Deputy Commissioner Of Income Tax (Exemptions), Circle-1, Bengaluru V. Karnataka Industrial Areas Development Board, Bengaluru

ITA 578/BANG/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 0608 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 01-11-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH
• Keywords: Depreciation; Charitable institution; Capital expenditure; Capital Gains
• Section: 32; 11; 143(3); 264; 43

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA Nos. 577 & 578/Bang/2021 Assessment Years : 2009-10 & 2010-11 The Deputy Commissioner of Income Tax (Exemptions), Circle – 1, Bangalore. Vs. M/s. Karnataka Industrial Areas Development Board, No. 49, 4 th & 5 th Floor, Khanija Bhavan, Race Course Road, Bangalore – 560 001. PAN: AAATK1305J APPELLANT RESPONDENT Assessee by : Shri Padam Chand Khincha, CA Revenue by : Shri Sumer Singh Meena, CIT DR (OSD) Date of Hearing : 20-12-2021 Date of Pronouncement : 05-01-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals by the revenue has been filed by revenue against the two separate order dated 15.03.2021 passed by the National Faceless Appeal Centre (NFAC), Delhi relating to Assessment Years 2009-10 and 2010-11. At the outset, both appeals are in respect of identical issue of disallowing carry forward of capital expenditure by the Ld.AO in the order dated 27.12.2017 in giving effect to the order passed by Page 2 of 10 ITA Nos. 577 & 578/Bang/2021 this Tribunal dated 04.09.2015 and 20.04.2016 for assessment year 2009-10 and 2010-11. For sake of convenience, we are narrating the facts pertaining to assessment year 2009-10. 2. Brief facts of the case are as under for A.Y. 2009-10: The assessee filed its return declaring income at Rs. Nil after claiming exemption u/s 11 of the Act. This claim was denied in the original assessment (dated 23/11/2011) holding that the assessee is hit by the Proviso to section 2(15) of the Act. In first appeal, the Ld.CIT(A) confirmed the order of the Ld.AO. In second appeal, this Tribunal held that the assessee is working on a no profit basis and therefore, the Proviso to section 2(15) does not apply. This Tribunal vide order dated 04/09/2015 in ITA No. 378/Bang/2013 directed the Ld.AO to allow the exemption u/s 11. This Tribunal also held that, the assessee is entitled to benefits of section 11 and that the Proviso to section 2(15) would not apply to its case. Consequent to this order of this Tribunal, the Ld.AO passed OGE dated 27/12/2017 u/s 143(3) r.w.s 254. The Ld.AO followed the directions of this Tribunal and allowed deduction u/s 11 as claimed by the assessee. The Ld.AO determined excess of income over expenditure at Rs.186,18,76,570 and after allowing accumulation at 15% u/s 11(1)(a) arrived at a balance of Rs. 152,82,24,725. This was reduced to nil after giving deduction towards capital expenditure of Rs. 8976,39,52,932 to the extent of the available balance. The taxable income was reduced to nil for which the assessee has no grievance. However, the last line of the order u/s 143(3) r.w.s. 254 reads “Note: Excess expenditure if any, not allowed to be carry forward”. Page 3 of 10 ITA Nos. 577 & 578/Bang/2021 The assessee has grievance against this noting by the Ld.AO in the order. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A). The assessee argued that the Ld.AO erred in not allowing carry forward of excess application amounting to Rs.8823,57,28,207 (balance capital expenditure remaining after set off of current years surplus) to the subsequent AYs. According to the assessee, such excess application is eligible for carry forward and set off u/s. 11 and further that there is no direction or finding in the order of this Tribunal regarding excess of application over income. The assessee relied upon number of judicial pronouncements of this Tribunal. The assessee before the Ld.CIT(A) contended that the issue is squarely covered in its favour by the decision of the Hon’ble Karnataka High Court in the case of Ohio University Christ College (2018) 408 ITR 352, decision of Coordinate Bench of this Tribunal in case of ITO vs. Namma Sangha (2018) 98 taxmann.com 307 and decision of Hon’ble Karnataka High Court in case of Manipal Academy of High Education (2019) 111 taxmann.com 243. It is submitted that the Ld.CIT(A) granted carry forward of excess application to the subsequent year for set off. Aggrieved by the order of Ld.CIT(A), revenue is in appeal before us. We have considered the rival contentions of both sides in light of records placed before us. The controversy has arisen because in the original assessment order, a nil income got converted into taxable income and Page 4 of 10 ITA Nos. 577 & 578/Bang/2021 therefore this issue of carry forward of excess application remained to be considered. The Ld.AO in his original order, never considered this issue. The controversy has arisen simply because the Ld.AO has in the OGE that carry forward of unutilised capital expenditure cannot be allowed. We note that this issue is squarely covered in favour of the assessee by two decisions of Hon’ble Karnataka High Court in the case of Ohio University Christ College (supra) and Manipal Academy of Higher Education (supra). The matter is also covered in favour of the assessee by the decision of Co-ordinate Bench of this