Director of Income Tax (Exemption) v. Indian Trade Promotion Organisation

ORDER %

27.11.2013 CM No.14785/2013 (delav^ in ITA 449/2013 For the reasons stated in the apphcation,the appHcation is allowedandthedelayof 94 days inre-filingtheappealis condoned. ITA 7/2013,331/2013.268/2013 & 449/2013

¶1A commonissuearisesfor considerationintheaforesaidappeals. Hence, they are being decidedby this common order.

¶2The issue raised by Revenue in these appeals pertains to interpretationof Section11(1)clause 'a' of the IncomeTax Act, 1961. For the sake of convenience,the said clauseis reproduced below:- "Section11(1)in The Income-Tax Act, 1995

(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- {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 fifteenper cent of the incomefrom suchproperty."

¶3The contentionofRevenueisthatdepreciationallowedon capital assets cannot be treated as application of income under the said clause. In case depreciation was allowed and treated as application of income, then the assessee would be entitled to double deductionas purchaseor acquisitionof capitalassets for considerationwas also treated as application of income. It is submittedthat purposiveinterpretationshould be given to the said clause as the legislative intent was that a charitable institution must spend 85% of the funds available with them duringthe financialyear itselfand they shouldnot carryforward the funds beyond 15%. Accordingly,if an assesseehadacquired an asset and price paid was treated as application of income and had also claimed the said amount as expenditure in its income expenditure account, depreciation on the asset should not be allowable as application of income under Section ll(l)(a) of the Act.

¶4Revenue relies upon decision of the Kerala High Court in Lissie Medical Institution vs. C/r(2012) 348 ITR 344 (Ker). The said decision, no doubt, supports the proposition propounded by the Revenue and we would like to reproduce following observations:-

¶5"Senior counsel, Sri A. K. J. Nambiar, a;ppearing for the assessee, submitted that the assessee has been filing income-tax returns for several years includingthe assessment year 2005-06,and disallowanceis made only for this year. Since business income has to be as stated in section 29 by granting all deductions provided under sections 30 to 43D which includes depreciation under section 32, the assessee is entitled is the case pressed before us by the senior counsel appearing for the assessee. We have no doubt in our mind that business income of charitabletrust also has to be computed in the same manner as provided under section 29 of the Income-tax Act. However, issue that requires consideration is when the expenditure incurred for acquisition of depreciable assets itself is treated as application of income for charitable purposes under section ll(l)(a) of the Act, should not the cost of such assets to be treated as nil for the assessee and in that situationdepreciationto be grantedturns out to be nil. However, if depreciationprovided is claimed on notional cost after the assessee claims 100 per cent, of the cost incurred for it as application of income for charitable purposes, the depreciation so claimed has to be written back as income available.In fact, going by the several decisions of the various High Courts, we are sure that based on these decisions all the charitable institutions will be generating unaccountedincome equal to the depreciationamount claimed on an year to year basis which is nothing but black money. This aspect is not seen considered in any of these decisions.We, therefore,sought the views from the Central Board of Direct Taxes. Senior standing counsel, Sri P. K. R. Menon,appearingfor the Revenue,produced clarification obtained from Central Board whereinthey have stated as follows : "The Central Board of Direct Taxes is of the considered view that where an assessee has acquired an asset through application of income and has also claimed this amount as expenditure in its income expenditure account, depreciation on such asset would not be allowable to assessee. Such y notional statutory deductions like depreciation, if claimed as deduction while computingthe income of the 'the property held under trust' under the relevant head of income, is required to be added back while computing the income for the purpose of application in income expenditure account. This would imply that a correct figure of surplus from the trust property is reflected in the income and expenditure account of the trust to determine the income for the purpose of application under section 11 of the Income-tax Act. This would reduce the possibility of revenue leakage which may be a cause for generation of black v; money,"

