Date Of Judgment 14-08-2018 I.t.a v. M/S Academy Of General Education 2/23

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.371 OF 2014 BETWEEN' 1.COMMISSIONER OF INCOME TAX| CHRNTRAL REVENUE BUILDINGS ATTAVARA MANGALORE-5/5001 iaTHER ASSISTANT COMMISSIONBR OF INCOME TAXCIRCLE-1CIRCLE-1 UDUPI APPBRLLANT (BY MRJEEVAN J NEERALGI, ADV.) AND' M/S ACADEMY OF GENERAL EDUCATIONACADEMY HOUSEMANIPAL-576104PAN NO .AAATA 2976 RESPONDENT (BY SRI.S.PARTHASARATHI & SMT.SHEETAL BORKAR, ADVS.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:04/04/2014 PASSED IN ITA NO.1141/BANG/2013, FOR)THE ASSESSMENT YBAR 2010-11 WITH A PRAYER TO 1. DECIDE.THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHERQUESTIONS OF LAW AS MAY BE FORMULATED BY THEHON'BLE COURT AS DEEMED FIT 2. SET ASIDE THR APPELLATEORDER DATED: 04/04/2014 PASSED BY THE INCOME TAX)APPELLATE TRIBUNAL, 'C’ BENCH, BANGALORE IN APPEALPROCEEDINGS NO. ITA NO.1141/BANG/2013 FOR ASSESSMENT|YEAR 2010-11. THIS ILT.A. COMING ON FOR HEARING, THIS DAY | S.SUJATHAJ' DBLIVBRBD THR FOLLOWING:- JUDGMENT Mr.Jeevan J Neeralgi,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 law in the memo of appeal of Revenue are quoted herein below for readyreference: - Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 3/23 Depreciation: | “1.1. Whether, on the facts and in thecircumstances 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? | 1.2. Whether, on the facts and in thecircumstances of the case, the Tribunal were right|in law failing to take cognizance of the fact that|allowing of total cost of the asset as an|application of income and allowing of depreciation|on the value of such assets in the same year|results in double deduction and is not admissible|in the absence of clear statutory indication? 1.3. Whether, on the facts and in thecircumstances of the case, the Tribunal were|justified in law in not appreciating the fact that in|the case of CIT vs. Institute of Banking — 264 ITR|110 (Bom) the decision is regarding allowing of|depreciation on assets whose value was allowed|in the preceding years as application of income,| and not on allowing of depreciation in the same|assessment year in which the cost was allowed|as an application of income and, therefore, 1s|distinguishable? 1.4. Whether, on the facts and in thecircumstances of the case, the Tnbunal were|justified in law in not taking cognizance of the|judgment of Hon’ble High Court of Delhi in the|case of DIT (Exemption) vs. Charanji Charitable|Trust in ITA No.321 to 323/2013 wherein it ts.held that Tribunal was not justified in directing|the allowance of depreciation in respect of assets,the cost of which has been allowed as deduction|as application of income of the Trust? Carry forward of deficit:| 2 1Whether, on the facts and in _ thcircumstances of the case, the Tnbunal were|justified in law in allowing carry forward of deficit|of earlier years for set off against the income of|the 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.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 5/23 Carry forward of deficit:| 2 1Whether, on the facts and in _ thcircumstances of the case, the Tnbunal were|justified in law in allowing carry forward of deficit|of earlier years for set off against the income of|the 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.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 5/23 2.2. Whether, on the facts and in thecircumstances of the case, the Tnbunal were|justified in law in placing reliance on the decision|in the case of CIT Vs.Institute of Banking — 264|ITR 110 (Bombay) for allowing carry forward and|set off of deficit of earlier years, even though said|decision was not pursued in further appeal in|view of nil tax effect involved, and as per Section|268A the said decision is not binding in respect ofthis assessee? 2.3. Whether, on the facts and in thecircumstances of the case, the tribunal were|justified in law in failing to take cognizance of the|decision of Hon’ble Apex Court in the case of|Unionof|India|Vs.DharmendraTextilesProcessors (2008) 306 ITR 277 (SC) wherein theApex Court held that the Hon’ble High Courts can|only interpret the law and not legislate, and|legislative complainant casus omissus cannot besupplied by judicial interpretative process?| 3.|This Court in case oft‘Commissioner of Income Tax-Ill, Pune v. Rajasthan & Gujarati Charitable|Foundation Poona’ [2018] 89 taxmann.com 127 [SCI with regard to allowability and Depreciation in the hands ofReligious and Charitable Trust held as under: 65Learned 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 ofIncomeTax-III,PuneVU.RajasthanOSGujaratiCharitableFoundationPoona’[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 HighCourt]thecontentionof|theDepartmentpredicatedOTLdouble Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 7/23 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 incomefrom the temple property whichwas a Trust property.During thecourse of assessment proceedings for|assessment years 1977-78, 1978-79and 1979-80,the assessee claimeddepreciation on the value of thebuilding at the rate of 2.5 per centand they also claimed depreciation on| Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 8/23 Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 8/23 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 forcharitable 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)of the Act provides for depreciation in|respectof|building,plantand|machinery owned by the assessee. 