The order of the Bench was delivered by
A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER:-The Stay Petition and the connected appeal are filed by the assessee, aggrieved by the order of the Learned Commissioner of Income-Tax(A)-VII, Chennai dated 31/03/2015 in ITA No.334/13-14 passed under Sec.143(3) read with section Sec. 250 of the Act. It was decided by the Bench to hear the appeal of the assessee and accordingly the same is heard.
2. The Assessee has raised ten elaborate grounds in its appeal; however the cruxes of the issues are that:-
i) The Ld. CIT (A) had erred by travelling beyond the subject matter of the appeal and erroneously held that the assessee trust is not eligible to claim the benefit U/s.11 of the Act.
ii) The Ld. CIT(A) had erred by holding that the corpus donation received by the assessee trust will become the income of the assessee trust since the assessee trust is not treated as a charitable institution.
iii) The Ld. CIT(A) had erred by holding that the assessee trust would not be eligible to carry forward excess application of income of Rs. 6,22,83,776/-.
iv) The Ld. CIT(A) had erred by not treating the loss on sale of assets for Rs. 14,31,181/- as application of income.
v) The Ld. CIT(A) had erred by not allowing depreciation of Rs. 2,83,44,917/- as application of income.
vi) The Ld. CIT(A) had erred by not allowing the claim of bad debts of Rs. 3,08,658/- as application of income.
4. The brief facts of the case are that the assessee-trust registered u/s 12AA of the Act, is engaged in the activity of running hospitals, filed its return of income for the assessment year 2010-11 on 01.10.2010 declaring ‘Nil’ income after claiming deduction U/s. 11 of the Act and depreciation on the assets. The case was taken up for scrutiny and assessment was completed U/s.143 (3) of the Act on 21.03.2013 wherein the ld. Assessing Officer disallowed the claim of depreciation, carried forward of excess application of funds, bad debts written off as application of fund, and loss on transfer of assets as application of income. While doing so, the Ld. Assessing Officer allowed the benefit of Section-11 of the Act to the assessee trust. On appeal, the Ld. CIT (A) went a step forward and disallowed the benefit of Section-11 of the Act by denying to treating the assessee trust as a charitable institution.
5.1 Ground Nos.(i) & (ii): Denial of the benefit of Section-11 of the Act and thereby taxing the corpus donation received.
The Ld. CIT (A) was of the opinion that the assessee trust is not carrying out charitable activities and therefore not entitled for the benefit of Section-11 of the Act because of the following reasons:-
i) The assessee trust is involved in the activity of providing medical relief by charging a hefty price unblended with the tinge of charity
ii) Charity and commerce cannot co-exist. In the case of the assessee medical relief is provided for a price consideration leading to commercial activity.
iii) The activity of medical relief provided by the assessee is akin to the character of hotelier providing food to hungry people.
iv) If charity is not the motive for the services provided, then it will open the floodgate to everyone to sell anything on the pretext of providing some relief or the other.
v) The Income Tax Act only grants relief to the assessee to provide charitable medical relief to the assessee and not otherwise.
vi) If medical relief is provided on commercial basis, then the special status provided under the Act has to be denied and relief U/s.11 cannot be granted.
vii) In the case of the assessee trust, it reveals that hefty sum are received from both in-patients and out-patients and thereby bringing it under the category of business organization.
viii) Reliance was placed by the Ld. CIT (A) in the decision of the CUT Vs. Surat Art silk cloth Mfrs association 121 ITR (SC) wherein it was held that fulfilling charitable purposes must be “unsullied by profit making interest”.
ix) The assessee was carrying out its objectives for the purpose of making profit.
x) Discounts to patients were provided only to the extent of 1.6% of the operating revenue of the assessee’s trust. Similarly free treatment is given to the patients only to the extent of 3% of the operating revenue. When the fact reveals that even the corporate hospitals and clinics offer better discount than the assessee trust. The procedure to get discount are also cumbersome.
xi) The assessee is running its hospital as a normal routine commercial hospital but in the grab of charitable institution.
xii) The assessee has not distinguished its activities as to how it differs from other corporate hospitals/polyclinic/dispensaries run by individual doctors.
xiii) The intention of the statute is to provide charitable medical relief, charitable education etc., and not for commercial operations.
