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M/s. Karnataka Industrial Areas Devt. Board Versus Dy. Director of Income Tax (Exemptions) , Circle 17 (1) , Bangalore

2016 (5) TMI 168 - ITAT BANGALORE

Exemption under Section 11 - disallowance of claim as the assessee is hit by the proviso to Section 2(15) rws 13(8) - Held that:- We find that there is no change in the facts for the year under consideration as well as it was for the Assessment Year 2009-10. Accordingly, we hold that the provisions of proviso to Section 2(15) of the Act are not applicable in the case of the assessee. Though the assessee has contended that the surplus is arising only from the interest income and other income in t .....

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ction 11 of the Act.

Addition on account of lump-sum lease charges received - Held that:- Assessing Officer did not accept the contention of the assessee and observed that the lease is for a long period which amounts to transfer of the land to the allottee and therefore the entire lump-sum lease rental received by the assessee during the year was considered as revenue receipt of the assessee. It is pertinent to note that the land allotted on lease is not a outright sale giving absolut .....

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se rental proportionate to the lease period and therefore the consistent accounting method followed by the assessee for a considerable long time cannot be disturbed when there is nothing on record to suggest that the accounting method followed by the assessee resulted avoidance of tax. Accordingly, we set aside the orders of the authorities below qua this issue and delete the additions made by the Assessing Officer. - Decided in favour of assessee

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ellant : Shri Padamchand Khincha, C.A. For the Respondent : Mrs. Neera Malhotra, CIT-II (D.R) ORDER Per Shri Vijay Pal Rao, J. M. These cross appeals are directed against the order dt.10.12.2013 of Commissioner of Income Tax (Appeals), Mysore for the Assessment Year 2010-11. 2. First we take up the appeal filed by the assessee wherein the assessee has raised the following grounds : 1. The order passed by the learned Commissioner of Income tax (Appeals), Mysore to the extent prejudicial to appell .....

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iable to be quashed. 3. The learned Commissioner of Income tax (Appeals), Mysore has erred in concluding that the appellant is assessable in the status of Association of Persons . The assessment made and the order passed on a wrong person i.e., under a different status, is bad in law and liable to be quashed. 4. The learned Commissioner of Income tax (Appeals), Mysore has erred in concluding that the appellant is not eligible for exemption under section 11 of the Income tax Act, 1961. 4.1 The le .....

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5. The learned Commissioner of Income tax (Appeals), Mysore has erred in confirming the addition of ₹ 1,74,00,000/- relying on the audit report of the Auditor General. On facts and circumstances of the case and law applicable, the addition so made is liable to be deleted in entirety. 6. The learned Commissioner of Income tax (Appeals), Mysore has erred in confirming the levy of interest under section 234A and 234B of the Act. On facts and circumstances of the case and law applicable, inter .....

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b) Assessment made and the order passed on a wrong person i.e., under a different status be held as bad in law. (c) Exemption under section 11 be allowed as claimed by the appellant. (d) Addition of ₹ 1,74,00,000/- be deleted. Interest levied under section 234A and 234B be deleted. 3. Ground Nos.2 to 4.2 is regarding disallowance of exemption under Section 11 on the ground that the assessee is hit by the proviso to Section 2(15) rws 13(8) of the Income Tax Act, 1961 (in short 'the Act& .....

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ed Registration as charitable institution under Section 12A of the Act vide order dt.206.1988. Subsequently, the registration was sought to be cancelled by the department in view of the proviso to Section 15 of the Act and the matter was carried to this Tribunal and further to the Hon'ble jurisdictional High Court. The Tribunal set aside the action of the authorities for cancellation of registration and held that the registration cannot be cancelled without satisfaction of the conditions sti .....

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f proviso to Section 2(15) of the Act. The assessee challenged the action of the Assessing Officer before the CIT (Appeals). The CIT (Appeals) concurred with the finding of the Assessing Officer and held that the cancellation of Registration under Section 12A is not very crucial factor in deciding the taxability of the income of the assessee which is held to have been attracted by amended provisions of proviso to Section 2(15) rws 13(8) of the Act as applicable to the year under consideration. 4 .....

