The order of the Bench was delivered by
1. Vijay Pal Rao (Judicial Member).-This appeal by the Revenue is directed against the order dated March 17, 2014 of the Commissioner of Income-tax (Appeals), Mysore for the assessment year 2011-12.
2. The Revenue has raised the following grounds :
"1. The order of the learned Commissioner of Income-tax (Appeals) is against law and facts of the case.
Depreciation :
2.1. The learned Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for depreciation on 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 asses see as application of income for charitable activities.
2.2. The learned Commissioner of Income-tax (Appeals) erred in not following the ratio laid down by the hon'ble apex court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC)- wherein it is held that a double deduction cannot be presumed in the absence of a clear statutory indication.
2.3. The learned Commissioner of Income-tax (Appeals) failed 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.
2.4. The learned Commissioner of Income-tax (Appeals) erred in not following the ratio laid down by the hon'ble Kerala High Court in the case of Lissie Medical Institutions v. CIT I. T. A. No. 42 of 2011 dated February 17, 2012 [2012] 348 ITR 344 (Ker) wherein it is held that in order to reflect the true income to be available for application for charitable purposes, the assessee should write back in the accounts the depreciation amount to form part of income to be accounted for applications for charitable purposes.
2.5. The learned Commissioner of Income-tax (Appeals) failed to consider that the decision in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) is regarding allowing of depreciation on assets whose value was allowed in the preceding years as an appli cation 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, is distinguishable.
2.6. The order of the Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer be restored by placing reliance on the recent judgment of the hon'ble High Court of Delhi in the case of DIT (Exemption) v. Charanjiv Charitable Trust dated March 18, 2014 in I. T. A. Nos. 321 to 323 of 2013 [2015] 4 ITR-OL 180 (Delhi) wherein it is held that the 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
3.1. The learned Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to allow carry forward of deficit of assessment years 2001-02 and onwards for set off against the surplus of assessment year 2006-07, when there is no provision in the Income-tax Act to allow carry forward of such deficit, and the number of years for which such carry forward of deficit for set off can be allowed. The learned Commissioner of Income-tax (Appeals) erred in not specifying the provisions of the Income-tax Act, while directing the Assessing Officer to allow carry forward of deficit.
3.2. The learned Commissioner of Income-tax (Appeals) erred in placing reliance on the decision in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) for allowing carry forward and set off of deficit of earlier years, even though the 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 of this asses see. The learned Commissioner of Income-tax (Appeals) also erred in failing to take cognizance of the decision of the hon'ble apex court in the case of Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277 (SC) wherein the apex court held that the hon'ble High Courts can only interpret the law and not legislate, and legislative casus omissus cannot be supplied by judicial interpretative process.
Gain on revaluation of investments
4.1. The learned Commissioner of Income-tax (Appeals) erred in not considering the fact that during the year the assessee has gained an amount of Rs. 71,46,120 on revaluation of investments which is credited to the income and expenditure account.
4.2. The learned Commissioner of Income-tax (Appeals) erred in not taking cognizance of the fact that the assessee cannot adopt dual method of valuation of investments, i.e., one for computing the income and expenditure account and other for arriving at the income for Income-tax purpose.
4.3. The learned Commissioner of Income-tax (Appeals) erred in not taking cognizance of the fact that in the assessment year 2001-02 the provision debited in the income and expenditure account was dis allowed, provision being not an allowable expenditure whereas the fact in the assessee's case for the year under consideration is that gain on revaluation of investments is accounted for in the books of account but reduced from the computation of income for Income-tax purpose.
5. For these and other grounds that may be urged at the time of hearing the orders of the Commissioner of Income-tax (Appeals) may be set aside on these points and that of the Assessing Officer be restored.
