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2015 (12) TMI 1365 - ITAT BANGALORE

2015 (12) TMI 1365 - ITAT BANGALORE - [2015] 44 ITR (Trib) 18 (ITAT [Bang]) - 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 .....

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y 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 earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of .....

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e of the assessee - Decided against revenue - I. T. A. No. 658 /Bang/ 2014 (assessment 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 .....

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for charitable activities. 2.2. The learned Commissioner of Income-tax (Appeals) 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 a .....

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r application for charitable purposes, the assessee should write back in the accounts 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 de .....

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d that the Tribunal was not justified in directing the allowance of depreciation 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 allo .....

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and set off of deficit of earlier years, even though the said decision was not 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 .....

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ing cognizance of the fact that the assessee cannot adopt dual method of valuation 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 as .....

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" 3. Ground No. 1 is general in nature and does not require any specific 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, .....

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t claiming capital expenditure as application of income and again claiming depreciation 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 Asse .....

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Court in the case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker). 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 .....

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such expenditure is not permissible being a double deduction. 10. On the other 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 depreciat .....

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1 (P&H) ; 3. CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (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 Relig .....

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issue in favour of the assessee. 12. We have heard the rival submissions as well 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 &# .....

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at in a series of other judgments including the judgments of the hon'ble Bombay 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 ar .....

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me because section11(1) says that the former shall not be included in the latter, 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 prof .....

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bited 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 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 .....

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e 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 esti mated amount by which the capital invested in the asset has expired .....

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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 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 inc .....

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wing 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 amount for which a legal liability has be .....

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ion of Mr. Srinivasan. Explanation to section 11(1)(a), on the contrary, takes 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 i .....

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he 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 under section 11(3) to the extent that they represent outgoings for purposes ot .....

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the principles of accountancy for the purpose of determining the income derived 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 Reve .....

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ni Mandal [2015] 378 ITR 593 (Bom), by observing in para 6 as under (page 595) : "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 acq .....

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e, we have no reason to take a divergent view from the view taken by the co-ordinate 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 t .....

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elevant capital asset, cost of acquisition was considered as application of income 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 con .....

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come. It was so held by the hon'ble Karnataka High Court in the case of CIT 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 dec .....

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on that issue and also the decision of the hon'ble Supreme Court in the case 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 .....

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a reference to the decision of the hon'ble Karnataka High Court in the case 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 issu .....

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l 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.' 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 .....

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7,87,598 inclusive of current year deficit to be carried forward for setting up 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. .....

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nsidered and decided by this Tribunal in favour of the assessee in the case of 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) .....

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incurred in the earlier years and the said expenses are adjusted against the 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 CI .....

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assets the cost of which has been fully allowed as application of income under 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 .....

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ture and in order to incur that expend iture, 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 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 .....

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n that the co-ordinate Bench of this Tribunal has followed the decision of the 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 .....

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ed that it is only a book adjustment and no real income was realised and hence, 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 relev .....

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sset, however, the observations of the hon'ble Supreme Court are relevant 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 p .....

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to the profit and loss account. The amount so arrived at is to be reduced by 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 s .....

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ead with Guid ance Note issued by Institute of Chartered Accountants of India 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, .....

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t and loss account, however, in substance there is no credit to the profit and 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 co .....

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ind out the real working results of the company. Thus, the reduction sought by 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 & .....

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g it from the depreciation of ₹ 127,57,06,000, the assessee artificially 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 .....

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of ₹ 288,58,19,000 was added to the historical cost of assets on the asset 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., as .....

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rovisions, as they then existed, certain adjustments were required to be made 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 wi .....

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