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TMI Blog2018 (5) TMI 2094X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the additions made by A.O. holding that hostel/ mess facility for students is separate business activity in terms of section 11(4A) merely on irrelevant consideration like surplus should have been reimbursed to students or used to reduce fee or giving contents of some website about fall in demand for rooms at Meerut etc, even after accepting that maintenance of such hostel is mandatory as per the concerned controlling Authority and it was an integral and inalienable part of educational activity. Thus finding is perverse. 3. That the learned assessing officer has failed to appreciate the fact that maintaining hostel/mess facility to students is an essential & integral part of "education" u/s 2(15) of the Act and not a separate business activity covered under section 11(4A) as also accepted in the past assessments and there is no change in law about the first three limbs of section 2(15) even after 01.04.2009, , hence overall surplus of the society as worked out in Income & Expenditure account of the society and consequently used and invested in the fulfillment of the main objectives of the society resulting into application of income and as such exempt under the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which separate books of accounts need to be maintained. He therefore relying on various decisions and examining the income and expenditure account of hostel recepts and expenses, determined the net surplus of the hostel activities at Rs. 4,05,65,348/- and charged it to tax as business income of the assessee. 3. It was further observed by the Assessing Officer that the assessee trust has claimed a depreciation of Rs. 57079339/- , which was disallowed by him on the premise that hundred percent application of capital expenditure has already been allowed to the assessee in the year of investment and now the claim of the depreciation on the same assets again amounts to double deduction. He, therefore, following the decision of the Hon'ble Supreme Court in case of escorts Ltd and Querela High Court decision in case of Iessi medical institutions. Versus CIT, disallowed the depreciation of Rs. 5,70,79,339/-. Accordingly, total taxable income of the assessee was determined at Rs. 4,05,65,348/-. This order of assessment was challenged before the ld. CIT(A), where the first appellate authority, after considering the submissions of the assessee and various decisions, dismissed the appeal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view by the decision of the Hon'ble Allahabad High Court in IIT versus state of UP, (1976) 38 STC 428 (All) wherein question arose in Indian Institute of Technology v. State of U.P. (1976) 38 STC 428 (All) with respect to the visitors' hostel maintained by the Indian Institute of Technology where lodging and boarding facilities were provided to persons who would come to the Institute in connection with education and the academic activities of the Institute. It was observed that the statutory obligation of maintenance of the hostel, which involved supply, and sale of food was an integral part of the objects of the Institute nor could the running of the hostel be treated as the principal activity of the Institute. The Institute could not be held to be doing business. Further meals being supplied in a hostel to the scholars, visitors, guest faculty etc. can not be exigible to sales tax where main activity is academics as held in Scholars home Senior Secondary School 42 VST 530. Further, the reliance placed by the lower authorities on the decision of the Hon'ble Madras High Court in case of DCIT versus Wellington charitable trust is also misplaced because in that case, the only ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 199 ITR 43 (SC), was dispelled and distinguished. In Escorts Limited (supra) the claim for depreciation under Section 32 of the Act was denied as the entire expenditure on the capital asset had been allowed under Section 35(2)(iv) of the Act while computing business profit and loss. Secondly, the Supreme Court was not concerned with the case of a charitable trust/institution, and the question as to whether income under the head "profits and gains of business" should be computed on commercial principles in order to determine the amount of income available for application for charitable purposes. Decisions of other High Courts in CIT versus Sheth Manilal Ranchhoddas Vishram Bhavan Trust, (1992) 198 ITR 598 (Guj.), CIT versus Raipur Pallottine Society, (1989) 180 ITR 579 (MP), CIT versus Society of the Sisters of ST. Anne, (1984) 146 ITR 28 (Kar.), CIT versus Trustee of H.E.H. the Nizam's Supplemental Religious Endowment Trust, (1981) 127 ITR 378 (AP) and CIT versus Rao Bahadur Calavala Cunnan Chetty Charities, (1982) 135 ITR 485 (Mad.) were referred to in affirmation of the legal ratio. It was, inter alia, held: "11. .........The only question is whether the income of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the exemption u/s. 11(1)." 4. Accordingly, the appeal was dismissed after observing that no contrary judgment has been brought to the notice of this Court. 5. The High Court of Kerala in Lissie Medical Institutions versus Commissioner of Income Tax, (2012) 348 ITR 344 (Ker) has taken a different view, inter alia, holding as under: "5. It is settled position through several decisions of High Courts and Supreme Courts that when business is held in trust by charitable institutions income from business has to be computed by granting deductions provided u/s 30 to 43D as provided under S.29 of the Income Tax Act. 6. Senior counsel Sri.A.K.J.Nambiar appearing for the assessee submitted that the assessee has been filing income tax returns for several years including the assessment year 2005-2006, and disallowance is made only for this year. Since business income has to be as stated in S.29 by granting all deductions provided u/s 30 to 43D which includes depreciation u/s 32, assessee is entitled is the case pressed before us by the Senior counsel appearing for the assessee. We have no doubt in our mind that business income of charitable trust also has to be computed in the same manner a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian Trade Promotion Organisation, and other connected matters, decided on 27th November, 2013. The said order records that the Bench was initially inclined to accept the submission made of the Revenue, but for several reasons mentioned and recorded, declined to interfere and refer the question/ ratio accepted in Vishwa Jagriti Mission (supra), to a larger bench. This Court referred to the following example to explain the controversy in question: "5. ... In order to appreciate the contention raised by the Revenue, we would like to give one example which would clarify the contention or the issue raised before us. An assessee, a charitable institution, say has income from property held under Trust of Rs. 1,00,000/-. As per mandate of clause a, 85% of the said amount i.e. Rs. 85,000/should be spent in the said financial year. The said assessee spends and acquires a capital asset for Rs. 50,000/-. The purchase price for acquisition of the capital asset i.e. Rs. 50,000/- is treated as application of income for the purpose of clause a to Section 11(1). On the capital asset, the assessee also claims depreciation say @ 20%. Accordingly, the assessee claims that the application of income w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 period, the estimated 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 through rising the asset for earning profits, and should, therefore, be charged against those profits as they are earned. " "If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to tax u/s. 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 the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption u/s. 11(1). " This court thereafter referred to the circular/clarification dated 2nd February, 2012 by the CBDT, issued after decision of Kerala High Court in Lisse Medical ( supra) and has expounded as under: "9. After the decision of the Kerala High Court in Lissie Medical Institution vs. CIT (supra), the Board issued a fresh circular or clarification dated 02.02.2012 and has observed: "The view of the CBDT to be conveyed to the Court in this regard is as under: The Central Board of Direct Taxes is of the considered view that where an assessee has acquired an asset through application of income and has also claimed this amount as expenditure in its income expenditure account, depreciation on such asset would not be allowable to the assessee. Such notional statutory deductions like depreciation, if claimed as deduction while computing the income of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions. We are concerned only with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accounting principles, there is authority for the proposition that depreciation is a necessary charge in computing the net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under Section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can the assessee again claim dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) was accepted and affirmed, were noticed. Referring to the decision of the Kerala High Court in Lissie Medical Institutions (supra) it was observed: 15. "Kerala High Court was also conscious of the said decisions and the fact that Section 11(1)(a) had been interpreted in a different manner. It was in these circumstances that the Kerala High Court in the last portion of paragraph 6, as quoted above, has stated that the assessee would be entitled to write back depreciation and if done, the Assessing Officer would modify the assessment determining the higher income and allow recomputation of depreciation written back for the purpose of application of income for charitable purposes in future or subsequent years. This may lead to its own difficulties and problems as suddenly the entire depreciation written off would have to be added first and then in one year substantial application of income would be required. This may be impractical and would disturb the working of many a charitable institutions. The legal interpretation which has continued since 1984, if disturbed and implemented, would not appropriately resolved. Consistency and certainty is more appropriate. 16. The equally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of this Court the question was whether the income of the assessee, which was a charitable trust, should be computed on commercial principles and if so, whether depreciation on fixed assets used for charitable purposes should be allowed as a deduction. This Court noticed that there was a consensus of judicial opinion on this aspect and held, after referring to those authorities as well as a circular of the CBDT issued on 19.07.1968, that while computing the income of the trust available for application for charitable purposes, depreciation on assets used for charitable purposes should be allowed. The point to be noticed is that in this judgment, this Court referred to and distinguished the judgment of the Supreme Court in Escorts Ltd. (supra) on the ground that in Escorts (supra), the Supreme Court was concerned with a case where the deduction of the cost of the asset was allowed under Section 35(1) as capital expenditure incurred on scientific research and, therefore, no deduction for depreciation on the very same assets was held allowable under general principles of taxation, as it would amount to double deduction. The judgment of this Court in DIT vs. Vishwa jagrati Mission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Act of 2014, sub-section (6) to Section 11 stands inserted with effect from 1st April, 2015 to the effect that where any income is required to be applied, accumulated or set apart for application, then for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of an asset, the acquisition of which has been claimed as application of income under this Section in the same or any other previous year. The legal position, therefore, would undergo a change in terms of Section 11(6), which has been inserted and applicable with effect from 1st April, 2015 and not to the assessment years in question. The newly enacted sub- section relates to application of income. 