Date Of Judgment 14-08-2018 I.t.a v. M/S Manipal Hotel And Restaurant Management College Trust 2/21

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 14 DAY OF AUGUST 2018. PRESENT THE HON'BLE Dr. JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA| 1.T.A.No.13 OF 2016 BETWEEN' 1.COMMISSIONER OF INCOME TAX|(EXEMPTIONS)(EXEMPTIONS) CHRNTRAL REVENUE BUILDINGSQUEENS ROADBANGALORE-560 OO] iaTHR DEPUTY COMMISSIONER |OF INCOME TAX.CIRCLE-1UDUPI. !APPBRLLANT (BY MRSANMATHI E I, ADV.) AND' M/S MANIPAL HOTEL AND ©RESTAURANT MANAGEMBNTCOLLEGEHK TRUSVALLKY VIEWINTERNATIONAL MANIPALPAN: AAATM?175 !RESPONDENT (BY SRI.S.PARTHASARATHI & SMT.SHEETAL BORKAR, ADVS.) Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 2/21 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:31/08/2015 PASSED IN ITA NO.640/BANG/2014, FOR)THE ASSESSMENT YBAR 2011-2012 WITH A PRAYER TO DECIDETHE FOREGOING QUESTION OF LAW AND / OR SUCH OTHERQUESTIONS OF LAW AS MAY BE FORMULATED BY THEHON'BLBE COURT AS DBEMBD FIT AND SBT ASIDE THEAPPELLATE ORDER DATED:31/08/2015 PASSED BY THE ITAT,|'A’' BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. ITA NO.640/BANG/2014 FOR ASSESSMENT YEAR 2011-12, AS SOUGHT|FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS”DEEMED FIT, IN THE INTEREST OF JUSTICE.| THIS ILT.A. COMING ON FOR HEARING, THIS DAY | S.SUJATHAJ. DKELIVE RED THE FOLLOWING: JUDGMENT Mr.Sanmathi E.I.,Adv. for Appellants-RevenueMr.S.Parathasarathi & Smt.Sheetal BorkarAdvs. for.Respondent-Assessee Both the learned counsel at bar submit that the! controversy raised in the present case is covered by a decisionof this Court. Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 3/21 2 |The suggested substantial questions of law in thememo of appeal of Revenue are quoted herein below for readyreference:-. “1. WhetherOnthe facts|and.in.the|circumstances of the case, the Tnbunal were|justified in law in allowing assessee’s claim for|depreciation on new assets put into use during|the accounting year relevant to this assessment|year, even though the entire cost of these assets|have been claimed by the assessee as an|application of income for charitable activities and|the amendment made in 2012 in LT.Act will also|hold that assessee is not entitled for depreciation|on assets put to user 2. Whether on the facts and in thecircumstances of the case, the Tnbunal were|justified in law in allowing carry forward of deficit|of earlier years for set off against the income ofthe current year, when there is no provision in the|IT Act to allow carry forward of such deficit, and|the number of years for which such carry forward|of deficitfor set off can be allowed? Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 4/21 3.|This Court in case of‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujaratt Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 I with regard to allowability and Depreciation in the hands ofReligious and Charitable Trust held as under: ioaeLearned Counsel at the Bar submittedthat so far as the issue regarding claim ofDepreciation under Section 32 of the Act isconcerned, the controversy is no longer resintegra, having been settled by the Hon’bleSupreme Court in the case of|©“ ‘Commissioner Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 4/21 3.|This Court in case of‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujaratt Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 I with regard to allowability and Depreciation in the hands ofReligious and Charitable Trust held as under: ioaeLearned Counsel at the Bar submittedthat so far as the issue regarding claim ofDepreciation under Section 32 of the Act isconcerned, the controversy is no longer resintegra, having been settled by the Hon’bleSupreme Court in the case of|©“ ‘Commissioner of Income Tax-III, Pune v. Rajasthan &GujarattCharitableFoundationPoona’[2018] 89 taxmann.com 127 [SC» by which|the Hon’ble Supreme Court has affirmed theview taken by the Bombay High Court in‘Commissioner of Income Tax v. Institute ofBanking Personnel Selection (IBPS)’ [2003]131 Taxman 386 [Bom.|. Lhe relevant portion|of the said Judgment of Bombay High Court asquoted by the Hon’ble Supreme Court andaffirmed is quoted below for ready reference. Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 5/21 “In the said judgment, [Bombay HighCourt]thecontentionof|theDepartmentpredicatedOTLdouble.benefit was turned down in_ thefollowing manner: 3. As stated above, the first question|which requires consideration by thiscourt is : whether depreciation was|allowable on the assets, the cost of|which has been fully allowed asapplication of income under section 11in the past years? In the case of CIT v.MunisuvratJain1994Tax|LawReporter, 1084 the facts were as|follows. TheaASSCS SCWas(OCharitable Trust. It was registered asa Public Charitable Trust. It was also|registeredwith the Commissioner,|Pune.|The assessee derived incomefrom the temple property whichwas a Trust property.During the)course of assessment proceedings for|assessment years 1977-78, 1975-79and 1979-80,the assessee claimed§ Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 6/21 depreciation on the value of thebuilding at the rate of 2.5 per cent and they also claimed depreciation on|furniture at the rate of 5 per cent. The|question which arose before the court|fordeterminationWas, whetherdepreciation could be dented to the|ASSESSECEGasexpenditureOnacquisition of the assets had been|treated as application of income in the.year of acquisition? It was held by the|Bombay High Court that section 11 of|the Income Tax Act makes provision in|respect of computation of income of theTrust from the _ properly held focharitable or religious purposes and it|also provides for application and|accumulation of income. On the other|hand, section 28 of the Income Tax Act|deals with chargeability of income|from profits and gains of business and|section 29 provides that income from|profits and gains of business shall be|computed in accordance with section30 to section 43C, That, section 32(1) Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 7/21 of the Act provides for depreciation in| Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 7/21 of the Act provides for depreciation in| respectof|building,plantand|machinery owned by the assesseeand used for the 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 canbe allowed as deduction only under|section 32 of the Income Tax Act and|not under general principles. The courtrejected this argument. It was heldthatnormaldepreciationCaNbeconsidered as a legitimate deduction|in computing the real income of the|assessee on _ general principles. under section 11(1)(a) of the Income|TaxAct.TheCOUTTrejectedtheargument on behalf of the revenue that|section 32 of the Income Tax Act was|the only section granting benefit ofdeduction on account of depreciation.|It was held that income of a Charitable|Trust derived from building, plant and Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 8/21 machinery and furniture was liable tobe computed in normal commercialmanner although the Trust may not becarrying on any business and the|assets in respect whereof depreciation|is claimed may not be_ businessassets. In all such cases, section 32 of|the Income Tax Act providing fordepreciation for computation of income|derived from business or profession 1s not applicable. However, the income of.the Trust is required to be computedundersection.I]OTLcommercialprinciples after providing for allowance|for normal depreciation and deduction|thereoffrom gross income of the Trust. |In view of the aforestated Judgment ofthe Bombay High Court, we answerquestion No. 1 in the affirmative L.e., in|favour of the assessee and against the|department. 4.Question No. 2 herein isidentical to the question which was|raised before the Bombay High Court Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 9/21 in the case of Director of Income Tax|(Exemption)Vv.FramjeeCawasjee|Institute (1993) 109 CTR 463 (Bom). In|that case, the facts were as follows:The assessee was the Trust. It derived|its income from depreciable assets.|TheaSsSSCS Stookinto|account|depreciationON.those.assetsin|computing the income of the Trust.|The Income Tax Officer held thatdepreciation could not be takeninto account because, full capitalexpenditure had been allowed inthe year of acquisition of theassets.The assessee went in appeal|beforetheAssistantAppellateCommissioner. TheappealWas.rejected. The Tribunal, however, tookthe view that when the Income Tax!Officer stated thatfull expenditure hadbeen allowed in the year of acquisition|of the assets, whathe really meantwas that the amount spent onacquiring those assets had beentreated as ‘application of income’ Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 10/21 of the Trust in the year in whichthe income was spent in acquiringthose assets. This did not mean'that in computing income fromthose assets in subsequent years,depreciation in respect of thoseassetscannotbe.takenintoaccount.This view of the Tribunalhas been confirmed by, the Bombay|High Court in the above judgment.