6. The applicant craves leave to add, delete, amend or modify any of the grounds of appeal."
3. Ground No. 1 is general in nature and does not require any specific finding for adjudication.
4. Ground No. 2 is regarding claim of depreciation on the asset put into use.
5. The assessee is a registered charitable trust with the object of promoting education and advanced studies in medicine, science, etc. The assessee- trust was granted registration under section 12AA of the Income-tax Act, 1961 and also received approval for exemption under section 10(23C)(vi) of the Income-tax Act, 1961. The assessee filed its return of income showing nil income and excess of expenditure over the income. The Assessing Officer completed the assessment under section 143(3). During the course of assessment proceedings, the Assessing Officer noted the assessee claimed depreciation on the assets, even though the entire cost of the assets were claimed by the assessee and application of income and exempt under section 11 of the Income-tax Act, 1961. Thus, the Assessing Officer was of the view that claiming capital expenditure as application of income and again claiming depreciation on the same amount results in double deduction. The Assessing Officer placed reliance on the judgments of the hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 (SC) as well as the decision of the hon'ble Kerala High Court in the case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker) and held that double deduction cannot be allowed. Accordingly, the Assessing Officer disallowed the claim of depreciation to the tune of Rs. 70,40,56,376.
6. On appeal, the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee by following the order of this Tribunal in the case of Asst. CIT v. Shri Adichunchanagiri Shikshana Trust [2012] 19 ITR (Trib) 828 (Bang).
7. Before us, the learned Departmental representative has strongly supported the order of the Assessing Officer and placed reliance on the judgments of the hon'ble Kerala High Court in the case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker). The learned Departmental representative has pointed out that the hon'ble Kerala High Court has decided this issue against the assessee by considering all the decisions which were relied upon by this Tribunal in the case of Asst. CIT v. Shri Adichunchanagiri Shikshana Trust [2012] 19 ITR (Trib) 828 (Bang).
8. The learned Departmental representative submitted that the hon'ble High Court has observed that when the expenditure incurred for acquisition of depreciable assets itself is treated as application of income for charitable purpose under section 11(1)(a) of the Income-tax Act, 1961 then, the cost of such asset should be treated as nil.
9. The learned Departmental representative has thus, contended that while the income of the trust has to be computed in the commercial sense and the capital expenditure was allowed as application of income for charitable purpose, then, the claim of depreciation on such expenditure is not permissible being a double deduction.
10. On the other hand, the learned authorised representative has submitted that the decision of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC) is not applicable in case of a trust because the said decision was on the issue of allowability of claim of depreciation on an expenditure on which the claim under section 35 was also made and allowed. In the case in hand, there is no double claim of depreciation. Therefore, there is no bar in allowing the depreciation on the capital expenditure for acquiring the assets which were put to use for charitable purposes. The learned authorised representative has submitted that an identical issue has been considered and decided by various decisions of the hon'ble High Courts as well as by this Tribunal. He has relied upon the following decisions :
1. CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) ;
2. CIT v. Manav Mangal Society [2010] 328 ITR 421 (P&H) ;
3. CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn) ;
4. Asst. CIT v. Shri Adichunchanagiri Shikshana Trust [2012] 19 ITR (Trib) 828 (Bang) ;
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5. CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598 (Guj) ;
6. CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) ;
7. CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) ; and
8. CIT v. Trustee of H. E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP).
11. The learned authorised representative then referred the recent decisions of the co-ordinate Bench of this Tribunal dated March 20, 2015 in case of Asst. CIT v. City Hospital Charitable Trust, Bangalore in I. T. A. No. 676(B)/2014 [2015] 42 ITR (Trib) 583 (Bang) and submitted that the Tribunal after considering the judgment of the hon'ble Kerala High Court in case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker) has decided this issue in favour of the assessee.