5.2 Ld. A.R. submitted before us that even though there is surplus derived from providing medical relief, the benefit of Section-11 cannot be denied subject to the fulfillment of other conditions provided in the Act, because the provisions of section 2(15) specifically provides that any services in the nature of medical relief ought to be considered as charitable in nature. The Ld. A.R. further relied in the decision of Hon’ble Apex Court reported in 2015-TIOL-20-SC-II in the case of M/s.Queen’s Educational society Vs. CIT vide order dated 16th March, 2015 wherein it was held that if the educational institution generates surplus, it will not cease to exist solely for educational purpose and considered as profit making enterprise. Ld. D.R on the other hand argued in support of the orders of the Revenue.
5.3 We have heard the rival submissions and carefully perused the materials available on record. Section-2(15) of the Act clearly provides that any activity in the nature of providing medical relief would be considered as a charitable activity. Further the proviso clarifies that only activities that are in the nature of “advancement of any other object of general public utility” shall not be considered to be for charitable purpose if it involves in carrying of any activity in the nature of trade, commerce or business etc., generating revenue exceeding a specified limit. Thus, the activity in the nature of medical relief will fall outside the scope of the proviso and any surplus resulting from the activity of carrying medical relief will not be taxable if the surplus is dealt with in the manner provided under the Act. The decision of Hon’ble Apex Court cited supra relied by the Ld. A.R also supports this view. Further, the Hon’ble Bombay High Court in the case of Vanita Vishram Trust Vs. CIT reported in (2010) 327 ITR 0121 held as follows:
“The petitioner has been conducting primary and secondary schools and colleges for arts, science, commerce and technical courses in Mumbai since 1929 and in Surat since 1940. Nor is there any dispute before the Court that save and except for conducting these educational institutions, the petitioner has not carried on any other activities right since 1929. In this background, it would be necessary to advert to the objects set out in the memorandum of association. Clause III(b) spells out as the object, amelioration of the condition of Gujarati Hindu women of the then Bombay Presidency and other places and alleviation of their social status by educating to them in subjects tending to their material, moral and spiritual advancement, opening out for them proper and suitable fields of work, lawfulness and influence in Hindu society. From this object, it is abundantly clear that the amelioration of the condition of Gujarati speaking Hindu women was sought to be improved, when the trust was founded in March, 1928, by providing for the education of this class of women. The means by which this object is sought to be achieved is by conducting Ashrams or homes for women and girls, particularly for widows and orphaned girls either as free or as paying inmates and by conducting schools for imparting religious, secular and industrial education and training in fine arts. A number of ancillary objects have been adverted therein including provision of libraries and gymnasiums, publication of books and by means of pecuniary and other help to students of the institution. A holistic reading of the object clause would establish beyond doubt that the sole purpose for the establishment of the petitioner was to further the cause of education amongst women belonging to a particular class, as stated therein. Though the objects clause contained varied objects including the management and development of movable and immovable properties, the statement of fact before the Court which is not disputed is that the only activity which has been carried out by the trust ever since its inception is the conduct of educational institutions. The Court, it must be emphasized, is not dealing with an institution which has sought approval for the first time or which has been set up in the proximate past. The trust has a history of over eighty years during the course of which the only activity is of conducting educational institutions. The fact that the trust exists solely for educational purposes is evidenced from the assessment orders for asst. yrs. 2000-01 and 2006-07, copies of which form a part of the record before the Court. Both these orders which have been made under s. 143(3) of the Act, contain a statement to the effect that the assessee is running schools with Gujarati and English as media of instruction at the primary and secondary stages and that the assessee also conducts a college for girls with the sole intent of imparting education. The record of these proceedings also contains a judgment of a Division Bench of this Court dt. 29th June, 2005 in a reference under s. 256(1) to which the petitioner was the applicant. The issue before the Court in the reference was whether the assessee was entitled to exemption under s. 10(22) on interest earned on surplus funds of the school run by the trust for asst. yrs. 1979-80 and 1980-81. The Division Bench observed that merely because a certain surplus arose from the operations of the trust, it could not be held that the institution was run for the purpose of profit, so long as no person or individual was entitled to any portion of the profit and the profit was utilized for the purpose of promoting the objects of the institution. The income of the trust was, therefore, held to be exempt under s. 10(22). The Division Bench followed the decision of the Supreme Court in Aditanar Educational Institution Etc. vs. Addl. CIT (1997) 139 CTR (SC) 7: (1997) 224 ITR 310(SC) and noted as a principle of law that if after meeting the expenditure, a surplus results incidentally from an activity lawfully carried on by the educational institution, the institution would not cease to be one which is existing solely for