Date Of Judgment 14-08-2018 I.t.a v. M/S Krupanidhi Education Trust

IN THE HIGH COURT OF KARNATAKA, BENGALURU. DATED THIS THE 14[TH|]DAY OF AUGUST 2018. PRESENT THE HON'BLE Dr. JUSTICE VINEET KOTHARI AND THE HON’BLE Mrs.JUSTICE S.SUJATHA| 1.T.A.No.3Q06 OF 201 BETWEEN: THRE DIRECTOR OF INCOMETAX (EXEMPTION)C.R.BUILDINGS, QUEENS ROADBANGALORE — 560 OO1. @APPRLLANT (BY MR.SANMATHI E.I., ADV.) AND( M/S KRUPANIDHI EDUCATIONTRUSTCHAKKABBLANDUR.CARMELRAM POST|VARTHUR HOBLIOFF. SARJAPUR ROAD.BANGALORE —- 560 034PAN: AAATK 1211R.BBNGALURU-560009| RESPONDENT (BY MR.A.SHANKAR & MR.M.LAVA, ADVS.) 2/23 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 19601, ARISING OUT OF ORDER DATED:20.02.2015 PASSED IN ITA NO.4995/BANG/2014, FOR THEASSESSMENT YEAR: 2009-2010, VIDE ANNEXURE-A, WITH APRAYER TO DECIDE THE FOREGOING QUESTION OF LAWAND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BEFORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (B)SBT ASIDE THR APPELLATK ORDER DATED: 20.02.2015 PASSEDBY|THERITAT,|'B'BRENCH:BBNGALURUIN-APPHBKAPROCEEDINGS NO. ITA NO.495/BANG/2014 AS SOUGHT FOR IN)THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF ASDEEMED FIT, IN THE INTEREST OF JUSTICE.| THIS|L.T.A.COMING|ON|ROR|HBARING|ON|INTRBROLOCUTORYAPPLICATION,THIS|DAY.Dr. VINE ETKOTHARIJ- DELIVBRED THERE FOLLOWING: JUDGMENT Mr.Sanmathi E.I.,Adv. for Appellants —RevenueMr.A.Shankar & Mr.M.Lava,Advs. For Respondent-Assesseee 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 the memo of appeal of Revenue are quoted herein below for readyreference: - Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 3/23 “1.Whether,Ortthefactsandin|circumstances of the case, the Hon'ble Tribunal|was correct in law in not following the decision ofthe Hon’ble Supreme Court in the case of Escorts|Limited & another vs. Union of India 199 ITR 43)whereinthe|Hon’hbleoupremeCourthas|categorically held when deduction under section|35(2)(w)1S|allowedIn|respectof|capitalexpenditure on scientific research, no depreciation|is Qllowable under section 32 on the same assetand in the absence of clear statutory indication to the contrary, the statute should not be read as to|permit an assessee two deductions? D2 Whether,Onthefactsandin|circumstances of the case, the Tribunal was|correct in not following the decision of Kerala High|Court in the case of Lissie Medical Institutions|vs.CIT, Kocht 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. Whether, on the facts and in thecircumstances of the case, the Tribunal was right| in not appreciating the intention of legislature not|to allow double deduction at any point of time and|therefore, for bringing clarity on the issue, the law|has been amended w.e.f. assessment year 2015-16?| 4Whether,Onthefactsandin|circumstances of the case, the Tribunal was|correct in holding that depreciation is allowable in|cases of trust on normal commercial principles,|where the assessment of trusts are covered under|section 11, 12 and 13 of the IT Act, 1961 and the|provisions of section 28 to 44 of the Act are not|applicable to charitable trust as only application|of income during the year is allowable under|section 11 of the Act and depreciation being a|notional expenditure is not allowable?| 5Whether,Onthefactsand.In|circumstances of the case, the Tribunal was|correct in following it decision in the case of Cutcht|Menon Union, wherein it is stated the distinction|between the application of income and_ thededuction of depreciation as expenditure stating|that the allowance of depreciation has nothing to|dowiththe|application of income1S not 5Whether,Onthefactsand.In|circumstances of the case, the Tribunal was|correct in following it decision in the case of Cutcht|Menon Union, wherein it is stated the distinction|between the application of income and_ thededuction of depreciation as expenditure stating|that the allowance of depreciation has nothing to|dowiththe|application of income1S not appropriate and acceptable as the investment in|the capital assets as well as depreciation are both|claimed as application of income in determining|surplus/ deficit during the year? 6. Whether,Orlthefactsandin|circumstances of the case, the Tribunal was|correct in holding that the normal provisions ofsection 28 to 44 of the Act are applicable and|depreciation is allowable to charitable trust, when|in cases of trust which are covered by provisions|of section 11,12 and 13 only application of income|during the year is allowable under section 11 of|the Act and depreciation being a_ notionalexpenditure is not allowablePr” 3.