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TMI Blog2018 (6) TMI 1862X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue is now settled, in favour of the assessee, by Hon'ble Supreme Court's judgment in the case of CIT Vs Rajasthan and Gujarati Charitable Foundation [(2018) 402 ITR 441 (SC)] wherein Their Lordships have, inter alia, observed as follows: 1. These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as 'Act'). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of the Act was that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act. The Court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature. 5. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well. 5. Grievance of the assessee thus indeed merits acceptance. The assessee is, over and above the claim under section 11 and 12, entitled to the depreciation as well. Learned CIT(A) had declined the same on the ground that since the assessee is allowed exemption under section 11, there is no question of grant of depreciation. The view so taken by the learned CIT(A), in the light of binding judicial precedents, does not merit our approval. We, therefore, direct the Assessing Officer to grant the depreciation as well. 6. Ground no. 1 is thus allowed. 7. In ground 2 of the appeal filed by the assessee, grievance is that the CIT(A) erred in not adjudicating upon ground nos. 8,9 and 10 before him as academic and general. 8. Learned r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption under section 11. The Assessing Officer further observed that the assessee has not maintained the books of accounts as per the Major Port Trust Act, 1963. Even in the second round of proceedings thus, the exemption under section 11 was declined. Aggrieved by the stand of the Assessing Officer, assessee carried the matter in appeal before the CIT(A) who upheld the claim of the assessee, in respect of exemption under section 11, by observing as follows: "6.3 I have carefully considered the contention of the appellant and the various orders. The main issue which requires to be considered is whether the appellant is entitled for exemption u/s. 11 or not, in view of the registration granted to it u/s. 12A. The A.O. has given four reasons for denying the exemption, which have been reproduced earlier in para-6.1 above. The four reasons are being discussed individually in the succeeding paragraphs. 6.4 The first reason given by the A.O. is that no claim of exemption u/s.11 or 12 was filed in the original return of income. As per the decision of the Hon'ble Supreme Court in case of Goetz India (supra), it is beyond the scope of the A.O. to grant the exemption if it was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that audit report in Form 10B has not been submitted before filing the return of income and the same is obtained much after. It is held by the A.O. that as per s.12A(1)(b) read with Rule 17B, audit, report in Form 10B has to be submitted before the A.O. along with the return of income on or before due date prescribed u/s.139. It was noticed by the A.O. that Form 10B was signed by the auditor on 15/10/2009 while the registration u/s.12AA was granted by CIT-1, Rajkot on 15/12/2008. Therefore, there is an inordinate delay in filing of the audit report. The A.O. therefore denied the exemption. 6.7 During the course of appellate proceedings, it was contended by the appellant that various authorities, including the Hon'ble Gujarat High Court, have held that the filing of the audit report is a directory and not a mandatory condition and if the defect is cured by appropriate rectification carried out at a subsequent stage, the same should be allowed. The appellant has also relied upon the decision of the Hon'ble Gujarat High Court in case of Nanjibhai Dungarbhai in 1TA No.56 of 1985, wherein it is held that exemption u/s. 11 cannot be denied merely on the ground that the audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while Kandla Port Trust is a local authority incorporated under the Major Port Trust Act, 1963 and therefore a public sector undertaking. The share holding by the Central Government in Kutch Railway Company therefore exceeds 51% and thus it is a government company as defined u/s.617 of the Companies Act. In respect of Petronet VK India Ltd., various government companies hold 69% of the shareholding as under :- Indian Oil Corporation - 26% Petronet India Ltd - 26% State Bank of India - 5% Kandla Port Trust - 5% GIIC - 5% Canara Bank - 2% 6.10 As regards Petronet India Ltd., it is also a government company as more than 51% shareholding is held by central government as under:- Indian Oil Corporation - 18% HPCL - 16% BPCL - 16% Stale Bank of India - 10% 6.11 It pan thus be seen that both the companies are public sector undertakings / company as mentioned in s.l3(l)(d)(iii) and the investment made in in shares of these companies is as per me provisions of the section. As there is no violation of s. 13(1)(d)(iii),the appellant is held to be eligible for exemption u/s. 11 and the said exemption cannot be denied to it on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the Tribunal and the matter was remitted to the file of the Assessing Officer for consideration on merits in the light of the registration under section 12A. On these facts, in our considered view, the Assessing Officer was indeed in error in applying the ratio of Goetze India decision (supra). In the light of law laid down by Hon'ble Supreme Court in the case of National Thermal Power Co Ltd Vs CIT [(1998) 229 ITR 383 (SC)], there is no bar on admission of a new claim by the assessee. In any event, Goetze decision does not apply to the appellate authorities, and, we may, in this regard, refer to Hon'ble Delhi High Court's judgment in the case of CIT Vs Jai Parabolic Springs Ltd (306 ITR 402) as also unreported decisions of Hon'ble jurisdictional High Court in the cases of CIT Vs Symphony Comfort Ltd (TA No 97 of 2000) and CIT Vs Arvind Limited (TA No. 1407 of 2011). In the light of these discussions, the CIT(A) was quite justified in rejecting the stand of the assessee. As regards the requirement of filing the audit report on form 10B alongwith the return of income, find that, as reported in 179 ITR 61 (Stat), Hon'ble Supreme Court has dismissed the SLP against Hon'ble jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is dismissed. 