Case Law Details

Case Name : M/s Vels Institute of Science Technology & Advanced Studies Vs The Deputy Director of Income Tax (Exemptions) (ITAT Chennai)
Appeal Number : ITA No.1759/Mds/2013 & C.O. No.15/Mds/2014
Date of Judgement/Order : 28/10/2015
Related Assessment Year : 2010-11
Courts : All ITAT (4895) ITAT Chennai (226)

M/s Vels Institute of Science Technology & Advanced Studies Vs. DDIT (E)- ITAT Chennai-  Section 13(1)(a) says that if any part of the property or income of the Trust is given to the interested person without either adequate security or adequate interest, for the benefit of the person interested, then there shall be a diversion of funds for the interested person. Section 13(1)(c) says that if the amount paid is excess of what was reasonably paid for the service rendered has to be considered as used or applied for the benefit of person interested. In the case before us, the Managing Trustee has not rendered any service. In fact, there was an agreement for purchase of property. Therefore, the question arises for consideration is whether the money advanced by the assessee to the extent of Rs. 15,76,00,000/- is without adequate security and after cancelling the agreement, whether the assessee has received the adequate interest from the Managing Trustee. We have carefully gone through the order of the CIT(Appeals). From the order of the CIT(Appeals) it appears that the assessee has received Rs. 4,06,92,078/- being the interest from the Managing Trustee, in addition to the principal amount after cancellation of agreement. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that after cancellation of agreement, the assessee-Trust was returned and compensated by way of interest. Therefore, the transaction between the assessee-Trust and the Managing Trustee cannot be construed as without any adequate security or without any adequate interest. Therefore, this Tribunal is of the considered opinion that the money was in fact advanced in pursuance of the agreement for sale. After cancellation of agreement, the money was returned in its entirety. Since there was delay in repayment of money received as advance for sale of the land, the Managing Trustee has also paid interest to the extent of Rs. 4,06,92,078/-. Therefore, at any stretch of imagination, it cannot be said that the money was diverted for interest of the Managing Trustee. Therefore, this Tribunal is of the considered opinion that there is no violation of Section 13 of the Act.

IN THE INCOME TAX APPELLATE TRIBUNAL, “C” BENCH, CHENNAI
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No.1759/Mds/2013 & C.O. No.15/Mds/2014
Assessment Year : 2010-11
M/s Vels Institute of Science Technology & Advanced Studies
Vs.
The Deputy Director of Income Tax (Exemptions)

Appellant by : Shri S. Bharath, CIT .

Respondent by : Shri R. Sivaraman, Advocate

Date of Hearing : 19.08.2015

Date of Pronouncement : 28.10.2015

ORDER PER N.R.S. GANESAN, JUDICIAL MEMBER:

The appeal by the Revenue and the cross-objection by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-VII, Chennai, dated 31.05.2013 and pertain to assessment year 2010-11.

2. Shri S. Bharath, the Ld. Departmental Representative, submitted that the assessee-Trust is registered under Section 12AA of the Income-tax Act, 1961 (in short ‘the Act’) and claimed exemption under Section 11 of the Act for the year under consideration. However, the Assessing Officer found that the assessee-Trust gives loan to the interested persons in violation of Section 13(1)(c) r.w.s. 13(3) of the Act. According to the Ld. D.R., during the year under consideration a sum of Rs. 15,76,00,000/- was outstanding as loan and advances. The Assessing Officer on verification of balance sheet, found that the said amount was paid to Dr. Ishari K. Ganesh, the founder and Managing Trustee of the assessee-Trust. Therefore, the Assessing Officer found that the transaction of loan was in violation of Section 13(1)(c) r.w.s. 13(3) of the Act. Referring to assessment order, the Ld. D.R. submitted that the Assessing Officer brought out the entire transaction at pages 2 and 3 of his order. The assessee claimed before the Assessing Officer that the transaction being a loan transaction, the money was received in pursuance of agreement for sale. According to the Ld. D.R., the assessee claimed before the Assessing Officer that it intended to establish a medical college. Therefore, the assessee entered into an agreement for purchase of land with the Managing Trustee. However, after considering the material available on record, the Assessing Officer found that out of the total consideration of Rs. 20 Crores, the Managing Trustee received an advance of Rs. 16,91,00,000/-. Therefore, the Assessing Officer found that even if the transaction of purchase of property was considered to be genuine, the payment of advance to the trustee, which is in excess of the market value of the land, would make the assessee ineligible for making claim under Section 11 of the Act. Therefore, according to the Ld. D.R., there was a clear violation of provisions of Section 13(1)(c) of the Act, since the money was advanced to the Managing Trustee without any adequate security.

