Date Of Judgment 14-08-2018 I.t.a v. M/S Karnataka State Muslim Federation

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.2423 OF Z2O BETWEEN& 1.THERE DIRECTOR OF INCOME TA (EXEMPTIONS), C R BUILDIGNS, QUEENS ROAD, BANGALORE. 2.THR DEPUTY DIRECTOR OF [INCOME TAX(E) CIRCLE -177(1)(E) CIRCLE -177(1) BANGALORE, APPBRLLANT (BY MRSANMATHI E.I., ADV.) AND& M/S.KARNATAKA STATE MUSLIM FEDERATIONNO.22/1, ARABIC COLLEGE POST,NAGAWARA,| BANGLAORE-560 045, RESPONDENT (BY MR© PARTHASARATHI & SMT.SHEETAL BORKAR, ADVS.) Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 2/22 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:09/01/2015 PASSED IN ITA NO.365/BANG/2014, FOR)THE ASSESSMENT YBAR 2009-10 WITH A PRAYER TO:1. DECIDETHE FOREGOING QUESTION OF LAW AND / OR SUCH OTHERQUESTIONS OF LAW AS MAY BE FORMULATED BY THEHON'BLE COURT AS DEBMBEBD FIT. 2. SET ASIDE THAPPELLATE ORDER DATED: 09/01/2015 PASSED BY THE ITAT,"ATBENCH,BANGALORE,ASSOUGHTFOR,INTHERRESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN-ITA NO. 365/BANG/2014 FOR ASSESSMENT YEAR 2009-10. THIS ILT.A. COMING ON FOR HEARING, THIS DAY |S. SUJATHA J. DELIVERED THR FOLLOWING:- JUDGMENT Mr.Sanmathi E.I.,Adv. for Appellants-RevenueMr.S.Parthasarathi & Smt.Sheetal Borkar,Advs. tor Respondent-Assessee Both the learned counsel at bar submit that the'controversy raised in the present case is covered by a decisionof this Court. 2 |The suggested substantial questions of la w in the memo of appeal of Revenue are quoted herein below for readyreference: - Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 3/22 aianWhether,Onfacts|and.in| circumstances of the case, the Hon'ble Tribunal|was correct in law in upholding the order of the|CIT (A) following the decision of the Tribunal in the|assessee’s own case in ITA No.37/Bang/2013|dated 09.10.2013 without going to the merits of|the case wherein the Tribunal has held that asper normal accounting principles depreciation 1s a|deduction to arrive at income and it does notamount to application of income and therefore,|there was no claim of double deduction? 2. Whether on facts and in circumstances ofthe case, the Tribunal was correct in law in notfollowing the decision of the Hon'ble Supreme|Court in the case of Escorts Ltd., and another vs.Union of India 199 ITR 43 wherein the Hon’ble|Supreme Court has_ categorically held whendeduction under Section 35(2)(tv) is allowed in|respectof|capitalexpenditureOnscientificresearch, no depreciation is allowable wunderSection 32 on the sqme asset and in the aqbsenceof clear statutory indication to the contrary, the|statute should not be read as to permit an|assessee tiwo deductions? Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 4/22 3Whether the Hon’ble Tribunal was)correct in not following the decision of Kerala High|Court in the case of Lissie Medical Institutions vs.CIT, Kochi in ITA No.42 of 2011 wherein the other|judicial pronouncements by various high courts|were held to be not applicable holding that the|issue of double deduction was not before them? 3.|This Court in case oft‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujaratt Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 [SC)I withregard to allowability and Depreciation in the hands ofReligious and Charitable Trust held as under: Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 4/22 3Whether the Hon’ble Tribunal was)correct in not following the decision of Kerala High|Court in the case of Lissie Medical Institutions vs.CIT, Kochi in ITA No.42 of 2011 wherein the other|judicial pronouncements by various high courts|were held to be not applicable holding that the|issue of double deduction was not before them? 3.|This Court in case oft‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujaratt Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 [SC)I withregard to allowability and Depreciation in the hands ofReligious and Charitable Trust held as under: 65Learned Counsel qt 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 ofIncome.Tax-IIl,PuneDvDRajasthanasGujaratiCharitableFoundationPoona’[2018] 89 taxmann.com 127 [SC» by which|the Hon’ble Supreme Court has affirmed the Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 5/22 view 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. “In the said judgment, [Bombay High|Court}the|contentionof|the|DepartmentpredicatedOTLdouble.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|Law.Reporter, 1084 the facts were as|follows. TheaASSCS SCLUaS(OCharitable Trust. It was registered as Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 6/22 a Public Charitable Trust. It was also|registeredwith the Commissioner,|Pune.The assessee derived incomefrom the temple property whichwas a Trust property.During thecourse of assessment proceedings for|assessment years 1977-78, 1975-79and 1979-80,the assessee claimeddepreciation on the value of thebuilding at the rate of 2.5 per centand they also claimed depreciation on|furniture at the rate of 5 per cent. The|question which arose before the court|fordeterminationLUGS,whetherdepreciation could be dented to the|ASSESSEBE,asexpenditureOnacquisition 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 inrespect of computation of income of the.Trust from the properly held forcharitable or religious purposes and it|also provides for application and| Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 7/22 Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 7/22 accumulation of income. On the other|hand, section 28 of the Income Tax Act|deals with chargeabiity 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 45C, That, section 32(1)of the Act provides for depreciation in|respectof|building,plantandmachinery 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 heldthatnormaldepreciationCATbeconsidered as a legitimate deduction|in computing the real income of the|assessee on_ general principles or Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 8/22 under section 11(1)(a) of the Income|TaxAct.TheCOUTTrejectedthe|argument 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 andmachinery and furniture was liable tobe computed in normal commercial|manner 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 computed|undersectionI]OTLcommercialprinciples after providing for allowance|for normal depreciation and deduction|thereoffrom gross income of the Trust. |In view of the aforestated Judgment of Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 9/22 the 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 Courtin 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|depreciationOF|thoseassetsin|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|beforethe|AssistantAppellateCommissioner. TheappealLWWa Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 10/22 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’of the Trust in the year in whichthe income was spent in acquiringthose assets. This did not meanthat 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 is 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. 