER YEARS HAD TO BE BROUGHT FORWARD AND INCOME OF THE TRUST WAS TO BE ARRIVED AT BASED ON COMMERCIAL PRINCIPLES, LE ARNED A.R. RELIED ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF GOVINDU NAICKER ESTATE V. ADIT (248 ITR 368) AND TH AT OF HONBLE DELHI HIGH COURT IN THE CASE OF DIT V. RAGHUVANSHI CHARITABLE TRUST & OTHERS (2010) 44 DTR 223. RELIANCE WAS ALSO PLAC ED IN THIS REGARD ON THE DECISION OF HONBLE GUJARAT HIGH COUR T IN THE CASE OF CIT V. SHRI PLOT SWETAMBER MURTI PUJAK JAIN MANDAL (211 ITR 293) AND THAT OF HONBLE RAJASTHAN HIGH COURT IN THE CAS E OF CIT V. MAHARANA OF MEWAR CHARITABLE FOUNDATION (164 ITR 43 9). I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 10 12. ADVERTING TO THE CLAIM OF DEPRECIATION, LEARNED A.R. SUBMITTED THAT DEPRECIATION WAS A PART OF UTILIZATION AND HAD TO BE CONSIDERED WHILE COMPUTING THE APPLICATION OF INCOME OF THE TR UST. ACCORDING TO HIM, THIS WAS THE VIEW TAKEN BY HONBLE PUNJAB & HA RYANA HIGH COURT IN THE CASE OF CIT V. MARKET COMMITTEE, PIPLI (330 ITR 16), HONBLE DELHI HIGH COURT IN THE CASE OF DIT V. VISH WA JAGRITI MISSION IN ITA NO.140/2012 DATED 29 TH MARCH, 2012, HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SOCIETY OF THE SISTERS OF ST. ANNE (146 ITR 28), HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. BHORUKA PUBLIC WELFARE TRUST (240 ITR 513) AND BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. SHETH MANILAL RANCHHODDAS BISHRAM BH AVAN TRUST (198 ITR 598). 13. PER CONTRA, LEARNED D.R. SUBMITTED THAT INSOFAR AS DEPRECIATION CLAIM WAS CONCERNED, HONBLE KERALA HIGH COURT IN T HE CASE OF LISSIE MEDICAL INSTITUTIONS V. CIT (2012) 24 TAXMANN 9 HAD HELD THAT ONCE EXPENDITURE ON ACQUISITION OF ASSETS WERE CONSIDERE D AS APPLICATION OF INCOME, DEPRECIATION THEREON COULD NOT AGAIN BE CONSIDERED AS APPLICATION FOR CHARITABLE PURPOSES. FURTHER, ACCO RDING TO HIM, ASSESSEE HAD ITSELF WITHDRAWN THE CLAIM OF DEPRECIA TION BEFORE THE ASSESSING OFFICER AND COULD NOT NOW TURN BACK. LEA RNED D.R. FURTHER I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 11 SUBMITTED THAT LOAN AMOUNTS WERE DIRECTLY USED FOR ACQUIRING FIXED ASSETS AND THEREFORE, COULD NOT BE CONSIDERED AS UT ILIZATION OF INCOME FOR THE RELEVANT PREVIOUS YEAR. 14. IN SUPPORT OF REVENUES CROSS-APPEAL, LEARNED D .R. SUBMITTED THAT LD. CIT(APPEALS) HAD ACCEPTED THE TREATMENT OF ` 4 CRORES UTILIZED FOR PLACING SECURITY DEPOSIT, AS APPLICATI ON OF INCOME, CONSIDERING FRESH EVIDENCE WITHOUT PUTTING IT TO TH E ASSESSING OFFICER. ASSESSEE HAD NOT PLACED SUCH EVIDENCE BEFORE THE AS SESSING OFFICER AT ALL. FURTHER, ACCORDING TO HIM, CIT(APPEALS) FE LL IN ERROR WHEN HE CONSIDERED SUCH OUTGO TO BE REVENUE IN NATURE, WHEN ADMITTEDLY IT WAS ONLY A FIXED DEPOSIT GIVEN AS SECURITY. IN ANY CASE, ACCORDING TO HIM, ONCE ASSESSEE HAD EXPENDED LARGE SUMS OUT OF L OANS TAKEN, THAT TOO