22. We now take up the cross appeals filed against the learned CIT(A)'s order dated 8th August 2014 passed by the CIT(A) in the matter of order under section 154 r.w.s. 143(3) for the assessment year 2005-06. 23. So far these cross appeals are concerned, the issue in appeal lies in a very narrow compass of material facts. The impugned rectification was carried out as, subsequent to the assessment under section 143(3) having been finalized, the Assessing Officer noticed that the assessee had, by offering net prior period income of Rs 2,24,07,638, effectively claimed prior period expenses of Rs 1,33,31,591 and offered to tax prior period income of Rs 3,57,39,229. The Assessing Officer was of the view that this netting is impermissible since while "prior period income has to be offered to taxation, whereas prior period expenses have to be disallowed as the assessee is following mercantile method of accounting". It was in this backdrop that the Assessing Officer held that the said mistake is required to be rectified under section 154. He, accordingly, proceeded to make an addition of Rs 2,66,63,182 returned by the assessee. Aggrieved, assessee carried the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, and decline to interfere in the matter. Once the rectification order itself stands quashed, all the corollaries will follow. 26. With these observations, the appeal filed by the Assessing Officer is dismissed and the appeal filed by the assessee is dismissed as infructuous. 27. We now take up the cross appeals against the order dated 25th September 2014 passed by the CIT(A) in the matter of assessment under section 143(3) r.w.s. 254(1) of the Income Tax Act, 1961, for the assessment year 2005-06. 28. We will first take up the appeal filed by the Assessing Officer. 29. Grievances raised by the Assessing Officer are as follows: "1. Ld. CIT(A) has erred in allowing the assessee's claim of its income exempt u/s 11 of the Act while assessee had not satisfied various conditions laid down for claiming such exemption. 2. Ld. CIT(A) has erred in deleting the addition made on account of disallowance of depreciation despite the fact that depreciation has been allowed correctly by the Assessing Officer under provisions of the Act. 3. Ld. CIT(A) has erred in deleting addition made on account of disallowance of PL reward being contingent liability while directing the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this amount of Rs 35,19,745 should be allowed in the assessment year 2008- 09, i.e. the assessment year relating to the previous year in which the amount was paid. None of the parties is happy with this verdict. While the Assessing Officer is aggrieved of the direction given by the CIT(A), the assessee is aggrieved of his sustaining the disallowance. Both the parties are in appeal before us. 36. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 37. We see merits in the plea of the assessee. The quantification of productivity linked reward was not in doubt in the relevant previous year. The quantification was at 20%. The amount representing 15.5% is only "adhock payment" made during the relevant previous year. The actual payment cannot restrict the deductibility of a liability which is very well foreseen and quantified as a present liability. The amount claimed as deduction by the assessee represents present liability, and the mere fact that it was paid at a later date, as authorised by the Ministry of Shipping, Road Transport and Highways, does not restrict the deductibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and after giving an opportunity of hearing to the assessee. 48. Ground no. 3 is thus allowed for statistical purposes in the terms indicated above. 49. In the result, the appeal filed by the assessee is partly allowed in the terms as indicated above. 50. We now take up the cross appeals against the order dated 12th September 2014 passed by the CIT(A) in the matter of assessment under section 143(3) r.w.s. 254(1) of the Income Tax Act, 1961, for the assessment year 2006-07. 51. In the appeal filed by the assessee, the grievances raised are as follows: 1. Ld. CIT(A) has erred in law and on facts in confirming the action of learned Assessing not allowing to set-off carried forward loss of AY 2005-06 to the extent of Rs.2,66,63,182/- 2. Ld. CIT (A) has erred in law and on facts in confirming the action of learned Assessing Officer in computing the total income after taking into consideration the income assessed as per order passed u/s 154 of the Act, and accordingly, erred in not allowing to set-off of carried forward loss of Rs.26,88,28,986/- of AY 2005-06. Under the circumstances, direction may be given to the ld. AO to allow the same. 3. The learned CIT(A) has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are like this. Without prejudice to the stand of the Assessing Officer that the assessee is not entitled to exemption under section 11 and 12 anyway, he nonetheless proceeded to compute the income of the assessee on the assumption that the provisions of Section 11 to 13 will apply on this fact situation. He noted that the assessee has obtained form 10B on 