Tribunal in case of ITO vs Namma Sangh (supra). We note that 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 purposes only in year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purpose. Hence even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of later year will amount to application of income of such later year. Page 5 of 10 ITA Nos. 577 & 578/Bang/2021 This was considered by the co-ordinate Bench in case of DCIT vs. Manipal Academy of Higher Education (supra) held as under: “11. We have heard the rival submissions as well as relevant material on record. So far as the facts relating to this issue of claim of depreciation are concerned, there is no dispute that the assessee incurred an expenditure for acquisition of the asset to the tune of Rs.411,14,20,599/- and claimed the same as application of income. There is no dispute before us on the said claim of application of income. Since the assessee also claimed depreciation of Rs.70,40,56,376/-on such capital asset the AO disallowed the claim of depreciation on the ground that it would amount to double deduction. We find that the Hon'ble Kerala High Court in case of Lissie Medical Institute (supra) held that the claim of depreciation on capital expenditure for acquiring of the asset would amount to double deduction when the assessee has already claimed the said capital expenditure as application of income. We find that in a series of other judgments including the judgments of the Hon'ble Bombay High Court and Hon'ble Punjab & Haryana High Court as well as the other decisions as relied upon by the learned AR, a contrary view has been taken by holding that the claim of depreciation on the capital expenditure would not amount to double deduction even if the said capital expenditure was claimed as deduction on account of application of income. Thus, it is clear that there are divergent views by different High Courts on this issue however, the judgment and rulings of the jurisdictional High Court is binding on this Tribunal. In case of Society of the Sisters of St. Anne (supra) the Hon'ble jurisdictional High Court while dealing with the issue of allowability of claim of depreciation has held as under; '13. It is clear from the above provisions that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the perosn in receipt of the income. The expression "total income" has been defined under s. 2(45) of the Act to mean "the total amount of income referred to in s. 5 computed in the manner laid down in this Act". The word "income" is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word "income", therefore, is a much wider term than the expression "profits and gains of business or profession". Net receipt after deducting all the necessary expenditure of the trust (sic). 14. There is a broad agreement on this proposition. But still the contention for the Revenue is that the depreciation allowance being a notional income (expenditure ?) cannot be allowed to be debited to the expenditure account of the trust. This contention appears to proceed on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In Page 6 of 10 ITA Nos. 577 & 578/Bang/2021 Spicer & Pegler's Book-keeping and Accounts, 17th Edn., pp. 44, 45 & 46, it has been noted as follows : "Depreciation is the exhaustion of the effective life of a fixed asset owing to 'use' or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period." "At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned." "If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance sheet will not present a true and fair view of the state of affairs; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired." 15. In CIT v. Indian Jute Mills Association [1982] 134 ITR 68, the Calcutta High Court, while construing the expression "expenditure incurred" in s. 44A of the Act, observed : "depreciation claimed shall include the expenditure incurred." 16. There are only two recognised methods of accounting : (i) cash basis, and (ii) merecantile basis. Under the cash basis only cash transactions are recorded. It is only cash receipts and cash payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 at 230 in the following words : "The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." Page 7 of 10 ITA Nos. 577 & 578/Bang/2021 17. It is not in dispute that if the mercantile system is followed, the depreciation allowance in respect of the trust property should be allowed. 18. Mr. Srinivasan, however, urged that there are enough indications in s. 11 to exclude the mercantile system of accounting. The learned counsel relied upon s. 11(1)(a) and s. 11(4) in support of his contention. We do not think that there is anything in these sub-sections to support the contention of Mr. Srinivasan. Explanation to s. 11(1)(a), on the contrary, takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not be on cash basis only. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the I.T.Act in respect of business undertaking. 19. The depreciation if it is not allowed as a necessary deduction for computing the income from the charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income. The Board also appears to have understood the "income" u/s. 11(1) in its commercial sense. The relevant portion of the Circular No. 5-P (LXX-6) of 1968, dated July 19, 1968, reads : "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 purpose of the trust or otherwise, and also after adding back any 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 u/s. 