ITA No. 165/Mds./2015

N R S Ganesan, JM And A Mohan Alankamony, AM,JJ.

For the Appellants : Mr Pushya Seetharaman, Sr.Adv. & M/s Sreevidhya Adv.
For the Respondent : Mr N Madhavan, JCIT, DR

ORDER

The order of the Bench was delivered by

A. Mohan Alankamony, Accountant Member-This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-VII, Chennai dated ITA 2 No.165 /Mds/2015 09.09.2014 in ITA No.263/11-12passed under Sec.143(3) read with section 147 & 250 of the Act.

2. The Assessee has raised three elaborate grounds in its appeal, however the assessee has not pressed ground No.1 which relates to treating of revised return filed on 19.02.2008 as invalid and hence this ground is dismissed. The other two grounds are extracted herein below for adjudication:-
i) The Ld. CIT (A) erred in disallowing the depreciation of Rs. 16,61,341/- in the case of the Trust.
ii) The Ld. CIT (A) erred by not allowing the benefit of carry forward of the excess expenditure of the previous year for setting off the same in the current year's income for the purpose of section-11 of the Act.

3. The brief facts of the case is that the assessee is a trust, filed its return of income on 31.10.2007 for the assessment year 2006-07. Since the assessee had claimed depreciation in respect of the asset the cost of which has been already allowed as application of income, the Ld. Assessing Officer was of the belief that income has escaped assessment in the case of the assessee and therefore, notice U/s. 148 was issued on 13.09.2010 and the assessment was completed U/s. 143(3) of the Act wherein the Ld. Assessing Officer disallowed Rs. 16,61,341/- being the depreciation claimed by the assessee and also denied the excess application of income amounting to Rs. 5,79,100/- of the earlier year to be taken into account as application of income in the relevant assessment year.

4.1 Ground No.1 - Disallowing the depreciation of Rs. 16,61,341/-

During the relent assessment year, the assessee had claimed depreciation of Rs. 16,61,341/- in its "income and expenditure account". The Ld. Assessing Officer denied the benefit of depreciation in the case of the assessee trust because the cost of the asset on which depreciation is claimed was already allowed as application of income. While doing so, the Ld. Assessing Officer observed as follows:-

"The value of assets on which depreciation has been claimed, has been fully allowed as expenditure/application in the earlier years. Hence the represent claim is only a double deduction over and above the full value of the assets. Unless the Act specifically allows through an enactment, a weighted deduction or double deduction is not permissible. Reliance is placed on the following decisions, where the Tribunal has held that where the capital expenditure has been treated to have been applied for the objects of the Trust allowance for depreciation on the same asset would amount to double deduction.

1. Mahila Sidh Nirman Yojna 50 ITD 472 Delhi A Bench
2. Dy. DIT Eranakulam Vs. Adi Sankara Trust (ITAT Cochin ITA No.96/Cochi/2009) 
3. DIT(E) Vs. Lissie Medical Institutions ITA No.1010/Coch/2008 and C.O No.6/coch/2009 dated 26.10.10
4. Prakash Education Society in ITA No.4730 &4731/D/2007 ITAT Delhi bench

In the case of Escorts Ltd and Another Vs. UOI and Others in 199 ITR 43(SC) the Apex Court observed that when deduction U/s. 35(2)(iv) was allowed in respect of capital expenditure on scientific research, no depreciation was to be allowed U/s. 32 on the same asset. The fundamental axiom is that double deduction is not intended unless there is a clear statutory indication to the contrary. The same principle holds good in this case also. Following the above decisions, the claim of the assessee of Rs. 16,61,341/- is disallowed on depreciation."

4.2. On appeal the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer by observing as under:-

"4.1 Regarding the disallowance of depreciation, there are conflicting decisions for and against the allowance or otherwise. The latest decision on this issue was the decision of Delhi High Court in the case of CIT Vs Charanjiv Trust by its order dated March, 2014. It is a fact that the assets when purchased are claimed as application of income by the trusts. Again the depreciation on the same assets is claimed year after year while computing the income. This obviously amounts to double deduction. This vital aspect was not appreciated by some of the Courts/ITATs. These decisions derive substance from the decision of Bombay High Court in the case of CIT Vs. P K Badlani (1970) 76 ITR 369 . The decision was rendered before the introduction of section 11(1)(d) of the Act w.e.f 01.04.1989. The section 11(1)(d) was not properly appreciated by the Courts/ITATs while passing orders allowing depreciation. The decisions relied on by the Assessing Officer appreciated the issues clearly and decided that allowing depreciation again will amount to double deduction and lead to anomalous situation. Therefore, I am of the opinion that the Assessing Officer is correct in disallowing depreciation. Moreover I rely on the latest decision of Delhi High Court in the case of DIT(E) Vs. Charanjiv Charitable Trust (Date of order 18.03.2014) in confirming the order of the Assessing Officer. Therefore the claim of depreciation is also not allowed.

