Income Tax Appellate Tribunal - Hyderabad
Pallavi Educational Society, ... vs Asst.Dit(E)-Iii,, Hyderabad on 13 December, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 482Hyd/2013
Assessment Year: 2009-10
Pallavi Educational Society, vs. Asst. Director of Income-tax
Hyderabad. (E) - III, Hyderabad.
PAN - AAATP 3593M
(Appellant) (Respondent)
Assessee by : Shri S. Rama Rao
Revenue by : Shri S. Srinivas
Date of hearing 25-10-2017
Date of pronouncement 13-12-2017
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
1. This appeal of the assessee is directed against the order of CIT(A)- IV, dated 11/01/2013, Hyderabad relating to AY 2009-10.
2. Briefly the facts of the case are that the assessee is running an educational institution in the name of Pallavi Model School at Secunderabad and has been granted registration u/s 12A of the Act w.e.f. 01/04/1995. It filed its return of income on 30/09/2009 claiming exemption u/s 11 and admitted nil income. A survey u/s 133A was conducted in the case of the assessee on 21/10/2011. The AO rejected the claim of exemption u/s 11 on the ground that assessee has given advance to M/s Shalivahana Associates, in which, one of the trustee is holding substantial interestand also disallowed the 2 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
depreciation claimed by the assessee. He assessed the total income of the assessee at Rs. 60,95,011/-.
3. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) upheld the action of the AO with regard to denial of exemption u/s 11 on the ground that it has given advance to M/s Shalivahana Associates of Rs. 32,07,995/- and disallowance of depreciation. CIT(A) allowed the claim of exemption u/s 11 with regard to contributions to the building fund of Rs. 3,20,000/-.
4. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
" 1. The order of the learned Commissioner of Income-Tax (Appeals) is erroneous to the extent it is prejudicial to the appellant herein.
2. The learned Commissioner of Income-Tax (Appeals) erred in holding that there was any violations to the provisions of Sec.13(l)(c) of the I.T. Act and that the appellant is not eligible for exemption u/s 11 of the I.T. Act.
3. The learned Commissioner of Income-Tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing depreciation in respect of the fixed assets and on the expenditure incurred for acquisition of assets. The learned Commissioner of Income-Tax (Appeals) ought to have seen that for computation of income depreciation is allowable as deduction and whereas for the purpose of considering utilization the cost of acquisition has to be considered."
5. Ground No. 1 is general in nature.
6. With regard to ground No. 2, it is observed that as per the assessee's balance sheet, an advance of Rs. 32,07,995/- had been given to M/s Shalivahana Associates in which Sri M. Komaraiah, Secretary of the assessee, was a partner. The assessee explained that a running account had been maintained between the assessee and the said firm, that the firm had provided interest free advances to the society through the entire year and that if the transactions were 3 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
viewed in their entirety, there was no overall benefit to the firm. The AO rejected the explanation of the assessee and held that section 13(3) mandates that no loans should be given to any of the specified persons for any amount or any period. The AO also held that neither any interest had been paid to the assessee for the loan given nor any security attached to the balance payable. The AO, therefore, held that the assessee had violated the provisions of section 13(1)(c) and hence, assessee was not entitled to exemption u/s 11 of the Act.
7. Before the CIT(A), the AR of the assessee submitted that the assessee had availed interest free advances from Shalivahana Associates for most part of the year, that the transactions were in the nature of receipts and payments in a running account, that beginning with a credit balance of Rs. 27,92,005/- on 1.4.2008, the assessee had paid Rs. 75,00,000/- on 31.3.2009 which resulted in debit balance of Rs. 32,07,995/- at the end of the year. The AR submitted that all the transactions were interest free and they had not resulted in any net benefit to Shalivahana Associates and therefore, there was no violation of sec. 13(1)(c). The AR submitted that had interest been charged on these transactions, the interest payable by the assessee would have been Rs. 4,63,122/- and interest receivable would have been Rs, 1,274/- so that it was the trust which was a benefited through these transactions. The AR also submitted that the reference by the AO to section 13(2)(a) was inappropriate since the transactions were effected in a running account and were not in the nature of a loan. The AR relied on few case law before the CIT(A), which were mentioned at page 4 of CIT(A)'s order.