12. We have heard the rival submissions as well as the relevant material on record. So far as the facts relating to this issue of claim of depreciation are concerned, there is no dispute that the assessee incurred an expenditure for acquisition of the asset to the tune of Rs. 4,11,14,20,599 and claimed the same as application of income. There is no dispute before us on the said claim of application of income. Since the assessee also claimed depreciation of Rs. 70,40,56,376 on such capital asset the Assessing Officer disallowed the claim of depreciation on the ground that it would amount to double deduction. We find that the hon'ble Kerala High Court in the case of Lissie Medical Institutions v. CIT [2012] 348 ITR 344 (Ker) held that the claim of depreciation on capital expenditure for acquiring of the asset would amount to double deduction when the assessee has already claimed the said capital expenditure as application of income. We find that in a series of other judgments including the judgments of the hon'ble Bombay High Court and the hon'ble Punjab and Haryana High Court as well as the other decisions as relied upon by the learned authorised representative, a contrary view has been taken by holding that the claim of depreciation on the capital expenditure would not amount to double deduction even if the said capital expenditure was claimed as deduction on account of application of income. Thus, it is clear that there are divergent views by different High Courts on this issue however, the judgment and rulings of the jurisdictional High Court is binding on this Tribunal. In the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn) the hon'ble jurisdictional High Court while dealing with the issue of allowability of claim of depreciation has held as under (page 31) :
"It is clear from the above provisions that the income derived from property held under trust cannot be the total income because section11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression 'total income' has been defined under section 2(45) of the Act to mean 'the total amount of income referred to in section 5 computed in the manner laid down in this Act'. The word 'income' is defined under section 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided under section 28. The word 'income', therefore, is a much wider term than the expression 'profits and gains of business or profession'. Net receipt after deducting all the necessary expenditure of the trust (sic).
There is a broad agreement on this proposition. But still the contention for the Revenue is that the depreciation allowance being a notional income (expenditure ?) cannot be allowed to be debited to the expenditure account of the trust. This contention appears to proceed on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be under stood as necessary outgoings. The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In Spicer and Pegler's Book-keeping and Accounts, 17th Edition, pages 44, 45 and 46, it has been noted as follows :
'Depreciation is the exhaustion of the effective life of a fixed asset owing to 'use' or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective life time ; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period.'
'At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, the esti mated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.'
'If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits ; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represents that part of their value on acquisition, which has not yet expired.'
In CIT v. Indian Jute Mills Association [1982] 134 ITR 68 (Cal), the Calcutta High Court, while construing the expression 'expenditure incurred' in section 44A of the Act, observed :
'depreciation claimed shall include the expenditure incurred.'
There are only two recognised methods of accounting : (i) cash basis, and (ii) mercantile basis. Under the cash basis only cash trans actions are recorded. It is only cash receipts and cash payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC) at 230 in the following words :
'The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed.'
It is not in dispute that if the mercantile system is followed, the depreciation allowance in respect of the trust property should be allowed.
Mr. Srinivasan, however, urged that there are enough indications in section 11 to exclude the mercantile system of accounting. The learned counsel relied upon section 11(1)(a) and section 11(4) in support of his contention. We do not think that there is anything in these sub-sections to support the contention of Mr. Srinivasan. Explanation to section 11(1)(a), on the contrary, takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not be on cash basis only. Section 11(4) is not intended to explain how the accounts of the business undertaking should be maintained. It is intended only to bring to tax the excess income computed under the provisions of the Income-tax Act in respect of business undertaking.
The depreciation if it is not allowed as a necessary deduction for computing the income from the charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income. The Board also appears to have understood the 'income' under section 11(1) in its commercial sense. The relevant portion of the Circular No. 5-P (LXX-6) of 1968, dated July 19, 1968, reads :
'Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purpose of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption under section 11(1).'
In CIT v. Trustee of H. E. H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378 (AP), the Andhra Pradesh High Court has accepted the accounts maintained in respect of the trust in conformity with the principles of accountancy for the purpose of determining the income derived from the property held in trust.
In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) at 495, the Madras High Court observed :
'The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by section 14.'
In the result, we answer the question in the affirmative and against the Revenue."