educational purposes since the object is not to make profit. The Division Bench also observed that if the trust exists solely for educational purposes and conducts an educational institution, the fact that it had other objects would not disentitle it to the exemption so long as the activity carried out by it in that assessment year was that of running an educational institution and not for profit. The Court observed that the assessee had existed only for educational purposes which consisted of running educational institution and not for earning profits. The observations of the Division Bench which have been made in the context of s. 10(22) would furnish a cogent answer to both the issues on which the applications for approval were rejected by the first respondent. Firstly, though the memorandum of association contains varied objects, so long as the record demonstrates that the assessee only conducts educational institutions, it must be regarded as existing solely for the purpose of education. No other activity is carried on. Secondly, the fact that a surplus may incidentally arise from the activities of the trust, after meeting the expenditure incurred for conducting educational activities would not disentitle the trust of the benefit of the provisions of s. 10(23C). Insofar the aspect of surplus is concerned, one must in addition, advert to the provision which has been made by Parliament in the third proviso to s. 10(23C). By the third proviso, it has been clarified that in the case inter alia of universities or other educational institutions which have applied its income or accumulated it for application wholly and exclusively to the objects for which it is established and in a case where fifteen per cent of income is accumulated on or after 1st April, 2002, the period of the accumulation of the amount exceeding fifteen per cent, shall in no case exceed five years. This provision would establish that Parliament did not regard the accumulation of income by a university or educational institution governed by sub-cl. (vi) as a disabling factor, so long as the purpose of accumulation is the application of the income wholly and exclusively to the objects for which the institution has been established. Parliament has, however, prescribed that where more than fifteen per cent of the income is accumulated after 1st April, 2002, the amount exceeding fifteen per cent shall not be accumulated for a period in excess of five years. For all these reasons, we are of the view that the rejection of the approval by the first respondent was manifestly misconceived - Aditanar Educational Institution Etc. vs. Addl. CIT (1997) 139 CTR (SC) 7: (1997) 224 ITR 310(SC) relied on; Pinegrove International Charitable Trust Vs. UOI (2010) 37 DTR (P&H) 105 concurred with; CIT Vs.Queens’ Educational Society (2009) 223 CTR(Uttarakhand) 395:”
5.4 The Hon’ble Delhi High Court in the case of Deputy Director of Income Tax Vs. Shanti Devi Progressive Education Society reported in (2012) 340 ITR 0320 held as follows:-
“In the absence of any finding or allegation that the assessee society running schools has diverted its funds for non-educational activities and anything on record to show existence of profit motive, exemption u/s.10(22) could not be denied on the ground that the assessee was collecting money by way of admission fee, corpus fund and loans from the parents of the students, more so as it is registered u/s.12A and exemption u/s.10(22) has been allowed to it for several years in the past and even in subsequent years.”
5.5 Following the aforesaid decisions, we hereby hold that the assessee trust engaged in running of hospitals would be entitled for the benefit of Section-11 of the Act even though it is incidentally generating surplus, since it is running a hospital and thereby providing medical relief, however subject to the compliance of the other provisions of the Act. Thus this issue is decided in favour of the assessee. Since we have held that the assessee trust would be eligible for the benefit of Section-11 of the Act, consequently we hereby hold that the Corpus donations received by the assessee trust shall not be included in the total income of the previous year in which such donation is received by the trust, as provided U/s.11 (1)(d) of the Act. Further we make it clear that the Ld.CIT(A) has powers to enhance an assessment and travel beyond the subject matter of the appeal as per Section 251(2) of the Act after providing an opportunity of being heard.
6.1 Ground No.(iii): Disallowance of the carry forward and set off of excess application of income.
During the course of assessment proceedings, it was observed that the assessee had claimed Rs. 6,24,83,776/- as excess application of fund to be carried forward to the subsequent years. It was also observed that the excess application of fund claimed by the assessee trust was not from the income earned by the assessee trust during the previous year. Therefore it was clear that excess application of fund was either sourced from the loan obtained by the assessee trust or from the accumulation of funds during the earlier years. It was further observed that only Rs. 3,75,02,118/- was applied from the income derived during the relevant previous year and the balance amount of Rs. 3,07,92,656/- was actually spent from the accumulated funds of the earlier years. The excess application of fund claimed by the assessee trust also included the claim of depreciation for the assessment years 2008-09, 2009-10 & 2010-11 of Rs. 2,04,59,791/-, Rs. 2,24,88,139/-, & Rs. 2,83,44,917/- respectively, which have been disallowed during the assessment proceedings as double deductions since the entire cost of the asset was already allowed as application of funds. For the above reasons the Ld. Assessing Officer disallowed the claim of carry forward of excess application of funds for Rs. 6,24,83,776/-. On appeal, since the Ld. CIT (A) withdrew the benefit of Section-11 of the Act to the assessee, this issue was not addressed as it was not relevant.