2.12.2008 but filed the same on 14.1.2013. It was also noted that "no details of such specified amount in the modes prescribed under section 11(5) were attached" in the board resolution dated 2.12.2008. The AO was of the view that there was no specific purpose for which resolution was made, and it was totally vague and devoid of any specific purposes. The Assessing Officer further observed that the money so accumulated has not been invested as prescribed under section 11(5). He further observed, referred to judicial precedents, that "accumulation has to be conscious accumulation and not just a mass of unspent or unapplied profits". He thus concluded that "the assessee has fails to fulfil the conditions given in section 11(2), 11(5) rule 17 and thus this accepted accumulation of Rs 25,80,31,802 has to be treated as assessee's in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of Sree Seetharam Anjancya Veda Kendra vs. ADIT (Exemption) 83 ITD 235 wherein the decision of the Hon'ble Kolkata High Court has been distinguished. The Hon'ble ITAT Kochin has held as under:- "We also find considerable force in the arguments of the learned counsel for the assesses that, in fact, the decision of the Hon'ble Calcutta High Court in Trustees of Singhania Charitable Trust's case (supra) relied on by the authorities below is in support of the assessee's case. In that case, their Lordships of the Calcutta High Court at page 823 of the report observes thus: "Doubtless, it is not necessary that the assessee has to mention only one specific object. There can be selling apart and accumulation of income for more objects than one but whatever the objects or purposes might be, the assessee must specify in the notice the concrete nature of the purposes for which the accumulation is being made. Plurality of the purposes for accumulation may not be precluded but it must depend on the exact and precise purposes for which the accumulation is intended for the statutory period of ten years. The generality of the objects of the mist cannot take the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the appellant that total investments made in FDRs, long term bonds / deposits was amounting to Rs. 1321.82 crores as against the accumulated amount of Rs.25.8 crores. The investment made was much more than the amount required to be accumulated u/s.11(2) and was as per the provisions of s. 11(5) and thus the accumulation should not be treated as income as taxable income in the hands of the appellant. I have carefully considered the contention of the appellant. It is seen that the total investments made by the appellant is Rs.1321 crores which is much more than Rs.25.8 crores. The amount has also been specifically set aside for creation of infrastructure, viz. road, rails etc. The A.O's contention is proved that no one-to-one correlation between the investment made and the accumulation u/s.11(2) has been established by the appellant. However, the quantum of investment as prescribed in the modes u/s.11(5) is substantially more than the amount required' to be accumulated u/s.11(2). It is therefore held that the amount of Rs.25.8 crores has required to be accumulated u/s. 11(2) has been properly invested by the appellant as prescribed in the modes u/s. 11(5). The A.O. is direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree with the learned CIT(A) that "creation of infrastructural facilities" cannot be said to be a vague objective- particularly in a situation, like that of the assessee, where spread of operations and the need of operational infrastructure is really substantial. Its not a sweeping generalization of a statement, as has been made out by the Assessing Officer. Similarly, as regards the quantum of investment under section 11(5), it is admittedly much more than the amount required under section 11(2) and, therefore, whether each investment is corelated on one to one basis or not, the requirements of section 11(5) are satisfied. The actual investments in permissible modes are well over Rs 1,321 crores as against the requirement of investment of Rs 25.80 crores. The objection of the Assessing Officer is unsustainable in law and on facts. As to what happens after the prescribed time with which accumulated funds must be used, that cannot determine the question of correctness of accumulation at this stage. We approve the reasoning of the CIT(A) on this point as well. In any case, learned Departmental Representative has not pointed out any specific infirmities in the impugned order. In the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of Rs 6,24,99,868 was taxable in the hands of the assessee. In a connected grievance, the Assessing Officer has also raised a grievance, in ground no. 4 in his appeal, that "Ld. CIT(A) has erred in deleting addition made on account of disallowance of prior period expenses even though assessee is following mercantile system of accounting". We will also take it up together. 67. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 68. We find that the learned CIT(A) has indeed observed that "if prior period income is to be charged, then incidental prior period expenses need to be allowed from such income" but, by no stretch of logic, this observation can be construed to mean that the income in question must suffer the taxation. All this observation implies is that the accounting treatment must be uniform in respect of same type of income vis-à-vis same type of expenditure. There is no dispute in the present year that the income of the assessee was eligible for exemption, and, therefore, prior period income can not be brought to tax at all. What the assessee is contending ..... X X X X Extracts X X X X X X X X Extracts X X X X
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