13. A similar view has been taken by the hon'ble Bombay High Court in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) as well as by the hon'ble Punjab and Haryana High Court in the case of CIT v. Manav Mangal Society [2010] 328 ITR 421 (P&H). The view taken in the case of Institute of Banking (supra) has been reaffirmed by the hon'ble Bombay High Court in the recent decision dated March 23, 2015 in the case of DIT (Exemptions) v. Shri Vile Parle Kelavani Mandal [2015] 378 ITR 593 (Bom), by observing in para 6 as under (page 595) :
"6. As far as question No. 4 is concerned, this court has repeatedly held that there is nothing like double deduction. When the assessee has acquired an asset from the income of the trust and thereafter the amount that is claimed is the depreciation on the use of the assets, such depreciation claim does not mean double deduction. The deduction earlier claimed is towards application of funds of the trust for acquiring assets. The latter is depreciation and it is permissible deduction considering the use of the assets. This has been clarified repeatedly by this court. If any reference is required then the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) is enough."
14. Therefore, in view of the judgment of the hon'ble jurisdictional High Court in the case of Society of the Sisters of St. Anne (supra) as well as various decisions as relied upon by the learned authorised representative, we have no reason to take a divergent view from the view taken by the co-ordinate Bench of this Tribunal in the case of Shri Adichunchunagiri Shikshana Trust (supra) as well as in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang)), wherein the co-ordinate Bench of this Tribunal has decided an identical issue in paras 7 to 9 as under (page 587) :
"7. We have heard the submissions of the learned Departmental representative, who relied on the order of the Assessing Officer. We have considered the order of the Assessing Officer. Identical issue came up for consideration before the Income-tax Appellate Tribunal, Bangalore Bench in the case of Deputy Director of Income-tax (Exemption) v. Cutchi Memon Union [2013] 60 SOT 260 (Bang-Trib), wherein similar issue has been dealt with by this Tribunal. In the aforesaid case, the assessee claimed depreciation and the Assessing Officer denied depreciation on the ground that at the time of acquir ing the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The Assessing Officer took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of the hon'ble Supreme Court in Escorts Ltd. [1993] 199 ITR 43 (SC). The Commissioner of Income-tax (Appeals), however, allowed the claim of the assessee. On further appeal by the Revenue, the Tribunal held as follows :
'20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the hon'ble Karnataka High Court in the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn). It was held in CIT v. Tiny Tots Education Society [2011] 330 ITR 21 (P&H), following CIT v. Market Committee, Pipli [2011] 330 ITR 16 (P&H) that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The deci sion of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC) have been referred to and distinguished by the hon'ble court in the aforesaid decisions.
21. The issue raised by the Revenue in the ground of appeal is thus no longer res integra and has been decided by the hon'ble Punjab and Haryana High Court in the case of CIT v. Market Committee, Pipli [2011] 330 ITR 16 (P&H). The hon'ble Punjab and Haryana High Court after considering several decisions on that issue and also the decision of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The hon'ble Punjab and Haryana High Court made a reference to the decision of the hon'ble Supreme Court in the case of Escorts Ltd. [1993] 199 ITR 43 (SC) and observed that the hon'ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one under section 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research under section 35(1)(iv) of the Act. The hon'ble court there after held that a trust claiming depreciation cannot be equated with a claim for double deduction. The hon'ble Punjab and Haryana High Court has also made a reference to the decision of the hon'ble Karnataka High Court in the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn), wherein it was held that under section 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the Commissioner of Income-tax (Appeals) on the above issue does not call for any interference.
22. Consequently, ground No. 5 raised by the Revenue is dismissed.'
8. We may also add that the legal position has since been amended by a prospective amendment by the Finance (No. 2) Act, 2014 with effect from April 1, 2015 by insertion of sub-section (6) to section 11 of the Act, which reads as under :
'(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.'
9. As already stated, the aforesaid amendment is prospective and will apply only from the assessment year 2015-16. In view of the above legal position, we are of the view that the order of the Commissioner of Income-tax (Appeals) does not call for any inter ference. Consequently grounds Nos. 2 to 2.5 raised by the Revenue are dismissed."