FOR ACQUIRING FIXED ASSETS, THE SAME AMOUN TS COULD NOT AGAIN BE CONSIDERED AS APPLICATION OF INCOME OF THE ASSES SEE. RELIANCE WAS PLACED ON CIRCULAR NO.100 DATED 24 TH JANUARY, 1973 OF CBDT WHICH, ACCORDING TO HIM, CONSIDERED REPAYMENT OF LO ANS AS APPLICATION OF INCOME. IF REPAYMENT OF LOAN WERE A PPLICATION OF INCOME, THEN, ACCORDING TO HIM, DEPLOYMENT OF LOAN ALSO COULD NOT BE TAKEN AS APPLICATION OF INCOME. AS FOR THE CLAIM O F ASSESSEE THAT EARLIER YEARS EXCESS EXPENDITURE OUGHT HAVE BEEN A LLOWED FOR SETTING I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 12 OFF, LEARNED D.R. SUBMITTED THAT NO REVISED RETURN WAS FILED BY THE ASSESSEE AND ASSESSING OFFICER COULD NOT GIVE SUCH A RELIEF WITHOUT A REVISED RETURN. 15. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. ISSUES IN THIS APPEAL ARE - (I) WHETHER LOAN TAKEN WAS UTILIZED FOR ACQUIRING F IXED ASSETS AND IF SO, UTILIZED COULD IT STILL BE CONSIDERED AS APPLICATION OF INCOME OF THE ASSESSEE? (II) WHETHER SUM OF ` 4 CRORES PLACED BY THE ASSESSEE AS SECURITY WITH M/S UNIVERSITY OF HEALTH SCIENCES CAN BE NOT CONSIDERED AS CAPITAL OUTGO AND IF IT IS NOT A CAPI TAL OUTGO, WHETHER IT CAN BE CONSIDERED AS APPLICATION OF INCO ME. (III) WHETHER CLAIM OF DEPRECIATION CAN BE CONSIDER ED AS APPLICATION OF INCOME. (IV) WHETHER IN COMPUTING THE INCOME OF A CHARITABL E TRUST, SET OFF OF EXCESS EXPENDITURE OF EARLIER YEARS COUL D BE GIVEN EVEN WHERE THERE IS NO SUCH CLAIM IN THE RETU RN. TAKING UP THE FIRST QUESTION, WITHOUT DOUBT, ASSESS EE HAD LOANS OF ` 15,03,70,801/- RAISED DURING THE RELEVANT PREVIOUS YEAR. AS PER ASSESSING OFFICER, ASSESSEE HAD ALSO ACQUIRED FIXED ASSETS OF ` 12,85,43,524/- OUT OF THE ABOVE. FIXED ASSETS SCHE DULE FILED BY THE ASSESSEE ALONG WITH ITS STATEMENT OF TOTAL INCOME, COPY OF WHICH HAS BEEN FILED BEFORE US BY LEARNED A.R., CLEARLY REFLE CTS ACQUISITION OF ITS I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 13 ASSETS TO THE TUNE OF ` 12,85,43,524/-. CLAIM OF THE ASSESSEE IS THAT LOAN RAISED HAD GONE INTO A COMMON KITTY AND THEREF ORE, COST OF ACQUISITION OF ASSETS HAD GONE OUT OF COMMON KITTY. IN OTHER WORDS, ACCORDING TO ASSESSEE, ONCE THE PAYMENTS WERE MADE OUT OF COMMON KITTY, IT COULD ONLY BE CONSIDERED AS UTILIZ ATION OF INCOME. GROSS RECEIPTS OF THE ASSESSEE FOR THE RELEVANT PRE VIOUS YEAR CAME TO ` 6,82,56,876/-. ASSESSING OFFICER HAD STARTED HIS COMPUTATION THEREFROM. THE WHOLE OF SUM OF GROSS RECEIPTS WERE FEES AND COLLECTIONS. ASSESSEE HAD ALSO STARTED ITS COMPUTA TION FROM THE SUM OF ` 6,82,56,876/-. HOWEVER, ASSESSEE CONSIDERED THE S UM OF ` 12,85,43,524/- USED FOR ACQUIRING FIXED ASSETS, AS A PART OF UTILIZATION OF THE ABOVE RECEIPTS, WHEREAS, THE A.O. DID NOT AC CEPT THIS CONTENTION. REQUIREMENT FOR CLAIMING EXEMPTION UND ER SECTIONS 11 AND 12, IS SPECIFIED UNDER SECTION 11(1)(A), WHICH IS