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DEPUTY COMMISSIONER OF INCOME-TAX Versus MANIPAL ACADEMY OF HIGHER EDUCATION

Depreciation on the asset put into use - assessee is a registered charitable trust - Held that:- As decided in CIT, Karnataka I Versus Society Of The Sisters Of St. Anne [1983 (8) TMI 44 - KARNATAKA High Court ] it is not in dispute that if the mercantile system is followed, the depreciation allowance in respect of the trust property should be allowed - Decided in favour of assessee

Carry forward of deficit - Held that:- There is no dispute that an identical issue was considered and d .....

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uld not be liable to tax. The expenditure, if incurred in an 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 expen .....

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sessment year 2011-12). - Dated:- 24-7-2015 - VIJAY PAL RAO (Judicial Member) and JASON P. BOAZ (Accountant Member) Farhat Hussain Qureshi, for the appellant. Sajjan Kumar Tulsiyan, for the respondent. ORDER The order of the Bench was delivered by 1. Vijay Pal Rao (Judicial Member).-This appeal by the Revenue is directed against the order dated March 17, 2014 of the Commissioner of Income-tax (Appeals), Mysore for the assessment year 2011-12. 2. The Revenue has raised the following grounds : &qu .....

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s) erred in not following the ratio laid down by the hon'ble apex court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC)- wherein it is held that a double deduction cannot be presumed in the absence of a clear statutory indication. 2.3. The learned Commissioner of Income-tax (Appeals) failed to take cognizance of the fact that allowing of total cost of the asset as an application of income and allowing of depreciation on the value of such assets in the same year results i .....

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ccounts the depreciation amount to form part of income to be accounted for applications for charitable purposes. 2.5. The learned Commissioner of Income-tax (Appeals) failed to consider that the decision in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) is regarding allowing of depreciation on assets whose value was allowed in the preceding years as an appli cation of income, and not on allowing of depreciation in the same assessment year in which the cost was allowed as an app .....

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on in respect of assets, the cost of which has been allowed as deduction as application of income of the trust. Carry forward of deficit 3.1. The learned Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to allow carry forward of deficit of assessment years 2001-02 and onwards for set off against the surplus of assessment year 2006-07, when there is no provision in the Income-tax Act to allow carry forward of such deficit, and the number of years for which such carry .....

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pursued in further appeal in view of nil tax effect involved, and as per section 268A the said decision is not binding in respect of this asses see. The learned Commissioner of Income-tax (Appeals) also erred in failing to take cognizance of the decision of the hon'ble apex court in the case of Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277 (SC) wherein the apex court held that the hon'ble High Courts can only interpret the law and not legislate, and legislative cas .....

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tion of investments, i.e., one for computing the income and expenditure account and other for arriving at the income for Income-tax purpose. 4.3. The learned Commissioner of Income-tax (Appeals) erred in not taking cognizance of the fact that in the assessment year 2001-02 the provision debited in the income and expenditure account was dis allowed, provision being not an allowable expenditure whereas the fact in the assessee's case for the year under consideration is that gain on revaluation .....

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finding for adjudication. 4. Ground No. 2 is regarding claim of depreciation on the asset put into use. 5. The assessee is a registered charitable trust with the object of promoting education and advanced studies in medicine, science, etc. The assessee- trust was granted registration under section 12AA of the Income-tax Act, 1961 and also received approval for exemption under section 10(23C)(vi) of the Income-tax Act, 1961. The assessee filed its return of income showing nil income and excess of .....

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reciation on the same amount results in double deduction. The Assessing Officer placed reliance on the judgments of the hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) as well as the decision of the hon'ble Kerala High Court in the case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker) and held that double deduction cannot be allowed. Accordingly, the Assessing Officer disallowed the claim of depreciation to the tune of ₹ 70,4 .....

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r). The learned Departmental representative has pointed out that the hon'ble Kerala High Court has decided this issue against the assessee by considering all the decisions which were relied upon by this Tribunal in the case of Asst. CIT v. Shri Adichunchanagiri Shikshana Trust [2012] 19 ITR (Trib) 828 (Bang). 8. The learned Departmental representative submitted that the hon'ble High Court has observed that when the expenditure incurred for acquisition of depreciable assets itself is trea .....

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r hand, the learned authorised representative has submitted that the decision of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC) is not applicable in case of a trust because the said decision was on the issue of allowability of claim of depreciation on an expenditure on which the claim under section 35 was also made and allowed. In the case in hand, there is no double claim of depreciation. Therefore, there is no bar in allowing the depreciation on the capital ex .....

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Karn) ; 4. Asst. CIT v. Shri Adichunchanagiri Shikshana Trust [2012] 19 ITR (Trib) 828 (Bang) ; Page No : 0025 5. CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598 (Guj) ; 6. CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) ; 7. CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) ; and 8. CIT v. Trustee of H. E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP). 11. The learned authorised repre .....

