Case Law Details

Case Name : Indian Medical Association Vs ITO (ITAT Ahmedabad)
Appeal Number : ITA. Nos: 611 & 2186/AHD/2018
Date of Judgement/Order : 16/09/2019
Related Assessment Year : 2014-15
Courts : All ITAT (7331) ITAT Ahmedabad (485)

Indian Medical Association Vs ITO (ITAT Ahmedabad)

Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent, of its income derived from property held under trust. For the present purposes, the donations the assessee received, would constitute its property and it is entitled to accumulate twenty-five per cent of that income and not the 25% of income left after application. Therefore, assessee was entitled for carry forward of deficit @ 15%.

FULL TEXT OF THE ITAT JUDGEMENT

1. These two appeals have been filed by the Assessee and one cross appeal has been filed by the Revenue against the order of the learned Commissioner (Appeals). Since Assessees and assessment years are common, therefore, for the sake of brevity, we would like to dispose of all three appeals by way of a common order.

2. First of all, we would like to deal with ITA No. 611/Ahd/2018. There is a delay of 65 days for filing of appeals on behalf of the assessee in support of its contention, the appellant has filed an affidavit of its staff giving reason for delay for filing of appeals. We are satisfied with the reasons given by the appellant and would like to condone the delay and proceed with the appeal.

3. Appellant has taken solely ground that learned Commissioner (Appeals) has erred in giving guidelines to the assessing officer for giving allowance of deficit and requested that appeal to be decided on the basis of the ground raised that the direction and guidelines cannot be given in what manner such deficit has to be allowed.

4. During the course of scrutiny proceedings it was noted that assesses has claimed depreciation of Rs. 1.33.657. As in the case of Trust, capital expenditure is allowed as application of the income of the trust in respective year no further deduction can be allowed in the form of depreciation as application of income. Moreover, the income of the trust has to be arrived at in the normal commercial manner without reference to the provisions of section 14. Whenever any capital assets is acquired by the Trust, expenditure towards the same is met out of income of respective year and it is allowed as application of income for that year, In view of the above, assesses was required to show cause as to why Claim of depreciation should not be disallowed and added back to the total income of the trust. 4.1. The assessee submitted its reply in the matter vide letter, dated 30-11-2016, wherein it was stated that income of a charitable trust is to be computed in a normal manner and therefore, depreciation debited to Income & Expenditure ACCOUNT is DEDUCTIBLE. ASSESSEE has placed Reliance on the decision of Gujarat High Court in the case of CIT v. Sheth Manilal Ranchoddas Vishram Bhuvan Trust (1992) 198 ITR 598 (Guj).

4.2 Assessee reply in this regard has been considered carefully but not found acceptable. The income of the trust has to be arrived at in the normal commercial manner without reference to the provisions of section 14. Reliance in this regard is also placed on the decision of the hon’ble Supreme Court In the case of Escorts Ltd. v. Union of India (1993) 199 ITR 43 (SC)  wherein it was held by the apex court that when deduction under section 32 (iv) was allowed in respect of capital expenditure as Scientific Research, no depreciation was to be allowed under section 32 of the Income Tax Act in the same asset.

4.3 In the case of Lissie Medical Institutions v. CIT (2012) 348 ITR 344 (Ker), the hon’ble High Court of Kerala has held that When the expenditure incurred for acquisition of depreciable assets itself is treated as application of income or charitable purpose under section 11(1)(a), should not the cost of such assets to be treated as nil for the assessee and in that situation depreciation to be granted terms out to be Nil. However, if depreciation provided is claimed on notional cost after the assessee claims 100% of the cost incurred for it as application of income for charitable purpose, the depreciation so claimed has to be written back as income available. In fact, going by the several decisions of various High Courts, the charitable institutions will be generating unaccounted income equal to the depreciation amount claimed on year to year basis which is nothing but black money. The hon’ble High Court of Kerala in the said order, has referred to decision of various High Courts including the decision of Hon’ble Gujarat High Court in the case of CIT v. Sheth Manilala Ranchoddas Vishram Bhavan Trust, (1992) 198 ITR 598 (Guj) and held that “we do not find in any of these decisions this aspect is considered and discussed by any of the High Court.”