3. Shri Bharath, the Ld. D.R., further submitted that the assessee has received donation from Sri Balaji Charitable and Educational Trust. According to the Ld. D.R., by a gift deed dated 03.03.2010, Sri Balaji Charitable and Educational Trust has donated three of its institutions to the assessee-Trust, along with land, building and other infrastructures. The assessee recognized these educational institutions as its own institutions on and from 01.10.2009. Since the Assessing Officer found that the loan was advanced by the assessee-Trust to its Managing Trustee against the provisions of Section 13(1)(c) of the Act, the assessee is not eligible for exemption under Section 11 of the Act. Therefore, the corpus of the institution received by the assessee as donation from Sri Balaji Charitable and Educational Trust to the extent of Rs. 37,83,27,838/- was taken as income of the assessee. According to the Ld. D.R., since there was violation of Section 13(1)(c) of the Act, the assessee is not eligible for exemption under Section 11 of the Act, therefore, the Assessing Officer rejected the claim of the assessee. However, on appeal by the assessee, the CIT(Appeals) allowed the claim of the assessee on the ground that the money was advanced to the Managing Trustee for purchasing the landed property since the Trust had intended to establish a medical college. Therefore, the CIT(Appeals) allowed the claim of the assessee. According to the Ld. D.R., as rightly observed by the Assessing Officer, the money was advanced to the Managing Trustee in violation of provisions of Section 13(1)(c) of the Act. Therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.

4. On the contrary, Shri R. Sivaraman, the Ld.counsel for the assessee, submitted that the assessee-Trust has established and administering educational institutions. The educational institution established by the assessee was recognized as deemed university by University Grants Commission. For the purpose of obtaining the deemed university status, the University Grants Commission prescribes certain guidelines, including infrastructure facilities. During the financial year 2009-10, the assessee-Trust planned to start a medical college as part of its charitable activity. As per the guidelines prescribed by Medical Council of India, the minimum land required is 25 acres. Therefore, the assessee-Trust proposed to purchase the land belonging to the Managing Trustee Dr. Ishari K. Ganesh to the extent of 28.93 acres of land. In that process, the assessee-Trust has paid Rs. 15,76,00,000/- on 31.03.2010. An agreement was also entered into between the assessee-Trust and the Managing Trustee for purchase of land. The Ld.counsel further submitted that the assessee-Trust has also taken loan from the Managing Trustee and the related persons. In fact, the CIT(Appeals) extracted the interest-free loan received by the assessee-Trust from the related persons and Managing Trustee.

5. According to the Ld.counsel for the assessee, Section 13 of Act is not prohibiting any transaction by the Trust with interested persons. What is prohibited by Section 13 of the Act is advancing of money without adequate security or adequate interest. In the case before us, even though the money was advanced for purchase of property as per the agreement for sale, after cancellation of agreement, the Managing Trustee has paid interest on the amount advanced. In fact, the Managing Trustee has paid Rs. 4,06,92,078/- as interest including compensation of Rs. 25,00,000/-. In fact, the CIT(Appeals) extracted the value of the interest paid by the Managing Trustee at page 49 of his order. Therefore, according to the Ld. counsel, it cannot be said that the money advanced by the assessee is without any adequate security or without any interest. In fact, the assessee had paid more interest than the market rate. Therefore, there is no question of violation of Section 13(1)(c) of the Act.

6. Referring to the receipt of three institutions from Sri Balaji Charitable and Educational Trust, the Ld.counsel for the assessee submitted that, in fact, the assessee-Trust received as donation three institutions from Sri Balaji Charitable and Educational Trust. No funds of the assessee-Trust were transferred to Sri Balaji Charitable and Educational Trust. The Institution has received as donation from the institution which has similar object. The disallowance was made merely because the assessee-Trust advanced to interested persons. Since the advance was made only for the purpose of purchasing the land and the Managing Trustee has also repaid the amount with interest, according to the Ld. counsel, there is no violation of Section 13(1)(c) of the Act. Therefore, the receipt of donation of three institutions from Sri Balaji Charitable and Educational Trust cannot be a reason for rejecting the claim of the assessee under Section 11 of the Act. Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee under Section 11 of the Act.

