Date Of Judgment 14 -08-2018 I.t.a v. M/S Maria Seva Sangha

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.293 of 2016 BETWEEN) Ll.COMMISSIONER OF INCOME TAX (EXEMPTIONS), MANGALORE iaTHER ASSISTANT DIRECTOROF INCOME TAX,OF INCOME TAX, (EXEMPTIONS) CIRCLE-17 (2) BANGALORE (BY MR,SANMATHI E I, ADV.) AND) M/S MARIA SEVA SANGHANO.6, 1ST FLOOR, ROSERICHMOND TOWNBANGALORE -560025PAN: AAATM2062L APPBRLLANT (BY MR.A SHANKAR & MR.M LAVA, ADVS.) …RESPONDENT Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 2/22 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:160/10/2015 PASSED IN ITA NO.320/BANG/2015, FORTHE ASSESSMENT YBEAR 2007-2008 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: 16/10/2015 PASSED BY THE ITAT,'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. ITA NO.320/BNG/2015 FOR ASSESSMENT YEAR 2007-08, AS SOUGHT)FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS”DEEMED FIT, IN THE INTEREST OF JUSTICE.| THIS|TA.COMINGON|FORHBARING|ON|INTRBROLOCUTORYAPPLICATION,THIS|DAY|Dr. VINEET‘KOTHARI J.DELIVBRED THERE FOLLOWING : JUDGMENT Mr.Sanmathi E I, Adv. for appellants -RevenueMr.A Shankar & Mr.Lava M, Advs. 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. 2 |The suggested substantial questions of law in thememo of appeal of Revenue are quoted herein below for readyreference: - Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 3/22 “1 WhetherOnthe facts|and|inthecircumstances of the case, the Tribunal is right in|holding that the assessee is eligible for carry|forward of excess application of Rs.3,56,06,558 to|the subsequent years when the income of a|charitable or religious trust/institution is required|to be computed by applying general commercial|principleswithoutreferringtothe|regularprovisions of Income Tax as contained under|Chapter-IV and as such while arriving at the|income|of|FTcharitableOrreligioustrust/ institution, various heads of income ascontemplated under Section 14 and_ spectficprovisions|of|computationof|income|underrespective heads as envisaged under Section 15|to 59 are not pressed into action?. 2. Whether on the facts and in _ thcircumstances of the case, the tribunal is right in|law in holding that the assessee is entitled to|carry forward of excess application without|appreciating that the provisions of Sections 70 to|80 of IT Act are not applicable to trusts as they|only deal with carry forward and set off of loss| Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 4/22 and not excess expenditure or deficit under|section 11 (1) (a) of the ActP” 3.|This Court in case of‘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: 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 ofIncome.Tax-IIl,PuneDvDRajasthanasGujarattCharitableFoundationPoona’[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| 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: 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 ofIncome.Tax-IIl,PuneDvDRajasthanasGujarattCharitableFoundationPoona’[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| Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 5/22 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 1 1in 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 asa Public Charitable Trust. It was also|registeredwith the Commissioner,|Pune.The assessee derived income from the temple property which was a Trust property.During the Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 6/22 course of assessment proceedings for|assessment years 1977-78, 1975-79and 1979-80,the assessee claimed§depreciation 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|fordeterminationWas, whetherdepreciation could be denied to theASSESSEBE,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 in|respect of computation of income of the.Trust 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 chargeabiity of income|from profits and gains of business and|section 29 provides that income from| Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 7/22 profits and gains of business shall be|computed in accordance with section30 to section 43C, That, section 32/(1)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.TheCOUTTrejectedthe|argument on behalf of the revenue that|section 32 of the Income Tax Act was|the only section granting benefit of Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 8/22 Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 8/22 deduction 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 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 ofthe 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 Le., in|favour of the assessee and against the|department. Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 9/22 4Question 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.|TheaSsSSCSSCtookintoaccount|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|beforethe|AssistantAppellateCommissioner. TheappealWasrejected. 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 meant Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 10/22 was 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 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 ts no'need to interfere with the same7 < Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 11/22 6. Sincethe1SSUEregardingclaimof|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 the present Assessment Year, the controversy is covered by thejudgment in|Commuisstoner of Income Tax (Exemptions) and another Vs. Ohio University Christ Collegerendered OT]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 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,theAssessingOfficer 4With regard to carrying forward of the losses forbeing set off against the income of the charitable trust for the present Assessment Year, the controversy is covered by thejudgment in|Commuisstoner of Income Tax (Exemptions) and another Vs. Ohio University Christ Collegerendered OT]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 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,theAssessingOfficer Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 12/22 observed that the assessee 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|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. Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 13/22 3.2 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 rivalcontentionsof|boththelearnedDepartmental Representatives for Revenue|and the learned Authorised Representative|fortheaASsSSCSSand|perusedandcarefullyconsideredthe|materialOnrecord,includingthejudicialpronouncements cited. The facts of the|issue before us 1s that the-assessee hadincurredcertain|preliminaryexpenditure 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 of Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 14/22 expenditure.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,includingthe|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 income.Should be understood in its commercial|sense : in the case of trusts also and| Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 15/22 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 income.Should be understood in its commercial|sense : in the case of trusts also and| Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 15/22 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(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 and Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 16/22 tear, 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 cashbasis. Section 11(4) is not intended toexplain how the accounts of the businessundertaking should be maintained. It isintended only to bring to tax the excess Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 17/22 income computed under the provisions ofthe Act in respect of business undertaking. 12.|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, afteraddingbackanyappropriationsOrapplications thereof towards the purposesof the trust or otherwise, and also afteradding back any debits made for capitalexpenditure incurred for the purposes of Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 18/22 “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 of Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 18/22 the 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. TheNizam’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 of)accountancyfortheDUrposes—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 set Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. off in the year under consideration, is a justifiedfinding of fact based on the correct interpretation oflaw and the judgment relied upon by it rendered bythe cognate Bench. Therefore, the same does not callfor 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 trustforcharitable.and.religiousDUrposes In|thesubsequent year. The relevant portion of the saidjudgment of Bombay High Court ts also quoted belowfor ready reference :| “NormaldepreciationCEaYbeconsidered as a legitimate deduction incomputing the real income of the assessee —on general principles or under section Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 20/22 I1(1})(a)of|the|Inome-taxAct,L961.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|respectwhereofdepreciation1sclaimed.notbe.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. 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 the Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 21/22 earlier years against the income earned bythe trust in the subsequent year will have|to be regarded as application of income of 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 the Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 21/22 earlier years against the income earned bythe trust in the subsequent year will have|to be regarded as application of income of the trust for charitable and_ religiouspurposes in the subsequent year in which|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 appellantdoes not now arise for our further consideration in thepresent appeal. Date of Judgment 14 -08-2018 I.T.A.No.293/2016 Commissioner of Income Tax (Exemptions) & Another Vs. M/s Maria Seva Sangha. 22/22 The appeal filed by Revenue is accordingly|disposedot| in terms of the aforesaid judgments of this Court. No costs. SS Sd/-JU DGE Sd/-JU DGE