4.4 There is a long debate and legal battle at different judicial platform and the issue has not attended finality till recent time. Reliance in this regard is strongly placed on a recent decision of Supreme Court of India in SLP No. 17251 of 2015 in the case of Director Of Income Tax (Exemptions) v. Vile Parle Kelavni Mandal (2015) 63 taxmann.com 326 (SC) wherein, hon’ble Supreme Court granted special leave petition filed against judgment of High Court of Bombay in the above case wherein it was held by High Court of Bombay that depreciation claimed on the assets acquired from income of trust did not amount to double deduction. In view of the above fact and judicial pronouncement, the claim of depreciation of Rs. 1,33,657 is disallowed and added back to the total income of the assesses.

5. Against the order of the learned assessing officer, assessee preferred first statutory appeal before the learned Commissioner (Appeals) who directed the assessing officer to verify and allow quantum of deficit to be set off against income of assessment year 2014-15 in following manner :–

“If the appellant has applied more than the income during the year then assessing officer is directed to allow carry forward of deficit of that year to be set off against future income of the appellant (Reliance placed on the judgment of Hon’ble Gujarat High Court in the case of CIT v. Plot Swetamber Murtipijak Jain Mandai (1995) 211 ITR 293 (Guj). In that year, the assessing officer shall not allow any accumulation under section 11(1)(a) of the Act @ 15%. (For example- If appellant earns Rs. 100 and applies Rs. 110 then Rs. 10 would be allowed to be carried forward as deficit and there will be no accumulation under section 11(1)(a).) In an immediate subsequent year, assessing officer will allow, firstly, the set off of the deficit carried forward from earlier year. Then, assessing officer shall reduce the amount applied during the year. If, after the adjustments of carried forward deficit and application of income, the appellant has any surplus of income over the expenditure then the appellant would be No. Commissioner (Appeals)- 9/10843/ITO(E)/Wd.1/Ahd/16-17 assessment year 2014-15 eligible to accumulate to the extent of 15% under section 11(1)(a) from the income. (For example: If appellant earns Rs. 100 in immediate succeeding year and applies Rs. 80 then Rs. 90, i.e. Rs. 10 as earlier year deficit and Rs. 80 being current years application, would be allowed against income of Rs. 100. The remaining Rs. 10 will be allowed to be accumulated under section 11(1)(a). And, if there happens to be still any excess income left over, then remaining amount shall be allowed by the assessing officer to be accumulated under section 11 (2) of the Act and according to the stipulations mentioned therein i.e. filing of Form 10 and purpose for which accumulation under section 11 (2) has been made etc. In short, the assessing officer will not allow accumulation of income either under section 11(1)(a) @15% or under section 11(2) of the Act along with carry forward of deficit. Application of income shall precede accumulation.”

Based on the above referred guideline assessing officer is hereby directed to allow the set off of deficit of earlier year to be adjusted against income of current year.”

6. Against the order of the learned Commissioner (Appeals), assessee preferred appeal before us stating that learned Commissioner (Appeals) cannot direct the assessing officer that how deficit is to be allowed. And in support of its contention, learned A.R. cited a judgment of Hon’ble Supreme Court in the matter of CIT v. Programme for Comminity Organisationwherein in similar circumstances, appeal of the Revenue was dismissed and the relief was granted to the assessee :–

“The question that really requires consideration is whether, for the purposes of section 11(l)(a) of the Income Tax Act, 1961, the amount for the grant of exemption of twenty-five per cent, should be the income of the trust or it should be its total income as determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts :–

The assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied there out for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the assessee is entitled to accumulate twenty-five per cent, of Rs. 2,57,376 as it contends, or twenty-five per cent, of Rs, 87,010, as the Revenue appeared to contend.

