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2015 (12) TMI 42 - ITAT BANGALORE

2015 (12) TMI 42 - ITAT BANGALORE - [2015] 44 ITR (Trib) 291 (ITAT [Bang]) - Disallowance of faculty teaching charges payable to Ohio University - CIT(A) deleted the addition - Held that:- The services have been rendered by the faculty members from Ohio University as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust’s objectives in India, viz. of imparting higher education in India. Ohio University has also offered the income earned by it from the .....

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w that a specific exemption is required from CBDT for making claim of application of income. This requirement has been specified only for those trusts that have as its objects, the promotion of international welfare. In the case of the assessee in the case on hand, the objects of charitable activities for imparting higher education in India, has already been approved by the Department while granting the assessee trust registration. Also unable to concur with the view of the Assessing Officer tha .....

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ight be deemed to be applied for that purpose. - Decided in favour of assessee.

Set off of brought forward excess application income/loss of earlier years - CIT(A) allowed claim - Held that:- The assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment pr .....

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commercial principle enunciated by the Hon’ble Karnataka High Court in the above referred case of Sisters of St. Anne (1983 (8) TMI 44 - KARNATAKA High Court) applies to trusts as well. In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses - Decided in favour of assessee.

Loss on acco .....

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mme fee is also a deductible expenditure as held by the Hon’ble Apex Court in the case of Woodward Governor India (P) Ltd. (2009 (4) TMI 4 - SUPREME COURT ). In this view of the matter, we uphold the decision of the learned CIT (Appeals) - Decided in favour of assessee.

Disallowance of Accumulation of Income - Held that:- The purposes mentioned by the assessee trust in Form No.10 were ‘for use in purchase of fixed assets’ and for use in other purposes, ‘for fulfillment of the objects .....

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iews taken by different High Courts has decided the issue in favour of the assessee by observing that there is no decision of the jurisdictional High Court in the matter, the decision favourable to the assessee should be followed. As decided in Director of Income Tax, Exemptions And Others Versus Envisions [2015 (6) TMI 38 - KARNATAKA HIGH COURT ] as long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the obje .....

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udevan, Advocate. ORDER Per Shri Jason P. Boaz, A.M. : These appeals by the Revenue are directed against the order of the Commissioner of Income Tax (Appeals), Mysore dt.20.09.2013 for Assessment Years 2008-09 and 2009-10. These appeals being heard together and having certain common issues are disposed off by way of this common order. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, is a public charitable trust registered under Section 12A of the Income Tax Act, 1961 (in shor .....

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luded under Section 143(3) of the Act vide orders dt.22.12.2010 for Assessment Year 2008-09 and dt.15.12.2011 for Assessment Year 2009-10, wherein additions/disallowances under various heads were made. 2.2 Aggrieved by the orders of assessment for Assessment Years 2008-09 and 2009-10, the assessee preferred appeals before the CIT (Appeals), Mysore. The learned CIT (Appeals) disposed off the appeals by way of a common order dt.20.9.2013 allowing the assessee s appeals. 3. Revenue is aggrieved by .....

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charitable purposes in India can be considered as application of income in India, but without observing the fact that the assessee has not utilized or spent any amount during the year under consideration and only made a book entry crediting the amount to Ohio University s account by following mercantile method of accounting and the actual payment of the same has happened in the subsequent asst. year implying that there was no real application of income within the meaning of section l1{l){a) dur .....

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of Sec.ll{l)(a), the assessee is required to prove not only that it has already incurred the expenditure and liability to pay the amounthas accrued, but also it has already paid/remitted the amount to the party concerned towards the discharge of such accrued liability. 4) The CIT (Al has failed to appreciate the fact that the method of accounting followed by the assessee has no relevance for the purpose of arriving at the income applied towards the objects u/s l1{l)(a) and such application of in .....

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earlier decision of the Hon ble Supreme Court in the case of H.E.H. Nizams Religious Endowment Trust v. CIT {1996} 59 ITR 582 (SCj was overruled in the case of Nachimuttu Industrial Association. 6) The CIT (A) has failed to appreciate the fact that in view of nonutilisation/ non- application of income to the extent of ₹ 2,66J2,407/-, being faculty teaching charges payable to Ohio University, Athens, USA, in the year under consideration, it is not relevant to discuss the second ground i.e. .....