12. In these circumstances, we do not find any merit in the appeals in the case of Indraprastha Cancer Society, Abul Kalam Azad Islamic Awakening and in the case of M/s Sanskriti Educational Society (ITA No. 348/2014). Similarly, we do not think it is necessary and required that we should issue notice in the application for condonation of delay filed in the case of M/s Sanskriti Educational Society (ITA Nos. 463 and 464/2014) as on merits the Revenue is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business. (5) The forms and modes of investing or depositing the money referred to in clause (b) of sub-section (2) shall be the following, namely : - (i)...... (ii)...... ....... (6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall 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. 4. The various sub-sections of section 11 stipulate the methodology for computing the income applied to charitable and religious purposes and the 15% that may be accumulated or set apart. The section also envisages the inclusion of a business undertaking in the property held under trust and the determination of income therefrom. Sub Section 5 sets out the acceptable forms and modes of investment for the purposes of proper application. Sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, it was felt that such double claim was not the intention of Legislature and the provisions of Section 35(2) (iv) were amended to provide that where a deduction was allowed for any previous year in terms of Section 35(1), no depreciation was liable to be allowed for the same or any other previous year in respect of that asset. 10.The amendment was made to operate retrospectively with effect from 1.4.1962 and the Supreme Court, while upholding the retrospective application of the provision states thus:- 'We think that all misconception will vanish and all the provisions will fall into place, if we bear in mind a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and if it is intended it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions - both under s.10(2)(vi) and s.10(2)(xiv) under the 1922 Act or under s.32(1)(ii) and 35(2)(iv) of the 1922 Act - qua the same expenditure." ...... ..... '15.For the reasons discussed above, we are of the view that, even be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpress language regard having to its unusual nature and its serious impact on the Revenues of the State.' ........ ........ 'That the Parliament never intended to provide for a double deduction is also the opinion of the Direct Tax Law Committee. In its interim report, (December, 1977) the Committee (popularly known as 'Choksi Committee') had this to say in para 3.29 of its report: "3.29.- Our attention has also been drawn to certain anomalous situations in the matter of allowance of depreciation. In certain cases where a full deduction has been allowed in relation to a capital asset under other sections (as for example, section 35 which permits a deduction in respect of capital expenditure for scientific research), the tax payers have contended that such deduction is independent of the allowance by way of depreciation. In our view, the intention of the legislature is not to allow a double deduction (of 20%) in respect of the same asset, once under section 35 and, again, by way of depreciation under section 35. If and to the extent that there is any anomaly or contrary view possible on a construction of section 35, we recommend that the law should be clarified to provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al accounting were liable to be followed. He would rely on the decision of the jurisdictional High Court in Commissioner of Income Tax Vs. Rao Bahadur Calavala Cunnan Chetty Charities (1982) (135 ITR 485) = 2003-TIOL-984-HC-MAD-IT and Bombay High Court in Commissioner of Income Tax Vs. Institute of Banking Personnel Selection (2003) (264 ITR 110). A distinction was sought to be made between computation in terms of Section 2(45) defining 'total income', and computation of 'income' in terms of section 11 of the Act. Referring to the scheme of section 11, he would contend that the provisions thereof constituted a complete code which took into account the application of depreciation as a commercial principle and not necessarily one of accountancy. 14. Mr. J. Balachander would refer to the decisions of the Kerala High Court in Catholic Diocese of Tiruvalla V. State of Kerala (209 ITR 596) and Andhra Pradesh High Court in CIT v.Trustee of H.E.H.Nizamm's Supplemental Religious Endowment Trust (127 ITR 378), in support of his submission that commercial principles of accounting are to be applied in computing income for the purposes of section 11. He would refer to the Accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes. Accounting Standards will not, however, apply to those activities which are not of commercial, industrial or business nature, (e.g., an activity of collecting donations and giving them to flood affected people.) It is also clarified that exclusion of an entity from the applicability of the Accounting Standards would be permissible only if no part of the activity of such entity was commercial, industrial or business in nature. For the removal of doubts, it is clarified that even if a very small proportion of the activities of an entity was considered to be commercial, industrial or business in nature, then it could not claim exemption from the application of Accounting Standards. The Accounting Standards would apply to all its activities including those which were not commercial, industrial or business in nature." 18. This was clarified by the 'Technical Guide on Internal Audit for not-forprofit organizations' issued by the Internal Audit Standards Board of the ICAI recommending that the Accounting Standards setting out wholesome principles of accounting including depreciation should be followed by all non- profit organisations irrespective of whether any part of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning the receipts, and secondly the stage of application to Charitable/Religious objects. The two stages are distinct and are required to be complied with consecutively in order to determine the correct income and its application. 23. The question before the Supreme Court in the matter of Escorts related to duel claims under section 35 of the Act in relation to the same asset - the first, weighted deduction and the second, depreciation. Thus, two benefits were extended in respect of the very same asset. We are faced with an entirely different and distinct position in the present batch of appeals - one that involves a claim for exemption in respect of income earned from property held for charitable or religious purposes. We see no double benefit that is extended to the assessee in this regard. 24. Truth to tell, this Court in the matter of Calavala Cunnan Charities, has decided the question now under consideration in favour of the assessee and we could well have decided this Batch of appeals simply on the strength of the aforesaid decision. We are however persuaded to proceed further with the discussion since a conflicting view has been expressed by the Kerala High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding that the excess application of the earlier year could not be set off against the income of the current year contrary to the judgment of this Honourable Court in the case of Matriseva Trust (2000) 242 ITR 20(Mad)?' 29. Learned senior counsel appearing for M/s.St. Thomas Orthodox Syrian Cathedral Parish Trust, the assessee, Mrs. Pushya Sitaraman would contend that the excess application of earlier years was liable to set off against the income of the current year and relied on the decision of the jurisdictional High Court in the case of Commissioner of Income Tax Vs. Matriseva Trust (242 ITR 20). While Sri.J.Narayanaswamy, learned counsel appearing for the Department does not seriously object to the argument advanced on merits, he would raise a technical objection to the effect that in the present case, the claim was made under a revised return. The original return of income was filed only on 31.10.2007 beyond 31.10.2006 when it was due and as such would debar the consideration of the claim made in the revised return. 30. Records reveal that the original return was filed on 31.10.2007 and a revised return was filed on 19.2.2008. Notice under Section 148 was issued on 13.9.2010, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.' .... 34.The short point that arises for decision is whether the provisions of Section 11(6) inserted by Finance (No.2) Act, 2014 w.e.f. 1.4.2015, operate prospectively with effect from assessment year 2015-16 or retrospectively with respect to earlier years as well. In this regard, M/s.Pushya Sitaraman, learned senior counsel and other learned counsels appearing for the assesses refer to the provisions of Circular 1 of 2015dated 21.1.2015 (371 ITR (St) 0022) containing explanatory notes to the provisions of Finance (No.2) Act, 2014. The relevant portion of the circular reads as follows; '7.3 Several issues had arisen in respect of the application of exemption regime to trusts or institutions in respect of which clarity in law was required. 7.4 The first issue was regarding the interplay of the general provision of exemptions which are contained in section 10 of the Income-tax Act vis-à-vis the specific and special exemption regime provided in sections 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment does not purport to be clarificatory, on the other hand the Explanatory Memorandum makes it applicable only w.e.f. A Y 2015-16 and application of the amendment retrospectively would certainly lead to a great deal of hardship to the assessee. We are thus of the view that the provisions of section 11(6) of the Act inserted with effect from 1.4.2015 shall operate prospectively with respect to assessment year 2015-2016 only." 14. Therefore in view of the above two decisions of the Hon'ble high courts, we reverse the finding of the lower authority and direct the Ld. assessing officer to delete the disallowance of these 5707 9339/- being the amount of depreciation claimed by the assessee on the assets on which deduction is application of income has already been granted. In the result ground No. 4 of the appeal of the assessee is allowed." 6. There being no change in the facts and circumstances and no contrary material on record, respectfully following the decision of Co-ordinate Bench of Tribunal, we decide these issues in favour of the assessee. The case of assessee further stands supported by the decision of Hon'ble Supreme Court in CIT vs. Rajasthan and Gujrati Charitable Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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