¶6From the above, what is clear is that the Central Board also confirms view taken by us that after allowing cost of acquisition as application of income for charitable purposes and over and above if depreciation is claimed on such assets, so much of the depreciation allowed will generate income outside books of account and unless depreciation is simultaneously written back by the assessee \ > as income available for application for charitable purposes in the next year, there will be violation of section ll(l)(a) of the Act. We find that the hon'ble SupremeCourt has clearly statedthis position,thoughnot in the same context. In the decision in Escorts Ltd. V. Union of India [1993] 199 ITR 43

(SC) relied on by the Tribunal wherein the hon'ble Supreme Court states as follows (page 60): "The mere fact that a baseless claim was raised by some over enthusiastic assessees who sought a double allowance or that such claim may perhaps have been accepted by some authorities is not sufficient to attribute any ambiguity or doubt as to the true scope of the provisions as they stood earlier." For the forgoing reasons, we dispose of the appeal by confirming the order of the Tribunal. However, as rightly pointed out by the counsel for the assessee the system of allowing depreciation was followed by the assessee for several years and it was consistent with the view taken by several High Courts in India in the decisions above cited. We find force in this contention because assessee cannot be taken by surprise by disallowing depreciation which was being allowed for several years and to demand tax for one year after making disallowance. We feel the assessee should be allowed to write back the depreciation for this year and even for previous and then allow the same to be carried forward for application for subsequent years. It is for the assessee to write back depreciation and if Hi >- V II done the AssessingOfficerwill modify the assessment determining higher income and allow recomputed income with depreciationwritten back by the assessee to be carried forward for subsequentyears for application for charitable purposes. The appeal is disposed of as above by answering the questionin favourof the Revenue but by granting the relief to the assessee as above."

¶5As is clear from paragraph6 above, the Kerala High Court has relied upon the decision of the Supreme Court in the case of Escorts Ltd. vs. Union of India, (1993) 199 ITR 43 (SC). We shall refer to this judgment subsequently. In order to appreciate the contentionraisedby the Revenue,we would like to give one example which would clarify the contention or the issue raised before us. An assessee, a charitable institution, say has income from propertyheld underTrustof Rs.1,00,000/-. As per mandate of clause 'a', 85% of the said amount i.e. Rs.85,000/- should be spent in the said financial year. The said assessee spends and acquires a capital asset for Rs.50,000/-. The purchase price for acquisition of the capital asset i.e. Rs.50,000/- is treated as application of income for the purpose of clause 'a' to Section 11(1). On the capital asset, the assessee also claims depreciation say @ 20%. Accordingly, the assessee claims that the application of income would include Rs.10,000/- which is to be allowed as depreciation as to this extent, the asset purchased has depreciated. In other words, Rs.60,000/- is to be treated as application of money for the purpose of clause 'a' to Section v.. V 11(1).

¶6Initially we were inclined to accept the submission raised by the Revenue that there are several good reasons why we have declined to interfere and refer the matter to a larger bench to consider judgment of this Court in DIT vs. Vishwa Jagriti Mission, ITA No. 140/2012 (Del.).