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l area are not profit motive but the assessee is performing these activities only to achieve the objective of providing and promoting establishment and development of industries as well as industrial infrastructural facilities. The learned Authorised Representative has referred to the income and expenditure details and submitted that out of the transactions of purchase of land and allotment of the same to the industry resulted a surplus of ₹ 142 Crores. There is only a surplus of ₹ 1 .....

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sessee in the form of penalties and other charges. Thus there is no inherent profit motive in carrying out the main activity of the assessee. The learned Authorised Representative thus pointed out that an identical issue was considered by this Tribunal in the assessee's own case for the Assessment Year 2009-10 wherein the Assessing Officer disallowed exemption under Section 11 of the Act in the light of proviso to Section 2(15). The Tribunal after considering the objects and functions of the .....

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se for the Assessment Year 2009-10. 5. On the other hand, the learned Departmental Representative has submitted that even if the proviso to Section 2(15) is held to be not applicable in the case of the assessee, the exemption under Section 11 is required to be examined as per the terms and conditions stipulated under the said provision and application of income by the assessee as required under the said provision. The learned D.R. has relied upon the orders of the authorities below. 6. We have h .....

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. The Tribunal after considering the objections and definitions of the assessee as per the KIADB Industrial Area Development Act has vide order dt.4.9.2015 in paras 18 to 49 held as under : 18. Our attention was drawn to the preamble of The Karnataka Industrial Areas Development Act, 1966 (hereinafter referred to as KIAD) under which the Assessee was established as a body corporate, which reads thus: An Act to make special provisions for securing the establishment of industrial areas in the Stat .....

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lish an Industrial Areas Development Board and for purposes connected with the matters aforesaid; 19. He brought to our notice that in pursuance of the power vested under section 5 of the KIAD Act, the State Government has notified a Board called as the Karnataka industrial Area Development Board (Board in short) to achieve the objectives of the KIAD Act. The purpose of establishing the Board is provided under section 5(1) of the KIAD Act, which provides: Establishment and incorporation. - For t .....

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olly owned infrastructure agency of Government of Karnataka. set up under Karnataka Industrial Areas Development Act of 1966. It is established through a State Government notification. The assessee is a creation of law. The law was enacted with certain specific objectives. Thus, the objectives for which the assessee is constituted was laid out even prior to its incorporation. The assessee and its activities are therefore ring fenced to this special Act, namely KIAD Act. 21. The State Government .....

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of the assessee which outlines its Aims and objectives and Functions. It states: Aims & Objectives: (a) Promote rapid and orderly development of industries in the stale. (b) Assist in implementation of policies of Government within the purview of KIAD Act. (c) Facilitate in establishing infrastructure projects. (d) Function on No Profit - No Loss basis. Functions: (a) Acquire land and form industrial areas in the state. (b) Provide basic infrastructure in the industrial areas. (ç) Ac .....

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lined. The funds cannot be distributed or appropriated to any person unless the same is in accordance with the assessee s objectives. The employment utilization and channelizing of funds can be done within the broad framework of the assessee s objectives. Acquisition and development of lands 25. The Acquisition section (one of the wings of the assessee) conducts the proceedings for acquisition of land as per KIAD Act and hands these lands to KIADB. Special Deputy Commissioner heads acquisition w .....

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purpose of development, and pay compensation for such compulsory acquisition. The Board cannot decide what land to acquire and how much to compensate the land owners. It is only when an area is declared as an industrial area and the land is acquired under section 28 of KIAD Act or transferred by the Government under section 32 of the KIAD Act, that the role of the Board begins. Restraint on expenditure from funds of the assessee 26. Section 23 stipulates that the assessee shall have the authorit .....

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ment of any other object of general public utility ? 28. The objectives of the assessee are explicit and cannot he circumvented. The assessee is a creation of law, It is not formed or set-up by any person(s) for any pecuniary benefit or commercial motive. The assessee owes its genesis to KIAD Act, a State Government legislation. The assessee s incorporation. Functioning, powers and scope are set out in the KIAD Act. Being a creation of a special law, compliance with the provisions therein is man .....

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would scale up; efficiencies stand enhanced and standardization becomes achievable. All these transformations translate into overall amelioration of the society and country as a whole. An institution with such a far sighted and development oriented objective is certainly one which benefits the public at large. The assessee serves the cause of general public utility and is therefore covered within the gamut of Charitable purpose as defined by section 2(15) of the I.T. Act. 30. In the course of c .....