REPRODUCED HEREUNDER:- 11 (1) SUBJECT TO THE PROVISIONS OF SECTIONS 60 TO 63, THE FOLLOWING INCOME SHALL NOT BE INCLUDED IN THE TOT AL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIPT OF THE INCOME- (A) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST WHOL LY FOR CHARITABLE OR RELIGIOUS PURPOSES, TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES IN INDIA; A ND, WHERE ANY SUCH INCOME IS ACCUMULATED OR SET APART FOR APP LICATION I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 14 TO SUCH PURPOSES IN INDIA, TO THE EXTENT TO WHICH T HE INCOME SO ACCUMULATED OR SET APART IS NOT IN EXCESS OF FIF TEEN PER CENT OF THE INCOME FROM SUCH PROPERTY; 16. INCOME DERIVED FROM PROPERTY HELD UNDER TRUST I S EXEMPT ONLY TO THE EXTENT IT IS APPLIED FOR THE AVOWED PURPOSES OR SET APART FOR SUCH PURPOSES WITHIN A LIMIT OF 15% OF SUCH INCOME. IT IS VERY CLEAR FROM THE ABOVE THAT IF THE INCOME DERIVED FROM PROPERTY HELD UNDER TRUST IS TO BE EXEMPT OR IS NOT TO BE INCLUDED IN THE TOTAL INCOME, THEN SUCH INCOME HAS TO BE APPLIED FOR THE PURPOSES OF THE TR UST. LOAN RAISED FROM A BANK OR ANY PERSON FOR THAT MATTER, IS NEVER INCOME DERIVED FROM THE PROPERTY HELD UNDER TRUST. UTILIZATION OF SUCH LOAN WILL ALSO BE NOT AN APPLICATION OF INCOME DERIVED FROM PROPERTY HELD UNDER TRUST. UTILIZATION OF LOAN WILL BE APPLICATION OF LOAN RAI SED AND NOT APPLICATION OF INCOME OF THE TRUST. IT MIGHT BE TRUE THAT LOAN OF ` 15,03,70,801/- RAISED HAD GONE INTO A COMMON KITTY. BUT, THE FACT REMAINS THAT OUT OF THE SUMS IN THE COMMON KITTY, ATLEAST ` 15,03,70,801/- WERE LOANS AND NOT INCOME DERIVED FROM PROPERTY HELD UNDER TRU ST. AS LONG AS COMMON KITTY CONTAINED LOANS, SUMS UTILIZED FROM SU CH COMMON KITTY, AT LEAST TO THE EXTENT OF THE LOAN, WILL BE UTILIZA TION OF SUCH LOANS, UNLESS THERE REMAINED SUBSTANTIAL SURPLUS IN SUCH C OMMON KITTY. CONTENTION OF THE ASSESSEE THAT ONCE LOAN HAD GONE INTO COMMON I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 15 KITTY, A PRESUMPTION HAS TO BE TAKEN THAT MONEY EXP ENDED FOR ACQUIRING CAPITAL ASSET HAD FIRST GONE OUT OF OWN F UNDS AND THEN OUT OF LOAN FUNDS, CANNOT BE ACCEPTED. THIS IS FOR A REAS ON THAT THERE IS NO SUCH DEMARCATION POSSIBLE ONCE THE AMOUNTS ARE IN A COMMON FUND. THERE IS NO CASE FOR THE ASSESSEE THAT THE LOANS RE MAINED INTACT WITHOUT UTILIZATION AT THE END OF THE RELEVANT PREV IOUS YEAR. THE LOANS WERE INDEED USED DURING THE RELEVANT PREVIOUS YEAR. BALANCE SHEET OF THE ASSESSEE SHOWS A BANK BALANCE OF ` 1,80,56,480/- AND CASH- IN-HAND OF ` 2,83,232/- ONLY. EVEN PRESUMING THAT WHOLE OF SUC H BALANCES REPRESENTED LOANS, STILL A SUBSTANTIAL PAR T OF THE LOANS STOOD EXPENDED DURING THE RELEVANT PREVIOUS YEAR. 17. NOW TAKING A LOOK AT CIRCULAR NO.100 DATED 24 TH JANUARY, 1973 OF CBDT, IT READS AS UNDER:- SEC.11 OF THE I.T. ACT REQUIRES 100 PER CENT OF TH E