8. After considering the submissions of the assessee, the CIT(A) observed that the AR of the assessee has not specified the nature of transactions which the assessee had undertaken with Shalivahana Associates which resulted in maintaining the running account. He further observed that without any such financial transactions in the 4 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
course of which money was paid or received from Shalivahana Associates, the transaction with this party necessarily takes the character of a loan account and has to be examined in the light of the relevant provisions of section 13. As regards the claim of the assessee that there was no benefit to Shalivahana Associates since money was payable by the assessee and not vice versa, the CIT(A) observed that the claim of the AR is without any merit as section 13(2)(a) applies to a situation where any party of the income or property of the trust is lent to a specified person 'for any period' during the previous year. In view of the above observations the CIT(A) further analyzed the issue with case law and held that the loan to Shalivahana Associates was in violation of section 13(2)(a) as a result of which the assessee ceases to be eligible for exemption u/s 11 of the Act.
9. Before us, the ld. AR of the assessee submitted that in case of fund requirement assessee had availed interest free advances from Shalivahana Associates for most part of the year and it submitted a statement showing that their transactions with Shalivahana Associates for the year under consideration. He submitted that assessee has paid an amount of Rs. 75 lakhs to Shalivahana Associates on the last date of the year, by such payment, the outstanding amount of the advance accounts becomes receivable to the extent of Rs. 32,07,995/-. This is nothing but running account. Further he submitted that, in case, interest is to be charged on the above transaction, assessee must have paid Rs. 4,15,213/- as interest and must have received Rs. 1,143/-. He submitted that it clearly demonstrates that real benefit was enjoyed by the assessee and not by Shalivahana Associates. He submitted that these transactions cannot be brought u/s 13(2)(a) of the Act. For this proposition, he relied on the following case law:
1. Vempati Chinna Satyam Kuchipudi, [2011] 10 ITR 201 (Chennai)
2. CIT Vs. Kamala Town Trust, [2005] 279 ITR 89 (All.) 5 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
3. DIT Vs. Pariwar Sewa Sansthan, [2002] 254 ITR 268 (Delhi)
4. CIT Vs. 21 st Society for Immaculate Conception, [2000] 241 ITR 193 (Madras)
5. ADIT € Vs. Mohammed Sadhak Trust, [2014] 63 SOT 99 (Chennai Tribunal)
10. Ld. DR, on the other hand, relied on the orders of revenue authorities.
11. Considered the rival submissions and perused the material facts on record and case law relied on by the ld. AR. It is observed that assessee has received advances from Shalivahana Associates regularly for its requirement and whenever there is surplus, the assessee used to return the advances. To this effect, a copy of the ledger account is placed on record (refer pages 27 to 42 of paper book). We find that assessee has issued two cheques on the last dates of the year (30 th & 31 st March, 2009) for Rs. 50 & 25 lakhs respectively in favour of Shalivahana Associates (refer page 42 of the paper book). Since cheques were issued on the last dates of the FY, the outstanding balance at the end of the year becomes receivable for the first time to the extent of Rs. 32,07,995/-. It is clear from the record that the funds remitted to the concern in which the trustee is holding substantial interest. Whether income is so used or applied is a question to be decided on the facts and circumstances of each case. The legislature, however, also creates a fiction and enumerates in clause (a) to (h) of sub-section (2), a list of circumstances in which the income shall be deemed to have been used or applied for the benefit of specified persons. The clause (a) deals with "any part of income or property is lent or continues to be, to any person referred in sub-section (3) of section 13 for any period during PY without adequate security or interest or both. In the given case, the assessee has lent the funds without any security or interest. It is worth to note the meaning of 'lend' explained by Hon'ble AP High Court in the case of CIT/CWT Vs. Polisetty Somasundaram Charities [1990] 183 ITR 377 (AP). The Hon'ble High Court discussed the distinction between 6 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
