M/s North Western Karnataka Road Transport Corporation, Hubli V. DCIT, Hubli

ITA 734/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1477 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-12-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 28-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CIT IDR
• Keywords: Depreciation; Charitable institution; Unabsorbed depreciation; Capital expenditure
• Section: 143(3); 263; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NOS. 734 & 735/BANG/2010 ASSESSMENT YEARS : 2005-06 & 2006-07 M/S. NORTH WESTERN KARNATAKA ROAD TRANSPORT CORPORATION, CENTRAL OFFICE, GOKUL ROAD, HUBLI. : APPELLANT VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1), HUBLI. : RESPONDENT APPELLANT BY : SHRI S. PARTHASARATHI, ADVOCATE RESPONDENT BY : SHRI G.V. GOPALA RAO, CIT-I(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THESE TWO APPEALS INSTITUTED BY NWKR TRANSPORT CORPORATION, HUBLI FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07 ARE DIRECTED AGAINST THE ORDERS OF THE LD. CIT, HUBLI IN LRP NOS.263/ 05 /CIT HBL/2009-10 AND 263/ 06 /CIT HBL/2009-10 DATED: 26.3.2010 RESPECTIVELY [ U/S 263 OF THE ACT.] ITA NO.734 & 735/BANG/10 PAGE 2 OF 23 I. ITA NO: 734/10 AY 2005-06: 2. THE NWKR TRANSPORT CORPORATION [ THE ASSESSEE IN SHORT] HAD RAISED EIGHT GROUNDS, IN WHICH GROUND NOS:1, 7 AND 8 BEING GENERAL IN NATURE AND NO SPECIFIC ISSUES INVOLVED, THEY HAVE B ECOME NON- CONSEQUENTIAL. IN THE REMAINING GROUNDS, THE SUBST ANCES OF THE ISSUES RAISED ARE, FOR THE SAKE OF CLARITY, REFORMULATED I N A CONCISE MANNER AS UNDER: (1) THE CIT ERRED IN INCLUDING RS.21.34 CRORES IN THE G ROSS RECEIPT WITHOUT APPRECIATING THAT THESE AMOUNTS REPRESENTED GROSS VALUE OF ASSETS WHICH WERE WITHDRAWN FROM THE ASSETS SCHE DULE AND DO NOT REPRESENT THE ACTUAL REALIZATION OF SCRAP VALUE WHICH WAS REALIZED DURING THE YEAR WAS RS.5.6 CRORES ONLY WHI CH INCLUDED MISC. RECEIPT AND TAKEN INTO ACCOUNT TO ARRIVE AT G ROSS RECEIPT; (2) THE CIT ERRED IN NOT CONSIDERING THE UTILIZATION OF DEPRECIATION RESERVE AT RS.21.43 CRORES ADOPTED BY THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT RS.34.92 CRORES REPRESEN TED LOAN REPAYMENT DURING THE YEAR AND, HENCE, THE AMOUNT WI THDRAWN FROM DEPRECIATION RESERVE REMAINS AT RS.21.34 CRORE S; & (3) THE CIT ERRED IN NOT ALLOWING THE DEPRECATION CLAIM ON MOTOR BUSES AT 40%. II. ITA NO: 735/10 AY 2006-07: 3. LIKEWISE, FOR THIS AY TOO, THE ASSESSEE HAD RAIS ED NINE GROUNDS, OUT OF WHICH, GROUND NOS.1, 8 AND 9 BEING GENERAL, THEY DO NOT SURVIVE FOR ADJUDICATION. THE REMAINING GROUNDS ARE REPRODUCED , IN A CONCISE MANNER, AS UNDER: (1) THE CIT ERRED IN INCLUDING RS.60.4 CRORES IN THE GR OSS RECEIPT WITHOUT APPRECIATING THAT THESE AMOUNTS REPRESENTED GROSS VALUE OF ASSETS WHICH WERE WITHDRAWN FROM THE ASSETS SCHEDUL E AND DO NOT REPRESENT THE ACTUAL REALIZATION OF SCRAP VALUE WHI CH WAS REALIZED DURING THE YEAR WAS RS.3.32 CRORES ONLY WHICH INCLU DED MISC. RECEIPT AND DULY TAKEN INTO ACCOUNT TO ARRIVE AT GR OSS RECEIPT; ITA NO.734 & 735/BANG/10 PAGE 3 OF 23 (2) THE CIT ERRED IN NOT CONSIDERING THE UTILIZATION OF DEPRECIATION RESERVE AT RS.38.49 CRORES ADOPTED BY THE ASSESSEE WITHOUT APPRECIATING THE FACT THAT RS.48.02 CRORES REPRESEN TED LOAN REPAYMENT DURING THE YEAR AND, HENCE, THE AMOUNT WI THDRAWN FROM DEPRECIATION RESERVE REMAINS AT RS..38.49 CRORES; & (3) THE CIT OUGHT TO HAVE APPRECIATED THAT THE AO WAS R IGHT IN ALLOWING THE DEPRECIATION ON VEHICLES AS CLAIMED; (4) THE CIT OUGHT TO HAVE APPRECIATED THAT GRANTS RECEI VED CRF & MLA OF RS.1.64 CRORES WAS ACCOUNTED AS MISC. RECEIP TS AND THE SAME WAS TAKEN INTO ACCOUNT TO ARRIVE AT THE GROSS RECEIPT; & (5) THE CIT OUGHT TO HAVE APPRECIATED THAT THE EXEMPTIO N U/S 11 (1)(A) OF THE ACT ALLOWED BY THE AO AT 15% ON GROSS RECEI PT OF THE ASSESSEE WAS IN CONFORMITY WITH THE FINDING OF THE JURISDICTIONAL HIGH COURT. 4. SUBSEQUENTLY, THE ASSESSEE, IN ITS APPLICATIONS FOR BOTH THE AYS UNDER DISPUTE, HAD SOUGHT THE PERMISSION OF THIS BE NCH TO RAISE IDENTICAL ADDITIONAL GROUND WHICH IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT OUGHT TO HAVE APPRECIATED THAT THE AMOUNT WITHD RAWN FROM DEPRECIATION RESERVE WAS NOT TO BE INCLUDED IN THE GROSS INCOME OF THE APPELLANT FOR THE PURPOSE OF SECTION 11 OF THE ACT. 4.1. AFTER HEARING THE EITHER-SIDE, THE ASSESSEES REQUEST WAS CONCEDED AND THE REGISTRY WAS DIRECTED TO PLACE THE ASSESSEE S APPLICATIONS ON RECORD. 5. AS THE ISSUES RAISED IN THESE APPEALS BEING COM MON AND IDENTICAL, THEY WERE HEARD, CONSIDERED AND DISPOSED OFF, FOR THE SAKE OF CONVENIENCE, IN THIS COMMON ORDER. ITA NO.734 & 735/BANG/10 PAGE 4 OF 23 6. BRIEFLY STATED, THE ASSESSEE A PUBLIC TRANSPO RT CORPORATION HAD FURNISHED ITS RETURNS OF INCOME, ADMITTING LO SS/DEFICIT OF RS.45.16 CRORES AND RS.80.99 CRORES FOR THE AYS 2005-06 AND 2006-07 RESPECTIVELY. THE ASSESSMENTS WERE CONCLUDED U/S 143(3) OF THE AC T ON 10.5.2007 AFTER MAKING CERTAIN ADDITIONS/ADJUSTMENTS AS DETAILED IN THE RESPECTIVE ORDERS AND ARRIVED AT THE LOSS AT RS.8.60 CRORES AND RS.NI L FOR THE AYS 05-06 AND 06-07 RESPECTIVELY. 