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 u/s. 11(1)." 20. In CIT v. Trustee of H. E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378, the Andhra Pradesh High Court has accepted the accounts maintained in respect of the trust in conformity with the principles of accountancy for the purpose of determining the income derived from the property held in trust. 21. In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 at 495, the Madras High Court observed : "The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by s. 14." 22. In the result, we answer the question in the affirmative and against the Revenue'. Page 8 of 10 ITA Nos. 577 & 578/Bang/2021 12. A similar view has been taken by the Hon'ble Bombay High Court in the case of Institute of Banking (supra) as well as by the Hon'ble P&H High Court and in case of Manav Mangal Society (supra). The view taken in the case of Institute of Banking (Supra) has been re-affirmed by the Hon'ble Bombay High Court in the recent decision dated 23-03-015 in case of DIT(Exemption) v. Ville Parle Kelavani Mandal [2015] 378 ITR 593/232 Taxman 499/58 taxmann.com 288 Mumbai by observing inpara-6 as under; "6. As far as question no.4 is concerned, this Court has repeatedly held that there is nothing like double deduction. When the assessee has acquired an asset from the income of the trust and thereafter the amount that is claimed is the depreciation on the use of the assets, such depreciation claim does not mean double deduction. The deduction earlier claimed is towards application of funds of the trust for acquiring assets. The latter is depreciation and it is permissible deduction considering the use of the assets. This has been clarified repeatedly by this Court. If any reference is required then the case of CIT v. Institution of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386(Bom.) is enough". 12.1 Therefore, in view of the judgment of the Hon'ble jurisdictional High Court in case of Society of the Sisters of St. Anne (supra) as well as various decisions as relied upon by the learned AR, we have no reason to take a divergent view from the view taken by the co- ordinate bench of this Tribunal in case of Shri Adichunchunagiri Shikshana Trust (supra) as well as in case of City Hospital Charitable Trust (supra), wherein the co-ordinate bench of this Tribunal has decided an identical issue in para-7 to 9 as under; '7. We have heard the submissions of the ld. DR, who relied on the order of AO. We have considered the order of the AO. Identical issue ITA No.676/Bang/2014 Page 4 of 11 came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union [2013] 60 SOT 260 Bangalore ITAT, wherein similar issue has been dealt with by this Tribunal. In the aforesaid case, the assessee claimed depreciation and the AO denied depreciation on the ground that at the time of acquiring the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The AO took the view that allowing depreciation 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 Revenue, the Tribunal held as follows:- "20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT v. Tiny Tots Education Society Page 9 of 10 ITA Nos. 577 & 578/Bang/2021 [2011] 330 ITR 21 (P&H), following CIT v. Market Committee, Pipli [2011] 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon'ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon'ble 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 Hon'ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P&H). The Hon'ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon'ble Punjab & Haryana High Court made a reference to the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon'ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon'ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon'ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In 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 revenue is dismissed." 8. We may also add that the legal position has since 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 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." 9. 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) does not call for any interference. Consequently grounds No.2 to 2.5 raised by the Revenue are dismissed'. Page 10 of 10 ITA Nos. 577 & 578/Bang/2021 Following the judgment of the Hon'ble jurisdictional High Court in case of Society of the Sisters of St. Anne (supra) as well as the decision of the co- ordinate bench of this Tribunal, we do not find any error or any illegality in the order of the CIT(A), qua this issue. Respectfully following the above decision of the co-ordinate bench of this Tribunal in case of DCIT vs. Manipal Academy of Higher Education (supra) and decisions of Hon’ble Karnataka High Court (supra), we do not find any infirmity in the order of the Ld.CIT(A). The above view is applicable mutatis mutandis for A.Y. 2010-11. In the result, both the appeals filed by revenue are dismissed. Order pronounced in open court on 05 th January, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 05 th January, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore