The Deputy Commissioner Of Income Tax (Exemptions), Circle- 1, Bangalore V. M/s. Childrens Education Society, Bangalore

ITA 698/BANG/2020

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7806 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-09-2021
• Assessment Year: 2016-2017
• Appeal Filed On: 12-11-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: V. SRINIVASAN
• Keywords: Depreciation; Charitable institution; Question of law; Capital expenditure; Capital Gains
• Section: 32; 11; 12A; 264

Judgement Text

ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO.697 TO 699/BANG/2020 ASSESSMENT YEAR: 2014-15, 2016-17 & 2017-18 DEPUTY COMMISSIONER OF INCOME-TAX (EXEMPTIONS) CIRCLE-1 BANGALORE VS. M/S. CHILDRENS EDUCATION SOCIETY #NO.40, 1 ST PHASE, J.P. NAGAR BANGALORE 560 078. PAN NO : AAATC1553A APPELLANT RESPONDENT APPELLANT BY : SHRI MUZAFFAR HUSSAIN, D.R. RESPONDENT BY : SHRI V. SRINIVASAN, A.R. DATE OF H EARING : 01.09.2021 DATE OF PRONOUNCEMENT : 01.09.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: ALL THE THREE APPEALS FILED BY THE REVENUE ARE DIRE CTED AGAINST THE ORDERS PASSED BY LD CIT(A)-14, BANGALORE AND TH EY RELATE TO THE ASSESSMENT YEARS 2014-15, 2016-17 AND 2017-18. IN A LL THE THREE YEARS, THE REVENUE IS ASSAILING THE DECISION OF LD CIT(A) IN HOLDING THAT THE BROUGHT FORWARD DEFICIT IS ALLOWABLE AS AP PLICATION OF INCOME U/S 11(1)(A) OF THE ACT. 2. THE ASSESSEE IS A CHARITABLE TRUST REGISTERE D U/S 12A OF THE ACT. IN THE EARLIER YEARS, THE ASSESSEE HAD SPENT TOWARD S OBJECTS OF THE ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE PAGE 2 OF 6 TRUST, WHICH WERE IN EXCESS OF THE INCOME OF THAT Y EAR. THE ASSESSING OFFICER RESTRICTED THE APPLICATION OF INCOME TO THE EXTENT OF INCOME AVAILABLE. THE ASSESSEE SOUGHT CARRY FORWARD OF EX CESS APPLICATION AND CLAIMED THAT THE SAME SHOULD BE TREATED AS APPL ICATION OF INCOME OF THE SUCCEEDING YEAR. THIS CLAIM DID NOT FIND FA VOUR WITH THE AO. HENCE THE ASSESSEE FILED APPEALS BEFORE LD CIT(A) I N ALL THE THREE YEARS. THE LD CIT(A) ALLOWED THE CLAIM OF THE ASSE SSEE FOLLOWING THE DECISION RENDERED BY JURISDICTIONAL HONBLE KARNATA KA HIGH COURT IN THE CASE OF CIT (EXEMPTIONS) VS. MANIPAL ACADEMY OF HIGHER EDUCATION (2019)(111 TAXMANN.COM 243)(KAR). THE RE VENUE IS AGGRIEVED BY THE DECISION OF LD CIT(A) IN ALL THE T HREE YEARS. 3. WE HEARD THE PARTIES AND PERUSED THE RECORD . WE NOTICE THAT THE LD CIT(A) HAS FOLLOWED THE DECISION RENDERED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF MANIPAL ACADEMY OF HIGHER EDUCATION (SUPRA). THE RELEVANT OBSERVATIONS MADE BY THE JUR ISDICTIONAL HIGH COURT ARE EXTRACTED BELOW:- 4. WITH REGARD TO CARRYING FORWARD OF THE LOSSES FOR BEING SET OFF AGAINST THE INCOME OF THE CHARITABLE TRUST FOR THE PRESENT ASSE SSMENT YEAR, THE CONTROVERSY IS COVERED BY THE JUDGMENT IN CIT (EXEM PTIONS) V. OHIO UNIVERSITY CHRIST COLLEGE [2018] 99 TAXMANN.COM 377/408 ITR 352 (KAR.) IN WHICH THIS COURT HELD AS UNDER: '16. IN SO FAR AS THE SECOND QUESTION PROPOSED BY T HE REVENUE, QUOTED ABOVE IS CONCERNED ALSO, WE FIND THAT THE TRIBUNAL' S FINDINGS IN THIS REGARD DO NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THE SAID FINDINGS ARE QUOTED BELOW FOR READY REFERENCE: '5.