Section 11(l)(a) reads thus :–

“11.(1)(a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent, of the income from such property.”

Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent, of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent, thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty-five per cent, of Rs. 87,010.

For the aforesaid reasons, the civil appeal is dismissed.

No order as to costs.

7. Thus, respectfully following the judgment of Hon’ble Supreme Court in the aforesaid matter, we allow the appeal of the assessee.

8. In the result, appeal filed by the Assessee is allowed and direct the assessing officer to allow the deficit @ 15%.

9. Now we come to ITA No. 2186/Ahd/2018wherein assessee has taken following grounds of appeal :–

“The learned Commissioner (Appeals) has erred in confirming the calculation of deficit as per the excel sheet passed by assessing officer under Section 250 in as much as the appeal was preferred only for assessment year 2014-2015 whereas the effect is given from assessment year 2007-2008 without rectifying or reassessing of assessment year 2007-2008 onwards.”

10. Since we have given relief to the assessee in connected ITA No. 611/Ahd/2018. Thus, we allow the appeal of the assessee by holding that assessee is entitled for carry forward deficit @ 15% as held by the Hon’ble Supreme Court in the matter of CIT v. Programme For Comminity Organisationwherein it is held :–

“The question that really requires consideration is whether, for the purposes of section 11(1)(a) of the Income Tax Act, 1961, the amount for the grant of exemption of twenty-five per cent, should be the income of the trust or it should be its total income as determined for the purposes of assessment to income-tax. This question has to be answered in the light of these facts :–

The assessee-trust received donations in the aggregate sum of Rs. 2,57,376. It applied thereout for its charitable purposes the aggregate sum of Rs. 1,70,369 leaving a balance of Rs. 87,010. The question is whether the assessee is entitled to accumulate twenty-five per cent, of Rs. 2,57,376 as it contends, or twenty-five per cent, of Rs, 87,010, as the Revenue appeared to contend.

Section 11(1)(a) reads thus :–

“11. (l)(a) Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent, of the income from such property.”

Having regard to the plain language of the above provision, it is clear that a charitable or religious trust is entitled to accumulate twenty-five per cent, of its income derived from property held under trust. For the present purposes, the donations the assessee received, in the sum of Rs. 2,57,376, would constitute its property and it is entitled to accumulate twenty-five per cent, thereout. It is unclear on what basis the Revenue contended that it was entitled to accumulate only twenty-five per cent, of Rs. 87,010.

For the aforesaid reasons, the civil appeal is dismissed.

No order as to costs.

11. Now we come to ITA No. 2941/Ahd/2017 wherein Revenue has taken following grounds of appeal :–

1. The learned Commissioner (Appeals) has erred in the law allowing the depreciation of Rs. 1,33,657 to the assessee which amounts to double deduction as 100% deduction was allowed to the assessee as application of income.

2. The learned Commissioner (Appeals) has allowed the claim of depreciation without appreciating the facts that there are recent judicial pronouncement on this issue in favour of revenue in the case of Southern India Mills Association v. ITO, Company Ward-1, Coimbatore (2017) 77 taxmann.com 36 (Chennai-Trib.)]

3. The learned Commissioner (Appeals) has erred in the law and on facts in allowing the benefit of the deficit of Rs. 75,04,066 for earlier years against the .income of subsequent year in absence of any express provision in the Act regarding the same and also by overlooking the decisions in favour of revenue in this regard.

4. The revenue craves over: leave to add, alter, amend, modify, substitute, delete and/or rescind all or any Grounds of Appeal on or before the final hearing, in necessity so arises.

12. Since we have given relief in the connected appeals of the assessee and allowed his appeal is in toto. Therefore, appeal of the Revenue is dismissed.

13. In the result, appeal filed by the Assessees are allowed and appeal filed by the Revenue is dismissed.

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