2020 (1) TMI 1727 - AT - Income Tax

Exemption u/s 11 - allowing exemption of @ 15% on the net receipt OR gross receipt - HELD THAT - We note that in the provisions of section 11(1) it has been clearly mentioned 15% of the income hence it is gross income of the assessee trust and not the net income. Therefore based on this factual position as mentioned in Section 11(1) as noted above we direct the Assessing Officer to allow 15% exemption on gross receipts. Depreciation expenses to the assessee while calculating the application of funds - We note that in the case of Rajasthan Gujrati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT held that amendment in section 11(1) brought by the Finance Act 2014 w.e.f A.Y. 2015-16 which prohibited the allowance of depreciation is prospective in nature. That is amendment of the Finance Act 2014 is applicable from A.Y. 2015-16. In assessee s case the assessment year is 2012-13 therefore amendment of Finance Act 2014 does not apply to the assessee hence assessee is entitled for depreciation allowance. Therefore we direct the AO to allow the depreciation. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the exemption under Section 11 of the Income Tax Act, 1961, should be allowed at 15% on the gross receipts of the trust (Rs. 2,91,60,237/-) or on the net receipts (Rs. 3,47,60,989/-) as computed by the Assessing Officer.

(b) Whether depreciation expenses should be allowed as a deduction while calculating the application of funds under Section 11, considering the amendment by the Finance Act, 2014, which prohibits depreciation allowance w.e.f. assessment year 2015-16, whereas the assessment year in question is 2012-13.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Allowance of 15% exemption under Section 11 on Gross Receipts or Net Receipts

Relevant legal framework and precedents: Section 11(1) of the Income Tax Act provides exemption for income derived from property held under trust wholly or partly for charitable or religious purposes. The exemption is allowed to the extent income is applied to such purposes, and income accumulated or set apart for such purposes is not in excess of 15% of the income from such property. The provision explicitly refers to "15% of the income," which is interpreted as gross income derived from the property.

Court's interpretation and reasoning: The Tribunal examined the literal wording of Section 11(1), emphasizing that the exemption is to be calculated on "income" derived from the property, which is understood as gross income or gross receipts, not net income after certain deductions. The Assessing Officer had allowed the 15% exemption on net receipts (Rs. 3,47,60,989/-), which was less favorable to the assessee than allowing it on gross receipts (Rs. 2,91,60,237/-). The Tribunal noted that the statutory language clearly contemplates the exemption as a percentage of gross income.

Key evidence and findings: The factual matrix shows that the gross receipts from microfinance activity were Rs. 2,91,60,237/-, while the net receipts after adjustments were Rs. 3,47,60,989/-. The Assessing Officer's calculation of exemption on net receipts was challenged by the assessee.

Application of law to facts: Applying the statutory provision literally, the Tribunal found that the exemption under Section 11(1) must be computed on gross income. Therefore, the Assessing Officer's approach was incorrect, and the exemption should be calculated on gross receipts.

Treatment of competing arguments: The Assessing Officer's approach was presumably based on considering net receipts as "income" for exemption calculation. The Tribunal rejected this interpretation, holding that the statutory text and intent favor gross income as the base for exemption.

Conclusion: The Tribunal directed the Assessing Officer to allow the 15% exemption on gross receipts as per Section 11(1) of the Act.

Issue (b): Allowance of Depreciation while Calculating Application of Funds under Section 11

Relevant legal framework and precedents: Section 11 allows deduction for income applied to charitable or religious purposes. The Finance Act, 2014, amended Section 11(1) to prohibit allowance of depreciation from assessment year 2015-16 onwards. The Supreme Court in Rajasthan Gujrati Charitable Foundation (2018) 402 ITR 441 (SC) held that this amendment is prospective and does not apply to assessment years prior to 2015-16.

Court's interpretation and reasoning: Since the assessment year under consideration is 2012-13, prior to the effective date of the amendment, the Tribunal held that the amendment does not apply. Therefore, depreciation expenses are allowable deductions while calculating the application of funds under Section 11 for this assessment year.

Key evidence and findings: The depreciation amount claimed by the assessee was Rs. 20,35,022/-. The Assessing Officer disallowed this depreciation while computing income applied to charitable purposes.

Application of law to facts: Applying the Supreme Court's ruling and the effective date of the amendment, the Tribunal found that depreciation must be allowed for the assessment year 2012-13.

Treatment of competing arguments: The Assessing Officer's disallowance was based on the amended Section 11(1) provisions, which the Tribunal found inapplicable retrospectively. Hence, the disallowance was not justified.

Conclusion: The Tribunal directed the Assessing Officer to allow depreciation while calculating the application of funds for the relevant assessment year.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations:

"We note that in the provisions of section 11(1) it has been clearly mentioned '...15% of the income', hence it is gross income of the assessee trust and not the net income. Therefore, based on this factual position as mentioned in Section 11(1) as noted above, we direct the Assessing Officer to allow 15% exemption on gross receipts."

"Hon'ble Supreme Court in the case of Rajasthan Gujrati Charitable Foundation (2018) 402 ITR 441 (SC) held that amendment in section 11(1) brought by the Finance Act, 2014 w.e.f A.Y. 2015-16 which prohibited the allowance of depreciation is prospective in nature. That is amendment of the Finance Act, 2014, is applicable from A.Y. 2015-16. In assessee's case the assessment year is 2012-13, therefore amendment of Finance Act, 2014 does not apply to the assessee, hence, assessee is entitled for depreciation allowance."

Core principles established include:

- The 15% exemption under Section 11(1) is to be calculated on gross income derived from the property held under trust, not on net income.

- Amendments to tax provisions are prospective unless expressly stated otherwise; hence, depreciation disallowance introduced from A.Y. 2015-16 does not affect earlier years.

Final determinations:

- The exemption under Section 11(1) shall be computed on gross receipts.

- Depreciation expenses shall be allowed while calculating application of funds for the assessment year 2012-13.

Accordingly, the Tribunal allowed the appeal of the assessee and directed the Assessing Officer to recompute the income and exemption accordingly.