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE A SSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD CLAIMED APPL ICATION OF INCOME ON ACCOUNT OF EXPENDITURE OF EARLIER YEARS, WHICH HAS BEEN BROUGHT FORWARD AND SET OFF IN THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUND THAT THERE IS NO EXPRESS PROVISION IN TH E ACT PERMITTING THE ADJUSTMENT OF EARLIER YEARS BROUGHT FORWARD EXPENSES AS APPLICATION OF INCOME IN THE CURRENT YE AR. ACCORDING TO THE ASSESSING OFFICER, THE APPLICATION OF INCOME FOR CHARITABLE PURPOSES MUST BE DURING THE RELEVANT PREVIOUS YEAR. SINCE THE INCOME OF THE TRUST IS EXEMPT FROM TAX, THE ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE PAGE 3 OF 6 QUESTION OF DEFICIT DOES NOT ARISE AND ALSO THE TRU ST IS REQUIRED TO UTILIZE 85% OF THE INCOME OF THE PREVIOUS YEAR F OR CHARITABLE PURPOSES DURING THE YEAR. IN THIS VIEW O F THE MATTER AND FOR THE ABOVE REASONS, THE ASSESSING OFFICER DI SALLOWED THE ASSESSEE'S CLAIM OF EXPENDITURE OF EARLIER YEAR S BEING BROUGHT FORWARD AND SET OFF DURING THE YEAR. 5.2 ON APPEAL, THE LEARNED CIT (APPEALS) ALLOWED TH E AMORTIZATION OF THE EXPENDITURE AS CLAIMED BY THE A SSESSEE AND DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY PLACING RELIANCE ON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SOCIETY OF THE SI STERS OF ST. ANNE REPORTED IN 146 ITR 28 (1984) AND CBDT CIRCULAR NO.5-P(LXX)-6 OF 1968. 5.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH T HE LEARNED DEPARTMENTAL REPRESENTATIVES FOR REVENUE AND THE LE ARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUD ING THE JUDICIAL PRONOUNCEMENTS CITED. THE FACTS OF THE ISS UE BEFORE US IS THAT THE ASSESSEE HAD INCURRED CERTAIN PRELIM INARY EXPENDITURE IN THE YEAR OF SETTING UP OF THE TRUST. THE SAME IS AMORTISED BY THE ASSESSEE TRUST OVER A PERIOD OF 5 YEARS FROM THE YEAR OF INCURRING OF EXPENDITURE. THE FACT OF A MORTIZATION WAS NOT DISPUTED BY THE ASSESSING OFFICER IN THE AS SESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2007-08 WHERE THE E NTIRE AMOUNT WAS ADDED BACK CLAIMING 1/5TH OF THE EXPENDI TURE. THE UN-AMORTIZED EXPENDITURE HAS BEEN BROUGHT FORWA RD AND SET OFF AS APPLICATION OF INCOME IN SUBSEQUENT YEAR S, INCLUDING THE ASSESSMENT YEARS 2008-09 AND 2009-10 WHICH ARE UNDER CONSIDERATION. 5.3.2 WE FIND THAT THE ISSUE BEFORE US IS DIRECTLY RELATED TO THE ISSUE DECIDED BY THE HON'BLE KARNATAKA HIGH COURT I N THE CASE OF SISTERS OF ST. ANNE (SUPRA) CITED BY THE AS SESSEE. IN THE SAID CASE, THE HON'BLE KARNATAKA HIGH COURT AT PARA S 8 TO 10 THEREOF HAS HELD AS UNDER : ** ** ** 5.3.3 FURTHER, THE CBDT CIRCULAR NO.5-P (LXX)-6 OF 1968 CITED BY THE ASSESSEE MAKES IT CLEAR THAT INCOME SH OULD BE UNDERSTOOD IN ITS COMMERCIAL SENSE : IN THE CASE OF TRUSTS ALSO AND THEREFORE THE COMMERCIAL PRINCIPLE ENUNCIATED B Y THE HON'BLE KARNATAKA HIGH COURT IN THE ABOVE REFERRED CASE OF SISTERS OF ST. ANNE (SUPRA) APPLIES TO TRUSTS AS WE LL. IN VIEW OF THE FACTUAL AND LEGAL MATRIX OF THIS ISSUE IN THE C ASE ON HAND AS DISCUSSED ABOVE, WE CONCUR WITH THE DECISION OF THE LEARNED CIT (APPEALS) IN CANCELLING THE DISALLOWANC E MADE BY THE ASSESSING OFFICER AND IN ALLOWING THE AMORTI ZATION OF EXPENSES. CONSEQUENTLY, GROUND NO.B (1 TO 6) OF THE ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE PAGE 4 OF 6 REVENUE'S APPEAL FOR ASSESSMENT YEAR 2008-09 AND GR OUND NO.C FOR ASSESSMENT YEAR 2009-10 ARE DISMISSED.' 