6.1. SUBSEQUENTLY, THE CIT, HUBLI, FOR THE REASONS RECORDED IN HIS IMPUGNED ORDERS U/S 263 OF THE ACT DATED: 26.3.2010 , HAD ARRIVED AT A CONCLUSION THAT THE ASSESSMENT ORDERS PASSED U/S 14 3(3) OF THE ACT WERE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E. 6.2. THE REASONS SET-OUT BY THE CIT FOR THE ISSUA NCE OF NOTICE U/S 263 OF THE ACT ARE SUMMARIZED AS UNDER: A.Y 2005-06 : (I) AT PARA 19 OF THE NOTES TO THE BALANCE SHEET AN D P & L A/C, IT WAS STATED THAT THE ACTUAL UTILIZATION OF DEPRECIATION RESERVE DURING THE YEAR 2004-05 TOWARDS CAPITAL LOANS AS PER THE FINALIZED ACCOUNTS WAS RS.34.92 CRORES, WHEREAS THE AO HAD TAKEN THE SAME AT RS.21.43 CRORE S FROM SCHEDULE VI OF THE SAID REPORT. THE ADDITION TO GROSS RECEIPT ON ACCOUNT OF ACTUAL UTILIZATION OF DEPRECIATION RESERVE WAS TO BE CONSI DERED AT RS.34.92 CRORES INSTEAD OF RS.21.43 CRORES AND, THUS, GROSS RECEIPT S BEING UNDERSTATED BY RS.13.57 CRORES; (II) IN THE DEPRECIATION STATEMENT, IT WAS NOTICED THAT THE ASSESSEE HAD RECEIVED RS.21.34 CRORES TOWARDS SALE OF SCRAP WHIC H WAS NOT INCLUDED IN THE ASSESSMENT ORDER WHILE WORKING OUT THE QUANTUM OF GROSS RECEIPT; (III) THE ASSESSEE HAD CLAIMED DEPRECIATION ON MOTO R BUSES AT 40% WHICH HAS BEEN ALLOWED BY THE AO. HOWEVER, THE ASSESSEES NA TURE OF BUSINESS WAS PUBLIC TRANSPORT SERVICE AS MENTIONED IN COL.8(A) OF PART B OF THE AUDIT REPORT, THE ASSESSEE WAS NOT ELIGIBLE FOR HIGHER RA TE OF DEPRECIATION; ITA NO.734 & 735/BANG/10 PAGE 5 OF 23 (IV) THE AOS ACCEPTANCE OF THE ASSESSEES CLAIM OF 100% DEDUCTION IN INVESTMENT ON THE VEHICLES AS APPLICATION OF FUNDS TOWARDS CHARITABLE PURPOSES AND THE CLAIM OF DEPRECIATION ON SUCH VEHI CLES WOULD AMOUNT TO DOUBLE DEDUCTION AND FOR THIS PROPOSITION THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ESCORTS LTD & ANR. V. UNION OF INDIA 199 ITR 93 WAS APPLIED AND THE AOS ACTION IN DEDUCTING THE ENTIRE DEPRECIATION CLAIM OF RS.15.11 CRORES (INCLUSIVE OF DEPN. ON MO TOR BUSES) FROM GROSS RECEIPTS AS APPLICATION OF FUNDS WAS NOT IN ORDER. 6.3. AFTER DUE CONSIDERATION OF THE ASSESSEES REB UTTAL AND EXPLANATION AS RECORDED IN HIS IMPUGNED ORDER UNDER DISPUTE, THE LD. CIT HAD REASONED THUS (I) ACTUAL UTILIZATION OF DEPRECIATION RESERVE : (ON PAGE 5).HENCE, PARA NO.19 OF THE NOTES TO ACCOUNTS READ WITH THE RELEVANT RESOLUTIONS EXTRACTED ABOVE THUS LEADS TO THE INEVITABLE CONCLUSION THAT THE ACTUAL UTILIZATION OF DEPRECIAT ION RESERVE DURING THE RELEVANT ACCOUNTING YEAR TOWARD REPAYMENT OF CAPITA L LOAN WAS TO THE TUNE OF RS.34.92 CRORES AND NOT RS.21.34 CRORES AS ADOPT ED BY THE AO FOR THE PURPOSE OF QUANTIFYING THE GROSS RECEIPT, THUS RESU LTING IN THE GROSS RECEIPT BEING PRIMA FACIE UNDER-ADOPTED TO THE TUNE OF RS.1 3.57 CRORES APPROXIMATELY AND, THEREFORE, RESULTING IN THE ASSE SSMENT ORDER SO PASSED BEING ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. (II) NON-INCLUSION OF RS.21.34 CRORES FROM SALE OF SCRA P IN THE GROSS RECEIPT : (ON PAGE 7) IT IS THE CONTENTION OF THE ASSESSEE T HAT THE IMPUGNED AMOUNT MERELY REPRESENTS THE GROSS VALUE OF ASSETS WHICH A RE WITHDRAWN FROM THE ASSET SCHEDULE AND DOES NOT REPRESENT ACTUAL REALIZ ATION OF SCRAP VALUE WHICH ACCORDING TO THE ASSESSEE WAS TO THE TUNE OF RS.5.60 CRORES ONLY AS MENTIONED EARLIER. IN OTHER WORDS, THE ARGUMENT OF THE ASSESSEE IS THAT IT IS ONLY WHEN SUCH SCRAP IS ACTUALLY SOLD, THE SAME IS REFLECTED AS A RECEIPT IN THE ACCOUNTS I.E., ON CASH BASIS. THIS PRACTICE SO FOLLOWED BY THE ASSESSEE, IN MY CONSIDERED OPINION, IS LEGALLY UNTENABLE SINCE A DMITTEDLY, THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING AND REC OGNIZES INCOME AND EXPENDITURE ACCOUNT ON ACTUAL BASIS. NO DOUBT, AT COL.11 (PG.13 OF THE AUDIT REPORT) OF THE ACCOUNTING POLICIES, IT IS MENTIONED THAT INCOME FROM SALE OF SCRAP IS DERIVED ONLY WHEN THE MATERIAL/SCRAPED BUS ES ARE LIFTED BY THE BIDDERS, BUT THIS POLICY IN MY CONSIDERED VIEW, IS CLEARLY IN CONTRAVENTION TO THE PROVISIONS OF LAW U/S 145A OF THE ACT W.E.F. 1. 4.1999 WHICH PROHIBITS ADOPTION OF HYBRID/MIXED SYSTEM OF ACCOUNTING. BE THAT AS IT MAY, THE FACT REMAINS THAT THE AUDITO RS IN THE DEPRECIATION SCHEDULE ANNEXED AS ANNEXURE-I (FORMING PART OF THE REPORT U/S 44AB) HAVE CLEARLY CERTIFIED THAT SCRAP SOLD WAS TO THE TUNE O F RS.21,58,61,170 AND NOT ITA NO.734 & 735/BANG/10 PAGE 6 OF 23 RS.5.60 CRORES AS NOW CONTENDED AND, HENCE, ADMITTE DLY SINCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, T HE IMPUGNED AMOUNT OF RS.21,58,61,170, IN MY CONSIDERED OPINION, ON THE B ASIS OF THE FACTS AVAILABLE ON RECORD, WAS REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF QUANTIFYING THE GROSS RECEIPT AND NON-CONSIDERATION OF THE SAME FOR THE PURPOSE OF QUANTIFYING THE SAME HAS THUS RESULTED I N THE ASSESSMENT ORDER SO PASSED BEING ERRONEOUS AND PREJUDICIAL TO THE INTER EST OF REVENUE. (III) CLAIM OF HIGHER RATE OF DEPRECIATION : (ON PAGE 8)THE RELIANCE PLACED BY THE ASSESSEE IN CIRCULAR NO.609 DATED: 29.7.1991 ISSUED BY THE BOARD TO SAY THE LEA ST IS MISPLACED, IN AS MUCH AS, A METICULOUS READING OF THE SAID CIRCULAR WOULD GO TO INDICATE THAT THE SAME WAS ISSUED IN THE CONTEXT OF ALLOWANCE OF DEPN. ON MOTOR VEHICLE OWNED AND USED BY TOUR OPERATOR AND TRAVEL AGENTS I N THE BUSINESS OF RUNNING THEIR VEHICLES ON HIRE FOR TOURISTS. THE A SSESSEE IS NEITHER A TOUR OPERATOR NOR A TRAVEL AGENT AND, FURTHER, IT DOES N OT RUN ITS BUSES ON HIRE FOR TOURISTS. ON THE CONTRARY AS DISCUSSED EARLIER, TH E ASSESSEE COMPANY IS RUNNING PUBLIC TRANSPORT SERVICE FOR WHICH IT WAS I NCORPORATED ACCORDINGLY UNDER THE RELEVANT STATUTE. HENCE, THE IMPUGNED CI RCULAR, IN MY CONSIDERED OPINION, IS INAPPLICABLE TO THE FACTS OF THE ASSESS EES CASE AND, THEREFORE, THE ASSESSEE IS NOT ELIGIBLE FOR THE HIGHER RATE OF DEP RECIATION AS CLAIMED BY IT. FURTHER, IN VIEW OF THE FACTS AS NARRATED ABOVE IN THE INSTANT CASE, THE RATIO OF THE DECISIONS IN THE CASE OF CIT V. BALAKRISHNA TRANSPORT, WITH DUE RESPECT, IN MY CONSIDERED VIEW, IS NOT APPLICABLE, SINCE IN THAT CASE, THE QUESTION BEFORE THE HONBLE COURT WAS WHETHER THE A SSESSEE ENGAGED IN THE BUSINESS OF PLYING VEHICLES AS AN ACTIVITY USES THE CONCERNED VEHICLES FOR HIRE OR NOT. IN THE INSTANT CASE AS DISCUSSED EARLIER TH E FACT REMAINS THAT AT NO POINT OF TIME HAS THE ASSESSEE HIRED OUT ITS BUSES TO THE PASSENGERS UTILIZING ITS BUS SERVICES. THEREFORE, IN VIEW OF THE DISCUSSION MADE ABOVE, TH E CONTENTION OF THE ASSESSEE THAT IT IS ENTITLED TO THE HIGHER RATE OF DEPRECIATION IN RESPECT OF BUSES PLIED BY IT IS UNTENABLE AND THE ACCEPTANCE O F THE SAID CLAIM BY THE AO HAS THUS RESULTED IN THE ASSESSMENT SO MADE BEING E RRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. (IV) DOUBLE