'lend' and 'invest' and pointed out that in commercial parlance "lending" is associated with advancing money for an assured return at an agreed rate of interest returnable on demand or within specified period with minimal risk, while, the expression 'invest' in a broad sweep takes in lending also, but, it can be considered as confined to laying out the amount in a venture with a profit motive and with no promise of assured return involving risk. From the above, it is clear that 'lent' means advancing money for an assured return with minimal risk. In the given case, the assessee has not lent any money as per commercial intention. It habitually taking advances from the concern and in 'quid-pro-quo', it has advanced money to the other concern without any return. On verification, we noticed that the peak advances taken by assessee is to the extent of Rs. 42,92,005/- and most part of the year, assessee owed to the other concern. It is pertinent to note that for 364 days, assessee has utilized the funds and on the last day of the year, it has advanced to the other concern in 'quid-pro-quo'. In our considered view, this is unreasonable on the part of the AO to deny the benefit u/s 11. The intention of the legislature to introduce the strict rules and fiction in section 13(2) is to safeguard the income and assets of the trust. In the given case, there is no such danger to the income or to the assets of the trust. One has to apply the provisions particularly the beneficial provision with the open mind and heart. Considering the above discussion and on the ground of reasonableness, we allow the ground raised by the assessee and direct the AO to allow the exemption u/s 11, which is lawfully available to the assessee.
11.1 With regard to the submission of the ld. AR and relying on the case law, we reject the case law as they are not relevant to the facts on hand, also distinguished by the ld. CIT(A) in his order and we also reject the concept of applying the notional interest.
7 ITA No. 482 /Hyd/2013Pallavi Educational Society, Hyd.
12. As regards ground No. 3 regarding disallowance of claim of depreciation of Rs. 10,11,041/-, the AO observed that depreciation had been claimed by the assessee on assets, the cost of which had already been claimed as application of income. The AO, therefore, held that this would amount to double deduction in view of the decision in the case of Escorts Ltd. Vs. UOI, 199 ITR 43 (SC) and disallowed the depreciation.
13. The CIT(A) following the decision of the ITAT, Hyderabad in the case of ACIT Vs. Sri Venkat Sai Educational Society and others (ITA No. 1440/Hyd/2011 and others dated 09/04/2012) upheld the disallowance of depreciation.
14. Considered the rival submissions and perused the material facts on record. We have considered the Escorts Ltd. (supra), on which reliance placed by the ld. DR, wherein the Hon'ble Supreme Court has adjudicated that the assessee cannot claim double benefit claiming deduction u/s 32 and u/s 35 at the same time. The intention of legislature is not to extend double benefit by observing that the deduction of the allowance on scientific research assets and that of depreciation are basically of the same nature intended to enable the assessee write off certain items of capital expenditure against his business priority. This decision cannot be applied in the present case because the assessee is not into business and its profits are exempt. The assets acquired are out of application of capital funds and the depreciation is calculated to determine the actual income over expenditure. The allowability of deduction of depreciation in the case of a charitable / religious trust is supported by a number of other legal precedents by Hon'ble Courts are as follows :
"1. CIT Vs Market Committee, Pipli [2011] 330 ITR 16 (P&H) In this case, the assessee was registered under section 12AA of the Income-tax Act, 1961, as a charitable trust. The Assessing Officer disallowed the depreciation on the ground that since the income of the assessee was exempt from tax 8 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
under sections 11 to 13, allowing depreciation to ascertain whether 85 per cent of funds were applied for purposes of trust, would amount to conferring double benefit. This view was affirmed by the Commissioner (Appeals). The appeal of the assessee to the Tribunal was allowed on a statement that the matter was covered in favour of the assessee by another order of the Tribunal.
On further appeal by the Revenue before the High Court, dismissing the appeal, it was held that the income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. There was no double deduction claimed by the assessee. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11.