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st. years without appreciating the fact that as per the scheme of taxation of charitable and religious trust/institution as codified u/s 11, 12 and 13, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds of the trust. 2) The CIT (A) has failed to appreciate the fact that the normal computation of income under respective heads as envisaged u/s 14 r.w.S. 15 to 59 are not applicable to the computation of income in resp .....

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o appreciate the fact that the concept of application of income is embedded in the statute u/s 11 only to ensure that the income earned by the assessee by way of voluntary contributions as well as conducting some income generating activities such as running hospitals/ educational institutions is applied/utilized/expended towards the objects in order to allow exemption of such income from tax. 4) The CIT (A) has failed to appreciate the fact that application/ utilization towards the charitable or .....

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the provisions of Sec.ll(l)(a) there is no concept of recognizing application/ utilization over and above the income of the assessee and such application/ utilization is beyond the purview of Section 11 and 12. In each assessment year, the assessee is required to prove that it has applied or utilized the entire amount of income towards charitable or religious purposes so as to avail the benefit of tax exemption on such income and, therefore, excess application of income would not come Into pictu .....

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gross receipts cannot be considered as loss incurred eligible for carry forward and set off against the income of subsequent assessment years. Similarly, any capital expenditure incurred over and above the net surplus eligible for application, cannot be carried forward and set off against the income of subsequent assessment years. 6) The CIT (A) has failed to follow the decision of the Hon ble ITAT, Bombay in the case of Income-tax Officer vs. Trustees of Sri Sathya Sai Trust (33 ITO 320) wherei .....

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ent assessment years. On the other hand, the CIT (Al has placed reliance on the decision of Hon ble Jurisdictional High Court in the case of CIT v. SOCiety of the Sisters of St. Anne (146 ITR 28) which is totally misplaced inasmuch as the issue involved in that case was relating to allowability of depreciation as deduction while computing the income of the assessee for the purpose of section l1(l)(a). A.Y.2009-10: A) Disallowance of faculty teaching charges payable to Ohio University amounting t .....

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in the books of accounts at the end of the financial year on the basis of prevailing value of rupee in terms of USdollar. 2) The CIT (A) has failed to appreciate the fact that the assessee did not pay the faculty teaching charges to Ohio University to the extent of ₹ 2,OS,58,120/- during the year under consideration and the same is reflected under current liabilities as on 31.03.2009, but created provision towards loss on account of exchange fluctuation as on 30.03.2009 based on the diffe .....

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11, 12 and 13, any notional expenditure incurred including exchange fluctuation loss cannot be allowed as expenditure or application of income. Further, any expenditure or application of income shall be allowed by following real income method of accounting and accordingly, there should be real application/ expenditure by way of actual payment to the parties concerned. C) Disallowance of preliminary expenses of Rs.l,08,292/-: Please refer to the grounds of appeal for the A.Y. 2008-09 on the issu .....

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he income is being accumulated u/s 11(2) except stating that purchase of fixed assets and equipments and used as per the objectives of the trust and such general purposes cannot be construed as specific purposes as envisaged u/s 11(2). 2) The CIT (A) has failed to appreciate the fact that the assessee has not identified the specific amount with purpose meant for accumulation u/s 11(2) giving the particulars of mode of investment/deposit of the same such as, amount of Income invested in fixed dep .....

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absolute and the same should be spelt out in clear terms in the statutory Form No.10 filed along with the return of income. In this regard, the assessee should furnish the specific details of amount of income accumulated, the purpose for which the specified amount is accumulated and the period of accumulation or the year (s) in which the accumulated income will be utilized for the intended purposes. Also, the assessee is required to Invest or deposit such accumulated income in the forms or modes .....

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es payable to Ohio University (for both A.Ys. 2008-09 & 2009-10). 4.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed application of income under Section 11 of the Act which included the faculty teaching charges to Ohio University towards academic expenses. The Assessing Officer disallowed the assessee s claim for the following reasons :- (i) Merely making an entry in the books of accounts cannot be considered as application of income for .....