7. We have considered the rival submissions on either side and perused the relevant material on record. It is not in dispute that the assessee-Trust is registered under Section 12AA of the Act. It is also not in dispute that there was an agreement for sale of the land belonging to the Managing Trustee to the assessee-Trust. The only objection of the Revenue appears to be that the sale of the land is not on par with the market value. From the order of the Assessing Officer it appears that the market value of the land is very less than what was agree to be sold to the assessee-Trust. The fact remains that there was an agreement for sale of the property and the assessee-Trust advanced the funds. There is no fixed price for sale of land. The price of a land is flexible, depending upon various factors. The urgency of the vendor to sell the property, the necessity of the purchaser to purchase the property, the location of the land, the area of the land, infrastructures available nearer to the land and future prosperity for development of the land, etc. need to be considered while determining the market value of a land. Apart from that, it is well settled principles of law that market value is nothing but a price agreed between the willing seller and willing purchaser. Therefore, we cannot say that a particular land has to be sold by a particular person for a particular rate. If two willing persons agreed to sell and purchase the property for a particular price, then the Assessing Officer may not have any role to dismiss the agreed price unless there are some evidences found that the agreed price disclosed is not actually the agreed price. In the case before us, it is nobody’s case that the price agreed between the Managing Trustee and the Trust is not actually the agreed price. Therefore, the observation of the Assessing Officer in the assessment order that the value of the land is much less than what was agreed between the parties cannot stand in the eye of law. When the assessee-Trust intended to establish a medical college for which it requires minimum 25 acres of land and the Managing Trustee has such vast area of land, nothing wrong in purchasing the land from the Managing Trustee by paying the market value. Subsequently, the assessee-Trust could not establish medical college. Therefore, the agreement was cancelled. In fact, the Managing Trustee repaid the part amount along with interest. It is not the case of the Revenue that the interest paid by the Managing Trustee is not in market rate.

8. We have carefully gone through the provisions of Section 13 of the Act. Section 13(1)(a) says that if any part of the property or income of the Trust is given to the interested person without either adequate security or adequate interest, for the benefit of the person interested, then there shall be a diversion of funds for the interested person. Section 13(1)(c) says that if the amount paid is excess of what was reasonably paid for the service rendered has to be considered as used or applied for the benefit of person interested. In the case before us, the Managing Trustee has not rendered any service. In fact, there was an agreement for purchase of property. Therefore, the question arises for consideration is whether the money advanced by the assessee to the extent of Rs. 15,76,00,000/- is without adequate security and after cancelling the agreement, whether the assessee has received the adequate interest from the Managing Trustee. We have carefully gone through the order of the CIT(Appeals). From the order of the CIT(Appeals) it appears that the assessee has received Rs. 4,06,92,078/- being the interest from the Managing Trustee, in addition to the principal amount after cancellation of agreement. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that after cancellation of agreement, the assessee-Trust was returned and compensated by way of interest. Therefore, the transaction between the assessee-Trust and the Managing Trustee cannot be construed as without any adequate security or without any adequate interest. Therefore, this Tribunal is of the considered opinion that the money was in fact advanced in pursuance of the agreement for sale. After cancellation of agreement, the money was returned in its entirety. Since there was delay in repayment of money received as advance for sale of the land, the Managing Trustee has also paid interest to the extent of Rs. 4,06,92,078/-. Therefore, at any stretch of imagination, it cannot be said that the money was diverted for interest of the Managing Trustee. Therefore, this Tribunal is of the considered opinion that there is no violation of Section 13 of the Act.

9. Now coming to the receipt of donation from Sri Balaji Charitable and Educational Trust, what was received by the assessee is capital asset by way of three institutions and its infrastructures. It is nobody’s case that the assessee’s funds were diverted to any other Trust. When the assessee received three institutions for carrying out its charitable activity, it cannot be said that there was a violation of any other provisions of Income-tax Act. In fact, the Assessing Officer himself disallowed the claim of the assessee on the ground that the money was advanced to the Managing Trustee. Since this Tribunal found that there was no violation of Section 13(1)(c) of the Act in respect of the agreement entered between the assessee-Trust and the Managing Trustee for purchase of property and it is not in dispute that the Managing Trustee returned entire amount with interest of Rs. 4,06,92,078/-, the assessee is entitled for exemption under Section 11 of the Act. Therefore, this Tribunal do not find any infirmity in the order of the CIT(Appeals) and accordingly, confirmed.

10. The assessee has filed the cross-objection claiming depreciation to the extent of Rs. 5,25,30,554/-.

11. Admittedly, the assessee-Trust is registered as charitable institution and it is claiming exemption under Section 11 of the Act. The claim of the assessee under Section 11 of the Act is allowed by the CIT(Appeals) which was confirmed by this Tribunal in the earlier part of this order. It is not the case of the assessee that it is not doing any business. Therefore, this Tribunal is of the considered opinion that the assessee is not entitled for any depreciation under Section 32 of the Act. In fact, this Bench of the Tribunal in the case of Tamil Nadu Cricket Association v. DDIT(Exemptions) had an occasion to consider an identical issue. This Tribunal, vide its order dated 14th August, 2015 in I.T.A. Nos.1535 to 1537/Mds/2014, recorded its finding which is as follows:

“11. We have considered the rival submissions on either side and perused the relevant material on record. Let’s first take assessment year 2008-09. The assessee is claiming depreciation under Section 32 of the Act. For the purpose of convenience, we are reproducing Section 32 hereunder:-

“32 (1) In respect of depreciation of–

(i) buildings, machinery, plant or furniture being tangible assets ;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession the following deductions shall be allowed–

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed.