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any part thereof. By the achievement of these objects, it is not intended to serve merely the interests of the members of the assessee. Advancement or promotion of trade, commerce and industry leading to economic prosperity ensures the benefit of the entire community. That prosperity would be shared also by those: who engage in trade, commerce and industry but on that account the purpose is not rendered any the less an object of general public utility. It may be remembered that promotion and pr .....

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to specific industrialists/entrepreneurs. The objective is not service of individual industrial houses but promotion of overall industrialization of Karnataka. An incidental benefit to some industrialists/entrepreneurs would not dilute the progressive and charitable objective of the assessee. 32. To summarize, the ld. counsel submitted that the assessee plays a vital role in supplementing the governmental efforts in boosting industrialization. The assessee is a creation of law constituted for t .....

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cement of general public utility by the Apex Court. Activities of the assessee are therefore to be regarded as covered within the operative provisions of section 2(15). 33. It was also submitted that assessee has continuously devoted itself to the promotion of industries in the State of Karnataka. It has not been formed and is not carrying on activities with a motive to distribute its surplus. There is no intention to make profits. The objects are to carry out Industrial and infrastructure promo .....

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acquires agricultural land from the farmers by paying compensation to the farmers. Such compensation is determined by Deputy Commissioner of District. Such land would be developed into plots for the purposes of projects approved by State High level Clearance Committee (headed by Chief Minister). State Level Single Window Clearance Committee is headed by Chief Secretary. Govt. of Karnataka and District Level Single Window Clearance Committee is headed by the Deputy Commissioners of the Districts .....

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ayble to land owners (B) Compensation for cost of structures wells etc on the land (A+B) Cost of land (C) Establishment charges at 11% on(A+B) (D) Interest at 12.75% p.a on (A+B) (E) Total cost of acquisition (A+B+C+D) (F) Development cost for formation of layout ( road drainage water supply parks etc.) (G) Board service Charges at 10% on (F) (I) Interest charged by the Board at 12.75% p.a on (F) (J) Total Cost of development (F+G+I) (k) Total cost of acquisition and development [(E)+(J)] 36. On .....

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s. These are excess funds available with the Board which are housed with the banks to generate passive interest income. Thus, the core activity of industrialization of lands (the alleged business activity) does not fetch profits; the source of income which generates surplus is from bank interests and thereby not generated on account of Board s normal course of activities. 37. In view of all the above, it was submitted by the ld. counsel for the assessee that the action of the AO affirmed by CIT( .....

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lied for charitable purpose, the assessee has to be considered as existing for a charitable purpose. The decisions in Krupanidhi Educational Trust v DIT(E), ITA No. 86/2012 dt. 14.9.2012 - Bangalore ITAT; Loka Shikshana Trust v ClT [1975] 101 ITR 234 (SC), Cricket Association of Bengal v CIT [1959] 37 ITR 277 (Cal), CIT v. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Born), The Trustees of the Tribune, In re (1939) 7 ITR 423 (PC) and para No. 19 Page No. 528 - Volume I of The Law and Prac .....

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world. The latter indicates the import of business kind efficiency in carrying out activities. It is an evidence of being organized and carrying on activities in a structured and efficient manner. 40. Mere adoption of business principles does not transform a charitable institution into a business entity. The Apex Court has echoed similar view in the case of CIT v Andhra Pradesh State Road Transport (1986) 159 ITR I (SC) wherein he Court observed as under:- No activity can be carried on efficien .....

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tion but would reflect unsound principles of management. (emphasis supplied) 41. In the present case, the assessee has carried on its activities on business principles and sound principles of management. As a result, the assessee has been able to repeatedly generate surplus funds. This fact by itself does not render the assessee a non-charitable entity; but only is an execution of sound management principles by a charitable organisation. The assessee undertakes development of industries and infr .....

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al pronouncements. We will make a reference to those decisions at the appropriate place, to the extent it is necessary to dispose this appeal. 43. The learned DR placed strong reliance on the findings of the AO in the order of assessment and the order of the CIT(A). 44. We have given a very careful consideration to the rival submissions. The purpose for which the Assessee exists is for the advancement of any other object of general public utility . The fact that the Assessee enjoyed registration .....

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o Sec.2(15) of the Act will be applicable to the Assessee in the light of the decision of the Hon ble Delhi High Court in the case of India Trade Promotion Organization Vs. DGIT(Exemption) and others 371 ITR 333 (Delhi). The learned counsel for the Assessee has placed strong reliance on this decision to support his plea that the proviso to Sec.2(15) of the Act is not applicable to Assessee. The facts of the case before the Hon ble Delhi High Court in the case of India Trade Promotion Organizatio .....

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y withdrew the approval granted to the Assessee consequent to the insertion of the proviso to Sec.2(15) of the Act, on the ground that the Assessee was deriving rental income from letting out space for rent during trade fairs and exhibitions, was deriving income from sale of tickets and income from food and beverage outlets. The said withdrawal was challenged by the Assessee before the Hon ble Delhi High Court. The Hon ble Delhi High Court had to go into the question as to the scope of the provi .....

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3;in relaıon to any trade, commerce or business. Both these parts are further subject to the condition that the activities so carried out are for a cess or fee or any other consideration, irrespective of the nature or use or application or retention of the income from such activities. In other words, if, by virtue of a cess or fee or any other consideration, income is generated by any of the two sets of activities referred to above, the nature of use of such income or application or retenti .....

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ve no bearing on determining the nature of the activity carried on by the petitioner. But, in deciding whether any activity is in the nature of trade, commerce or business, it has to be examined whether there is an element of profit making or not. Similarly, while considering whether any activity is one of rendering any service in relation to any trade, commerce or business, the element of profit making is also very important. (iii) The meaning of the expression "charitable purposes" h .....

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and its importance throughout India or throughout any State or States. (iv) Merely, because an institution derives income out of activities which may be commercial, that does, in any way, affect the nature of the Institution as a charitable institution if it otherwise qualifies for such a character. (v) Merely because a fee or some other consideration is collected or received by an institution, it would not lose its character of having been established for a charitable purpose. If the dominant a .....

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in Article 14 of the Constitution). Courts should always endeavour to uphold the Constitutional validity of a provision and, in doing so, the provision in question may have to be read down, as pointed out above. (vii) Section 2(15) is only a definition clause. Section 2 begins with the words, ―in this Act, unless the context otherwise requires. The expression "charitable purpose" appearing in Section 2(15) of the said Act has to be seen in the context of Section 10(23C)(iv). When .....

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the said Act would be that it carves out an exception from the charitable purpose of advancement of any other object of general public utility and that exception is limited to activities in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration. In both the activities, in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade .....

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an institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it cannot but be regarded as an institution established for charitable purposes. (emphasis supplied) 46. It can be seen from the various provisions of the KIAD Act which we have set out in the earlier part of the order that the dominant and prime objective of the Assessee is not profit making. Prior to the introduction of the proviso to .....

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ts is ₹ 120.90 Crores. The Earnest Money Deposit given by the allottees are parked by the Assessee in fixed deposit and those deposits has earned the aforesaid interest income. Therefore there can be no profit element in earning this interest income. Besides the above, the other components of interest are interest from Allottees, penal interest from Allottees, interest on staff loan, interest from SB and others, interest on seed money, dividend received and interest on income tax refund. T .....

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marily object of the Assessee and expenditure in the form of administrative expenses of ₹ 15.42 Crores and 10.61 Crores which are fixed expenses and necessary to carry on the primary object alone are considered than there would be loss. This by itself would demonstrate that the Assessee does not exist for profit. 47. The main aim and object for which the Assessee was established is to (a) Promote rapid and orderly development of industries in the stale. (b)Assist in implementation of polic .....

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r making profits. 48. A look at the income stream of the Assessee clearly reveals that all the activities from which the Assessee derives income are an inherent part of the main object of the Assessee. It is clear from the facts of the case that profit making is not the driving force or objective of the Assessee. Rather the purpose for which the Assessee was created is to regulate and develop drinking water and drainage facilities in the urban areas of the State of Karnataka and for matters conn .....

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ot driven primarily by desire or motive to earn profits but to do charity through advancement of an object of general public utility. The assessee is operating on no profit basis. This is substantiated by the actual income received on operations of the Assessee and the expenditure incurred set out in the earlier paragraphs of this order. The proviso to Sec.2(15) of the Act is therefore not applicable to the case of the Assessee. We therefore hold that the Assessee is entitled to the benefits of .....