DEDUCTION ON ACCOUNT OF ALLOWANCE OF CLAIM OF DEPRECIATION ON VEHICLES : (ON PAGE 10)I HAVE CAREFULLY CONSIDERED THE SUBMISS IONS PUT FORTH AS ABOVE. WITH PROFOUND RESPECT TO THE JUDGMENT OF THE HONBL E JURISDICTIONAL HIGH COURT AND THE OTHER DECISIONS CITED, IN MY CONSIDER ED OPINION, THE RATIO OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE REFERRED TO ABOVE IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. THE HONBLE APEX COURT HAS HELD THAT THERE IS A FUNDAMENTAL AXI OM THAT DOUBLE DEDUCTION IS NOT INTENDED UNLESS THERE IS A CLEAR S TATUTORY INDICATION TO THE ITA NO.734 & 735/BANG/10 PAGE 7 OF 23 CONTRARY. THOUGH THE SAID JUDGMENT WAS DELIVERED I N THE CONTEXT OF DOUBLE DEDUCTION CLAIMED BY THE ASSESSEE BOTH U/S 35 AND S .32 OF THE INCOME-TAX ACT, 1961 WHICH HAS BEEN HELD TO BE UNTENABLE BY TH E HONBLE COURT, YET THE COURT HAS CLEARLY OBSERVED HEREIN THAT THERE IS A B ASIC LEGISLATIVE SCHEME UNSPOKEN BUT CLEARLY UNDERLYING THE ACT THAT TWO AL LOWANCES CANNOT BE AND ARE NOT INTENDED TO BE GRANTED IN RESPECT OF THE SA ME ASSET OR EXPENDITURE. IN THE INSTANT CASE, THE ASSESSEE WAS ALLOWED 100% DEDUCTION IN RESPECT OF INVESTMENT ON VEHICLES AS APPLICATION OF FUNDS AND, HENCE, THE CLAIM OF DEPRECIATION ALLOWANCE ON THE SAME IN RESPECT OF TH E VERY SAME ASSET FOR BEING CONSIDERED TOWARDS APPLICATION OF FUNDS FOR W ORKING OUT THE SURPLUS, IN MY OPINION, TANTAMOUNT TO A DOUBLE DEDUCTION KEE PING IN VIEW THE RATIO OF THE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE REFERRED TO EARLIER. THE FACT OF THE MATTER IS THAT THE COST OF THE ASSETS W ERE ALLOWED TO BE DEDUCED 100% AS APPLICATION AGAINST THE SURPLUS OF THE APPE LLANT IN THE EARLIER YEAR AND ALSO IN THE RELEVANT YEAR. THIS BEING SO, THER E IS NO COST AVAILABLE FOR ALLOWANCE OF DEPRECIATION AND THIS IS WHAT THE HON BLE APEX COURT HAS OBSERVED BY HOLDING THAT THE ASSESSEE IS NOT ENTITL ED TO DEPRECIATION WHEN THE ASSET IN QUESTION HAS BEEN ALLOWED TO BE WRITTE N OFF COMPLETELY. IN THE INSTANT CASE SINCE FOR THE PURPOSE OF WORKING OUT T HE QUANTUM OF APPLICATION OF FUNDS, THE ASSESSEE HAS BEEN ALLOWED TO CONSIDER THE ENTIRE COST (INVESTMENT) ON VEHICLES AS APPLICATION OF FUNDS AN D THE SAME HAS BEEN GRANTED AS DEDUCTION FOR WORKING OUT THE SURPLUS, T HE FURTHER ALLOWANCE OF DEPRECIATION ON THE VERY SAME ASSET FOR BEING CONSI DERED AS APPLICATION OF FUNDS TO WORK OUT THE SURPLUS THUS AMOUNTS TO DOUBL E DEDUCTION KEEPING IN VIEW THE RATIO OF THE JUDGMENT OF HONBLE APEX COU RT. HENCE, THE ALLOWANCE OF DEPRECIATION AS APPLICATION OF FUNDS O VER AND ABOVE THE ALLOWANCE OF 100% DEDUCTION OF THE VERY SAME ASSET AS APPLICATION OF FUNDS HAS RESULTED IN THE ASSESSMENT ORDER SO PASSED BEIN G ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. A.Y 2006-07 : 6.4. THE REASONS SET-OUT BY THE CIT FOR ISSUANCE OF NOTICE U/S 263 OF THE ACT ARE SUMMARIZED AS UNDER: (I) AT PARA 23 OF THE NOTES TO THE BALANCE SHEET AN D P & L A/C, IT WAS STATED THAT THE ACTUAL UTILIZATION OF DEPRECIATION RESERVE DURING THE YEAR 2005-06 TOWARDS CAPITAL LOANS AS PER THE FINALIZED ACCOUNTS WAS RS.38.49 CRORES, WHEREAS THE AO HAD TAKEN THE SAME AT RS.9.35 CRORES FROM SCHEDULE VI OF THE SAID REPORT. THE ADDITION TO GROSS RECEIPT ON ACCOUNT OF ACTUAL UTILIZATION OF DEPRECIATION RESERVE WAS TO BE CONSI DERED AT RS.38.49 CRORES INSTEAD OF RS.9.35 CRORES AND, THUS, GROSS RECEIPTS BEING UNDERSTATED BY RS.29.13 CRORES; ITA NO.734 & 735/BANG/10 PAGE 8 OF 23 (II) IN THE DEPRECIATION STATEMENT, IT WAS NOTICED THAT THE ASSESSEE HAD RECEIVED RS.60.40 CRORES TOWARDS SALE OF SCRAP WHIC H WAS NOT INCLUDED IN THE ASSESSMENT ORDER WHILE WORKING OUT THE QUANTUM OF GROSS RECEIPT; (III) THE AOS ACCEPTANCE OF THE ASSESSEES CLAIM OF 100% DEDUCTION IN INVESTMENT ON THE VEHICLES AS APPLICATION OF FUNDS TOWARDS CHARITABLE PURPOSES AND THE CLAIM OF DEPRECIATION ON SUCH VEHI CLES WOULD AMOUNT TO DOUBLE DEDUCTION AND FOR THIS PROPOSITION THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ESCORTS LTD & ANR. V. UNION OF INDIA 199 ITR 93 WAS APPLIED AND THE AOS ACTION IN DEDUCTING THE ENTIRE DEPRECIATION CLAIM OF RS.5.86 CRORES (INCLUSIVE OF DEPRECIATION ON MOTOR BUSES) FROM GROSS RECEIPTS AS APPLICATION OF FUNDS WAS NOT IN O RDER; (IV) IN PARA 6 OF THE NOTES TO THE BALANCE SHEET AN D P & L ACCOUNT, THE ASSESSEE HAD RECEIVED GRANTS FROM CRF AND MLA TO TH E TUNE OF RS.1.64 CRORES OUT OF WHICH RS.1.03 CRORES WAS UTILIZED AND THE BALANCE OF RS.61 LAKHS WAS REQUIRED TO BE ADDED TO THE GROSS RECEIPT ; & (V) EXEMPTION U/S 11(1)(A) OF THE ACT AT 15% OF THE GROSS RECEIPTS INSTEAD OF NET FIGURE WAS ALLOWED. 6.5. BRUSHING ASIDE THE ASSESSEES REBUTTAL AND IT S EXPLANATION AS RECORDED IN HIS IMPUGNED ORDER UNDER DISPUTE, THE L D. CIT HAD REASONED THUS (I) ACTUAL UTILIZATION OF DEPRECIATION RESERVE : (ON PAGE 5).HENCE, PARA NO.23 OF THE NOTES TO ACCOUNTS READ WITH THE RELEVANT RESOLUTIONS EXTRACTED ABOVE THUS LEADS TO THE INEVITABLE CONCLUSION THAT THE ACTUAL UTILIZATION OF DEPRECIAT ION RESERVE DURING THE RELEVANT ACCOUNTING YEAR TOWARD REPAYMENT OF CAPITA L LOAN WAS TO THE TUNE OF RS.38.49 CRORES AND NOT RS.9.35 CRORES AS ADOPTE D BY THE AO FOR THE PURPOSE OF QUANTIFYING THE GROSS RECEIPT, THUS RESU LTING IN THE GROSS RECEIPT BEING PRIMA FACIE UNDER-ADOPTED TO THE TUNE OF RS.1 3.57 CRORES APPROXIMATELY AND, THEREFORE, RESULTING IN THE ASSE SSMENT ORDER SO PASSED BEING ERRONEOUS AND PREJUDICIAL. (II) NON-INCLUSION OF RS.60.40 CRORES FROM SALE OF SCRA P IN THE GROSS RECEIPT : (ON PAGE 6) IT IS THE CONTENTION OF THE ASSESSEE T HAT THE IMPUGNED AMOUNT MERELY REPRESENTS THE GROSS VALUE OF ASSETS WHICH A RE WITHDRAWN FROM THE ASSET SCHEDULE AND DOES NOT REPRESENT ACTUAL REALIZ ATION OF SCRAP VALUE WHICH ACCORDING TO THE ASSESSEE WAS TO THE TUNE OF RS.3.32 CRORES ONLY AS MENTIONED EARLIER. IN OTHER WORDS, THE ARGUMENT OF THE ASSESSEE IS THAT IT IS ONLY WHEN SUCH SCRAP IS ACTUALLY SOLD, THE SAME IS REFLECTED AS A RECEIPT IN ITA NO.734 & 735/BANG/10 PAGE 9 OF 23 THE ACCOUNTS I.E., ON CASH BASIS. THIS PRACTICE SO FOLLOWED BY THE ASSESSEE, IN MY CONSIDERED OPINION, IS LEGALLY UNTENABLE SINCE A DMITTEDLY, THE ASSESSEE FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING AND REC OGNIZES INCOME AND EXPENDITURE ACCOUNT ON ACTUAL BASIS. NO DOUBT, AT COL.14 (PG.13 OF THE AUDIT REPORT) OF THE ACCOUNTING POLICIES, IT IS MENTIONED THAT INCOME FROM SALE OF SCRAP IS DERIVED ONLY WHEN THE MATERIAL/SCRAPED BUS ES ARE LIFTED BY THE BIDDERS, BUT THIS POLICY IN MY CONSIDERED VIEW, IS CLEARLY IN CONTRAVENTION TO THE PROVISIONS OF LAW U/S 145A OF THE ACT W.E.F. 1. 