15. Following the judgment of the hon'ble jurisdictional High Court in the case of Society of the Sisters of St. Anne as well as the decision of the co-ordinate Bench of this Tribunal, we do not find any error or any illegality in the order of the Commissioner of Income-tax (Appeals), qua this issue.
16. Ground No. 3 regarding carry forward of deficit. The assessee claimed a total deficit of Rs. 9,33,27,87,598 inclusive of current year deficit to be carried forward for setting up of the same as application of income in subsequent assessment years. The Assessing Officer rejected the claim of the assessee on the ground that in the Income-tax Act, there is no provision of carry forward of excess of expenditure over income.
17. On appeal, the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee by following the decision of this Tribunal dated February 16, 2010 in case of Dr. T. M. A Pai Foundation in I. T. A. No. 486 to 491(B)/2009. The Commissioner of Income-tax (Appeals) has also taken note of the fact that in the assessee's own case for the assessment year 2010-11 this issue was decided by the Commissioner of Income-tax (Appeals) in favour of the assessee.
18. We have heard the learned Departmental representative as well as the learned authorised representative and considered the relevant material on record. There is no dispute that an identical issue was considered and decided by this Tribunal in favour of the assessee in the case of Dr. T.M.A Pai Foundation, Manipal. The learned authorised representative of the assessee also relied upon the decision of this Tribunal in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang). We note that the Tribunal in the case of City Hospital Charitable Trust, while dealing with the issue of carry forward of excess expenditure over income has held in para 14 as under (page 590) :
"14. We have considered his submission. Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence, even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year, the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. In other words, the set-off of excess of expenditure incurred over the income of earlier years against the income of a later year will amount to application of income of such later year. The above is the position of law as held in the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) ; CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [1995] 211 ITR 293 (Guj). In CIT v. Institute of Banking [2003] 264 ITR 110 (Bom), it was held that in case of charitable trust whose income is exempt under section 11, excess of expenditure in the earlier years can be adjusted against income of subsequent years and such adjustment would be applica tion of income for subsequent years and that depreciation is allowable on the assets the cost of which has been fully allowed as application of income under section 11 in past years. In Gonvindu Naicker Estate v. Asst. DIT [2001] 248 ITR 368 (Mad), the hon'ble Madras High Court held that the income of the trust has to be arrived at having due regard to the commercial principles, that section 11 is a benevolent provision, and that the expenditure incurred on religious or charitable purposes in earlier year or years can be adjusted against the income of the subsequent year. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or char itable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expend iture, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn)."
19. As it is clear from the above decision that the co-ordinate Bench of this Tribunal has followed the decision of the hon'ble Rajasthan High Court in case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj) as well as the decision of the hon'ble Bombay High Court in the case of CIT v. Institute of Banking [2003] 264 ITR 110 (Bom). Accordingly, following the decision of the co-ordinate Bench in the case of Asst. CIT v. City Hospital Charitable Trust [2015] 42 ITR (Trib) 583 (Bang), we uphold the order of the Commissioner of Income-tax (Appeals) on this issue.
20. Ground No. 4 regarding gain on revaluation of investments treated as income of the assessee. During the course of assessment proceedings the Assessing Officer noted that the assessee has deducted a sum of Rs. 71,46,120 from its gross income. On query, the assessee explained that the gain on revaluation of investments as per the market value as on March 31, 2011, was accounted however, it was not actually realised. The assesse claimed that it is only a book adjustment and no real income was realised and hence, the same was reduced from the gross receipts. The Assessing Officer did not accept the explanation of the assessee and added back the said amount to the assessee's returned income.