|Hence, Question No. 2 ts covered by|the decision of the Bombay High Courtin the above judgment. Consequently,|Question No. 2 is answered in the|affirmative1.é.,in favour}of theassessee and against, the department. After hearing learned counsel for the parties,weare of the opinion that the aforesaid view|taken by the Bombay High Court correctlystates the principles of law and there is no'need to interfere with the same7 . 6. Sincetheissueregardingclaimof|Depreciation in the hands of the Charitable Trust After hearing learned counsel for the parties,weare of the opinion that the aforesaid view|taken by the Bombay High Court correctlystates the principles of law and there is no'need to interfere with the same7 . 6. Sincetheissueregardingclaimof|Depreciation in the hands of the Charitable Trust Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 11/21 is no longer res integra, We are of the opinionthat no substantial question of law now arises inthe present Appeals filed by the Revenue.” 4With regard to carrying forward of the losses for being set off against the income of the charitable trust for thepresent Assessment Year, the controversy is covered by thejudgment in|Commuisstoner of Income Tax (Exemptions)and another .vs. Ohto University Christ College|rendered OTl17.07.2018in.ITA.No.312/2016 and ITA No.313/2016>in which this Court held as under: “16. In so far as the second question proposedby the Revenue, quoted above is concerned also,|we find that the Tribunal’s findings in this regarddo not give rise to any substantial question of law.The said findings are quoted below for readyreference : “O.1 In the course of assessment|proceedings,theAssessingOfficerObserved that the assessee had claimed.applicationof|incomeOnaccount|of|expenditure of earlier years, which Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 12/21 has been brought forward and set offin the year under consideration.TheAssessing Officer disallowed the same on|the ground that there is no expressprovisionin|theActpermittingtheadjustmentof|earlierYeda’rbroughtforward expenses as application of income|in the current year. According to theAssessingOfficer,the|applicationof|income for charitable purposes must beduring the relevant previous year. Sincethe income of the trust is exempt from tax,the question of deficit does not arise andalso the trust is required to utilize 85% ofthe income of the previous year forcharitable purposes during the year. Inthis view of the matter and for the abovereasons, the Assessing Officer disallowedthe assessee’s claim of expenditure ofearlier years being brought forward andset off during the year. 5.2 On appeal, the learned CIT(Appeals) allowed the amortization of theexpenditure as claimed by the assessee Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 13/21 and deleted the disallowance made by theAssessing Officer by placing reliance on|the decision of the|Hon’ble KarnatakaHigh Court in the case of CIT Vs.Society of the Susters of St. Annereported in 146 ITR 28 (1984) andCBDT Circular No.5-P(LXX)-6 of 1968. 5.3.1 We have heard the rivalcontentionsof|boththelearnedDepartmental Representatives for Revenue|and the learned Authorised Representative|fortheaASsSSCSSand|perusedand.carefullyconsideredthe|materialOrlrecord,includingthejudicialpronouncements cited. The facts of the|issue before us 1s that the- assessee hadincurredcertainpreliminaryexpenditure in the year of setting upof the trust. The same its amortised bythe assessee trust over a period of 5years from the year of incurring ofexpenditure.The fact of amortizationwas not disputed by the Assessing Officerin|theassessment|proceedingsfor Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 14/21 Assessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Ofthe|expenditure.Theun-amortizedexpenditure has been brought forward andSetoffas|applicationof|incomein.subsequentYyedr’rincludingthe|assessment years 2008-09 and 2009-10which are under consideration. Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 14/21 Assessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Ofthe|expenditure.Theun-amortizedexpenditure has been brought forward andSetoffas|applicationof|incomein.subsequentYyedr’rincludingthe|assessment years 2008-09 and 2009-10which are under consideration. 5.3.2 We find that the issue before usis directly related to the issue decided bythe Hon’ble Karnataka High Court in thecase of Sisters of St. Anne (supra) cited bythe assessee. In the said case, the Hon’bleKarnataka High Court at paras 8 to 10|thereof has held as under : - 5.3.3 Further, the CBDT CircularNo.5-P (LXX)-6 of 1968 cited by _ thassessee makes it clear that incomeShould be understood in its commercial|sense : in the case of trusts also and|thereforethecommercialprinciple|enunciated by the Hon'ble Karnataka HighCourt in the above referred case of Sisters Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 15/21 of St. Anne (supra) applies to trusts aswell. In view of the factual and legal matrixof this issue in the case on hand asdiscussed above, we concur with the|decision of the learned CIT (Appeals) incancelling the disallowance made by theAssessing Officer and in allowing the|amortization of expenses. Consequently,Ground No.B (1 to 6) of the Revenue’sappeal for Assessment Year 2008-09 andGround No.C for Assessment Year 2009-10are dismissed.” 17. In our opinion, the matter ts squarely covered bya decision of the cognate Bench of this Court in thecase ofCIT vs. Society of the Sisters of St. Anne(1984) 16 Taxman 400 (Kar.) and (1984) 146)ITR 28,wherein the congnate Bench of this Courtheld that even the depreciation not involving anycash outflow is also in the character of expenditureand therefore such depreciation is nothing butdecrease in the value of property through wear andtear, deterioration or obsolescence and the allowancemade for that purpose in the books of accountswere deemed to be the application offunds for the Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 16/21 purpose of Sec. 11 of the Act. The relevant portion ofthe said judgment is also quoted below for ready|reference: “11. Mr. Srinivasan, however, urgedthat there are enough indications inSection 11 to exclude the mercantilesystem of accounting. The learned counsel|relied upon sections 11(1)(a) and 11(4) insupport of his contention. We do not think|that there is anything in these sub-sectionsto support the contention of Mr. Srinivasan. —Explanation to section I11(1)(a) on _ tcontrary takes note of the income notreceived in a particular year. It lendssupport to the contention of the assessee|that accounting need not only be on cashbasis. Section 11(4) ts not intended toexplain how the accounts of the businessundertaking should be maintained. It isintended only to bring to tax the excessincome computed under the provisions ofthe Act in respect of business undertaking. ]2.|The depreciation if it is notallowed as necessary deduction for Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 17/21 computingtheincomefromthecharitable institutions, then there isno way to preserve the corpus of thetrust for deriving the income.TheBoard also appears to have understoodthe income’ under section 11(1) in itscommercial sense. The relevant portion ofthe Circular No.5XX-6 of 1968, dated 19-6-L968.(SeeTaxmann’s:DtirectTaxes|Circulars, Vol. 1, 1980 edn. P.85) reads: ]2.|The depreciation if it is notallowed as necessary deduction for Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 17/21 computingtheincomefromthecharitable institutions, then there isno way to preserve the corpus of thetrust for deriving the income.TheBoard also appears to have understoodthe income’ under section 11(1) in itscommercial sense. The relevant portion ofthe Circular No.5XX-6 of 1968, dated 19-6-L968.(SeeTaxmann’s:DtirectTaxes|Circulars, Vol. 1, 1980 edn. P.85) reads: “Where the trust derives income from|house property, interest on _ securitiescapital gains, or other sources, the word‘Income’ Should be wunderstood in itcommercial sense, 1.e., book income, afteraddingbackanyappropriationsOrapplications thereof towards the purposesof the trust or otherwise, and also afteradding back any debits made for capitalexpenditure incurred for the purposes ofthe trust or otherwise. It should be noted,in this connection, that the amounts so}added back will become chargeable to taxunder section 11(3) to the extent that they Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 18/21 represent outgoings for purposes otherthan those of the trust. The amounts spent)or applied for the purposes of the trustfrom out of the income, computed in the|aforesaid manner, Should not be less than7° per cent of the latter, if the trust ts to getthe full benefit of the exemption under)section 11(1).”