17. IN OUR OPINION, THE MATTER IS SQUARELY COVERED BY A DECISION OF THE COGNATE BENCH OF THIS COURT IN THE CASE OF CIT V. S OCIETY OF THE SISTERS OF ST. ANNE (1984) 16 TAXMAN 400 (KAR.) AND (1984) 146 ITR 28 , WHEREIN THE CONGNATE BENCH OF THIS COURT HELD THAT EVEN THE DEPRECIATION NOT INVOLVING ANY CASH OUTFLOW IS ALSO IN THE CHARACTER OF EXPENDITURE AND THEREFORE SUCH DEPRECIATION IS N OTHING BUT DECREASE IN THE VALUE OF PROPERTY THROUGH WEAR AND TEAR, DETERIORATION OR OBSOLESCENCE AND THE ALLOWANCE MAD E FOR THAT PURPOSE IN THE BOOKS OF ACCOUNTS WERE DEEMED TO BE THE APPLICATION OF FUNDS FOR THE PURPOSE OF SEC. 11 OF THE ACT. THE RELEVANT PORTION OF THE SAID JUDGMENT IS ALSO QUOTED BELOW FOR READY RE FERENCE: '11. MR. SRINIVASAN, HOWEVER, URGED THAT THERE ARE ENOUGH INDICATIONS IN SECTION 11 TO EXCLUDE THE MERCANTILE SYSTEM OF ACCOUNTING. THE LEARNED COUNSEL RELIED UPON SECTION S 11(1)(A) AND 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 SE CTION 11(1)(A) ON THE CONTRARY TAKES NOTE OF THE INCOME N OT RECEIVED IN A PARTICULAR YEAR. IT LENDS SUPPORT TO THE CONTE NTION OF THE ASSESSEE THAT ACCOUNTING NEED NOT ONLY BE ON CASH B ASIS. SECTION 11(4) IS NOT INTENDED TO EXPLAIN HOW THE AC COUNTS OF THE BUSINESS UNDERTAKING SHOULD BE MAINTAINED. IT I S INTENDED ONLY TO BRING TO TAX THE EXCESS INCOME COMPUTED UND ER THE PROVISIONS OF THE ACT IN RESPECT OF BUSINESS UNDERT AKING. 12. THE DEPRECIATION IF IT IS NOT ALLOWED AS NECESS ARY DEDUCTION FOR COMPUTING THE INCOME FROM THE CHARITA BLE INSTITUTIONS, THEN THERE IS NO WAY TO PRESERVE THE CORPUS OF THE TRUST FOR DERIVING THE INCOME. THE BOARD ALSO APPEA RS TO HAVE UNDERSTOOD THE 'INCOME' UNDER SECTION 11(1) IN ITS COMMERCIAL SENSE. THE RELEVANT PORTION OF THE CIRCULAR NO.5XX- 6 OF 1968, DATED 19-6-1968 (SEE TAXMANN'S DIRECT TAXES CIRCULA RS, VOL. 1, 1980 EDN. P.85) 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 SEN SE, I.E., BOOK INCOME, AFTER ADDING BACK ANY APPROPRIATIONS O R APPLICATIONS THEREOF TOWARDS THE PURPOSES OF THE TR UST OR OTHERWISE, AND ALSO AFTER ADDING BACK ANY DEBITS MA DE FOR CAPITAL EXPENDITURE INCURRED FOR THE PURPOSES OF TH E 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 OUT GOINGS FOR PURPOSES OTHER THAN THOSE OF THE TRUST. THE AMOUNTS SPENT OR APPLIED FOR THE PURPOSES OF THE TRUST FROM OUT OF T HE INCOME, ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE PAGE 5 OF 6 COMPUTED IN THE AFORESAID MANNER, SHOULD NOT BE LES S THAN 75 PER CENT OF THE LATTER, IF THE TRUST IS TO GET THE FULL BENEFIT OF THE EXEMPTION UNDER SECTION 11(1).' 13. IN CIT V. TRUSTEE OF H.E.H. THE NIZAM'S SUPPLEM ENTAL RELIGIOUS ENDOWMENT TRUST (1981) 127 ITR 378 , THE ANDHRA PRADESH HIGH COURT HAS ACCEPTED THE ACCOUNTS MAINTA INED IN RESPECT OF THE TRUST IN CONFORMITY WITH THE PRINCIP LES OF ACCOUNTANCY FOR THE PURPOSES OF DETERMINING THE INC OME DERIVED FROM THE PROPERTY HELD IN TRUST.' 