21. On appeal, the Commissioner of Income-tax (Appeals) deleted the addition made by the Assessing Officer.
22. We have heard the learned Departmental representative as well as learned authorised representative and considered the relevant material on record. The learned authorised representative has relied upon the judgment of the hon'ble Supreme Court in case of Indo Rama Synthetics (I.) Ltd. v. CIT [2011] 330 ITR 363 (SC) and submitted that it is only a notional gain on revaluation of the asset without actual realisation. We find that though, the judgment of the hon'ble Supreme Court is in relation to book profit under section 115JB and an adjustment on account of increase in the reserves due to revaluation of the asset, however, the observations of the hon'ble Supreme Court are relevant on the point of actual increase in the income. The relevant observation and conclusion of the hon'ble Supreme Court are in paras 20-25 are as under (page 371) :
"20. Book profit is not defined in the Act. It is income computed under the company law. By virtue of the minimum alternate tax provisions, in the case of a company whose total income as computed under the normal provisions of the Act is less than 30 per cent. of the book profit, the total income chargeable to tax will be 30 per cent. of the book profit as computed. For the purposes of section 115J, book profit will be the net profit as shown in the profit and loss account prepared in accordance with the provisions of Schedule VI to Companies Act, 1956 after certain adjustments. The net profit will be increased by Income-tax paid or payable, amount carried to any reserve, provision made for liabilities, etc., provided the amount(s) is debited to the profit and loss account. The amount so arrived at is to be reduced by item (i) to item (vii) including amounts withdrawn from reserves, if any such amount is credited to profit and loss account. Clauses (i) to (vii) of the Explanation to section 115JB(2) represent items of reduction from the net profits. Clause (i) mandates reduction for the amount(s) withdrawn from the reserves earlier created, provided such amount(s) is credited to the profit and loss account. Such credit is mandated so that the true working result gets reflected in the financial statement of the assessee-company. The said clause (i) contemplates only those reserves which actually affect the net profits as shown in the profit and loss account (see also clause (ii) for comparison). The object of various clauses (i) to clause (vii) is to find out the true working result of the assessee-company.
21. In the present case, the adjustment made in the profit and loss account was as per Accounting Standards 6 and 10 read with Guid ance Note issued by Institute of Chartered Accountants of India which is in conformity with section 211 of the Companies Act. The said adjustment was primarily in the nature of contra adjustment in the profit and loss account and not a case of effective credit in the profit and loss account (as contemplated in clause (i) of Explanation). The credit in the profit and loss account implies that the profit and loss account per se has been effectively credited by the said amount. Thus, the amount withdrawn from any reserve must in effect impact the net profit as shown in the profit and loss account. As per the accounting principles, the contra adjustment does not at all affect any particular account to which it has been carried. Unless an adjustment has the effect of increasing the net profit as shown in the profit and loss account, that entry cannot be said to be a credit to the profit and loss account and, therefore, though the amount has been literally credited to the profit and loss account, however, in substance there is no credit to the profit and loss account. Minimum alternate tax provisions were introduced as number of zero tax companies had grown. It was found that companies had earned substantial book profits and had paid huge dividends but paid no tax. In the present case, had the assessee deducted the full depreciation from the profit before depreciation during the accounting year ending March 31, 2001, it would have shown a loss and in which event it could not have paid the dividends and, therefore, the assessee credited the amount to the extent of the additional depreciation from the revaluation reserve to present a more healthy balance-sheet to its shareholders enabling the assessee possibly to pay out a good dividend. It is precisely to tax these kinds of companies that minimum alternate tax provisions had been introduced. The object of the minimum alternate tax provisions is to bring out the real profit of the companies. The thrust is to find out the real working results of the company. Thus, the reduction sought by the assessee under clause (i) to the Explanation to section115JB(2) in respect of depreciation has been rightly rejected by the Assessing Officer.