| 13. In CIT v. Trustee of H.E.H. The) Nizam’s|SupplementalReligiousEndowment Trust (1981) 127 ITR 378, the|Andhra Pradesh High Court has accepted|the accounts maintained in respect of the)trust in conformity with the principles ofaccountancyfortheDUrposes—ofdetermining the income derived from theproperty held in trust.” 1&. In view of the aforesaid findings of thelearned Tribunal, allowing any expenditure of theearlier year which has been brought forward and setoff in the year under consideration, is a justifiedfinding of fact based on the correct interpretation oflaw and the judgment relied upon by it rendered by|the cognate Bench. Therefore, the same does not call| Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 19/21 for interference. A similar view was also taken bythe Dwision Bench of Bombay High Court inCommissioner of Income-tax uv. Institute ofBanking (2003) 264 ITR 110,wherein the Division|Bench of Bombay High Court held that the incomederived from the trust property has also got to becomputed on commercial principles and if commercialprinciples are applied, then adjustment of expensesincurred by the trust for charitable and religiouspurposes in the earlier years against the incomeearned by the trust in the subsequent year will haveto be regarded as application of income of the trustforcharitableand|religiousDUrposes in|the|subsequent year. The relevant portion of the saidjudgment of Bombay High Court is also quoted belowfor ready reference : “NormaldepreciationCEaAbeconsidered as a legitimate deduction incomputing the real income of the assessee —on general principles or under section11(1)(a)of|theInome-taxAct,1961.Income of a charitable trust derived from|building,plantand.machineryand|furniture is liable to be computed in a|normal commercial manner although the Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 20/21 “NormaldepreciationCEaAbeconsidered as a legitimate deduction incomputing the real income of the assessee —on general principles or under section11(1)(a)of|theInome-taxAct,1961.Income of a charitable trust derived from|building,plantand.machineryand|furniture is liable to be computed in a|normal commercial manner although the Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 20/21 trust may not be carrying on any business|and|theassetsin|respectwhereofdepreciation1sclaimed.notbe.business assets. In all such cases, section32 of the Act providing for depreciation, forcomputationof|incomederivedfrom)business or profession is not applicable. |However, the income of the _ trust irequired to be computed under section 11)on commercial principles after providing forallowance for normal depreciation anddeduction thereoffrom the gross income ofthe trust. Incomederivedfrom|the|CrusSTproperty has also got to be computed on|commercial principles and tf commercialprinciples are applied, then adjustment of|EXPeENnSsincurredby|thetrustforcharitable and religious purposes in theearlier years against the income earned bythe trust in the subsequent year will haveto be regarded as application of income ofthe trust for charitable and_ religiouspurposes in the subsequent year in which| Date of Judgment 14-08-2018 I.T.A.No.13 /2016 Commissioner of Income Tax (Exemptions) & another Vs. M/s Manipal Hotel and Restaurant Management College Trust 21/21 adjustment had been made having regardto the benevolent provisions contained in)section 11 of the Act and such adjustmentwill have to be excluded from the income ofthe trust under section 11(1)(a).” In view of the controversy covered by the above decisions of this Court, we are of the opinion that thesubstantial questions of law as suggested by the appellantsdoes not now arise for our further consideration in thepresent appeal. The appeal filed by Revenue is accordingly|disposedot| in terms of the aforesaid judgments of this Court. No costs. SS| Sd/-. JUDGE. Sd/-.JUDGE|