4.1999 WHICH PROHIBITS ADOPTION OF HYBRID/MIXED SYSTEM OF ACCOUNTING. FURTHER THE CONTENTION THAT RS.60.4 CRORES REPRESEN TS THE GROSS VALUE OF ASSETS WHICH WERE WITHDRAWN FROM THE ASSET SCHEDULE S DO NOT APPEAR TO BE CORRECT, AS PER SCHEDULES IV AND IX TO THE AUDIT REPORT THE VALUE OF ASSETS WRITTEN OFF DURING THE YEAR WAS REFLECTED THEREIN A T RS.9.35 CRORES ONLY AND NOT AT RS.60.4 CRORES AS CLAIMED. IT WAS FURTHER CONTENDED THAT RS.60.4 CRORES COMPRI SES OF VALUE OF ASSETS WRITTEN OFF OF RS.9.35 CRORES AS WELL AS GROSS VALU E OF ASSETS WHICH WERE TRANSFERRED TO OTHER CATEGORIES I.E., RS.29.96 CROR ES FROM BUS CHASIS TO BUSES AND RS.21.08 CRORES FROM BUS CHASIS TO FINALLY BUIL T BUSES, THUS, ARGUING THAT THESE WERE ONLY TRANSFER ENTRIES TO ARRIVE AT THE G ROSS VALUE OF THE ASSETS WHICH WERE PUT TO USE DURING THE YEAR FOR THE PURPO SE OF ARRIVING AT THE QUANTUM OF DEPRECIATION ELIGIBLE. BE THAT AS IT MAY, THE FACT REMAINS THAT THE AUDITO RS IN THE DEPRECIATION SCHEDULE ANNEXED AS ANNEXURE-I (FORMING PART OF THE REPORT U/S 44AB) HAVE CLEARLY CERTIFIED THAT SCRAP SOLD WAS TO THE TUNE O F RS.60.4 CRORES AND NOT RS.3.32 CRORES AS NOW CONTENDED AND, HENCE, ADMITTE DLY SINCE THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, T HE AMOUNT OF RS.60.4 CRORES ON THE BASIS OF THE FACTS AVAILABLE ON RECO RD, WAS REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF QUANTIFYING THE GROSS RECEIPT AND NON- CONSIDERATION OF THE SAME FOR THE PURPOSE OF QUANTI FYING THE SAME HAS THUS RESULTED IN THE ASSESSMENT ORDER SO PASSED BEING ER RONEOUS AND PREJUDICIAL. THE AO, HOWEVER, IN THE ASSESSMENT ORDER HAD MADE A DDITION OF RS.60.4 CRORES TO THE GROSS RECEIPT TOWARDS SALE OF ASSETS WHICH WAS ACCEPTED BY THE ASSESSEE AND THE SAME WAS NOT APPEALED TO. IF THE A MOUNT ADDED BY THE AO WAS AKIN TO THE AMOUNT OF RS.60.4 CRORES AS BEING TOWARDS SALE OF SCRAPS AS DISCUSSED EARLIER, THE ASSESSMENT ORDER SO PASSED I N RESPECT OF THIS ISSUE NOT BEING ERRONEOUS AND PREJUDICIAL. HOWEVER, THE AO S HALL VERIFY THE SAME AND ACT IN ACCORDANCE WITH LAW. ITA NO.734 & 735/BANG/10 PAGE 10 OF 23 (III) DOUBLE DEDUCTION ON ACCOUNT OF ALLOWANCE OF CLAIM OF DEPRECIATION ON VEHICLES : (ON PAGE 9)I HAVE CAREFULLY CONSIDERED THE SUBMISSI ONS PUT FORTH AS ABOVE. WITH PROFOUND RESPECT TO THE JUDGMENT OF THE HONBL E JURISDICTIONAL HIGH COURT AND THE OTHER DECISIONS CITED, IN MY CONSIDER ED OPINION, THE RATIO OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE REFERRED TO ABOVE IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. THE HONBLE APEX COURT HAS HELD THAT THERE IS A FUNDAMENTAL AXI OM THAT DOUBLE DEDUCTION IS NOT INTENDED UNLESS THERE IS A CLEAR S TATUTORY INDICATION TO THE CONTRARY. THOUGH THE SAID JUDGMENT WAS DELIVERED I N THE CONTEXT OF DOUBLE DEDUCTION CLAIMED BY THE ASSESSEE BOTHER U/S 35 AND S.32 OF THE INCOME-TAX ACT, 1961 WHICH HAS BEEN HELD TO BE UNTENABLE BY TH E HONBLE COURT, YET THE COURT HAS CLEARLY OBSERVED HEREIN THAT THERE IS A B ASIC LEGISLATIVE SCHEME UNSPOKEN BUT CLEARLY UNDERLYING THE ACT THAT TWO AL LOWANCES CANNOT BE AND ARE NOT INTENDED TO BE GRANTED IN RESPECT OF THE SA ME ASSET OR EXPENDITURE. IN THE INSTANT CASE, THE ASSESSEE WAS ALLOWED 100% DEDUCTION IN RESPECT OF INVESTMENT ON VEHICLES AS APPLICATION OF FUNDS AND, HENCE, THE CLAIM OF DEPRECIATION ALLOWANCE ON THE SAME IN RESPECT OF TH E VERY SAME ASSET FOR BEING CONSIDERED TOWARDS APPLICATION OF FUNDS FOR W ORKING OUT THE SURPLUS, IN MY OPINION, TANTAMOUNT TO A DOUBLE DEDUCTION KEE PING IN VIEW THE RATION OF THE JUDGMENT OF THE HONBLE APEX COURT IN THE CA SE REFERRED TO EARLIER. THE FACT OF THE MATTER IS THAT THE COST OF THE ASSE TS WERE ALLOWED TO BE DEDUCED 100% AS APPLICATION AGAINST THE SURPLUS OF THE APPELLANT IN THE EARLIER YEAR AND ALSO IN THE RELEVANT YEAR. THIS B EING SO, THERE IS NO COST AVAILABLE FOR ALLOWANCE OF DEPRECIATION AND THIS IS WHAT THE HONBLE APEX COURT HAS OBSERVED BY HOLDING THAT THE ASSESSEE IS NOT ENTITLED TO DEPRECIATION WHEN THE ASSET IN QUESTION HAS BEEN AL LOWED TO BE WRITTEN OFF COMPLETELY. IN THE INSTANT CASE SINCE FOR THE PURP OSE OF WORKING OUT THE QUANTUM OF APPLICATION OF FUNDS, THE ASSESSEE HAS B EEN ALLOWED TO CONSIDER THE ENTIRE COST (INVESTMENT) ON VEHICLES AS APPLICA TION OF FUNDS AND THE SAME HAS BEEN GRANTED AS DEDUCTION FOR WORKING OUT THE S URPLUS, THE FURTHER ALLOWANCE OF DEPRECIATION ON THE VERY SAME ASSET FO R BEING CONSIDERED AS APPLICATION OF FUNDS TO WORK OUT THE SURPLUS THUS A MOUNTS TO DOUBLE DEDUCTION KEEPING IN VIEW THE RATIO OF THE JUDGMEN T OF HONBLE APEX COURT. HENCE, THE ALLOWANCE OF DEPRECIATION AS APPLICATION OF FUNDS OVER AND ABOVE THE ALLOWANCE OF 100% DEDUCTION OF THE VERY SAME AS SET AS APPLICATION OF FUNDS HAS RESULTED IN BEING ERRONEOUS AND PREJUDICI AL TO THE INTEREST OF REVENUE. (IV) NON-INCLUSION OF UNSPENT GRANTS IN GROSS RECE IPTS: THE ASSESSEE HAD NOT LED ANY EVIDENCE TO CORROBORAT E THAT THE AMOUNT HAD BEEN INCLUDED IN THE MISC. RECEIPT, MORE SO WHEN TH E BREAK UP OF MISC. RECEIPT ANNEXED TO WRITTEN SUBMISSION, THE AMOUNT D OES NOT STAND REFLECTED AND, THUS, THE NON-UTILIZATION OF RS.61 LAKHS OUT O F THE SAID GRANT WAS REQUIRED TO BE CONSIDERED BY THE AO FOR QUANTIFYING