|This Court in case of‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujaratt Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 [SC)PT witregard 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 of Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 6/23 Depreciation 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 theview taken by the Bombay High Court in‘Commissioner of Income Tax v. Institute ofBanking Personnel Selection (IBPS)’ [2003]I3S1 Taxman 386 /Bom.. Lhe relevant portionof 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]thecontentionof|theDepartmentpredicatedOTLdoublebenefit 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| Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 7/23 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. TheaSSCS SCCWas (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 thecourse of assessment proceedings for|assessment years 1977-78, 1978-79and 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|fordeterminationLUGS,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 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|profits and gains of business shall be|computed in accordance with section|30 to section 45C, 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 heldthatnormaldepreciationCATbeconsidered as a legitimate deduction|in computing the real income of the|assessee on_ general principles orunder 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 ts Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 10/23 not applicable. However, the income of.the Trust is required to be computed|undersection.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. 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)VD.FramjeeCawasyjeeInstitute (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 that Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 11/23 depreciation could not be takeninto account because, full capitalexpenditure had been allowed inthe year of acquisition of theassets.The assessee went in appeal|beforethe|AssistantAppellateCommissioner. TheappealLWWarejected. 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 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.| Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 12/23 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.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 12/23 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. 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 < 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 thepresent Assessment Year, the controversy is covered by thejudgment inCommuisstoner of Income Tax (Exemptions)and another .vs. Ohto University Christ College|rendered OT]17.07.20181n|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|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 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. Since the 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 assesseeand deleted the disallowance made by theAssessing Officer by placing reliance on|the decision of the|Hon’hble KarnatakaHigh Court in the case of CIT Vs.Society of the Sisters 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|boththe|learnedDepartmental Representatives for Revenue|and the learned Authorised Representative Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 15/23 fortheaASSCSSCEand|perusedandcarefullyconsideredthematerialOnrecord,includingthejudicialpronouncements cited. The facts of the|issue before us 1s that the-assessee had incurredcertain 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 ofexpenditure.The fact of amortizationwas not disputed by the Assessing Officerin|theassessment|proceedingsforAssessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Ofthe|expenditure.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 the case 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 : - 5.3.2 We find that the issue before usis directly related to the issue decided bythe Hon’ble Karnataka High Court in the case 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|thereforethe|commercialprinciple|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 tssue 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’s:appeal for Assessment Year 2008-09 and Ground 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 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. Srintvasan, 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-sections Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 18/23 to support the contention of Mr. Srinivasan.Explanation to section I1(1)(a) on _ thcontrary takes note of the income notreceived in a particular year. It lends)support to the contention of the assesseethat accounting need not only be on cash)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. ]2.|The depreciation if it is notallowed 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 19-6-1968|(SeeTaxmann’sDirectTaxes|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 theyrepresent outgoings for purposes otherthan those of the trust. The amounts spentor applied for the purposes of the trustfrom out of the income, computed in the|aforesaid manner, should not be less than7o per cent of the latter, if the trust is to getthe full benefit of the exemption undersection 11(1).” 13. In CIT v. Trustee of H.E.H. The|Nizam’s|SupplementalReligious 13. In CIT v. Trustee of H.E.H. The|Nizam’s|SupplementalReligious Date of Judgment 14-08-2018 I.T.A.No.306/2015 The Director of Income Tax (Exemption) Vs. M/s Krupanidhi Education Trust 20/23 Endowment 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|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 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 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 for allowance 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|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 above decisions of this Court, we are of the opinion that thesubstantial questions of law as suggested by the appellant does 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