¶7The controversy in question is not new and has been subject matter of judicial opinion and decisions from 1984. In the said year Kamataka High Court in Commissioner ofIncome Tax V5. Society of The Sisters of St. Anne 146 ITR 28 (Kar) had after referring to the provisions in question, held;- "It is clear from the above provisions that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression " total income " has been defined under s. 2(45) of the Act to mean " total amount of income referred to in s. 5 computed in the manner laid down in this Act". The word " income " is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word " income ", therefore, is a much wider term than the expression profits and gains of business or profession". Net receipt after deductingall the necessaryexpenditureof the trust (sic). There is a broad agreement on this proposition.But still the contention for the Revenue is that the depreciation allowance being a notional income (expenditure ?) cannot be allowed to be debited to expenditure account of the trust. This contention appears to proceed on assumption that the expenditure should necessarily involve actual delivery of or partingwith the money. It seemsto us that it ^ need not necessarilybe so. The expenditure should be understood as necessary outgoings. The depreciationis nothing but decrease in value of propertythroughwear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In Spicer & Pegler's Book-keepingand Accounts, 17th Edn., pp. 44, 45 & 46, it has been noted as follows : "Depreciation is the exhaustion of the effective life of a fixed asset owing to ' use ' or obsolescence. It may be computed as that partofthe costofthe assetwhichwillnotbe recovered when the asset is finally put out of ^ use. The objectofprovidingfor depreciation is to spread the expenditure, incurred in acquiringthe asset,overitseffectivelifetime; the amount of the provision, made in respect of an accounting period, is intended to representthe proportionof such expenditure, whichhas expiredduringthat period." "At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replacedor a substitutefound provisionfor '3 depreciation is the setting aside, out of the revenue of an accounting period, estimated amount by which the capital investedin the asset has expired during that period. It is the provision made for the loss or expense incurred through rising the asset for earning profits, and should, therefore, be charged against those profits as they are earned. " "If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, . balance-sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represent that part of their value on acquisition, which has not yet expired." V In CIT V Indian Jute Mills Association 1982] 134 ITR 68, the Calcutta High Court, while constructing expression " expenditure incurred " in s. 44A of the Act, observed: "depreciation claimed shall include expenditure incurred." There are only two recognised methods of accounting : (1) cash basis, and (ii) mercantile basis. Under the cash basis only cash transactions are recorded. It is only cash receipts and cash (U payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. CIT [1953]23 ITR 230 at 230 in the following words : " The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it, is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. It is not in dispute that if the mercantile system is followed, depreciation allowance in respect of the trust property should be allowed. xxxxxxxxxxxxxxxx The depreciation if it is not allowed as a necessary deduction for computing the income from the charitable institutions, then there is no way to preserve the corpus of the trust for derivingthe income.The Board also appears to have understood the " income " u/s. 11(1) in its commercial sense. The relevant portion of the Circular No. 5-P (LXX-6)of 1968,datedJuly 19, 1968,reads: Where the trust derives income from house

¶8property, 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 purpose of trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise.lt should be noted, in this connection, that the amounts so added back will become chargeableto tax u/s. 11(3)to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or appliedfor the purposesof the trust fi-om 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 fiill benefit of the exemption u/s. 11(1)." The aforesaid paragraph quotes the Board Circular No.5-P (LXX-6) of 1968 dated 19.07.1968. After the decision of the Kerala High Court in Lissie Medical Institution vs. CIT (supra),the Board issued a fi-esh circularor clarification dated 02.02.2012 and has observed;- "The view of the CBDT to be conveyed to the Court in this regard is as under:- The Central Board of Direct Taxes is of the considered view that where an assessee has acquiredan assetthroughapplicationof income and has also claimed this amount as expenditure in its income expenditureaccount, depreciation on such asset would not be alloweable to the assessee. Such notional statutory deductions like depreciation,if claimedas deductionwhile computing the income of 'the property held under trust' under the relevant head of income, is required to be added back while computing the income for the purpose of applicationin the income expenditureaccount. This would imply that a correct figure of surplus from the trust property is reflected in Income & Expenditureaccountofthetrustto determinethe income for the purpose of application under section 11 of the Income Tax Act. This would reducethe possibilityof revenueleakagewhich maybe a causeforgenerationof blackmoney."

¶10We also note that the KeralaHigh Court, in fact, has noted the clarificationswhichwere earlierissuedby the Boardin respectof 1968 circular. It is clear from the reasoning given by the Kerala High Court that they have not gone by the expresslanguageof Section11(a)andhavepurposivelyinterpretedthe provision.