THE GROSS RECEIPT; & ITA NO.734 & 735/BANG/10 PAGE 11 OF 23 (V) EXEMPTION U/S 11(1)(A) @ 15% ON GROSS RECEIPT INSTE AD OF NET AMOUNT : THE INCOME CONTEMPLATED U/S 11 IS THE REAL INCOME AND NOT THE INCOME AS ASSESSED OR ASSESSABLE. IF THE ACCOUNTS OF THE FUN D ARE PROPERLY MAINTAINED ACCORDING TO THE PRINCIPLES OF ACCOUNTANCY, THE ACC UMULATION SHALL BE UP-TO THE SPECIFIED PERCENT (SPECIFIED IN THE STATUE) OF THE NET INCOME AS PER ACCOUNTS. THIS WAS THE RATIO OF THE JUDGMENTS IN T HE CASES OF (I) CIT V. ESTATE OF SHRI V.L.ETHIRAJ 136 ITR 12 (MAD) (II) CIT V. NIZAMS SUPPLEMENTAL RELIGIOUS ENDOWMENT TRU ST 127 ITR 378 (AP) (III) CIT V. RAO BAHADUR CALAVALE CUNMAN CHETTY CHARITIES 135 ITR 485 (MAD) (IV) CIT V. GANGA CHARITY TRUST FUND 162 ITR 612 (GUJ) THE RATIO OF THE JUDGMENTS WAS TO THE EFFECT THAT I NCOME FOR THE PURPOSE OF S.11 DOES NOT REFER TO TOTAL INCOME AS DEFINED UN DER THE ACT BUT REFERS TO THE REAL INCOME AS DETERMINED IN THE COMMERCIAL SEN SE. BOARDS CIRCULAR NO.5-P DT.19.68 IS ALSO TO THE SAME EFFECT. IN THE CASE OF CIT V. PROGRAMME FOR COMMUNITY ORGANIZATION [248 ITR 1], THE ISSUE B EFORE THE APEX COURT WAS WHETHER THE AMOUNT FOR THE GRANT OF EXEMPTION O F 25% SHOULD BE THE INCOME OF THE TRUST OR IT SHOULD BE ITS TOTAL INCOM E AS DETERMINED FOR THE PURPOSE OF ASSESSMENT TO INCOME-TAX. THE HONBLE C OURT HELD THAT THE CHARITABLE TRUST WAS ENTITLED TO CALCULATE 25% OF I TS INCOME(AND NOT TOTAL INCOME AS DETERMINED FOR THE PURPOSE OF ASSESSMENT TO INCOME-TAX) DERIVED FROM PROPERTY HELD UNDER TRUST. IN THAT CASE, THE INCOME OF THE TRUST, INCIDENTALLY WAS THE GROSS RECEIPT WHEREAS THE TOT AL INCOME DETERMINED WAS A DIFFERENT AMOUNT. THE HONBLE COURT HAD CLEAR LY HELD THAT THE ENTITLED ACCUMULATION SHOULD BE WITH REGARD TO THE INCOME OF THE TRUST AND NEITHER WITH REFERENCE TO GROSS RECEIPT AS CANVASSED BY THE ASSESSEE NOR ALSO WITH REGARD TO THE TOTAL INCOME CONCEPT UNDER THE ACT. KEEPING THE RATIO LAID DOWN BY THE HONBLE COURT, THE ALLOWANCE OF EXEMPTI ON AT 15% BY THE AO ON THE GROSS RECEIPT INSTEAD OF ON THE NET INCOME O F THE ASSESSEE BEING ERRONEOUS AND PREJUDICIAL. 7. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PRE SENT APPEALS. THE EXTENSIVE SUBMISSIONS MADE BY THE LD. AR ARE SU MMED UP AS UNDER: A.Y 2005-06: (I) THAT THE SUM OF RS.21.34 CRORES REPRESENTED G ROSS VALUE OF ASSETS WHICH WERE WITHDRAWN FROM THE ASSETS SCHEDULE AND D ID NOT REPRESENT THE ACTUAL REALIZATION OF SCRAP VALUE. THE ACTUAL VALU E OF SCRAP REALIZED DURING THE YEAR WAS ONLY RS.5.6 CRORES WHICH INCLUD ED MISCELLANEOUS RECEIPT AND HAD BEEN TAKEN INTO ACCOUNT TO ARRIVE A T GROSS RECEIPT; ITA NO.734 & 735/BANG/10 PAGE 12 OF 23 - WITH REGARD TO DEPRECIATION RESERVE, IT WAS CONTEND ED THAT DURING THE YEAR THE ASSESSEE HAD CREATED DEPRECIATION RESERVE BY DEBITING DEPRECIATION TO THE EXTENT OF RS.36.43 CRORES WHICH REFLECTED IN SCHEDULE VI TO THE BALANCE SHEET AT PAGE 31; THAT O UT OF TOTAL DEPRECIATION RESERVE, THE ASSESSEE HAD WITHDRAWN RS .21.43 CRORES DURING THE RELEVANT YEAR WHICH HAD BEEN ADDED BY TH E AO, ALLEGING THAT THE AMOUNT WAS USED FOR ACQUISITION OF ASSETS, AND, THUS, THERE WAS NO MISTAKE IN THE ORDER OF THE AO; THAT THERE W AS NO WITHDRAWAL FROM THE RESERVE OF RS.34.92 CRORES AS ALLEGED BY T HE CIT IN HIS IMPUGNED ORDER ,UNDER CHALLENGE WHICH WAS EVIDENT F ROM THE ACCOUNTS. - THAT THE ASSUMPTION OF THE CIT WAS THAT THE LOANS W ERE REPAID TO THE EXTENT OF RS.34.92 CRORES OUT OF DEPRECIATION RESER VE; THAT ITEM NO.19 OF THE DIRECTORS REPORT AT PAGE 15 OF THE ANNUAL S TATEMENTS COULD HAVE INDUCED THE CIT TO PRESUME THAT LOANS WERE REP AID OUT OF DEPRECIATION RESERVE. THE DIRECTORS REPORT SAYS 19. THE ACTUAL UTILIZATION OF DEPRECIATION RESERVE S DURING THE YEAR 2004-05 TOWARDS CAPITAL LOANS AS PER FINALIZED ACCO UNTS IS TO RS.34.92 CRORES. - THAT THE AO HAD RIGHTLY ADDED RS.21.34 CRORES IN TH E ASSESSMENT, THAT THE SAID AMOUNT WAS ADJUSTED AGAINST THE ASSETS WRI TTEN OFF WHICH HAD BEEN MORE FULLY DECLARED IN SCHEDULE V AND, THUS, T HERE WAS NO ERROR IN THE ORDER OF THE AO; - WITHOUT PREJUDICE, REVERSAL FROM DEPRECIATION RESER VE ITSELF WAS NOT BE CONSIDERED FOR GROSS TOTAL INCOME SINCE IT WAS N OT THE INCOME EARNED IN THE RELEVANT YEAR WHICH WAS REQUIRED TO B E APPLIED. IN THE CIRCUMSTANCES, EVEN RS.21.34 CRORES ADDED BY THE AO WAS NOT REQUIRED TO BE ASSESSED; - AS REGARD REPAYMENT OF LOAN, THE SAME WAS SHOWN IN SCHEDULE VII WHICH WAS TO THE EXTENT OF RS.39.92 CRORES, OUT OF WHICH, RS.5 CRORES WAS BY WAY OF REDUCTION IN OD AND THE BALANCE WAS T HE REPAYMENT OF LOAN OUT OF THE COMMON POOL OF THE ASSESSEES FUNDS ; (II) WITH REGARD TO THE ALLEGED SALE OF SCRAP OF RS.21.34 CRORES, IT WAS THE VALUE OF ASSETS WRITTEN OFF AS DULY REFLECT ED IN SCHEDULE V, THAT THE SAME DID NOT REPRESENT THE SALE VALUE OF S CRAP. SALE OF SCRAP WAS ONLY TO THE EXTENT OF RS.1.69 CRORES WHICH HAD ALREADY BEEN INCLUDED IN THE MISCELLANEOUS RECEIPT [PAGE 6 OF TH E PB]; ITA NO.734 & 735/BANG/10 PAGE 13 OF 23 (III) THE DEPRECIATION CLAIMED REQUIRES TO BE AL LOWED IN ACCORDANCE WITH THE RATIOS LAID DOWN IN THE FINDINGS OF THE HO NBLE TRIBUNAL A.Y 2006-07: (I) AS REGARDS REVERSAL OF DEPRECIATION RESERVE, THE SAME WAS ONLY RS.9.35 CRORES WHICH HAS BEEN RIGHTLY ADOPTED BY TH E AO [VIDE SCHEDULE V]; (II) WITH REGARD TO REPAYMENT OF CAPITAL LOAN, IT WAS RS.48.02 CRORES [VIDE SCHEDULE VI] THERE WAS NO MENTION AS T O HOW THE AMOUNT WAS REPAID IN THE NOTE GIVEN BY THE MD. THU S, THERE COULD BE NO INFERENCE THAT THE REPAYMENTS WERE ONLY OUT OF DEPRECIATION RESERVE. AS REASONED FOR THE AY. 2005 -06, NO AMOUNT WAS REQUIRED TO BE INCLUDED. AS NARRATED IN THE SAID NOTE, EVEN RS.9.35 CRORES WAS NOT INCLUDIBLE IN THE GROSS RECEIPT OF THE ASSESSEE; (III) THAT THE AMOUNT OF GRANT OF RS.1.64 CRORES, THE SAME HAD BEEN FULLY INCLUDED IN THE MISC. RECEIPTS AND, THUS, THE RE WAS NO QUESTION OF MAKING FURTHER ADDITION OF RS.61 LAKHS; (IV) THAT THE AMOUNT OF RS.60.4 CRORES WAS NOT ON ACCOUNT OF SALE OF SCRAP, BUT, THE SAME WAS THE VALUE OF ASSETS WRI TTEN OFF WHICH HAD THE CUMULATIVE VALUE [ SOURCE: SCHEDULE I X]; THAT THE VALUE OF ASSETS WRITTEN OFF DURING THE YEAR WAS ONLY RS.9.35 CRORES WHICH HAS BEEN REDUCED OUT OF DEPRECIATION R ESERVE [REFER: SCHEDULE V]; THAT THE ACTUAL REALIZATION OF SCRAP WAS RS.3.32 CRORES WHICH HAS ALSO BEEN INCLUDED IN THE MISC. RECEIPTS[SOURCE: P 15 OF PB] AND, THUS, THERE WAS N O NEED FOR ANY ADDITION; & (V) IN RESPECT OF ALLOWANCE TO EXEMPTION OF 15%, I T WAS OUT OF GROSS INCOME, BUT, NOT OUT OF NET SURPLUS AFTER PRO VIDING FOR APPLICATION. - RELIES ON THE FINDING OF THE TRIBUNAL IN THE CASE O F ITO V. THE SECRETARY, AGRICULTURE PRODUCE MARKETING COMMITTEE, APMC YARD, HAVERI ITA NO.589/B/2009 DT: 12.4.2010 7.1. IN FURTHERANCE, DURING THE COURSE OF HEARING, THE LD. A R HAD FURNISHED A PAPER BOOK CONTAINING 1 47 PAGES WHIC H CONSIST OF, INTER ALIA, ITA NO.734 & 735/BANG/10 PAGE 14 OF 23 COPIES OF (I) CORRESPONDENCE WITH THE FIRST APPELLA TE AUTHORITY; (II) REVISED STATEMENTS OF COMPUTATION FOR THE AYS UNDER DISPUTE ETC., 7.2. ON THE OTHER HAND, THE LD. D R HAD JUSTIFIED THE STAND TAKEN BY THE LD. CIT IN INVOKING THE PROVISIONS OF S. 263 OF THE ACT AS THE ASSESSMENTS CONCLUDED BY THE AO FOR THE AYS UNDER C HALLENGE WERE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE AND, THUS, HE WAS WITHIN HIS REALM FOR THE DETAILED REASONS SET-OUT I N HIS PROCEEDINGS U/S 263 OF THE ACT. THE LD. D R WAS VEHEMENT IN HIS URGE TH AT THE ASSESSEE SHOULD HAVE NO GRIEVANCE TO AGITATE THE REASONABLENESS OF THE CIT AND, THEREFORE, FERVENTLY PLEADED THAT THE ORDERS OF THE LD. CIT RE QUIRE TO BE SUSTAINED. 8. WE HAVE DULY TAKEN NOTE OF THE SUBM ISSIONS OF THE EITHER SIDE AND ALSO DILIGENT IN PERUSING THE RELEVANT RECORDS AND THE DOCUMENTARY EVIDENCE ADDUCED BY THE LD. AR DURING THE HEARING P ROCEEDINGS. 9. WE VENTURE TO ADJUDICATE THE ISSUES RAI SED BY THE ASSESSEE IN A CHRONOLOGICAL ORDER AS UNDER: A.Y. 2005-06: GROUNDS (1) & (2) - ADDITION OF RS.2.34 CRORES 10. IT APPEARS THAT BOTH THE LD. AO AND LD. CIT HAV E NOT UNDERSTOOD THE NATURE OF ENTRIES PASSED IN THE BOOKS OF ACCOUNTS W ITH RESPECT TO DEPRECIATION RESERVE. ON PERUSING THE PRINTED 7 TH ANNUAL ACCOUNTS AND AUDIT REPORT OF THE ASSESSEE FOR THE FINANCIAL YEAR 2004-05, IT SEEMS THAT THE FOLLOWING JOURNAL ENTRIES ARE PASSED. ITA NO.734 & 735/BANG/10 PAGE 15 OF 23 DEPRECIATION RESERVE A/C DR. 21,34,78,417/- (PAGE 31 OF ANNUAL REPORT) TO DIESEL PASSENGER BUS CHAS IS COMPLETED BUS A/C. CR. 21,34,78, 417/- (PAGE 35 OF ANNUAL REP ORT) 11. THE ACCOUNTING STAFF OF THE ASSESSEE PRESENT AT THE TIME OF HEARING EXPLAINED THAT THIS ENTRY WAS PASSED SINCE THE PASS ENGER BUS WHOSE ORIGINAL COST WAS RS.21,34,78,417/- WERE CONDEMNED TO BE SCRAPPED AS IT WAS NOT OPERATIONAL AND HAD NO COMMERCIAL VALUE OTH ER THAN SCRAP VALUE. HE, FURTHER, EXPLAINED THAT THE ASSESSEES METHOD O F ACCOUNTING DEPRECIATION WAS BY DEBITING THE DEPRECIATION ACCOU NT AT THE RATE FORMULATED BY ITSELF AND THE CORRESPONDING CREDIT W AS EFFECTED IN THE DEPRECIATION RESERVE ACCOUNT. THUS, THE ASSET ACCO UNT WAS NOT REDUCED BY THE DEPRECIATION AND IT REMAINS AT THE ORIGINAL COS T OF ACQUISITION ALL THROUGH. IN THE RESULT, THE DEPRECIATION RESERVE SWELLS YEAR AFTER YEAR WITH THE DEPRECIATION CHARGE TO THE P&L A/C. WHILE AS THE AS SET REMAINS STATIC. WE HERE-BELOW ILLUSTRATE THE ENTRIES PASSED BY ASSESSE E AS IT APPEARS FROM THE ANNUAL REPORT FURNISHED BEFORE US. 1. DIESEL PASSENGER BUS CHASSIS COMPLETED BUS A/C. DR. XXXXXXXX TO BANK A/C. CR. XXXXXXXX (BEING THE ENTRY PASSED FOR PURCHASE OF PASSENGER B US) 2. DEPRECIATION A/C DR. XXX TO DEPRECIATION RESERVE A/C CR. XXX (BEING THE ENTRY PASSED FOR PROVIDING DEPRECIATION AS PER THE RATES FORMULATED BY THE ASSESSEE. THE DEPRECIATION IS CH ARGED TO P&L A/C AS PER SCHEDULE V (PAGE 26 & 30) WHILE AS DEPRECIATION RESERVE ACCOUNT IS ITA NO.734 & 735/BANG/10 PAGE 16 OF 23 DISCLOSED IN THE LIABILITIES SIDE OF THE BALANCE SH EET UNDER THE HEAD RESERVES AND FUNDS SUB-HEAD DEPRECIATION RESERVE, S CHEDULE V & VI, PAGE 6, 30 & 31 OF THE ANNUAL REPORT). 3. DEPRECIATION RESERVE A/C DR. XXXX TO DIESEL PASSENGER BUS CHASSIS COMPLETED BUS A/ C. CR. XXXX (BEING THE ENTRY PASSED FOR WRITING OFF THE ASSET A S THEY ARE CONDEMNED AND SCRAPPED). [IN THE CASE BEFORE US ENTRY PERTAINING TO RS.21.34 CRORES IS IS PAID DUE TO THIS REASON). 4. DEPRECIATION/P&L A/C DR. XX TO DIESEL PASSENGER BUS CHASIS COMPLETED BUS A/C. C R. XX (BEING THE ENTRY PASSED FOR UNABSORBED DEPRECIATION IF ANY CHARGED TO P&L A/C ON WRITE OFF OF ASSET DUE TO IT BEING SCRAPPED). 5. BANK/CASH A/C DR. XX TO P&L A/C XX (BEING THE VALUE OF SCRAP REALIZED ON SALE OF THE CONDEMNED BUSES). 12. FROM THE APPARENT SCHEME OF ENTRIES AS STATED A BOVE FOLLOWED BY THE ASSESSEE, IT APPEARS THAT BOTH THE LD. CIT IN H IS ORDER U/S. 263 OF THE ACT AND LD. AO U/S. 143(3) OF THE ACT, HAVE ERRED. THE LD. CITS FINDING IS THAT THE NOTES TO ACCOUNTS LEADS TO THE INEVITABLE CONCLUSION THAT THE ACTUAL UTILIZATION OF DEPRECIATION RESERVE DURING THE RELE VANT ACCOUNTING YEAR TOWARDS REPAYMENT OF CAPITAL LOAN WAS TO THE TUNE O F RS.34.92 CRORES AND NOT 21.34 CRORES AS ADOPTED BY THE LD. AO FOR THE P URPOSE OF QUANTIFYING GROSS RECEIPT, THUS RESULTING IN UNDER-STATEMENT TO THE EXTENT OF RS.13.57 CRORES (34.92 21.34). WHILE AS THE LD. AO IN HI S ORDER HAS STATED THAT THE ASSESSEE HAS UTILIZED A SUM OF RS.21,34,78,417 OUT OF DEPRECIATION RESERVE, WHICH WAS AVAILABLE FOR IT TO ACQUIRE CAPI TAL ASSET AND THEREFORE IN ITA NO.734 & 735/BANG/10 PAGE 17 OF 23 ORDER TO REDUCE THIS SUM FROM CAPITAL EXPENDITURE T HE SAME IS ADDED TO THE GROSS RECEIPTS IN THE HANDS OF THE ASSESSEE. 13. BOTH THE ABOVE PROPOSITIONS SEEMS TO BE ABSURD BECAUSE THE ACTUAL FACT IS THAT THE ABOVE ENTRIES ARE BOOK ENTRIES AND NEITHER DOES RESULT IN ACCRETION OF INCOME NOR PROVISION FOR DEPRECIATION CREDITED TO P&L ACCOUNT. IN FACT, THE ASSESSEE HAS CREATED A DEPRECIATION RE SERVE FUND INSTEAD OF REDUCING THE DEPRECIATION FROM THE VALUE OF THE ASS ETS. AS AND WHEN DEPRECIATION IS CHARGED, CORRESPONDINGLY DEPRECIATI ON RESERVE ACCOUNT IS CREDITED. WHEN THE ASSET IS CONDEMNED, THE ASSET A CCOUNT IS CREDITED IN THE CORRESPONDING DEBIT TO DEPRECIATION RESERVE ACC OUNT IN ORDER TO BALANCE THE BOOKS OF ACCOUNT. THIS ENTRY DOESNT BRING IN ANY EFFECT TO THE P&L ACCOUNT, EXCEPT TO THE EXTENT OF DIFFERENCE IN VALU E OF ASSET WITH THE DEPRECIATION WRITTEN OFF AND THE ACTUAL REALIZATION OF SCRAP AS EXPLAINED IN THE 4 TH ENTRY ILLUSTRATED ABOVE. 14. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US, THERE APPEARS TO BE A GLARING MISTAKE IN THE ORDERS OF TH E LD. CIT AND LD. AO AND, THEREFORE, IN THE INTERESTS OF JUSTICE, WE ARE OF THE OPINION THAT BOTH THE ORDERS OF THE REVENUE NEEDS TO BE SET ASID E AND REMITTED BACK ON THE FILE OF THE LD. AO FOR A DETAILED EXAMI NATION INTO THE ISSUE AND PASS APPROPRIATE ORDERS AS PER LAW ON MERITS. THIS BENCH MAKES IT VERY CLEAR THAT THE ABOVE FINDINGS HAVE BEEN ARR IVED AT ON THE BASIS OF AN OVER ALL REVIEW OF THE ANNUAL REPORTS AS WELL AS AUDIT REPORTS PLACED BEFORE US AND NOT BY VERIFICATION OF THE ENT RIES MADE IN THE BOOKS OF THE ACCOUNTS OF THE ASSESSEE. THEREFORE, THE LD. AO SHOULD ITA NO.734 & 735/BANG/10 PAGE 18 OF 23 NOT BE INFLUENCED BY OUR ABOVE OBSERVATIONS WITHOUT PROPER EXAMINATION OF THE BOOKS OF ACCOUNT. 15. NO DOUBT THE APPEAL OF THE ASSESSEE BEFORE US IS AR ISING OUT OF THE ORDER OF LD. CIT PASSED U/S. 263 OF THE ACT, TH US TECHNICALLY IT MAY APPEAR THAT STRIKING DOWN THE ORDER OF LD. CIT MAY SUFFICE IN THE PRESENT CIRCUMSTANCES, HOWEVER, SINCE THE TRIBUNAL BEING THE HIGHEST FACT FINDING AUTHORITY CANNOT CLOSE ITS EYES ON AN ERRONEOUS ORDER OF THE LD.AO BEFORE IT FOR CONSIDERATION AND COMMIT TH E GRAVE BLUNDER OF PERPETUATING THE MISTAKE APPARENT ON RECORD ON TECH NICAL REASONS. THE INTENTION OF THE ACT IS TO COLLECT THE CORRECT AMOUNT OF TAX FROM THE ASSESSEE AS PER LAW AND NOT TO ENRICH THE EXCHE QUER DUE TO THE IGNORANCE OF THE ASSESSEE OR MISTAKE OF THE REVENUE . GROUND NO.3 - ALLOWABILITY OF DEPRECIATION ON MOT OR BUSES: 16. (I) THE ASSESSEE HAS BEEN TRYING TO TAKE SAN CTUARY IN BOARDS CIRCULAR NO.609 DATED 29.7.1997 (SIC) 29.7.1991 TO CLAIM DEP RECIATION AT 40%. ON A GLIMPSE OF CIRCULAR CITED, WE FIND THAT THE CIRCU LAR HAD IN FACT DEALT WITH THE ALLOWANCE OF DEPRECIATION ON MOTOR VEHICLES OWN ED AND USED BY TOUR OPERATORS AND TRAVEL AGENTS IN THE BUSINESS OF RUNN ING THESE VEHICLES ON HIRE FOR TOURISTS . IT HAD ALSO BEEN FURTHER CLARIFIED THAT 3. FURTHER, UNDER SUB-ITEM (2)(II) OF ITEM III OF APPENDIX I TO THE INCOME- TAX RULES, 1962, A HIGHER RATE OF DEPRECIATION, NAM ELY 50%, IS ALLOWED ON MOTOR BUSES, MOTOR LORRIES AND MOTOR TAXIS USED IN A BUSINESS OF RUNNING THEM ON HIRE. THEREFORE, WHERE A TOUR OPERATOR OR T RAVEL AGENT USES SUCH VEHICLES, OWNED BY HIM, IN PROVIDING TRANSPORTATION SERVICES TO THE TOURISTS, HIGHER RATE OF DEPRECIATION SHOULD BE ALLOWED ON SU CH VEHICLES. IT IS CLARIFIED THAT 'MOTOR VANS' ARE AKIN TO 'MOTOR LORRIES' OR 'M OTOR BUSES' AND, ITA NO.734 & 735/BANG/10 PAGE 19 OF 23 THEREFORE, HIGHER RATE OF DEPRECIATION WILL BE ALLO WED ON MOTOR VANS ALSO, IF THEY ARE USED FOR PROVIDING TRANSPORT SERVICES TO T OURISTS. SINCE THE ASSESSEE HAS NOT BEEN USING IN A BUSINE SS OF RUNNING MOTOR BUSES ON HIRE, WE ARE OF THE FIRM VIEW THAT THE ABOVE ME NTIONED CIRCULAR CANNOT COME TO ITS RESCUE. (II) THE LD. A R, HOWEVER, ARMED WITH THE RUL ING OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. BALAKRISHNA TRANSP ORTS REPORTED IN 233 ITR 133 [KER] CAME UP WITH A STRONG PLEA THAT THE ASSES SEE IS ENTITLED TO CLAIM DEPRECIATION AT 40%. ON A PERUSAL OF THE SAID RULING, WE FIN D THAT THE DIVISION BENCH OF HONBLE KERALA HIGH COURT HAD OBSERVED THUS THE QUESTION IS, AS TO WHETHER THE VEHICLES SUCH A S MOTOR BUSES, MOTOR LORRIES AND MOTOR TAXIES ARE USED IN A BUSINESS OF RUNNING THEM ON HIRE OR NOT. REALLY, THE QUESTION REQUIRES CONSIDERATION FROM TH E POINT OF VIEW OF THE ASSESSEE IN THE CONTEXT. WHETHER THE PAYMENT IS MAD E BY ONE PERSON OR A GROUP OF PERSONS OR BY INDIVIDUAL PASSENGERS WOULD BE OF TOTAL IRRELEVANCE IN THE CONTEXT. THE REAL QUESTION IS, AS TO WHETHER THE ASSESSEE ENGAGED IN THE BUSINESS OF PLYING VEHICLES AS AN ACTIVITY USES THE CONCERNED VEHICLES FOR HIRE OR NOT . IT WOULD BE WHOLLY IRRELEVANT WHETHER THE ASSESSE E RECEIVES PAYMENTS IN REGARD TO THE ACTIVITY OF HIRE FROM A P ASSENGER, A GROUP OF PASSENGERS OR AN INSTITUTION ENGAGING THE VEHICLE F OR ITS TRANSPORT ACTIVITY . IN A GIVEN SITUATION, AN INSTITUTION MAY ENGAGE ITS ELF IN A TRANSPORT ACTIVITY TAKING THE VEHICLES OWNED BY SOMEONE ELSE FOR PLYIN G. THE MODE OF PAYMENT AND AS TO WHETHER A PERSON MAKES PAYMENT OR OTHERWI SE WOULD NOT BE A SITUATION OF RELEVANCE IN THE CONTEXT OF CONSIDERAT ION OF THE POSITION OF THE ASSESSEE. THE QUESTION WOULD BE THE MANNER IN WHICH VEHICLES ARE PLIED. THE SITUATION OF RELEVANCE WOULD BE AS TO WHETHER THE V EHICLES ARE RUNNING ON HIRE OR NOT . IF THERE IS NO DISPUTE THAT THE VEHICLES ARE RUN FOR HIRE IN ANY CAPACITY, WHETHER AS A PASSENGER SERVICE OR AS A TO URIST SERVICE OR AS A TAXI SERVICE, THE RELEVANT SITUATION IS THE MANNER IN WH ICH THE VEHICLES ARE RUN WHICH BELONGED TO THE ASSESSEE IN REGARD TO WHICH T HERE IS A CLAIM FOR DEPRECIATION. ITA NO.734 & 735/BANG/10 PAGE 20 OF 23 UNDISPUTEDLY, THE ASSESSEE IS A PARTNERSHIP FIRM EN GAGED IN TRANSPORT ACTIVITY. THE TRANSPORT ACTIVITY IS AS REGARDS PLYI NG OF TRANSPORT BUSES CARRYING PASSENGERS ON DIFFERENT ROUTES DETERMINED BY THE TRANSPORT AUTHORITIES. THE PASSENGERS WHO TRAVEL IN SUCH BUSE S TRAVEL ON HIRE. THIS WOULD OBVIOUSLY MEAN THAT THE BUSES IN REGARD TO WH ICH DEPRECIATION IS CLAIMED WOULD HAVE TO BE UNDERSTOOD IN THE NECESSAR Y CONTEXT OF THE SITUATION WITH REGARD TO THE CLAIM FOR DEPRECIATION THAT THE BUSES ARE RUNNING ON HIRE. AS ALREADY STATED, IT MAY BE THAT IN A GIVEN SITUATION IT MUST BE AN INDIVIDUAL, IN ANOTHER SITUATION A GROUP OR A T DIFFERENT SITUATIONS IT MAY BE A MARRIAGE PARTY. IN OUR JUDGMENT, THE SITUA TION WOULD NOT MAKE ANY DIFFERENCE. WHEN VEHICLES IN REGARD TO WHICH DEPREC IATION IS CLAIMED DO NOT RUN OTHERWISE THAN FOR HIRE, OBVIOUSLY, THE SITUATI ON WOULD BE GOVERNED BY ITEM E(1A) REPRODUCED ABOVE. . WE HAVE ALSO DULY PERUSED THE RULING OF THE HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF SOCIETY OF THE SISTERS OF ST. ANNE REPORTED IN 146 ITR 28 (KAR), ON THE STRENGTH OF WHICH THE AO HAD A LLOWED THE DEPRECIATION AS CLAIMED BY THE ASSESSEE AT 40%. SINCE THE RULIN G OF THE HONBLE HIGH COURT OF KERALA CITED SUPRA IS DIRECTLY ON THE POIN T, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS ENTITLED TO CLAIM DEPRECI ATION AT 40% ON MOTOR BUSES. IT IS ORDERED ACCORDINGLY. A.Y. 2006-07: 17. GROUND NO. 1 & 2 FOR THE ASSESSMENT YEAR IS ID ENTICAL TO THE ISSUE DISCUSSED IN THE IMMEDIATELY PRECEDING A.Y., WHICH HAS BEEN REMITTED BACK TO THE FILE OF LD. AO FOR FRESH CONSIDERATION. THE REFORE, OUR FINDING FOR THE RELEVANT A.Y. ALSO HOLDS GOOD AS THAT OF THE IMMEDI ATELY PRECEDING A.Y. GROUND NO.3 -ALLOWABILITY OF DEPRECIATION ON MOTOR BUSES : 18. AN IDENTICAL ISSUE CROPPED UP IN THE IMMEDIATE LY PRECEDING ASSESSMENT YEAR WHICH HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. AS THE ISSUE RAISED FOR THIS AY IS SIMILAR TO THAT OF THE IMMEDIATELY PRECEDING AY, OUR SAID FINDING HOLDS GOOD FOR THIS AY TOO. I T IS ORDERED ACCORDINGLY. ITA NO.734 & 735/BANG/10 PAGE 21 OF 23 GROUND NO. 4 ADDITION OF RS.1.64 CRORES BEING GRA NT RECEIVED FROM CRF AND MLA WHICH WAS ALREADY ACCOUNTED UNDER THE HEAD MISCELLANEOUS RECEIPTS 19. THE LD. CIT UNDER HIS 263 ORDER HAS OBSERVED A S UNDER : AS REGARDS GRANTS RECEIVED FROM CRF AND MLA AMOU NTING TO RS.1.64 CRORES, IT IS SUBMITTED THAT THE SAME HAS B EEN ACCOUNTED AS MISC. RECEIPT OF THE CORPORATION AND TAKEN INTO ACC OUNT TO ARRIVE AT THE GROSS PROFIT. EXCEPT FOR SO STATING, THE ASSESSEE HAS NOT LED ANY EVIDENCE TO CORROBORATE THAT THE IMPUGNED AMOUNT HAS BEEN INDEE D INCLUDED IN THE MISC. RECEIPT, MORE SO WHEN IN THE BREAK UP OF MISC. RECEIPT ANNEXED TO THE WRITTEN SUBMISSIONS, THE IMPUGNED AM OUNT DOES NOT STAND REFLECTED. HENCE, THE NON-UTILISATION OF RS. 61,00,000 OUT OF THE SAID GRANTS WAS REQUIRED TO BE CONSIDERED BY THE AO FOR THE PURPOSE OF QUANTIFYING THE GROSS RECEIPT AND NON-CONSIDERAT ION OF THE SAME HAS RESULTED IN THE ASSESSMENT ORDER SO PASSED BEIN G ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 20. IT WAS SUBMITTED BEFORE US THAT THE GRANTS REC EIVED FROM CRF AND MLA AMOUNTING TO RS.1.64 CRORES HAS BEEN TAKEN INTO ACCOUNT AS MISCELLANEOUS RECEIPTS OF THE CORPORATION AND WAS I NCLUDED FOR ARRIVING AT THE GROSS RECEIPTS. AT THE TIME OF HEARING, NO MATE RIAL EVIDENCE WAS BROUGHT BEFORE US TO SUBSTANTIATE THE CLAIM OF THE APPELLANT. HOWEVER, IN THE INTEREST OF JUSTICE, WE REMIT THIS ISSUE TO FIL E OF THE AO TO ASCERTAIN THE FACTS FROM THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE AND DECIDE THE ISSUE AFRESH ON MERITS. GROUND 5 - ALLOWANCE OF EXEMPTION AT 15% U/S 11(1)( A) OF THE ACT: 21. (I) AT THE OUTSET, WE WOULD LIKE TO POINT O UT THAT IN AN IDENTICAL ISSUE, THE HONBLE BENCH IN ITS FINDING IN ITA NO: 589/BAN G/2009 DATED: 12.4.2010 IN THE CASE OF ITO V. THE SECRETARY, A.P.M.C., HAVE RI HAD OBSERVED THAT ITA NO.734 & 735/BANG/10 PAGE 22 OF 23 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. THE ASSESSING OFFICERS COMPUTATION OF INC OME AVAILABLE FOR ACCUMULATION U/S 11(1)(A) IS CORRECT AND IS IN ACCO RDANCE WITH LAW. AS RIGHTLY POINTED OUT, FOR ACCUMULATION OF INCOME U/S 11(1)(A), IT IS TO BE COMPUTED ON COMMERCIAL PRINCIPLES AND NOT ON GROSS RECEIPTS. THE LEARNED DR HAS RIGHTLY RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF GEM & JEWELLERY EXPORTS PROMOTION COUNCIL SUPRA WHICH IN TURN, FOLLOWED THE DECISION OF THE HONBLE HIGH COURT OF MADRAS IN THE CASE OF CIT V. RAO BAHADUR CALAVALA CUNNAN CHETTY CHARITIES 135 ITR 48 5. THE WORDS USED IN SECTION 11(1)(A) IS INCOME AND NOT GROSS RECEIPT S. THE DECISION OF THE HONBLE SUPREME COURT HAS ONLY HELD THAT EXEMPTION U/S 11(1)(A) IS TO BE COMPUTED NOT WITH REFERENCE TO THE INCOME LEFT AFTE R APPLICATION BUT ON INCOME BEFORE APPLICATION AND NOWHERE IT WAS HELD T HAT EXEMPTION IS TO BE COMPUTED WITH REFERENCE TO GROSS RECEIPT. THEREFORE , WE HOLD THAT THE ASSESSING OFFICER IS JUSTIFIED IN ALLOWING 15% (II) IN VIEW OF THE ABOVE PROPOSITION, WE ARE O F THE FIRM VIEW THAT THE ASSESSING OFFICER HAD RIGHTLY ALLOWED THE APPROPRIA TE DEDUCTION FOR EXEMPTION. 22. LASTLY, THE ASSESSEE HAD COME UP WI TH AN ADDITIONAL GROUND FOR BOTH THE AYS UNDER DISPUTE WHEREIN, IT HAS BEEN, IN TER ALIA, PLEADED THAT THE AMOUNT WITHDRAWN FROM DEPRECIATION RESERVE WAS NOT TO BE INCLUDED IN THE GROSS INCOME OF THE ASSESSEE FOR THE PURPOSE OF S.11 OF T HE ACT. SINCE THIS ISSUE HAS A BEARING ON THE UTILIZATION O F DEPRECIATION RESERVE WHICH HAS BEEN DELIBERATED UPON IN THE FORE-GOING P ARAGRAPHS AND REMITTED BACK ON THE FILE OF THE LD. A.O FOR FRESH CONSIDERA TION, WE OF THE CONSIDERED VIEW THAT THIS ISSUE SHOULD ALSO BE REMITTED BACK TO THE AO FOR EXAMINATION AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH T HE LAW. IT IS ORDERED ACCORDINGLY. 23. IN THE RESULT , THE APPEALS OF THE ASSESSEE FOR THE AYS 2005-06 AND 2006-07 ARE PARTLY ALLOWED FOR STATISTICAL PURP OSES . ITA NO.734 & 735/BANG/10 PAGE 23 OF 23 PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF MARCH, 2011. SD/- SD/- ( SMT. P. MADHAVI DEVI ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 16 TH MARCH, 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.