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2015 (11) TMI 634 - ITAT BANGALORE

2015 (11) TMI 634 - ITAT BANGALORE - TMI - Entitlement to depreciation - Assessee enjoys registration u/s.12AA and is entitled to claim exemption of its total income u/s.11 - Held that:- The order of the CIT(A) in so far as it relates to allowing depreciation on opening WDV has to be confirmed but has to be reversed in so far as it relates to not allowing depreciation on the closing WDV of the block of assets. In other words, the Assessee should be entitled to depreciation as claimed by it - Dec .....

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xpenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the incom .....

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xpenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other.

Whether loan is repaid the Assessee would again claim deduction and hence the Assessee would get double deduction is without any sound basis? - Held that:- The claim of the Assessee for set off has to be allowed but with a rider that the Assessee in the year when the loan is repaid should not claim deduction of the sums repaid as loan as application of income. The above direc .....

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P.K. Srihari, Addl.CIT(DR) ORDER Per N.V. Vasudevan, Judicial Member ITA No. 907/Bang/14 is an appeal by the assessee while ITA No.1040/Bang/2014 is an appeal by the Revenue. Both these appeals are directed against the order dated 24.12.2013 of CIT(Appeals)-V, Bangalore, relating to assessment year 2009-10. 2. The assessee is a charitable institution set up under Section 25 of the Companies Act, 1956. It was established as a non-profit organization based in the United States of America. The obje .....

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ax Act, 1961 (Act) and is entitled to claim exemption of its total income u/s.11 of the Act. 3. The Assessee filed return of income for AY 2009-10 declaring total income of nil. The following was the computation of total income filed by the Assessee :- Particulars Amount Rs. Amount Rs. Income: Gains/donations 4,18,00,000 Income from workshops, training and technical and management services 84,23,491 5,02,23,491 Less: Income applied for charitable purposes eligible for exemption u/s.11 Operating .....

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jecting the claim of deficit of brought forward for AY 08-09 & 07-08. The CIT(A) directed the AO to disallow depreciation only on the opening WDV of the block of assets as against the claim of the Assessee for allowing depreciation on closing WDV of the block of assets which would also include additions to the block of assets during the previous year. The CIT(A) deleted disallowance of deduction on account of bad debts which has not been challenged by the revenue in its appeal. The CIT(A) de .....

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. In the course of assessment u/s. 143(3) of the Act, the AO noticed from the details of depreciation claimed, that the depreciation was claimed on assets, the cost of acquisition of the said assets had been claimed by the assessee as capital expenditure towards application of funds towards the objects of the trust and allowed as such. According to the AO, allowing such a claim would amount to allowing double deduction. On the facts of the present case, he was of the view that the decision of th .....

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en the view that where capital expenditure on acquisition of depreciable asset is considered as application of income for charitable purpose, allowing depreciation on the very same capital asset would not amount to double allowance. The assessee also pointed out that the decision of Escorts Ltd. (supra) will not be applicable as it was rendered on a different set of facts. 7. The AO however, held that allowance of depreciation when the cost has already been recovered by way of exemption as appli .....

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distinguished the cases cited by the Assessee. 8. On appeal by the Assessee, the CIT(A), held that the claim of the Assessee for depreciation has to be allowed but only on the opening WDV of the block of assets. The Assessee s claim was to allow depreciation on the closing WDV of the assets including the addition made to the block of assets during the previous year. 9. Aggrieved by the order of the CIT(A), the Revenue has preferred ground No.1 in its appeal and the Assessee has preferred ground .....

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the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The AO took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of Hon'ble Supreme Court in Escorts Ltd. (supra). The CIT(A), however, allowed the claim of assessee. On further appeal by the Revenue, the Tribunal held as follows:- 20. We have considered the rival submissions. If depreciation is not allowed as a .....

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e of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H) , following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon ble Supreme Court in the case o .....

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ase of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon ble Punjab & Haryana High Court made a reference to the decision of the Hon ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon ble Supreme Court was dealing with a case of two deductions under diff .....