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is exempt only under a general or special order of CBDT; (iii) The assessee did not prove that the payments made to Ohio University resulted in charitable purposes in India. 4.2 On appeal by the assessee, the learned CIT (Appeals) upheld the assessee s claim and deleted the disallowances made by the Assessing Officer by relying on the decision rendered by the CIT (Appeals) in the assessee s own case for Assessment Year 2007-08. The learned CIT (Appeals), while allowing the assessee s claim, obse .....

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arned CIT (Appeals) on this issue and supported the order of the Assessing Officer. It was submitted that the assessee has only made entries in the books of accounts in the relevant periods and had not utilized or spent the amount during the year and the actual payment of the same had happened in the subsequent year only and as such there was no application of income during the relevant year under consideration. It was submitted that the phrase such income is applied to such purposes in India ap .....

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ted that the assessee has actually incurred the said expenditure towards factulty teaching charges payable to Ohio University, USA and therefore it should be considered as having been applied under Section 11(1)(a) of the Act. In support of its contention, reliance was placed on the decision in the case of CIT Vs. Trustees of HEH Nizam s Charitable Trust (1981) 131 ITR 497 (A.P.) wherein it was held that the term applied does not mean spent . It was also submitted that the decision rendered in t .....

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taken to be applied for charitable purpose. In support of the assessee s contention, the learned Authorised Representative for the assessee placed reliance on the decisions in the case of CIT V. Radhaswami Satsang Sabha (1954) 25 ITR 472 (All) and CIT V. Thanthi Trust (1999) 239 ITR 502 (SC). 4.4.3 The learned Authorised Representative further submitted that merely because the payment was made outside India, this does not mean that the charitabale purpose was outside India. It was submitted tha .....

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ported in 130 TTJ 377 (Del). 4.5.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements relied upon by both parties. The basic facts, not in dispute, are that the assessee has entered into an agreement with Ohio University, USA, whereby Ohio University sends its faculty to the assessee s premises in India for teaching purposes, for which the assessee makes payment to Ohio University for providing the faculty and ot .....

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income accruing/arising to Ohio University in India by virtue of a PE in India. Further Ohio University had filed returns of income in India offering this income to tax and paid taxes accordingly. 4.5.2 It is also not disputed that the services have been rendered by the faculty members from Ohio University as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust s objectives in India, viz. of imparting higher education in India. Ohio University has al .....

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the judicial decisions of the ITAT, Mumbai and Delhi Benches, cited by the assessee, squarely apply to the case on hand. In the case of Gem and Jewellery Export Promotion Council V. ITO, reported in 68 ITD 95 (Mum), the Mumbai Bench of the Tribunal at para 33 thereof held as under :- 33. A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under s. 11 is for application of income for purposes in India and it does not restrict the application of income within the .....

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ia, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a). In the case of NASSCOM V DDIT in 130 TTJ 377 (Del), the Delhi Bench of the Tribunal at para 11 thereof has held as under :- 11. We have considered the rival submissions. A perusal of the provisions of s. 11(1)(a) of the Act clearly shows that the words used are is applied to such purpose in India . The words are not is applied in India . The fact that the l .....

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, Germany has not resulted in the benefit being derived in India. In these circumstances, it cannot be said that the expenditure incurred by the assessee in Hanover, Germany, which resulted in and which was for the purpose of attaining the charitable object in India, is not application of income. This view is also supported by the decision of a Co-ordinate Bench of this Tribunal in the case of Gem & Jewellery Export Promotion Council (supra), wherein, it has been held as follows : A bare rea .....

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a and the purpose for sending the delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a). In the case of NASSCOM V DDIT in 130 TTJ 377 (Del), the Delhi Bench of the Tribunal at para 11 thereof has held as under :- 11. ……. A perusal of .....

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tion. It is also not disputed that the activities of the assessee are charitable. It is also not the case of the Revenue that the expenditure incurred by the assessee in Hanover, Germany has not resulted in the benefit being derived in India. In these circumstances, it cannot be said that the expenditure incurred by the assessee in Hanover, Germany, which resulted in and which was for the purpose of attaining the charitable object in India, is not application of income. This view is also support .....

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should be in India. In this case, it is not disputed that the trade delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption .....

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registration. 4.5.5 We are also unable to concur with the view of the Assessing Officer that mere credit entries in favour of Ohio University in the assessee s books of account cannot be taken by the assessee as being for charitable purposes as contemplated in Section 11 of the Act. In this regard, the decision in the case of Trustees of HEH Nizam s Charitable Trust (supra) cited by the assessee squarely applies to the assessee s case. In the cited case, the trust had debited certain amounts to .....