Finance (No.2) Bill 2014 introduced sub-section (6) to Section.11 of the Act to deny depreciation in respect of any asset, acquisition of which has been claimed as an application of income U/s. 11 in the same or any other previous year. Though the amendment is prospective in nature and comes into force from 01.04.2014, it is clarificatory to put the issue at rest to deny double deduction to the assessee."

4.3 At the outset, we find that this issue has been elaborately considered and decided against the assessee in the case of The Anjuman-E-Himayath-E-Islam 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 reference:-
"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."

Therefore following the decision of the Tribunal cited hereinabove and agreeing with the reasoned orders of the Ld. CIT (A) and the Ld. Assessing Officer, we hereby hold that the assessee will not be entitled to claim the benefit of depreciation while computing income for the purpose of Section-11 of the Act. However, if the benefit of section-11 is denied and when the income of the assessee trust is computed under the other heads of the Act, then of course the benefit of depreciation can be availed by the assessee in accordance with relevant provisions of the Act. Thus, this issue is decided against the assessee.

5.1. Ground No.2 - Not allowing the benefit of carry forward of the excess expenditure of the previous year for setting off the same in the current year's income for the purpose of section-11 of the Act.

The assessee has stated in its revised return of income that a sum of Rs. 5,79,100/- which was donated in the earlier year i.e. before 31.03.2005 was omitted to be included in the accounts of that year. Therefore, the same is included as application of fund in the relevant assessment year. The Ld. Assessing Officer denied the same to be treated as application of income for the relevant assessment year because the assessee had not filed the return of income within the time limit prescribed U/s.139(1) of the Act and the revised return does not qualify for allowability U/s.139(5) of the Act. The Ld. Assessing Officer relied on various decisions of the higher judiciary while holding so. On appeal the Ld. CIT (A) elaborately considered the merits of the matter and decided against the assessee. The relevant portion of the order is extracted herein below for reference:-

"4.2. Regarding carry forward of excess application of earlier years, assessee's plea is not acceptable because of the following discussion.
Govindu Naicker Estate Vs. ADIT (1999) 105 Taxman 719 (Mad).
The Hon'ble High Court observed as under:

It is thus clear 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. I am in respectful agreement with the views of the learned Judges of the aforementioned High Courts with regard to these propositions.

The High Court further observed as under:

"The learned counsel for the revenue contended that the loss incurred under one head can only be set off against the income from the same head and referred to the decision of this Court in the case of CIT v. S.S. Thiagarajan [1981] 129 ITR 115. That principle is not of any relevance, if the expenditure incurred was for religious or charitable 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 expenditure, 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.

As the impugned order has not been made in conformity with the law as set out above, the impugned order will have to be and is set aside, and the matter is remanded to the Director of Income-tax (Exemptions) for fresh consideration in accordance with law."

The Bombay High Court in the case of CIT Vs. Institute of Banking Personnel Selection (2003) 131 Taxman 386 observed as under.

"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 for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11(1)(a) of the Act."

The Gujarat High Court in the case of CIT Vs. Maharana of Mewar Chairtable Foundation 164 ITR 439 and CIT Vs. Shri Plot Swetember Murti Pujak Jain Mandal 211 ITR 239 observed the similar views which are as under:-

"In other words, even if expenses for charitable and religious purposes are adjusted against the income of a subsequent year, the income of that year can be said to have been applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted."