INCOME OF A CHARITABLE AND RELIGIOUS TRUST TO BE APPLIED FOR RE LIGIOUS AND CHARITABLE PURPOSES TO BE ENTITLED TO THE EXEMPTION UNDER THE SAID SECTION. TWO QUESTIONS HAVE BEEN CONSIDERED REGARDING THE APPLIC ATION OF INCOME: (I) WHERE A TRUST INCURS A DEBT FOR THE PURPOSES OF THE TRUST, WHETHER THE REPAYMENT OF THE DEBT WOULD AMOUNT TO A N APPLICATION OF THE INCOME FOR THE PURPOSES OF THE T RUST? AND (II) WHETHER LOANS ADVANCED BY AN EDUCATIONAL TRUST TO S TUDENTS FOR HIGHER STUDIES WOULD BE TREATED AS APPLICATION OF I NCOME FOR CHARITABLE PURPOSES? I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 16 2. BOARD HAS DECIDED THAT REPAYMENT OF THE LOAN OR IGINALLY TAKEN TO FULFILL ONE OF THE OBJECTS OF THE TRUST WILL AMO UNT TO AN APPLICATION OF THE INCOME FOR CHARITABLE AND RELIGIOUS PURPOSES . AS REGARDS THE LOANS ADVANCED FOR HIGHER STUDIES, IF THE ONLY OBJE CT OF THE TRUST IS TO GIVE INTEREST-BEARING LOANS FOR HIGHER STUDIES, IT WILL AMOUNT TO CARRYING ON OF MONEY-LENDING BUSINESS. IF, HOWEVER , THE OBJECT OF THE TRUST IS ADVANCEMENT OF EDUCATION AND GRANTING OF S CHOLARSHIP LOANS AS ONLY ONE OF THE ACTIVITIES CARRIED ON FOR THE FULFI LMENT OF THE OBJECTIVES OF THE TRUST, GRANTING OF LOANS, EVEN IN TEREST-BEARING, WILL AMOUNT TO APPLICATION OF INCOME FOR CHARITABLE PURP OSES. AS AND WHEN THE LOAN IS RETURNED TO THE TRUST, IT WILL BE TREAT ED AS INCOME OF THAT YEAR. THE CIRCULAR CLEARLY STATED THAT REPAYMENT OF LOAN CAN BE CONSIDERED AS UTILIZATION FOR APPLICATION FOR RELIGIOUS AND CH ARITABLE PURPOSES. HENCE, IF WE ALLOW THE LOAN AMOUNT UTILIZED FOR ACQ UIRING FIXED ASSETS ALSO AS UTILIZATION OF INCOME DERIVED FROM PROPERTY HELD UNDER TRUST, THEN THE RESULT WILL BE DOUBLE ALLOWANCE OF THE SAM E AMOUNT. FIRST, WHEN THE LOAN IS UTILIZED FOR ACQUIRING THE CAPITAL ASSET AND SECOND, WHEN THE LOAN ITSELF IS REPAID. THIS WILL GIVE RIS E TO PIQUANT SITUATION, WHEREBY SAME AMOUNT IS CONSIDERED AS UTILIZED TWICE , AND SUCH AN ILLOGICAL INTERPRETATION, IN OUR OPINION, CANNOT BE GIVEN. 18. NOW, WE HAVE TO CONSIDER THE ARGUMENT OF THE AS SESSEE THAT OUT OF THE LOANS OF ` 15,03,70,801/-, A SUM OF ` 4 CRORES WAS DIRECTLY USED FOR PLACING DEPOSITS OFFERED AS SECURITY WITH UNIVERSITY OF HEALTH I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 17 SCIENCES. IF THAT BE SO, WITHOUT DOUBT, SAID SUM O F ` 4 CRORES WAS NOT USED IN ACQUISITION OF FIXED ASSETS OF ` 12,85,43,524/-. THE SUM, IF IT WAS PLACED DEPOSIT WITH THE SAID UNIVERSITY O F HEALTH SCIENCES FOR THE PURPOSE OF STARTING NEW COLLEGES, THEN OF COURS E, THERE IS SOME STRENGTH IN THE ARGUMENT OF THE ASSESSEE THAT IT WA S ONLY AN APPLICATION OF INCOME AND DID NOT RESULT IN ACQUISI TION OF ANY FIXED ASSETS. HOWEVER, WE FIND MERIT IN THE CONTENTION O F LEARNED D.R. THAT EVIDENCE PRODUCED BY THE ASSESSEE BEFORE CIT(APPEAL S) IN THIS REGARD WAS NEVER BEFORE THE ASSESSING OFFICER. 