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ll as the relevant material on record. So far as the facts relating to this issue of claim of depreciation are concerned, there is no dispute that the assessee incurred an expenditure for acquisition of the asset to the tune of ₹ 4,11,14,20,599 and claimed the same as application of income. There is no dispute before us on the said claim of application of income. Since the assessee also claimed depreciation of ₹ 70,40,56,376 on such capital asset the Assessing Officer disallowed the .....

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ombay High Court and the hon'ble Punjab and Haryana High Court as well as the other decisions as relied upon by the learned authorised representative, a contrary view has been taken by holding that the claim of depreciation on the capital expenditure would not amount to double deduction even if the said capital expenditure was claimed as deduction on account of application of income. Thus, it is clear that there are divergent views by different High Courts on this issue however, the judgment .....

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er, of the person in receipt of the income. The expression 'total income' has been defined under section 2(45) of the Act to mean 'the total amount of income referred to in section 5 computed in the manner laid down in this Act'. The word 'income' is defined under section 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provide .....

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eed 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 under stood 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 and Pegler's Book-keeping and Accounts, 17th Edition, pages 44, 45 and 46, it .....

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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 esti mated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred .....

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sset 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 ; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired.' In CIT v. Indian Jute Mills Association [1982] 134 ITR 68 (Cal), the Calcutta High Court, while construing the expression 'expenditure incurred' in section 44A of the Act, observed : 'depreciation claimed sha .....

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wn 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 amount for which a legal liability has been incurred before it is actually disbursed.' It is not in dispute that if .....

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note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not be on cash basis only. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the Income-tax Act in respect of business undertaking. The depreciation if it is not allowed as a necessary deduction for computing the income from the .....

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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 under section 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 .....

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d from the property held in trust. In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) at 495, the Madras High Court observed : 'The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by section 14.' In the result, we answer the question in the affirmative and against the Revenue." 13. A similar view has been taken by the hon'ble Bombay High Co .....

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: "6. As far as question No. 4 is concerned, this court has repeatedly held that there is nothing like double deduction. When the assessee has acquired an asset from the income of the trust and thereafter the amount that is claimed is the depreciation on the use of the assets, such depreciation claim does not mean double deduction. The deduction earlier claimed is towards application of funds of the trust for acquiring assets. The latter is depreciation and it is permissible deduction cons .....

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dinate Bench of this Tribunal in the case of Shri Adichunchunagiri Shikshana Trust (supra) as well as in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang)), wherein the co-ordinate Bench of this Tribunal has decided an identical issue in paras 7 to 9 as under (page 587) : "7. We have heard the submissions of the learned Departmental representative, who relied on the order of the Assessing Officer. We have considered the order of the Assessing Officer. I .....

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come in the year of its acquisition. The Assessing Officer took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of the hon'ble Supreme Court in Escorts Ltd. [1993] 199 ITR 43 (SC). The Commissioner of Income-tax (Appeals), however, allowed the claim of the 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 necessary d .....

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T v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn). It was held in CIT v. Tiny Tots Education Society [2011] 330 ITR 21 (P&H), following CIT v. Market Committee, Pipli [2011] 330 ITR 16 (P&H) 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 deci sion of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 .....

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ase of Escorts Ltd. [1993] 199 ITR 43 (SC), 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 and Haryana High Court made a reference to the decision of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC) and observed that the hon'ble Supreme Court was dealing .....

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e of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn), wherein it was held that under section 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 Commissioner of Income-tax (Appeals) on the above issue does not call for any interference. 22. Consequently, ground No. 5 raised by .....

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therwise 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.' 9. As already stated, the aforesaid amendment is prospective and will apply only from the assessment year 2015-16. In view of the above legal position, we are of the view that the order of the Commissioner of Income-tax (Appeals) does not call for any inter ference. Consequently grounds Nos. 2 to 2.5 raised by the Revenue are dismisse .....

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p of the same as application of income in subsequent assessment years. The Assessing Officer rejected the claim of the assessee on the ground that in the Income-tax Act, there is no provision of carry forward of excess of expenditure over income. 17. On appeal, the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee by following the decision of this Tribunal dated February 16, 2010 in case of Dr. T. M. A Pai Foundation in I. T. A. No. 486 to 491(B)/2009. The Commissioner o .....

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Dr. T.M.A Pai Foundation, Manipal. The learned authorised representative of the assessee also relied upon the decision of this Tribunal in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang). We note that the Tribunal in the case of City Hospital Charitable Trust, while dealing with the issue of carry forward of excess expenditure over income has held in para 14 as under (page 590) : "14. We have considered his submission. Section 11(1)(a) does not conta .....

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income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure 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 v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) ; CIT v. .....

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r section 11 in past years. In Gonvindu Naicker Estate v. Asst. DIT [2001] 248 ITR 368 (Mad), the hon'ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that section 11 is a benevolent 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 .....