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ip;……… We agree with the Tribunal that it is not correct to equate the word applied with the word spent . If the legislature intended that the amounts should actually be spent, there was nothing preventing it from using that word. There cannot be any doubt that the money which was sanctioned was applied for a specific purpose as there was nothing else to be done except the actual payment. The Tribunal was right in holding that the actual payment is irrelevant for purposes of .....

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ussed above, we uphold the decision of the learned CIT (Appeals) in deleting the addition/disallowance made in respect of faculty teaching charges. Consequently, the grounds raised by Revenue at A (1 to 5) for both A.Ys 2008-09 and 2009-10 are dismissed. 5. B & C : Set off of brought forward excess application of income/loss of income/loss of earlier years ( B for A.Y. 2008-09 and C for A.Y. 2009-10). 5.1 In the course of assessment proceedings, the Assessing Officer observed that the assess .....

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. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85% of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee s claim of expenditure of earlier years being brought forward and set off during the year. 5.2 On appeal, the learned CIT (Appeals) allowed the amortization of the expenditure as claimed .....

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cluding the judicial pronouncements cited. The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 1/5 th of the expenditure. The un .....

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on for the Revenue is that the depreciation allowance being a notional income (expenditure ?) cannot be allowed to be debited to the expenditure account of the trust. This contention appears to proceed on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The depreciation is nothing but decrease in value of property through wear .....

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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 .....

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the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable 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 the fair view of the state of affairs; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired. 9. In CIT vs. Indian Jute Mills Association (1982) 134 ITR 68 (Cal), the Cal .....

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T (1953) 23 ITR 230 at 230 (SC) in the following words : The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book-keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the am .....

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above referred case of Sisters of St. Anne (supra) applies to trusts as well. In view of the factual and legal matrix of this issue in the case on hand as discussed above, we concur with the decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing Officer and in allowing the amortization of expenses. Consequently, Ground No. B (1 to 6) of the Revenue s appeal for Assessment Year 2008-09 and Ground No.C for Assessment Year 2009-10 are dismissed. 6. B. Loss on acc .....

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penditure cannot be allowed and disallowed the assessee s claim. 6.2 On appeal, the learned CIT (Appeals) held that since programme fee payments by the assessee to Ohio University, USA has been allowed as application of income, the connected exchange fluctuations are also to be allowed and consequently deleted the disallowance made by the Assessing Officer. 6.3 Before us, the learned Departmental Representative was heard in respect of the Grounds raised, assailed the impugned order of the learne .....

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nce on the decision of the Hon ble Apex Court in the case of CIT Vs. Woodward Governor India (P) Ltd. reported in 312 ITR 254 (2009) (SC). 6.5 We have heard the rival contentions and perused and carefully considered the material on record. The basic facts of the matter on this issue are not in dispute. In the year under consideration, the assessee had incurred expenditure towards programme fees payable to Ohio University, USA We have already held at paras 4 to 4.5.6 of this order (supra) that th .....

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B for Assessment Year 2009-10. 7. D. Disallowance of Accumulation of Income (for A.Y. 2009-10) 7.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has shown accumulation of income under Section 11(2) of the Act. According to the Assessing Officer, the purpose of accumulation of income as declared in Form No.10 is not specific since the assessee has only stated that these were for fulfillment of the objectives of the Trust. The Assessing Officer disallow .....

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Representative was heard in support of the grounds raised and while assailing the impugned order of the learned CIT (Appeals), placed reliance on finding in the order of the Assessing Officer on this issue. 7.4 Per contra, the learned Authorised Representative for the assessee submitted that the assessee had disclosed the purpose of accumulation of income in Form No.10, as purchase of fixed assets and fulfillment of the objects of the trust. It was also submitted that the Hon ble High Court of .....

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Karnataka High Court (supra) is squarely applicable to the assessee in the case on hand. 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. The purposes mentioned by the assessee trust in Form No.10 were for use in purchase of fixed assets and for use in other purposes, for fulfillment of the objects of the trust. The Assessing Officer disallowed the assessee s claim for accumulation of income on th .....

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