19. COMING TO THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SATYA VIJAY PATEL HINDU DHARMASHALA TRUST ( SUPRA), WHOLE OF THE SURPLUS INCOME OF THE TRUST WAS USED FOR CONSTR UCTION OF DHARMASHALA AND IT WAS BECAUSE OF THIS REASON THAT THEIR LORDSHIP HELD, UTILIZATION OF LOANS BORROWED ALSO AS APPLICA TION OF INCOME DERIVED FROM PROPERTY HELD UNDER TRUST. 20. COMING TO THE QUESTION WHETHER DEPRECIATION CAN BE ALLOWED AS APPLICATION OF INCOME DERIVED FROM PROPERTY HELD UN DER TRUST, WE ARE OF THE OPINION THAT DECISIONS OF VARIOUS HIGH COURT S, NAMELY, THAT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF MARKET I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 18 COMMITTEE, PIPLI (SUPRA), THAT OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF SOCIETY OF THE SISTERS OF ST. ANNE (SUPRA), THAT OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF BHORUKA PUBLIC W ELFARE TRUST (SUPRA) AND THAT OF SHETH MANILAL RANCHHODDAS BISHR AM BHAVAN TRUST (SUPRA), ARE ALL IN FAVOUR OF THE ASSESSEE. IN THESE DECISIONS, IT WAS HELD THAT WHILE COMPUTING THE INCOME OF THE TRU ST, COMMERCIAL PRINCIPLE HAD TO BE FOLLOWED AND DEPRECIATION HAD T O BE ALLOWED. NO DOUBT, HONBLE KERALA HIGH COURT HAS TAKEN DIFFEREN T VIEW IN THE CASE OF LISSIE MEDICAL INSTITUTIONS (SUPRA). NEVERTHELE SS, TILL SUCH TIME, HONBLE JURISDICTIONAL HIGH COURT HAS GIVEN ITS MIN D ON THE ISSUE, ASSESSEE WILL BE FREE TO PRESS ITS CLAIM AND WE WIL L HAVE TO FOLLOW THOSE DECISIONS IN FAVOUR OF ASSESSEE. THEREFORE, DEPRECIATION HAS TO BE CONSIDERED AS AN APPLICATION OF INCOME DERIVED F ROM PROPERTY HELD UNDER TRUST. HOWEVER, WE HASTEN TO ADD THAT ALL TH E ABOVE DECISIONS REQUIRE WORKING OUT INCOME OF A TRUST BASED ON COMM ERCIAL PRINCIPLES, AND THIS OBVIOUSLY IMPLY THAT LOANS TAK EN BY AN ASSESSEE CANNOT BE CONSIDERED AS EXPENDITURE INCURRED IN A R EVENUE FIELD, ESPECIALLY WHEN SUCH LOANS WERE UTILIZED FOR ACQUIR ING FIXED ASSETS. 21. AS TO THE CLAIM OF THE ASSESSEE THAT EXCESS EXP ENDITURE OF EARLIER YEARS HAD TO BE ALLOWED FOR CARRY FORWARD A ND SET OFF, WE ARE OF I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 19 THE OPINION THAT THE DECISION OF HONBLE GUJARAT HI GH COURT IN THE CASE OF SHETH MANILAL RANCHHODDAS BISHRAM BHAVAN TR UST (SUPRA) IS CLEARLY IN ITS FAVOUR. IT WAS HELD BY THEIR LORDSH IP THAT A TRUST WAS ENTITLED TO SET OFF THE AMOUNT OF EXCESS APPLICATIO N OF INCOME OF PRIOR YEARS AGAINST DEFICIENCY OF CURRENT YEAR. THE SAME VIEW WAS TAKEN BY THEIR LORDSHIP IN THE CASE OF GOVINDU NAICKER ES TATE (SUPRA) ALSO. NO DOUBT, ASSESSEE DID NOT MAKE SUCH A CLAIM BEFORE ASSESSING OFFICER IN THE RETURN OF INCOME. HOWEVER, IN OUR O PINION, ASSESSING OFFICER WAS DUTY BOUND TO CONSIDER SUCH A CLAIM EVE N WITHOUT A REVISED RETURN FOR THE SIMPLE REASON THAT ASSESSEE HAD NO OCCASION TO MAKE SUCH A CLAIM IN