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it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference. 22. Consequently, ground No.5 raised by the revenue is dismissed. 11. We may also add that the legal position has since been amended by a prospective amendment .....

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revious year. 12. As already stated, the aforesaid amendment is prospective and will apply only from A.Y. 2015-16. In view of the above legal position, we are of the view that the order of the CIT(A) in so far as it relates to allowing depreciation on opening WDV has to be confirmed but has to be reversed in so far as it relates to not allowing depreciation on the closing WDV of the block of assets. In other words, the Assessee should be entitled to depreciation as claimed by it. Consequently gr .....

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d u/s. 12A of the Act. For the A.Y. 2009-10, the assessee filed a return of income claiming carry forward of excess expenditure incurred during the AY 08-09 & 07-08 totalling ₹ 2,74,97,241 which comprises of brought forward deficit of ₹ 2,66,04,960 pertaining to AY 08-09 and ₹ 8,92,281 pertaining to brought forward deficit of AY 07- 08. The assessee sought setting off of excess expenditure over income in the earlier AYs as application of income in the subsequent assessment .....

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this regard:- 16. Ground No. 4 & 5 relate to claim of loss/deficit of earlier years against income of the current year: As per details filed by the Ld. AR, such deficit or excess expenditure over income related to AY 2007-08 (Rs.892,281/-) and AY 2008-09 (Rs. 26,604,960/-), which were to be carried forward and set off against current year s income. It has also been explained that the major source of income of the appellant is the donation received from parent company, and expenditure in AY 2 .....

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the corpus or accumulations made u/s 11(1)(a). 16.2 Depending on the nature and type of deficit, it would have to be examined, as to whether it could be set off against the income of a subsequent year. For example, in case of unpaid bills, or drawings from corpus, the amount of such expenses in an earlier year will have to be owed to be set off or adjusted against the income of a subsequent year, before arriving at the income of such subsequent year for examining its application/accumulation. I .....

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eficit in AY 2008-09 on account of loan funds, against current year s income without actual repayment of such loans and liabilities, cannot be allowed either as deduction from gross income or application of income. Such action involves risk of double deduction as and when repayment of loan is made in a future year, say AY 2011-12, and claimed as application of income of that year. 16.3 It may be relevant to refer to the Hon ble Bombay Tribunal decision in case of Income-tax Officer v. Trustees o .....

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therefore, can be carried forward. Where the deficit arises as a result of excess spending for charitable purposes, such excess would not form part of the total income or loss and the same, therefore, cannot be carried forward. The claim of the assessee that the advance received by it in regard to the sale of property was in the nature of income, had also to be rejected for the simple reason that such advance could not go into the computation of the total income. If would be so even if the inco .....

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C was to be set aside. 16.4 Thus deficit arising from application of sums (loans/advances) which are not in the nature of income, or unpaid liabilities cannot be carried forward. They could be allowed in the year of payment or repayment. Similarly excess expenditure met out of accumulations u/s 11(1)(a) of earlier or current year s income could not be carried forward for set off, as such part of income are meant to be applied for the charitable purpose in any case. 16.5 To conclude, in the appel .....

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following deductions from the gross income of the appellant to arrive at the income before application/accumulation: (a) Bad debts written off (b) Depreciation on the opening value of the assets (c) Deficit or excess of expenditure of AY 2O07-08_ 17.2 The appellant has filed intimation before the Assessing Officer, under Explanation 2 to section 11(1) for accumulation of unutilized income in excess of 85% of income after deductions as above. The Assessing Officer is directed to compute such surp .....

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the Act to allow carry forward of excess application of income for set off as application of income in subsequent years. The ld. DR reiterated the stand of the Revenue as contained in the grounds of appeal. 17. We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated .....

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diture incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj), CIT Vs. Shri Plot Swetamber Murti Pujak Jain Mandal 211 ITR 293 (Guj.). In CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom) it was held that in case of charitable trust whose income is exempt under s. 11, excess of exp .....

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nevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of lo .....

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earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. Th .....

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