6.2 After hearing the both the parties, we find that this issue is squarely covered by the decision of this Tribunal in the case of The Anjuman-E-Himayath-E-Islam for the assessment year 2009-10 in I.T.A.No.2271/Mds./2014 vide order dated 02.06.2015. The relevant portion of the order is reproduced herein below for ready reference:-
“4.4 We have heard both the parties and carefully perused the materials available on record. Section-11(1)(a) of the Act provides that “income derived from property held under Trust wholly for charitable or religious purpose” shall not be included in the total income to the extent such income is applied for charitable or religious purpose in India. The Act also provides that upto 15% of such income is accumulated or set apart, then that shall also not be included in the total income. Further Section-11(1)(d) of the Act provides that “income in the form of voluntary contribution made with specific direction that they shall form part of the corpus of the trust or institution” will also not be included in the total income. By virtue of Section-2(24) of the Act the definition of ‘income’ includes any “voluntary contribution received by the trust created wholly or partly of charitable or religious purposes”. Further explanation to section-11(1)(a)(b) r.w.s 12(1) of the Act provides that any “voluntary contribution received other than with specific direction that they shall form part of the corpus of the trust or institution” created wholly for charitable or religious purpose shall be deemed to be the “income derived from property held under trust”. From the above it is clear that, when the assessee trust applies 85% of its income received by way of “voluntary contributions other than the voluntary contributions received with specific directions” and the “income derived from property held under trust”, then such income shall not be included in the total income of the Trust. Further the balance 15% of such income even if accumulated or set apart shall also not be included in the total income of the Trust. Therefore, what is provided under the Act is with respect to ‘application of income’ from the ‘income derived from the property held under the Trust’ and any ‘voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust’. Thus, there is no reference in Section-11 of the Act with respect to application of fund from the ‘corpus’ of the trust, ‘loan’ obtained by the Trust, ‘Sundry creditors’ of the Trust or ‘accumulate fund’ of the Trust for claiming exemption U/s.11 (1) of the Act.
4.5. Application of fund by any charitable institution is possible only from the following sources:-
i) Voluntary contributions received by the Trust towards its corpus,
ii) Other voluntary contributions,
iii) Accumulated fund,
iv) Amount received by way of loan,
v) Sundry creditors,
vi) “Income” derived from the “Property” held under the Trust.
[Hon’ble Calcutta High Court has held in the case DCIT VS. Girdharilal Shewnarain Tantia Trust reported in [1993] 199 ITR 15(Cal.) that “The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable”.
Further, Hon’ble Apex High Court has held in the case of J.K.Trust Vs. Ld. CIT /CEPT reported in [1957] 32 ITR 535(SC) that “Property” is a term of the widest import, and subject any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. Business would undoubtedly be property unless there is something to the contrary in the enactment. ]
When the Trust applies its funds from its Corpus, accumulated fund, Sundry creditors or from the loan obtained by the Trust, then such funds which are applied cannot be said to be funds applied from the income of the Trust. Therefore, there cannot be a case where the trust can apply its income more than the income received by it for the purpose of Section-11(1)(a)&(b) of the Act. Thus excess application of fund over and above the income of the Trust can arise only when funds are applied from the Corpus of the Trust, accumulated fund, Loan obtained by the Trust or goods and services received from Sundry Creditors. It can be logical to deduce that when funds are applied from borrowed funds or by way of Sundry creditors the same can be treated as application of fund in the year in which such Loan/Sundry creditors are repaid from the income of the Trust. However when amount is applied from the corpus fund or accumulated fund the same cannot be treated as application of fund for the purpose of Section 11 of the Act, because such fund have already been exempt from the income of the Trust in the year in which it is received or such amount is set aside and therefore once again treating the same as application of fund will amount to double deduction. Similarly voluntary contribution received toward Corpus is exempt from income of the trust in the year in which it is received and therefore when it is utilized for the objects of the Trust it cannot be considered as application of fund otherwise it will amount to double deduction. From the above factual and mathematical matrix it is evident that carry forward of excess application of fund in the commercial principles cannot be allowed as per the provisions of the Act because it would result in notional application of income in the subsequent year. These aspects have not been considered by the Mumbai Bench of the Tribunal, and the unreported decision of the Hon’ble Bombay High Court is also not placed before us.