¶11Clause 'a' of Section 11(1) stipulatesthat income derivedfrom property held under trust wholly for charitable or religious purposesis to be appliedfor such purposesin India and where such income is set aside or accumulated, it should not be in excessof 15% of the incomefrom such property. Thus, there is an embargo and probation from accumulatingor setting apart income derived from propertyheld under trust beyond 15% of income from such property. If there is a violationof the said provision,proportionateincome is deemedto be taxableand not exempt under Section 11(1). The language of the Section is \ peculiar and proceeds on its own wording. This aspect has been highlighted and pointed out in the judgment of Commissioner of Income Tax vs. Society of The Sisters of St. Anne (supra). Decision in the case of Escorts Ltd. (supra) was considered by the Delhi High Court in DIT vs. Vishwa Jagriti Mission (supra) decided on 29^^ March, 2012 and was distinguishedfor the following reasons. "13. The judgment of the Supreme Court in Escorts Limited Vs. Union ofIndia (supra) has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and statutory computation provisionsof ChapterIV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions.We are concernedonly with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accountingprinciples,there is authority for the proposition that depreciation is a necessary charge in computing the net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under Section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can assessee again claim deduction on account of depreciation in respect of the same asset. The Supreme Court ruled that, under general principles of taxation, double deduction in regard to the same business outgoing is not intended unless clearly expressed. The present case is not one of this type, as rightly distinguished by the CIT(Appeals)."

¶12We would like to reproduce Section 35 (2B)(c). "Section 35(2B)(a)

(b)

(c) Where a deduction allowed for any previous year under this sub-section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under [clause

(ii) of sub-section (1)] of section 32 for the same or any subsequent previous year."

¶13The language of the sub-clause 'c' to Section 35(2B) is conspicuous and entirely different and wordings are clear and lucid. The language of Section 11(1), as noticed above, is distinguished and not worded in a similar manner. In Escorts Ltd. (supra), the SupremeCourt was consideringthe said specific provision and the wordings therein. While dealing with the term "expenditure" and noticing the language it was held that no duplication or double deduction should be allowed towards depreciation in the same or subsequent year. Thus, the issue was decided against the assessee. Language of Explanation 1 to Section 43(1) can also be referred to and we notice that the language of the said explanation is absolutely different jfrom the language used in Clause (a) to Section 11(1). Section 11(1)(a) is a peculiar provision which postulates application of income and it is not dealing with expenditure as such. The legislative desire is that money should be applied for the purpose of charity. In Escorts (supra), the Supreme Court had observed that they were concerned with expenditure and since the entire costs of the capital assets had been allowed and had been set off against the business profit in five years or in one previous year, it was unconceivable that the depreciation should be allowed again on the same asset.

¶14From the year 1984 onwards, there have been a number of decisions of various High Courts taking a similar and identical view, as that of Society of the Sisters ofSt Anne (supra). These are as under:- Income Tax vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H), Income Tax vs. Tiny Tots Education Society, (2011) 330 ITR 21 (P&H), Commissioner of Income Tax vs. Manav Mangal Society, (2010) 328 ITR 421 (P&H), Commissionerof Income Tax vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, (1992) 198ITR 598 (Guj.), Commissioner ofIncome Tax vs. Raipur Pallottine Society, (1989) 180 ITR 579 (M.P.), Commissioner of Income Tax vs. Institute of Banking, (2003) 264 ITR 110 (Bom), and CITvs. Shakuntala Tharal Charitable Foundation,

(2013) 358 ITR 452 (MP).

¶15Kerala High Court was also conscious of the said decisions and the fact that Section ll(l)(a) had been interpreted in a different manner. It was in these circumstances that the Kerala High V/ Court in the last portion of paragraph 6, as quoted above, has stated that assessee would be entitled to write back depreciationandif done,the AssessingOfficerwouldmodifythe assessment determining higher income and allow recomputationof depreciationwritten back for the purpose of application of income for charitable purposes in future or subsequentyears. This may lead to its own difficultiesand problemsas suddenlythe entire depreciationwrittenoff would have to be added first and then in one year substantialapplication of incomewouldberequired.This may be impracticaland would Vy disturbthe workingofmany a charitableinstitutions. The legal interpretationwhich has continuedsince 1984, if disturbedand implemented,wouldnot appropriatelyresolved. Consistencyand certainty is more appropriate.

