Date Of Judgment 14 -08-2018 I.t.a v. M/S Medical Relief Society Of South Kanara

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.531 OF 2017 BETWEEN( Ll.PR. COMMISSIONER OF| INCOME TAX (EXEMPTIONS) BENGALURU 2. THR INCOME TAX OFFICER | (EXEMPTIONS) WARI])-MANGALURUMANGALURU .. APPBLLANTS (BY MR.SANMATHI E I, ADV.)| AND( M/S MEDICAL RELIEFSOCIBTY OF SOUTH KANARAMADHAV NAGARMANIPAL.PAN: AAAAM 2004 P RESPONDENT (BY MR»S.PARTHASARATHI & SMT.SHEETAL BORKAR, ADVS) Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 2/22 THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED:03/02/2017 PASSED IN ITA NO.1971/BANG/2016, FOR:THR ASSKHSSMBNT YRBAR 1998-1999 PRAYING THIS HON'BLCOURT TO DECIDE THE FOREGOING QUESTION OF LAW AND //OR|SUCH|OTHERQUESTIONS.OF|LA WASMAYBE.KRORMULATEBED BY THK HON BLE COURT AS DEEMED FIT ASEHTASIDETHERAPPBHRLLATORDERDATED:03/02/2017PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, CIRCUITBENCH, MANGALURU, IN APPEAL PROCEEDINGS NO. ITA NO.1971/BNG/2016)ROR|ASSESSMENT|YEBAR1998-1999,|AS|SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHERRELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.| THIS|LT.A..COMING|ON|KORHBARINGON|INTE ROLOCUTORYAPPLICATION,THIS|DAY.Dr. VINEET=KOTHARIJ- DELIVBRED THERE FOLLOWING: JUDGMENT Mr.Sanmathi E.I.,Adv. for Appellants-RevenueMr.S.Parthasarathi & Smt.Sheetal Borkar,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. Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 3/22 oD The suggested substantial questions of law in the memo of appeal of Revenue are quoted herein below for readyreference:-. “1. Whether on the facts and in thecircumstances of the case, the Tribunal is right in|holding that the provisions relating to set-off of|loss from one head against income from another|head and carry forward and set-off of loss against|the income of subsequent years as envisaged|under Sections 7O to 79 of the Act are applicable|to the charitable trust t.e., the assessee herein by|following its earlier order which has not reached|finality even when the normal computation of|income under respective heads as envisaged|under Sections 15 to 59 are not applicable to the|computation of income in respect of Trusts as per|Sections 11, 12 and 13? | aDWhether on the facts and in_ thecircumstances of the case, the Tribunal is right in|law in allowing depreciation on assets put into|use during the accounting year relevant to|assessment year, eventhough the entire cost of|these assets has been claimed by the assessee as| Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 4/22 application of income for charitable activities and|further failed to notice that it would amount to|double deduction and it is not as per the|provisions of the ActP” 3.|This Court in case oft‘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 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 of 3.|This Court in case oft‘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 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 of Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 5/22 Banking 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.benefit was turned down in_ thefollowing manner: 3. As stated above, the first question|which requires consideration by thiscourt is : whether depreciation was|allowable on the assets, the cost of|which has been fully allowed asapplication of income under section 11in the past years? In the case of CIT v.MunisuvratJain1994Tax|LawReporter, 1084 the facts were as|follows. TheaASSCS SCLUaS(OCharitable Trust. It was registered asa Public Charitable Trust. It was also|registeredwith the Commissioner,| 6/22 Pune.|The assessee derived incomefrom the temple property whichwas a Trust property.During the)course 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 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| 7/22 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 43C, 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 heldthatnormal|depreciationCaNbe.considered 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 Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 8/22 Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 8/22 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 ofthe Bombay High Court, we answerquestion No. 1 in the affirmative L.e., in| 9/22 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|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 in the year of acquisition of theassets.The assessee went in appealbeforetheAssistantAppellateCommissioner. TheappealWas.rejected. The Tribunal, however, tookthe view that when the Income Tax' Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 10/22 Officer stated thatfull expenditure hadbeen allowed in the year of acquisition|of the assets, whathe really meant 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 mean'that in computing income fromthose assets in subsequent years,depreciation in respect of thoseassetscannotbe.takenintoaccount.This view of the Tribunalhas been confirmed by, the Bombay|High Court in the above judgment.|Hence, Question No. 2 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| M/s Medical Relief Society of South Kanara 11/22 taken by the Bombay High Court correctlyStates the principles of law and there ts no'need to interfere with the same7 . 6. Sincetheissueregardingclaimof|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 inCommissioner of Income Tax (Exemptions) and another Vs. Ohio University Christ Collegerendered 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. Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 12/22 The said findings are quoted below for ready|reference : 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 inCommissioner of Income Tax (Exemptions) and another Vs. Ohio University Christ Collegerendered 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. Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 12/22 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. 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 disallowed 13/22 the 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 Karnataka 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 rivalcontentionsof|boththe|learnedDepartmental Representatives for Revenue|and the learned Authorised Representative|fortheaASSCSSCEand|perusedandcarefullyconsideredthematerialOnrecord,includingthejudicialpronouncements cited. The facts of the|issue before us 1s that the-assessee hadincurredcertain preliminary 14/22 expenditure 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]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 : - Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 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 : - Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 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 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 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’s:appeal 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) Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 16/22 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 I1(1)(a) on _ thcontrary 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 to 17/22 explain 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 understood|the 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 understood in itscommercial sense, 1.e., book income, afteraddingbackaryappropriationsOLr 18/22 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 understood|the 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 understood in itscommercial sense, 1.e., book income, afteraddingbackaryappropriationsOLr 18/22 applications 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 ofaccountancyforthePUFPOSEesof 19/22 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 : “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.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 21/22 Date of Judgment 14 -08-2018 I.T.A.No.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 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.531/2017 Pr. Commissioner of Income Tax (Exemptions) & another Vs. M/s Medical Relief Society of South Kanara 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