4.6 Now analyzing the facts of the case before us, it appears that the assessee trust’s gross receipts is Rs. 5,11,60,794/- and the assessee trust have spent Rs. 5,35,57,149/- which shows that the assessee trust has spent Rs. 23,96,355/- more than its income received during the relevant year. This amount of Rs. 23,96,355/- may have been taken out from the ‘corpus funds’, ‘accumulated funds’, ‘loan’ obtained by the assessee trust or arising out of ‘Sundry Creditors’. Therefore it is obvious that there is no excess application of income over and above the income received by the trust, hence the question of carry forward of excess application of income does not arise. However the amount applied from the ‘Loan’ or ‘Sundry Creditors’ will be allowed as application of fund in the year in which such ‘Loan’ or ‘Sundry Creditors’ are repaid. It is pertinent to mention that if the amount is applied from the ‘Corpus fund’ or ‘accumulated fund’ it will not be treated as application of fund because ‘Corpus fund’ and ‘accumulate fund’ are already exempt from the income of the Trust and once again if it is treated as application of fund it would amount to double deduction. Therefore the claim of the assessee to carry forward the excess application of fund cannot be entertained applying the commercial principles. However if the excess amount of Rs. 23,96,355/- is applied from the borrowed fund or from Sundry Creditors, the same shall be allowed as application in the year in which such Loan or Sundry Creditors are repaid from the income of the Trust as discussed herein above. Needless to mention that the income of the Trust refers to ‘income derived from the property held under the Trust’ and any ‘voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust’ i.e., item Nos.(ii) and (vi) mentioned hereinabove. This ground raised by the assessee is accordingly disposed off.”
6.3 Following the ratio of the above decision of the Chennai Bench of the Tribunal, we hereby hold that the claim of the assessee for carry forward of excess application of fund to subsequent years is not permissible as per the provisions of the Act. It is ordered accordingly.
7.1 Ground No.(iv): Denial of treating the loss on sale of assets of Rs. 14,31,181/- as application of income.
It was noticed by the Ld. Assessing Officer from the income & expenditure statement that the assessee trust had claimed Rs. 14, 31,55,182/- as loss on transfer of assets. The Ld. Assessing Officer was of the view that the same cannot be treated as application of funds as there was no cash outflow. It was further noticed by the Ld. Assessing Officer that the assessee trust had received Rs. 5,81,000/- as sale proceeds from these assets and the same has not been offered as income. Therefore the Ld. Assessing Officer treated the sale proceeds of Rs. 5,81,000/- as the income of the assessee. We are in agreement with the view taken by the Ld. Assessing Officer. The purchase cost of these assets would have been already allowed as application of funds in the year in which the assets were purchased. Therefore, the loss on sale of these assets cannot be treated as application of funds once again. It would amount to double deduction. Further the facts remain that the sale proceeds of Rs. 5,81,000/- is the income of the assessee because there is a cash inflow to that extend which has to be applied for the objects of the trust as provided under the provisions of the Act. Therefore the action of Ld. Assessing Officer is justified. It is ordered accordingly.
8.1 Ground No.(v): Disallowance of the depreciation while computing the income of the assessee trust.
During the course of assessment proceedings, it was observed by the Ld. Assessing Officer that the assessee had claimed depreciation on the same assets the full cost of which was allowed as application of funds. The Ld. Assessing Officer disallowed the claim of depreciation made by the assessee because the cost of the asset was already allowed as application of fund and therefore such claim would amount to double deduction. On appeal, the Ld. CIT (A) having withdrawn the benefit of Section-11 of the Act to the assessee did not adjudicated this issue as it had become irrelevant.