¶16The equallyplausibleand consistentinterpretationof clause (a) of Section11(1) of the Act is that incomederivedfi:om property must be calculatedas per the principlesof the Act. The said clause is not a computationprovisionand does not disturb the r .j % "income" earned or available but postulates that the "income" as computed in accordance with the provisions of the Act to the extent of 86% must be applied. Application of income may . include purchase of a capital asset. The said purchase is valid and taken into consideration for the purpose of ensuring compliance,i.e., applicationof money or funds and is not a factor which determines and decides the quantum of income derived from property held under trust. Computation of income is V" separateand distinct and has to be made on commercialbasis by applying provisions of the Act.

¶17In ITA No. 336/2013 - Director of Income Tax (Exemption) Vs. M/s. InternationalGoudiyaVedanta Trust, Revenue has raised an additionalquestionrelatingto subscriptionof Rs.2400/-received from the members. The Tribunal held that the subscription should be treated as a part of the corpus. Keeping in view the small amount involved, we are not inclined to decide this controversyin the presentappeal and leave the issue open to be ^ decidedin an appropriatecase.

¶18In view of the aforesaid position, we do not find merit in the presentappealsonthe saidaspectandthe samearedismissed. SANJIVKHANNA,J (I i C (LJL/J •= ^ lAN^ S EEVSACHDEVA,J NOVEMBER 27,2013/st

$-4,5,7, 11 & 12 ' * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 7/2013 (AssessmentYear2008-09) ' DIRECTOROF INCOMETAX (EXEMPTION) Appellant Through Mr. N.P. Sahni with Mr. Nitin Gulati & Mr. P. Roychaudhari, Advocates. versus INDIANTRADEPROMOTIONORGANISATION Respondent Through Mr. Ajay Vohra with Ms. Kavita Jha, Mr. Vaibhav Kulkami and Ms. Bhoomika Chaudhary, Advocates. + ITA 331/2013(AssessmentYear 2006-07) DIRECTOROF INCOMETAX (EXEMPTION) Appellant Through Mr. N.P. Sahni with Mr. Nitin Gulati & Mr. P. Roychaudhari, Advocates. versus COUNCIL OF SCIENTIFIC & INDUSTRIAL RESEARCH Respondent Through Mr. Ajay Vohra with Ms. Kavita Jha, Mr. Vaibhav Kulkami and Ms. Bhoomika Chaudhary, Advocates. + ITA 268/2013 (Assessment Year 2008-09) DIRECTOROF INCOMETAX (EXEMPTION) Appellant Through Mr. N.P. Sahni with Mr. Nitin Gulati & Mr. P. Roychaudhari, Advocates. i versus R.L. KHERACHARITABLETRUST Respondent Through Mr. AjayVohrawithMs. KavitaJha, Mr. Vaibhav Kulkami and Ms. Bhoomika Chaudhary,Advocates. + ITA 336/2013 (AssessmentYear 2009-10) DIRCTOROF INCOMETAX (EXEMPTION) Appellant Through Mr. N.P. Sahniwith]^. NitinGulati and Mr. P. Roychaoudhari, Advocates. versus M/S INTERNATIONAL GOUDIYA VEDANTA TRUST Respondent Through Ms. Prem Lata Bansal, Sr. Advocate with Mr. Ram Avtar Bansal, Mr. S.K. Khurana and Mr. Sanjay Sharma, Advocates. + ITA 449/2013 (AssessmentYear 2007-08) THE DIRECTOR OF INCOME TAX LAXMI NAGAR DELHI Appellant Through Mr. N.P. Sahni with Mr. Nitin Gulati & Mr. P. Roychaudhari, Advocates. versus TCI FOUNDATION 10 RAM BAGH AZAD MARKET ROHTAK ROAD NEW DELHI Respondent Through Mr. Ajay Vohra with Ms. Kavita Jha, Mr. Vaibhav Kulkami and Ms. Bhoomika Chaudhary, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE SANJEEV SACHDEVA