THE ORIGINAL RETURN, SINCE IT WAS UNDER A BONAFIDE IMPRESSION THAT ITS INCOME WOULD BE EXEMPT UNDER SECTIONS 11 AND 12 OF THE ACT, EVEN WITHOUT SUCH A SET OFF. IN OTHER WORDS, IN COMPUTATION OF ASSESSEE, THERE WAS NO SURPLUS LEFT FOR EFFECTING A SET OFF. AS HELD BY HON'BLE APEX COURT IN GOETZE (INDI A) LTD. (SUPRA), APPELLATE AUTHORITIES ARE HAVING THE POWER TO CONSI DER SUCH A CLAIM EVEN IF IT WAS RAISED BEFORE IT FOR THE FIRST TIME. THEREFORE, WE ARE OF THE OPINION THAT THE CLAIM OF THE ASSESSEE OUGHT HA VE BEEN ENTERTAINED IF SUCH CLAIM WAS FOUND FACTUALLY CORRE CT. I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 20 22. BASED ON THE ABOVE DISCUSSION, WE ANSWER THE QU ESTIONS RAISED AS UNDER:- (I) LOANS USED FOR THE PURPOSE OF ACQUIRING FIXED A SSETS CANNOT BE CONSIDERED AS INCOME DERIVED FROM PROPERT Y HELD UNDER TRUST APPLIED FOR THE PURPOSE OF TRUST. (II) LOAN AMOUNTS DIRECTLY USED FOR PLACING DEPOSIT AS SECURITY WITH UNIVERSITY OF HEALTH SCIENCES, CANNOT BE CONSI DERED AS EXPENDED FOR ACQUIRING FIXED ASSETS, BUT WILL HA VE TO BE CONSIDERED AS APPLIED FOR THE PURPOSE OF TRUST. HO WEVER, THIS REQUIRES VERIFICATION BY THE A.O. (III) DEPRECIATION CLAIMED BY THE ASSESSEE HAD TO B E ALLOWED WHILE COMPUTING INCOME DERIVED FROM PROPERTY APPLIE D FOR THE PURPOSE OF TRUST. (IV) ASSESSEE WAS ENTITLED TO CLAIM CARRY FORWARD O F EXCESS EXPENDITURE, IF IT WAS SO DETERMINED FOR EARLIER YE ARS, FOR SETTING OF AGAINST THE INCOME OF THE IMPUGNED ASSESSMENT YEAR. 23. BEFORE PARTING WITH WE WILL BE FAILING IN OUR D UTY IF WE DO NOT POINT OUT SOMETHING WHICH IS PREGNANT IN THE INCOME AND EXPENDITURE ACCOUNT FILED BY THE ASSESSEE. NONE OF THE EXPENDI TURE CLAIMED HAS ANY ELEMENT OF CHARITY AT ALL. ASSESSEE WAS COLLEC TING FEES FROM STUDENTS, SUCH COLLECTIONS COMING TO ` 6,82,56,876/-, AND RUNNING A NURSING SCHOOL WHICH RESULTED IN A SURPLUS INCOME. IN OUR OPINION, THERE WAS NO CHARITY IN SUCH ACTIVITIES. NEVERTHEL ESS, ALL THE LOWER AUTHORITIES ACCEPTED THE CLAIM OF THE ASSESSEE THAT EXPENDITURE I.T.A. NO. 2090/MDS/12 I.T.A. NO. 2172/MDS/12 21 INCURRED WAS FOR CHARITABLE PURPOSE AND IT WAS ELIG IBLE FOR EXEMPTION UNDER SECTIONS 11 AND 12 OF THE ACT, LEAVING US WIT H NO LEE-WAY TO DECIDE ON THIS ASPECT. 24. WITH ABOVE OBSERVATION, WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUES BACK TO THE FILE OF A.O. FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW AND BASED ON THE ANSW ERS GIVEN BY US TO THE QUESTIONS RAISED IN THIS APPEAL. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, WHEREAS, THAT OF THE REVENUE IS ALLOWED FOR STATISTICAL PURP OSES. ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 21 ST OF FEBRUARY, 2013, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 21 ST FEBRUARY, 2013. KRI. COPY TO: ASSESSEE/ASSESSING OFFICER/CIT(A)-XII, CHE NNAI-34/ DIT(E), CHENNAI/D.R./GUARD FILE