8.2 At the outset we find that on the earlier occasion, the Chennai Bench of the Tribunal in the case of The Anjuman-E-Himayath-EIslam for the assessment year 2009-10 in I.T.A.No.2271/Mds./2014 vide order dated 02.06.2015 had adjudicated the issue in favour of the Revenue. The relevant portion of the order is reproduced herein below for reference:-
“5.1 The assessee Trust had claimed depreciation on the assets as application of income in the return of income. The Ld. Assessing Officer opined that the claim of depreciation by the assessee would amount to double deduction because the entire cost of asset has already been claimed as application of income in the year in which the assets were purchased. Thereafter, the Ld. Assessing Officer citing certain decisions held that the claim of depreciation cannot be considered as application of income. On appeal, the Ld. CIT (A) was also of the view of the Ld. Assessing Officer and therefore confirmed Ld. Assessing Officer’s order. 5.2 We find this issue is elaborately discussed in the case of Lissie Medical Institution Vs. CIT reported in [2012] 348 ITR 344(Ker.) and held the issue against the assessee. While doing so, the Hon’ble Kerala High Court had considered the Circular No.5P(LLX-6) dated 19.06.1968 which has not been considered by the other decisions. The Circular No. 5P(LLX-6) is reproduced herein below for reference:-
1. Circular No. 5-P (LXX-6) of 1968, dated 19-6-1968. Subject : Section 11-Charitable trusts-Income required to be applied for charitable purpose-Instructions regarding.
In Board's Circular No. 2-P(LXX-5) of 1963, dated the 15th May, 1963, it was explained that a religious or charitable trust claiming exemption under section 11(1) of the Income- tax Act, 1961, must spend at least 75 per cent of its total income, for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.
2. Section 11(1) provides that subject to the provisions of sections 60 to 63 "the following income shall not be included in the total income of the previous year . . . ". The reference in sub-section (a) is invariably to "income" and not to "total income". The expression "total income" has been specifically defined in section 2(45) of the Act as "the total amount of income . . . computed in the manner laid down in this Act". It would accordingly be incorrect to assign to the word "income" used in section 11(1)(a), the same meaning as has been specifically assigned to the expression "total income" vide section 2(45).
3. In the case of a business undertaking held under trust, its "income" will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Incometax Officer in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.
4. 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 purposes 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).
5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed above, will be the "income" of the trust for purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).
After considering the Circular, the Hon’ble Kerala High Court held as follows:-
“Held, that after writing off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claimed the same amount in the form of depreciation, such notional claim became a cash surplus available with the assessee, which was outside the books of account of the trust unless it was written back which was not done by the assessee. It was not permissible for a charitable institution to generate income outside the books in this fashion and there would be violation of section 11(1)(a). It was for the assessee to write back the depreciation and if that was done, the Assessing Officer would modify the assessment determining higher income and allow recomputed income with the depreciation written back by the assessee to be carried forward for subsequent years for application for charitable purposes.”
Further Hon’ble Calcutta High Court has held in the case DCIT VS. Girdharilal Shewnarain Tantia Trust reported in [1993] 199 ITR 15(Cal.) that “The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. Respectfully following the decision of the Hon’ble Kerala High Court and taking cue from the decision of the Hon’ble Calcutta High Court, we do not find any hesitation to confirm the order of the Ld. CIT(A) and also the views expressed by him in his order. Accordingly this appeal is held in favour of the Revenue.
8.3 Following the ratio of the above decision of the Chennai Bench of the Tribunal, we hereby hold that the claim of depreciation made by the assessee cannot be entertained as per the provisions of the Act. It is ordered accordingly.
9.1 Ground No.(vi): Disallowing the claim of bad debts of Rs. 3,08,658/- as application of income.
The assessee had claimed bad debts of Rs. 3,08,658/- in its income & expenditure statement. The Ld. Assessing Officer did not allow it to be treated as application of fund because there was no actual cash outflow but it was merely a book adjustment. The view of the Ld. Assessing Officer was that the claim of bad debt is only notional expenditure and therefore cannot be construed as application of income. Since the Ld. CIT (A) withdrew the benefit of Section-11 to the assessee, this issue was not adjudicated as it was irrelevant. On this issue we are of the view that if the receivables on which such claim of bad debts is made was earlier treated as the income of the assessee trust for the purpose of Section-11(1) of the Act, by applying the accruing concept and following the mercantile system of accounting, then the same should be allowed as application of fund when such receivables have become bad and written off in the books of accounts during the relevant assessment year. It is ordered accordingly.
10. Since we have decided the appeal of the assessee, the stay petition filed by the assessee has become infructuous and accordingly it is dismissed.
11. In the result, the appeal of assessee is partly allowed as indicated herein above & the Stay Petition filed by the assessee is dismissed.
The order pronounced in the open court on the 1st January, 2016 at Chennai.