22. Take the facts of the present case. As stated above, the revalu ation reserve of Rs. 288,58,19,000 was created during earlier assess ment year 2000-01. During the accounting year ending March 31, 2001 (assessment year 2001-02), the profits of the assessee stood at Rs. 120,18,97,000 whereas depreciation stood at Rs. 127,57,06,000. Depreciation is a no-cash charge against the profits. Thus, company had a loss of Rs. 7,38,09,000 (i.e. Rs. 127,57,06,000 of depreciation as against profit of Rs. 120,18,97,000). However, by withdrawing Rs. 26,11,74,000, being the differential depreciation, from the revaluation reserve of Rs. 288,58,19,000 (which is only a notional adjustment entry to balance both sides of the balance-sheet) and reducing it from the depreciation of Rs. 127,57,06,000, the assessee artificially brings down the depreciation only to Rs. 101,45,32,000 which is then deducted from the profits before depreciation amounting to Rs. 120,18,97,000 so that there is a profit of Rs. 18,73,65,000. This is how the loss of Rs. 7,38,09,000 got converted to profit of Rs. 18,73,65,000. Thus, the financial statement for the year ending March 31, 2001 is made to look healthy.
23. The reasons given hereinabove are in addition to the reasons given by the authorities below while rejecting the claim of the asses see.
24. The matter could be examined from another angle. To reca pitulate the facts, the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending March 31, 2000) and amount of enhancement in valuation was Rs. 288,58,19,000 which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs. 288,58,19,000 was added to the historical cost of assets on the asset side of the balance- sheet and in order to equalise both sides of the balance-sheet the revaluation reserve to that extent was created on the liability side. Thus, the figure of profit remained untouched so far as the revalua tion of assets to the tune of Rs. 288,58,19,000 is concerned. The profits were not increased by the said amount when the asset was revalued. During the assessment year in question, i.e., assessment year 2001- 02, an amount of Rs. 26,11,74,000, being the differential depreciation, was transferred out of the said revaluation reserve of Rs. 288,58,19,000 and credited to the profit and loss account which the Assessing Officer disallowed by placing reliance on the proviso to clause (i) of the Explanation to section 115JB(2). Consequently, the Assessing Officer added back the said amount of Rs. 26,11,74,000 to the net profits. We agree with the Assessing Officer. Under the provisions, as they then existed, certain adjustments were required to be made to the net profit as shown in the profit and loss account. One such adjustment stipulated that the net profit shall be reduced by the amount(s) withdrawn from any reserves, if any such amount is credited to the profit and loss account. Thus, if the reserves created had gone to increase the book profits in any year when the provisions of section 115JB were applicable, the assessee became entitled to reduce the amount withdrawn from such reserves if such withdrawal is credited to profit and loss account. Now, from the above facts, it is clear that neither the said amount of Rs. 288,58,19,000 nor Rs. 26,11,74,000 had ever gone to increase the book profits in the said year ending March 31, 2000 (being the financial year). Thus, when such amount(s) has not gone to increase the book value at the time of creation of reserve(s), there is no question of reducing the amount transferred from such revaluation reserves to the profit and loss account. Thus, the proviso to clause (i) of the Explanation to section 115JB(2) comes in the way of the claim for reduction made by the assessee. In our view, the reduction under clause (i) to the Expla nation could have been availed of only if such revaluation reserve had gone to increase the book profits. As the amount of revaluation reserves had not gone to increase the book profits at the time it was created, the benefit of reduction cannot be allowed. One more fact needs to be highlighted. In this case, as indicated above, the revaluation reserve stood created during the earlier assessment year 2000-01. It has been vehemently argued on behalf of the assessee that creation of such reserve did not impact the profits of that year. The facts enumerated hereinabove shows that though the profit was not impacted, depreciation as the head of account was impacted. By inter play of the balance-sheet items with profit and loss account items the assessee, as stated above, has sought to project the loss of Rs. 7,38,09,000 as profit of Rs. 18,73,65,000."
23. Thus, it is clear that mere revaluation of asset would not increase income or receipt of the assessee, until and unless the said gain of revaluation is realised. Therefore, the gain on revaluation of the asset/investments without actual realisation cannot be treated as income of the assessee. Accordingly, this ground of the Revenue's appeal is dismissed.
24. In the result, the appeal of the Revenue is dismissed.
The order pronounced in the open court on this 24th day of July, 2015.