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ell as it was for the Assessment Year 2009-10. Accordingly, we hold that the provisions of proviso to Section 2(15) of the Act are not applicable in the case of the assessee. Though the assessee has contended that the surplus is arising only from the interest income and other income in the nature of penalty and other charges and not from the activity of acquisition of land and providing the infrastructure facilities for industrial development however, since the authorities below have not examine .....

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t the auditor has pointed out under statement of income to the tune of ₹ 5.81 Crores by the assessee. The assessee submitted before the Assessing Officer that the observation is basically in respect of lease transactions. The lease transactions have not been accounted as they were not sale transactions and only lease transactions. The Assessing Officer did not accept the explanation and contention of the assessee and after giving the benefit of cost and development of the land, the Assessi .....

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sheet and submitted that the assessee has already shown the rent receipt to the extent of ₹ 2,26,47,745. Therefore the said rent receipt has already been included and part of the total receipts. The assessee has been recognizing the rent receipt proportionate to the lease period. Thus the learned Authorised Representative has submitted that the Assessing Officer has made the addition by considering the total lump-sum amount received by the assessee instead of proportionate amounts relatin .....

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ee and therefore the Assessing Officer has added this amount on the basis of the audit report. He has relied upon the orders of the authorities below. 7.5 We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that the amount in question which has been added by the Assessing Officer on account of under statement of income pertains to the lease rentals received by the assessee for allotment of land on lease. The assessee contended that this .....

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. It is pertinent to note that the land allotted on lease is not a outright sale giving absolute title and ownership to the allottee. Only when a conveyance deed is executed on payment of unearned premium and until and unless the land is converted into freehold by executing a conveyance deed after payment of unearned premium the allottee gets absolute legal title of ownership of the land. The lease transaction does not give an absolute ownership or title as it can be cancelled and re-entered. Fu .....

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ssing Officer. 8. Ground No.6 is regarding interest under Sections 234A & 234D which is consequential and mandatory. 9.1 The revenue has raised the following grounds : 1. The CIT (Appeals) has erred in ignoring the fact that the assessee has claimed depreciation on the assets the cost of acquisition of which was already claimed by the assessee and allowed by the Department as application of income under Section 11(1) in the respective year(supra)) of acquisition/purchase of such assets. 2. T .....

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the same amount/expenditure except in a case wherein it is expressly provided in the stature. 4. The CIT (Appeals) has erred in not considering the ratio laid down by the Hon'ble Supreme Court in the case of Escorts Limited Vs. Union of India (199 ITR 43) wherein it is clearly held that depreciation cannot be allowed as deduction in respect of assets wherein the entire cost of acquisition being the capital expenditure on scientific research was allowed as deduction under Section 35(2)(iv). 5 .....

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) has erred in not considering the judicial precedent in the case of Lissie Medical Institution Vs. CIT (348 ITR 344) wherein, on similar set of facts pertaining to a charitable institution registered under Section 12A, the Hon'ble High Court of Karnataka has held that the assessee is not entitled to claim depreciation allowance as deduction in respect of an asset the cost of acquisition of which has already been claimed and allowed as application of income under Section 11(1). 7. The CIT (A .....

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from the grounds of raised by the revenue is disallowance of depreciation on the ground that it would tentamount to double deduction. Firstly in the form of application of income in the year of acquisition of asset and consequently in the form of depreciation. 9.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that this issue is now covered by various judgments of the Hon'ble jurisdictional High Court as well as other High C .....

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ing considered the rival submissions and material on record, at the outset we note that this issue has been covered by the decision of co-ordinate Bench in the case of Jyothi Charitable Trust (supra) wherein it has been held in paras 7 to 9 as under : 7. We have heard the submissions of the ld. DR, who relied on the order of AO. We have considered the order of the AO. Identical issue came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union (2013) 60 SOT .....

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d. (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 necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of sec .....

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ble 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 of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon ble Court in the aforesaid decisions. 21. The issue raised by the revenue in the ground of appeal is thus no longer res integra and has been decided by the Hon ble Punjab & Haryana High Court in the case .....

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ryana 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 different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double d .....

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