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction shall be allowed under this clause in respect of–(a) any motor car manufactured outside India, where such motor car is acqired by the assessee after the 28th day of February, 1975 5but before the 1st day of April, 2001, unless it is used–(i) in a business of running it on hire for tourists; or(ii) outside India in his business or profession in another country ; and(b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42: Provided further that where any asset referred to in clause (i) 6or clause (ii) or clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub- section in respect of such asset shall be restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) 6or clause (ii) or clause (iia), as the case may be: Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998, but before the 1st day of April, 1999, and is put to use before the 1st day of April, 1999, for the purposes of business or profession, the deduction in respect of such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation — For the purposes of this proviso,–

(a) the expression “commercial vehicle” means “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle” and “medium passenger motor vehicle” but does not include “maxi cab”, “motor-cab”, “tractor” and “road-roller” ;

(b) the expressions “heavy goods vehicle”, “heavy passenger motor vehicle”, “light motor vehicle”, “medium goods vehicle”, “medium passenger motor vehicle”, “maxi-cab”, “motor-cab”, “tractor” and “road-roller” shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988). Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent. of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991. Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

Explanation — 1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.

Explanation — 2. For the purposes of this sub-section “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43;

Explanation — 3. For the purposes of this sub-section, 10the expressions “assets” shall mean–

(a) tangible assets, being buildings, machinery, plant or furniture ;

(b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

Explanation — 4. For the purposes of this sub-section, the expression “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto) ;

Explanation — 5. For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income ;

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that no deduction shall be allowed in respect of-(A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person ; or(B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ; or(C) any office appliances or road transport vehicles ; or(D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year ;

(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause

(i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :

Provided that such deficiency is actually written off in the books of the assessee.

Explanation — For the purposes of this clause,– (1) “moneys payable” in respect of any building, machinery, plant or furniture includes–

(a) any insurance, salvage or compensation moneys payable in respect thereof ;

(b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso ;

(2) “sold” includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is 8an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. (2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.

In view of Section 32 of the Act, depreciation has to be allowed only in respect of an asset owned by the assessee and used for the purpose of business or profession. In this case, it is not a case of the assessee that they are not doing any business or profession. The assessee is categorically making a statement that they are charitable organization engaged itself in public utility service. Once the assessee claims that it is a charitable organization and not engaged in business or profession, this Tribunal is of the considered opinion that the provisions of Section 32 have no application at all. The provisions of Section 32 in fact were not brought to the notice of this Tribunal while deciding the assessee’s own case for assessment year 2007-08 and also the decision of Sri Mariamman Educational Health and Charitable Trust (supra). In fact, this Tribunal examined the issue elaborately in The Anjuman- E-Himayath-E-Islam v. ADIT in I.T.A. No.2271/Mds/2014 by order dated 2nd July, 2015 and found that when the assessee is eligible for exemption under Section 11 of the Act, it is not eligible for depreciation under Section 32 of the Act. For the purpose of convenience, we are reproducing the decision taken by the co- ordinate Bench of this Tribunal in The Anjuman-E-Himayath-E- Islam (supra):-

“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 Income-tax 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.”

12. Apart from that, when the assessee claims the cost of the capital expenditure as exemption under Section 11 of the Act, then the cost of the capital asset becomes NIL. Admittedly, depreciation under Section 32 of the Act has to be allowed only on written down value of the asset. When the written down value of the asset becomes NIL since the entire cost was allowed as application of income under Section 11 of the Act, this Tribunal is of the considered opinion that there cannot be any further claim for deduction under Section 32 of the Act. In view of the above, this Tribunal is of the considered opinion that the assessee is not eligible for deduction under Section 32 of the Act towards depreciation. However, it is made clear that the assessee is eligible for exemption under Section 11 of the Act for all the assessment years under consideration.”

12. In view of the above, this Tribunal is of the considered opinion that the assessee is not eligible for depreciation.

13. In the result, both the appeal of the Revenue and the cross- objection of the assessee stand dismissed.

Order pronounced on 28th October, 2015 at Chennai.

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