18. IN VIEW OF THE AFORESAID FINDINGS OF THE LEARNE D TRIBUNAL, ALLOWING ANY EXPENDITURE OF THE EARLIER YEAR WHICH HAS BEEN BROUGHT FORWARD AND SET OFF IN THE YEAR UNDER CONSIDERATION, IS A J USTIFIED FINDING OF FACT BASED ON THE CORRECT INTERPRETATION OF LAW AND THE JUDGMENT RELIED UPON BY IT RENDERED BY THE COGNATE BENCH. TH EREFORE, THE SAME DOES NOT CALL FOR INTERFERENCE. A SIMILAR VIEW WAS ALSO TAKEN BY THE DIVISION BENCH OF BOMBAY HIGH COURT IN COMMISSIONER OF INCOME- TAX V. INSTITUTE OF BANKING (2003) 264 ITR 110 , WHEREIN THE DIVISION BENCH OF BOMBAY HIGH COURT HELD THAT THE INCOME DER IVED FROM THE TRUST PROPERTY HAS ALSO GOT TO BE COMPUTED ON COMME RCIAL PRINCIPLES AND IF COMMERCIAL PRINCIPLES ARE APPLIED, THEN ADJU STMENT OF EXPENSES INCURRED BY THE TRUST FOR CHARITABLE AND R ELIGIOUS PURPOSES IN THE EARLIER YEARS AGAINST THE INCOME EARNED BY T HE TRUST IN THE SUBSEQUENT YEAR WILL HAVE TO BE REGARDED AS APPLICA TION OF INCOME OF THE TRUST FOR CHARITABLE AND RELIGIOUS PURPOSES IN THE SUBSEQUENT YEAR. THE RELEVANT PORTION OF THE SAID JUDGMENT OF BOMBAY HIGH COURT IS ALSO QUOTED BELOW FOR READY REFERENCE : 'NORMAL DEPRECIATION CAN BE CONSIDERED AS A LEGITIM ATE DEDUCTION IN COMPUTING THE REAL INCOME OF THE ASSES SEE ON GENERAL PRINCIPLES OR UNDER SECTION 11(1)(A) OF THE INOME-TAX ACT, 1961. INCOME OF A CHARITABLE TRUST DERIVED FRO M BUILDING, PLANT AND MACHINERY AND FURNITURE IS LIABLE TO BE C OMPUTED IN A NORMAL COMMERCIAL MANNER ALTHOUGH THE TRUST MAY N OT BE CARRYING ON ANY BUSINESS AND THE ASSETS IN RESPECT WHEREOF DEPRECIATION IS CLAIMED MAY NOT BE BUSINESS ASSETS. IN ALL SUCH CASES, SECTION 32 OF THE ACT PROVIDING FOR DEPRECIA TION, FOR COMPUTATION OF INCOME DERIVED FROM BUSINESS OR PROF ESSION IS NOT APPLICABLE. HOWEVER, THE INCOME OF THE TRUST IS REQUIRED TO BE COMPUTED UNDER SECTION 11 ON COMMERCIAL PRINC IPLES AFTER PROVIDING FOR ALLOWANCE FOR NORMAL DEPRECIATI ON AND DEDUCTION THEREOF FROM THE GROSS INCOME OF THE TRUS T. INCOME DERIVED FROM THE TRUST PROPERTY HAS ALSO GOT TO BE COMPUTED ON COMMERCIAL PRINCIPLES AND IF COMMERCIAL PRINCIPL ES ARE APPLIED, THEN ADJUSTMENT OF EXPENSES INCURRED BY THE TRUST F OR CHARITABLE AND RELIGIOUS PURPOSES IN THE EARLIER YEARS AGAINST THE INCOME EARNED BY THE TRUST IN THE SUBSEQUENT YEAR WILL HAVE TO BE RE GARDED AS APPLICATION OF INCOME OF THE TRUST FOR CHARITABLE A ND RELIGIOUS ITA NO.697 TO 699/BANG/2020 M/S. CHILDRENS EDUCATION SOCIETY, BANGALORE PAGE 6 OF 6 PURPOSES IN THE SUBSEQUENT YEAR IN WHICH ADJUSTMENT HAD BEEN MADE HAVING REGARD TO THE BENEVOLENT PROVISIONS CONTAINE D IN SECTION 11 OF THE ACT AND SUCH ADJUSTMENT WILL HAVE TO BE EXCLUDE D FROM THE INCOME OF THE TRUST UNDER SECTION 11(1)(A).' IN VIEW OF THE CONTROVERSY COVERED BY THE ABOVE DEC ISIONS OF THIS COURT, WE ARE OF THE OPINION THAT THE SUBSTANTIAL Q UESTIONS OF LAW AS SUGGESTED BY THE APPELLANT DO NOT NOW ARISE FOR OUR FURTHER CONSIDERATION IN THE PRESENT APPEALS. 4. WE NOTICE THAT THE LD CIT(A) HAS FOLLOWED BI NDING DECISION RENDERED BY JURISDICTIONAL HONBLE KARNATAKA HIGH C OURT AND HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH HIS ORD ER PASSED IN ALL THE THREE YEARS UNDER CONSIDERATION. 5. IN THE RESULT, ALL THE THREE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST SEPT, 2021 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 1 ST SEPT, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE