TMI Blog2018 (5) TMI 2094X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2010-11 on the following grounds : 1. That on the facts and circumstances of the case and in the law the learned commissioner of income-tax (Appeals) has grossly erred in confirming the additions made by Assessing Officer treating Hostel facility provided to college students as business of the appellant society considering the alleged surplus of ₹ 4,05,65,348/- as business income in the hand of appellant society. The observation made and basis adopted are erroneous, unjustified, unwarranted, bad in law and are without sufficient material on records. 2. That the Learned Commissioner of Income-tax ( Appeals) has grossly erred in confirming the additions made by A.O. holding that hostel/ mess facility for students is separate business activity in terms of section 11(4A) merely on irrelevant consideration like surplus should have been reimbursed to students or used to reduce fee or giving contents of some website about fall in demand for rooms at Meerut etc, even after accepting that maintenance of such hostel is mandatory as per the concerned controlling Authority and it was an integral and inalienable part of educational activity. Thus finding is perverse. 3. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the students in its college. After seeking the explanation of the assessee, the Ld. AO was of the view that generating of surplus on account of transportation, hostel running or any other activity falls under business category, which is incidental to the business. Therefore according to him the transportation and hostel running itself is not an educational activity and can at the most be said to be incidental to the object of the trust. Therefore, according to him the provisions of sub-section (4A) of section 11 would come into play to deal with these activities. He further held that educational activity and hostel in transportation activities are separable, for which separate books of accounts need to be maintained. He therefore relying on various decisions and examining the income and expenditure account of hostel recepts and expenses, determined the net surplus of the hostel activities at ₹ 4,05,65,348/- and charged it to tax as business income of the assessee. 3. It was further observed by the Assessing Officer that the assessee trust has claimed a depreciation of ₹ 57079339/ , which was disallowed by him on the premise that hundred percent application of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudents. The above issue is no more res Integra in view of the decision of the Hon ble Karnataka High Court in CIT versus Karnataka lingayat education society in ITA No. 5004/2012 dated 15/10/2014 wherein it has been held that providing hostel to the students/staff working for the society s incidental to achieve the object of providing education, namely the object of the society. In view of this we are of the opinion that providing of hostel facilities and transport facilities to the student and staff member of the educational Institute cannot be considered as business activity but is subservient to the object of educational activities performed by the society. We are also supported by our view by the decision of the Hon ble Allahabad High Court in IIT versus state of UP, (1976) 38 STC 428 (All) wherein question arose in Indian Institute of Technology v. State of U.P. (1976) 38 STC 428 (All) with respect to the visitors' hostel maintained by the Indian Institute of Technology where lodging and boarding facilities were provided to persons who would come to the Institute in connection with education and the academic activities of the Institute. It was observed that the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has purchased capital assets and treated the amount spent Director Of Income Tax ... vs M/S Indraprastha Cancer Society on 18 November, 2014 on purchase of the capital asset as application of income, is entitled to claim depreciation on the same capital asset utilised for business. Revenue submits that this would amount to double deduction. 3. This High Court in Director of Income Tax versus Vishwa Jagriti Mission (2013) 262 CTR 558 has held that the claim for depreciation should be allowed as per principles relating to commercial accountancy, when computing business income. Reliance placed by the Revenue on the decision of the Supreme Court in Escorts Limited versus Union of India, (1993) 199 ITR 43 (SC), was dispelled and distinguished. In Escorts Limited (supra) the claim for depreciation under Section 32 of the Act was denied as the entire expenditure on the capital asset had been allowed under Section 35(2)(iv) of the Act while computing business profit and loss. Secondly, the Supreme Court was not concerned with the case of a charitable trust/institution, and the question as to whether income under the head profits and gains of business should be computed on commercial pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould 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). 4. Accordingly, the appeal was dismissed after observing that no contrary judgment has been brought to the notice of this Court. 5. The High Court of Kerala in Lissie Medical Institutions versus Commissioner of Income Tax, (2012) 348 ITR 344 (Ker) has taken a different view, inter alia, holding as under: 5. It is settled position through several decisions of High Courts and Supreme Courts that when business is held in trust by charitable institutions income from bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be added back while computing the income for the purpose of application in the income expenditure account. This would imply that a correct figure of surplus from the trust property is reflected in the Income Expenditure account of the trust to determine the income for the purpose of application under section 11 of the Income Tax Act. This would reduce the possibility of revenue leakage which may be a cause for generation of black money. 6. Noticing the aforesaid judgment as well as circular/clarification dated 2nd Feb, 2012 issued by the Central Board of Direct Taxes, a Division Bench of this Court re-examined the entire issue in ITA No. 7/2013, Director of Income Tax (Exemption) versus Indian Trade Promotion Organisation, and other connected matters, decided on 27th November, 2013. The said order records that the Bench was initially inclined to accept the submission made of the Revenue, but for several reasons mentioned and recorded, declined to interfere and refer the question/ ratio accepted in Vishwa Jagriti Mission (supra), to a larger bench. This Court referred to the following example to explain the controversy in question: 5. ... In order to appreciate the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 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 am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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). This court thereafter referred to the circular/clarification dated 2nd February, 2012 by the CBDT, issued after decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If there is a violation of the said provision, proportionate income is deemed to be taxable and not exempt under Section 11(1). The language of the Section is peculiar and proceeds on its own wording. This aspect has been highlighted and pointed out in the judgment of Commissioner of Income Tax vs. Society of The Sisters of St. Anne (supra). Decision in the case of Escorts Ltd. (supra) was considered by the Delhi High Court in DIT vs. Vishwa Jagriti Mission (supra) decided on 29th March, 2012 and was distinguished for the following reasons. 13. The judgment of the Supreme Court in Escorts Limited Vs. Union of India (supra) has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing with expenditure as such. The legislative desire is that money should be applied for the purpose of charity. In Escorts Ltd.(supra), the Supreme Court had observed that they were concerned with expenditure and since the entire costs of the capital assets had been allowed and had been set off against the business profit in five years or in one previous year, it was unconceivable that the depreciation should be allowed again on the same asset. 8. Decisions of other High Courts in Commissioner of Income Tax versus Tiny Tots Education Society, (2011) 330 ITR 21 (P H) and Commissioner of Income Tax versus Institute of Banking, (2003) 264 ITR 110 (Bom.) in which the ratio as expounded in the case of Vishwa Jagriti Mission (supra) was accepted and affirmed, were noticed. Referring to the decision of the Kerala High Court in Lissie Medical Institutions (supra) it was observed: 15. Kerala High Court was also conscious of the said decisions and the fact that Section 11(1)(a) had been interpreted in a different manner. It was in these circumstances that the Kerala High Court in the last portion of paragraph 6, as quoted above, has stated that the assessee would be entitled to write b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would actually amount to double deduction on the basis of the ruling of the Supreme Court in Escorts Ltd. vs. UOI (supra). In respect of the additions to the fixed assets made during the previous year relevant to the assessment year 2006-07, the CIT (Appeals) held that since the cost of the assets was not allowed as a deduction by way of application of income, depreciation should be allow. The CIT (Appeals) has thus made a distinction between assets the cost of which was allowed as deduction as application of income and assets, the cost of which was not so allowed. The Tribunal has not kept this distinction in view, but has proceeded to rely upon a judgment of this Court in DIT vs. Vishwa Jagrati Mission (supra). In the judgment of this Court the question was whether the income of the assessee, which was a charitable trust, should be computed on commercial principles and if so, whether depreciation on fixed assets used for charitable purposes should be allowed as a deduction. This Court noticed that there was a consensus of judicial opinion on this aspect and held, after referring to those authorities as well as a circular of the CBDT issued on 19.07.1968, that while computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment in the case of Indian Trade Promotion Organisation (supra) was not cited and referred to. The judgment in the case of Charanjiv Charitable Trust (supra) is authored by the same Judge, who has also authored the decision in the case of Vishwa Jagriti Mission (supra). It is obvious that in Charanjiv Charitable Trust (supra), the Division Bench could not have taken a different view on the legal ratio as interpreted in Vishwa Jagriti Mission (supra). Further, the decisions in the case of Vishwa Jagriti Mission and Indian Trade Promotion Organisation (supra) being prior in point of time would act as binding precedents and could not have been overruled or dissented from by a coordinate Division Bench. 11. By Finance (No. 2) Act of 2014, sub-section (6) to Section 11 stands inserted with effect from 1st April, 2015 to the effect that where any income is required to be applied, 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 an asset, the acquisition of which has been claimed as application of income under this Section in the same or any other prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. (4A) Subsection (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business. (5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely : - (i)...... (ii)...... ....... (6) In this section where any income is required to be applied or accumulated or set apart fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made specifically applicable to section 11. According to him, the provisions of Section 11 extend a benefit to an assessee by way of exemption and granting depreciation in addition would amount to a double benefit that has to be specifically conferred. He would rely on the judgment of the Supreme Court in the case of Escorts Limited and another Vs. Union of India and others (SC) (1999 ITR 43) which deals with the grant of depreciation to an assessee also claiming weighted deduction under section 35(1) of the Act in respect of expenditure incurred on scientific research. 8. The provision, as it originally stood, placed no restriction on the claim of weighted deduction simultaneous with the claim of depreciation. While this is so, it was felt that such double claim was not the intention of Legislature and the provisions of Section 35(2) (iv) were amended to provide that where a deduction was allowed for any previous year in terms of Section 35(1), no depreciation was liable to be allowed for the same or any other previous year in respect of that asset. 10.The amendment was made to operate retrospectively with effect from 1.4.1962 and the Supreme Court, while upholding the retrospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an unreasonable interpretation upon the relevant provisions and to negating the intention of Parliament. I find it difficult to agree that the Indian Legislature - as also the Parliament made a conscious departure from the English Amendment with the idea of providing an additional benefit to induce the Indian assessees to invest more in scientific research. I find the argument rather convoluted. If the intention of the Legislature/Parliament was to provide more than 100% deduction, they would have said so, as they have done in cases where they provided for what is called weighted deduction'. (For example, See section 35(B) of 1961 Act). A double deduction cannot be a matter of inference, it must be provided for in clear and express language regard having to its unusual nature and its serious impact on the Revenues of the State. ........ ........ 'That the Parliament never intended to provide for a double deduction is also the opinion of the Direct Tax Law Committee. In its interim report, (December, 1977) the Committee (popularly known as 'Choksi Committee') had this to say in para 3.29 of its report: 3.29.- Our attention has also been drawn to certain anomalous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the assessee claims 100% of the cost incurred for it as application of income for charitable purposes, the depreciation so claimed has to be written back as income available. In fact, going by the several decisions of the various High Courts, we are sure that based on these decisions all the charitable institutions will be generating unaccounted income equal to the depreciation amount claimed on an year to year basis which is nothing but black money. This aspect is not seen considered in any of these decisions.' 13. The contentions of the learned counsels for the assessees are as follows: (i) Mr. Sridhar would state that in computing the income of an entity attracting the provisions of section 11, the principles of commercial accounting were liable to be followed. He would rely on the decision of the jurisdictional High Court in Commissioner of Income Tax Vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) (135 ITR 485) = 2003-TIOL-984-HC-MAD-IT and Bombay High Court in Commissioner of Income Tax Vs. Institute of Banking Personnel Selection (2003) (264 ITR 110). A distinction was sought to be made between computation in terms of Section 2(45) defining 'total income , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itute of Chartered Accountants of India and made mandatory on or after 1.4.1995 in the following terms: 'The reference to commercial, industrial or business enterprises in the aforesaid paragraph is in the context of the nature of activities carried on by the enterprise rather than with reference to its objects. It is quite possible that an enterprise has charitable objects but it carries on, either wholly or in part, activities of a commercial, industrial or business nature in furtherance of its objects. The Board believes that Accounting Standards apply in respect of commercial, industrial or business activities of any enterprise, irrespective of whether it is profit oriented or is established for charitable or religious purposes. Accounting Standards will not, however, apply to those activities which are not of commercial, industrial or business nature, (e.g., an activity of collecting donations and giving them to flood affected people.) It is also clarified that exclusion of an entity from the applicability of the Accounting Standards would be permissible only if no part of the activity of such entity was commercial, industrial or business in nature. For the removal of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined until an analogous 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, since the assets will be shown at an amount which is in excess of the true amount of the unexpired expenditure incurred on their acquisition.' 22. The claim of depreciation is thus part of standard accounting practice which is required for fair presentation of a company's financials. The computation of income in the case of an entity to which section 11 is applicable would be in two stages. Firstly, the determination of the profit arrived at, which would be the total receipts net of expenditure and depreciation incurred in earning the receipts, and secondly the stage of application to Charitable/Religious objects. The two stages are distinct and are required to be complied with consecutively in order to determine the correct income and its application. 23. The question before the Supreme Court in the matter of Escorts related to duel claims under section 35 of the Act in relation to the same asset the first, weighted deduction and the second, depreciation. Thus, two bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARIThave accepted the claim of the assessee distinguishing both the judgment of the Supreme Court in Escorts as well as that of the Kerala High Court. 27.In view of the discussion above, the question of law is answered in favour of the assessee and against the revenue. TCA.No.949 of 2015 28. T.C.A.No.949 of 2015 has been filed by the assessee raising the following two substantial questions of law. '1. Whether on the facts and circumstances of the case, the Tribunal was right in disallowing the claim of depreciation on assets acquired by way of application of funds in the earlier years, contrary to judgments of several High Courts? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the excess application of the earlier year could not be set off against the income of the current year contrary to the judgment of this Honourable Court in the case of Matriseva Trust (2000) 242 ITR 20(Mad)? 29. Learned senior counsel appearing for M/s.St. Thomas Orthodox Syrian Cathedral Parish Trust, the assessee, Mrs. Pushya Sitaraman would contend that the excess application of earlier years was liable to set off against the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee and the retrospective application thereof has to be examined by the assessing authority. We remand this issue to the file of the assessing authority for the limited purpose of examining the applicability of the amendment extracted above. If the amendment is found applicable to the assessee, the rationale of the decision of this Court in Matriseva (supra) shall be applied on merits. 33. Adverting to question No.1, the Tribunal has, in denying the benefit of depreciation to the assessee, applied the provisions of sub section 6 of section 11 reading as follows; '(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. .... 34.The short point that arises for decision is whether the provisions of Section 11(6) inserted by Finance (No.2) Act, 2014 w.e.f. 1.4.2015, operate prospectively with effect from assessment year 2015-16 or retrospectively with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply to assessment year 2015-16 and subsequent assessment years. Reliance was placed on the judgment of the Supreme Court in CIT Vs. Alom Extrusions Ltd (2009) and CIT vs Vatika Township (367 ITR 466) = 2014-TIOL-78-SC-IT-CB for the proposition that an amendment that increases the liability of an assessee is liable to be applied only prospectively. Mr. Narayanaswamy would object stating that the amendment had been inserted to a correct an existing anomaly and thus was clearly clarificatory, and consequently retrospective in operation. 36. We do not agree with the Revenue. The amendment, inserted specifically with effect from Assessment Year 2015-2016 seeks to disturb a vested right that has accrued to the assesee. The amendment does not purport to be clarificatory, on the other hand the Explanatory Memorandum makes it applicable only w.e.f. A Y 2015-16 and application of the amendment retrospectively would certainly lead to a great deal of hardship to the assessee. We are thus of the view that the provisions of section 11(6) of the Act inserted with effect from 1.4.2015 shall operate prospectively with respect to assessment year 2015-2016 only. 14. Therefore in view of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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