4.3. There are no other significant findings except the above observations by any of the high Courts. The income of the trust is not computed as per sec.28 to 44 DB of the Act under the head "profits and gains of business or profession" which contains the provisions of carry forward of losses of earlier year and set of such losses against the income of the current year. Income derived from property held under trust means real income and not the income computed for assessment. The question of spending of 85% of income and accumulation of 15% of income arise only when there is real income. The income derived should be during the current year and accumulation is also from current year's income. If the trust is able to spend the entire income derived from trust, the whole xpn is treated as application and exempted u/s 11 of the Act. There is no provisions u/s 11 of the Act to carry forward the excess spending in excess of 85% stipulation. If the trust spends more than the income, it should be either from corpus or from loan obtained. The application should always be from income derived or from income set apart or accumulated income. Thf, the question of carry forward of excess expenditure and set off of the same subsequently does not arise at all in the case of trusts. Reliance is placed on the decision of ITAT Delhi Bench 'F' in the case of Pushpawati Singhania Research Institute for Liver, Renal & Digestive Diseases Vs. DDIT(E) Inv.Circle -II, New Delhi (2009) 29 SOT( Delhi). In the above decision, the Hon'ble ITAT analysed all the decisions which are in favour of crry forward and set off and distinguished them and arrived at the correct decision as declared by the Income tax Act. The Bombay High Court in the case of CIT Vs. Institute of Banking Personnel Selection (2003) 131 Taxman 386 observed that the income of the trust is to be computed on the basis of commercial principles. It is not in dispute that to arrive at the actual income, commercial principles are to be applied. This does not mean that the excess expenditure is to be carried forward and allowed in the subsequent year. The principles of set apart / accumulation of income arises only if it is real income. Otherwise, the investment u/s.11(5) of the Act is not possible with deemed income. The intention of the legislature is to invest real income derived from property of the trust in specific assets when they are not utilized/applied. The very concept of exemption u/s.11 of the Act is defeated if provisions of profits and gains of business or provision relating to carry forward and set off is substituted for the "Income which do not form part of Total income" included under Chapter-III of the Income -tax Act.

Therefore all the contentions of the assessee are rejected in toto. The assessment order passed by the A.O for the A.Y 2006-07 requires no interference and confirmed fully."

5.2. At the outset we find the Chennai Bench of the Tribunal in the case of The Anjuman-E-Himayath-E-Islam, in ITA No. 2271/Mds./2014 vide order dated 02.06.2015 has decided the issue against the assessee. The relevant portion of the order is extracted herein below for reference:-
"4.1. Ground No.(i) - Disallowance of the carry forward and set off of excess application of income.

The assessee in its return of income had claimed Rs. 1,00,70,474/- as excess application of income to be carried forward as follows:-

However, the Ld. Assessing Officer allowed the claim of excess application to be carry forward Rs. 23,96,355/- as worked out herein below:-

4.2. On appeal, the Ld. CIT (A) denied the benefit of carry forward of excess application by observing as under:-

"Income derived from property held under trust means real income and not the income computed for assessment. The question of spending of 85% of income and accumulation of 15% of income arise only when there is real income. The income derived should be during the current year and accumulation is also from current year's income. If the trust is able to spend the entire income derived from trust, the whole expenditure is treated as application and exempted U/s. 11 of the Act. There is no provision U/s. 11 of the Act to carry forward the excess spending in excess of 85% stipulation. If the trust spends more than the income, it should be either from corpus or from loan obtained. The application should always be from income derived or from income set apart or accumulated income. Therefore the question of carry forward of excess expenditure and set off of the same subsequently does not arise at all in the case of trusts. Reliance is placed on the decision of ITAT Delhi Bench 'F' in the case of Pushpawati Singhania Research Institute for Liver, Renal & Digestive Diseases Vs DDIT(E),Inv. Circle-II, New Delhi (2009) 29 SOT 316(Delhi). In the above decision, the Hon'ble ITAT analysed all the decisions which are in favour of carry forward and set off and distinguished them and arrived at the correct decisions as declared by the Income-tax Act. The Bombay High Court in the case of Ld. CIT Vs. Institute of Banking Personnel Selection (2003) 131 Taxman 386 observed that the income of the trust is to be computed on the basis of commercial principles. It is not in dispute that to arrive at the actual income, commercial principles are to be applied. This does not mean that the excess expenditure is to be carried forward and allowed in the subsequent year. The principles of set apart/accumulation of income arise only if it is real income. Otherwise, the investment U/s. 11(5) of the Act is not possible with deemed income. The intention of the legislature is to invest real income derived from property of the trust in specific assets when they are not utilized / applied. The very concept of exemption U/s. 11 of the Act is defeated if provisions of profits and gains of business or provision relating to carry forward and set-off is substituted for the "Income which do not from part of Total income" included under Chapter-III of the Income-tax Act."

4.3. Before us, the Ld. A.R. citing the decision of the Bombay Tribunal in ITA No.6129/Mum./2013 in the case of M/s.Maharashtra Industrial Development Corporation, Mumbai vide order dated 05.03.2015 argued that the assessee should be allowed to carry forward the excess application. The Ld. D.R on the other hand argued in support of the order of the Ld. CIT (A).

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."

5.3. Following the above decision of the Tribunal supra and taking into consideration of the elaborate order of the Ld. CIT (A), we hereby hold that the claim of the assessee to carry forward the excess application of fund cannot be entertained applying the commercial principles. It is ordered accordingly.

6. In the result, the appeal of assessee is dismissed.

The order pronounced in the open court on 12.6.2015.