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So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an 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 e .....

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hon'ble Rajasthan High Court in case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) as well as the decision of the hon'ble Bombay High Court in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom). Accordingly, following the decision of the co-ordinate Bench in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang), we uphold the order of the Commissioner of Income-tax (Appeals) on this issue. 20. Ground No. 4 rega .....

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, the same was reduced from the gross receipts. The Assessing Officer did not accept the explanation of the assessee and added back the said amount to the assessee's returned income. 21. On appeal, the Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer. 22. We have heard the learned Departmental representative as well as learned authorised representative and considered the relevant material on record. The learned authorised representative has relied upon .....

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on the point of actual increase in the income. The relevant observation and conclusion of the hon'ble Supreme Court are in paras 20-25 are as under (page 371) : "20. Book profit is not defined in the Act. It is income computed under the company law. By virtue of the minimum alternate tax provisions, in the case of a company whose total income as computed under the normal provisions of the Act is less than 30 per cent. of the book profit, the total income chargeable to tax will be 30 per .....

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item (i) to item (vii) including amounts withdrawn from reserves, if any such amount is credited to profit and loss account. Clauses (i) to (vii) of the Explanation to section 115JB(2) represent items of reduction from the net profits. Clause (i) mandates reduction for the amount(s) withdrawn from the reserves earlier created, provided such amount(s) is credited to the profit and loss account. Such credit is mandated so that the true working result gets reflected in the financial statement of th .....

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which is in conformity with section 211 of the Companies Act. The said adjustment was primarily in the nature of contra adjustment in the profit and loss account and not a case of effective credit in the profit and loss account (as contemplated in clause (i) of Explanation). The credit in the profit and loss account implies that the profit and loss account per se has been effectively credited by the said amount. Thus, the amount withdrawn from any reserve must in effect impact the net profit as .....

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loss account. Minimum alternate tax provisions were introduced as number of zero tax companies had grown. It was found that companies had earned substantial book profits and had paid huge dividends but paid no tax. In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending March 31, 2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amou .....

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the assessee under clause (i) to the Explanation to section115JB(2) in respect of depreciation has been rightly rejected by the Assessing Officer. 22. Take the facts of the present case. As stated above, the revalu ation reserve of ₹ 288,58,19,000 was created during earlier assess ment year 2000-01. During the accounting year ending March 31, 2001 (assessment year 2001-02), the profits of the assessee stood at ₹ 120,18,97,000 whereas depreciation stood at ₹ 127,57,06,000. Depr .....

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brings down the depreciation only to ₹ 101,45,32,000 which is then deducted from the profits before depreciation amounting to ₹ 120,18,97,000 so that there is a profit of ₹ 18,73,65,000. This is how the loss of ₹ 7,38,09,000 got converted to profit of ₹ 18,73,65,000. Thus, the financial statement for the year ending March 31, 2001 is made to look healthy. 23. The reasons given hereinabove are in addition to the reasons given by the authorities below while rejecting .....

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et side of the balance- sheet and in order to equalise both sides of the balance-sheet the revaluation reserve to that extent was created on the liability side. Thus, the figure of profit remained untouched so far as the revalua tion of assets to the tune of ₹ 288,58,19,000 is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., assessment year 2001- 02, an amount of ₹ 26,11,74,000, being the different .....

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to the net profit as shown in the profit and loss account. One such adjustment stipulated that the net profit shall be reduced by the amount(s) withdrawn from any reserves, if any such amount is credited to the profit and loss account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to profit and loss a .....

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Highlight: Reopening of assessment - sufficiency of material available with the AO to form a belief that income chargeable to tax had escaped assessment - bogus purchases - seller refused to respond - notice would not be interfered with - HC

Highlight: Exemption u/s 11 - education activities - transport and hostel facilities surplus cannot be considered as business income of the assessee society

News: Draft Notification for insertion of new rule 39A in the Income-tax Rules, 1962 – comments and suggestions-reg.

Highlight: Genuineness of labour wages expenses, embroidery charges, fabrication expenses etc. - getting work done through small workmen who do not have any permanent place of residence - disallowance of ad hoc expenditure deleted.

Highlight: Project import - Since the goods were never used for the purpose for which it was imported, the actual user condition has been violated - Redemption fine and penalty imposed.

Highlight: Penalty u/s 112 (a) - CHA - Lack of due diligence and failure to take more precautions can not, by itself, bring in penal consequences

Highlight: Import of services - GST - The fact that those services were received outside India will not change the fact that the services have been paid for by the beneficiary appellant, who is located in India. - Demand confirmed.

Notification: SEZ for IT/ITES at Madhurwada Village, Visakhapatnam District in the State of Andhra Pradesh - denotified.

Highlight: Merely because payment is received in Indian rupee, it cannot be said that payment against export has not been received in convertible foreign exchange.



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