9/23 and 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 heldthatnormal|depreciationCaNbe.considered 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 andmachinery and furniture was liable tobe computed in normal commercialmanner although the Trust may not be Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 10/23 carrying 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 Courtin the case of Director of Income Tax|(Exemption)VD.FramjeeCawasyjeeInstitute (1993) 109 CTR 463 (Bom). In| Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 11/23 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. 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 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 Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 12/23 Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 12/23 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 is covered by|the decision of the Bombay High Courtin the above judgment. Consequently,|Question No. 2 is answered in the|affirmativeL.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.” Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 13/23 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|rendered 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,theAssessingOfficerObserved that the assessee had claimed.applicationof|incomeOnaccount|of|expenditure of earlier years, whichhas been brought forward and set off|in the year under consideration.TheAssessing Officer disallowed the same on Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 14/23 the ground that there is no expressprovisionin|theActpermittingtheadjustmentof|earlieryearsbroughtforward 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 assesseeand deleted the disallowance made by theAssessing Officer by placing reliance on|the decision of the|Hon’hble Karnataka Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 15/23 High 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|boththelearnedDepartmental Representatives for Revenue|and the learned Authorised RepresentativefortheaASsSSCSSand|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|the|assessment|proceedingsforAssessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Ofthe|expenditure.Theun-amortized 16/23 5.3.1 We have heard the nvalcontentionsof|boththelearnedDepartmental Representatives for Revenue|and the learned Authorised RepresentativefortheaASsSSCSSand|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|the|assessment|proceedingsforAssessment Year 2007-O8 where the entireamount was added back claiming 1/5[th]Ofthe|expenditure.Theun-amortized 16/23 expenditure 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 : - 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 as Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 17/23 discussed 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 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: Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 18/23 “11. Mr. Srintvasan, however, urgedthat there are enough indications in)Section 11 to exclude the mercantilesystem of accounting. The learned counselrelied upon sections 11(1)(a) and 11(4) in)support of his contention. We do not thinkthat there is anything in these sub-sections|to 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 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. 12.The depreciation tif it its noallowed as necessary deduction forcomputingtheincomefromthecharitable institutions, then there isno way to preserve the corpus of the trust for deriving the income.The Board 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: 12.The depreciation tif it its noallowed as necessary deduction forcomputingtheincomefromthecharitable institutions, then there isno way to preserve the corpus of the trust for deriving the income.The Board 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, afteraddingbackaryappropriationsOLrapplications 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 trust from 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 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 of Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 21/23 Banking (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,plantandmachineryandfurniture is liable to be computed in a|normal commercial manner although thetrust may not be carrying on any business|and|theassetsin|respectwhereofdepreciation1Sclaimednot.be| Date of Judgment 14-08-2018 I.T.A.No.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 22/23 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.371/2014 Commissioner of Income Tax & Another Vs. M/s Academy of General Education 22/23 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 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| will have to be excluded from the income ofthe trust under section 11(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. The appeal filed by Revenue is accordingly|disposedoft| in terms of the aforesaid judgments of this Court. SS| Sd/-.JUDGE. Sd/-.JUDGE|