10/22 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’of the Trust in the year in whichthe income was spent in acquiringthose assets. This did not meanthat 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 is 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. Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 11/22 After hearing learned counsel for the parties,We|are of the opinion that the aforesaid view|taken by the Bombay High Court correctlyStates the principles of law and there ts no'need to interfere with the same7 . 6. Sincethe|Issueregardingclaim.of|Depreciation in the hands of the Charitable Trustis 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 forbeing 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|renderedOT]17.07.20181|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 regard 12/22 do not give rise to any substantial question of law.The said findings are quoted below for ready|reference : “O.1 In the course of assessmentproceedings,theAssessingOfficerObserved that the aqssessee had claimedapplicationof|incomeOnaccount|of|expenditure of earlier years, whichhas been brought forward and set offin the year under consideration.TheAssessing Officer disallowed the same on|the ground that there is no expressprovisionin|theActpermittingthe|adjustmentof|earlieryearsbroughtforward expenses as application of income|in the current year. According to theAssessingOfficer,theapplicationof|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 above Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 13/22 reasons, 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 assesseeand 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 nvalcontentionsof|boththe|learnedDepartmental Representatives for Revenue|and the learned Authorised RepresentativefortheaASsSSCSSand|perusedand.carefullyconsideredthematerialOnrecord,includingthe|judicialpronouncements cited. The facts of the|issue before us 1s that the- assessee had Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 14/22 5.3.1 We have heard the nvalcontentionsof|boththe|learnedDepartmental Representatives for Revenue|and the learned Authorised RepresentativefortheaASsSSCSSand|perusedand.carefullyconsideredthematerialOnrecord,includingthe|judicialpronouncements cited. The facts of the|issue before us 1s that the- assessee had Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 14/22 incurredcertainpreliminaryexpenditure 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|the|assessment|proceedingsforAssessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Oftheexpenditure.Theun-amortizedexpenditure has been brought forward andSetoffas|applicationof|incomein.subsequentyears,includingtheassessment 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 : - Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 15/22 5.3.3 Further, the CBDT CircularNo.5-P (LXX)-6 of 1968 cited by _ thassessee makes it clear that income'Should be understood in its commercialsense : in the case of trusts also and|thereforethecommercialprinciple|enunciated by the Hon'ble Karnataka HighCourt in the above referred case of Sistersof 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 is squarely covered bya decision of the cognate Bench of this Court in thecase ofCIT vs. Society of the Sisters of St. Anne Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 16/22 (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 thepurpose 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 mercantile|system 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 _ contrary 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 cash Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 17/22 basis. Section 11(4) is 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. Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 17/22 basis. Section 11(4) is 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. L2.|The depreciation tif it its noallowed as necessary deduction forcomputingtheincomefromthecharitable 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, after Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 18/22 addingbackanyappropriationsOrapplications 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 soadded back will become chargeable to taxunder section 11(3) to the extent that theyrepresent 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’sSupplementalReligiousEndowment 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—of Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation determining 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|for interference. A similar view was also taken by|the Dwision Bench of Bombay High Court in|Commissioner of Income-tax v. Institute ofBanking (2003) 264 ITR 110,wherein the DivisionBench of Bombay High Court held that the income|derived from the trust property has also got to be|computed on commercial principles and if commercial|principles are applied, then adjustment of expenses|incurred by the trust for charitable and religious|purposes in the earlier years against the income|earned by the trust in the subsequent year will have|to be regarded as application of income of the trust|forcharitable.and.religiousPurposes,in|theSubsequent year. The relevant portion of the said 20/22 judgment of Bombay High Court is also quoted below for ready reference : 20/22 judgment of Bombay High Court is also quoted below for 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 thetrust may not be carrying on any business|andtheassetsin|respectwhereofdepreciation1Sclaimednot.be|business assets. In all such cases, section32 of the Act providing for depreciation, forcomputationof|income|derivedfrom)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. Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 21/22 Incomederivedfrom|the|CrusSTproperty has also got to be computed on|commercial principles and tf commercialprinciples are applied, then adjustment of|EXPENSESincurredby|thetTuST.forcharitable 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|adjustment had been made having regardto the benevolent provisions contained insection 11 of the Act and such adjustment|wil have to be excluded from the income ofthe trust under section 1 1(1)(a).” In view of the controversy covered by the abovedecisions 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. Date of Judgment 14-08-2018 I.T.A.No.242/2015 The Director of Income Tax (Exemptions) & Another Vs. M/s Karnataka State Muslim Federation 22/22 The appeal filed by Revenue is accordingly|disposedoft| in terms of the aforesaid judgments of this Court. No costs. SS| Sd/-.JUDGE| Sd/-.JUDGE|