2. CIT Vs Institute of Banking [2003] 264 ITR 110 (Bom) In this case, the assessee claimed depreciation which was rejected by the Assessing Officer (AO) on the ground that capital expenditure incurred, during the accounting year, was allowed as a deduction from the income of the assessee. The assessee filed an appeal before the CIT(A) who allowed the appeal of the assessee. On further appeal before the Tribunal, by the Department, the Tribunal confirmed the order of the CIT(A).
On appeal against the decision of the Tribunal, it was held by the Hon. High Court that the Tribunal was right in law in directing the AO to allow depreciation on the assets, the cost of which had been fully allowed as application of income under section 11 in the past years.
In this connection, the relevant part of the Head Note on pages 110 and 111 is reproduced as follows :
Normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-Tax Act, 1961. Income of a charitable trust derived from building plant and machinery and furniture is liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Act providing for depreciation, for computation of income derived from business or profession is not applicable. However, the income of the trust is required to be computed under section 11on commercial principles after providing for allowance for normal depreciation and deduction thereof from the gross income of the trust.9 ITA No. 482 /Hyd/2013
Pallavi Educational Society, Hyd.
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 had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a).
3. DIT (E) Vs Framjee Cawasjee Institute [1993] 109 CTR 463 (Bom) It was held in this case that depreciation on depreciable assets had to be taken into account in computing income of the trust, although the amount spent on acquiring such assets had been treated as application of income of the trust in the year in which assets were acquired.
4. CIT Vs Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598 (Guj) It was held in this case that the income from the properties held under trust has to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 of the Income-Tax Act, 1961. The expression "income" has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. The computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chapter III. The amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes.
5. CIT Vs Tiny Tots Education Society [2011] 330 ITR 21 (P&H) In this case the assessee was a charitable institution registered under section 12AA of the Income-tax Act, 1961. In its accounts, the assessee calculated depreciation for the purpose of showing the amount utilized. The Assessing Officer disallowed the depreciation on the ground that the income of the assessee being exempt, claim for depreciation would amount to taking of double benefit. The Commissioner (Appeals) held that deduction for computing income to preserve 10 ITA No. 482 /Hyd/2013 Pallavi Educational Society, Hyd.
the corpus of the trust was permissible and did not amount to double benefit. This view was upheld by the Tribunal observing that application of income was not computation of income of the charitable institution. Therefore, the question whether depreciation was to be allowed or not, had nothing to do with the application of income. The income was always to be computed on commercial principles and as per the system of accounting followed by the assessee, subject always to the statutory provisions.
On further appeal by the Revenue before the High Court, dismissing the appeal, it was held that the assessee was not claiming double deduction on account of depreciation. The income of the assessee being exempt, the assessee was only claiming that depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. It could not be held that double benefit was given in allowing the claim for depreciation for computing income for purposes of section 11.
6. CIT Vs Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) It was, inter-alia held in this case that the income from the properties of the trust would have to be arrived at in a normal commercial manner without classification under various heads set out in section 14 of the Act.
It was also held in this case that the expression "Income" has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. It was further observed that the computation under the different categories or heads, arises only for the purposes of ascertaining the total income for the purposes of charge. Thus, provisions can not be introduced to find out that the income derived from the property held under the trust to be excluded from the total income is, for the purpose of exemptions under Chapter III.
In view of the aforesaid reasons, it is clearly established that a charitable / religious trust is entitled to deduction of depreciation allowance and such a deduction does not amount to double benefit or double deduction. Accordingly, we delete the disallowance made on this count and ground is accordingly allowed.
11 ITA No. 482 /Hyd/2013Pallavi Educational Society, Hyd.
15. In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 13 th December, 2017.
Sd/- Sd/-
(D. MANMOHAN) (S. RIFAUR RAHMAN)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated: 13 th December, 2017
kv
Copy to:-
1) Pallavi Educational Society, C/o Sri S. Rama Rao, Advocate, Flat No. 102, Shriya's Elegance, 3-6-643, Street No. 9, Himayatnagar, Hyderabad - 500 029.
2) ADIT(E) - III, Hyderabad
3) CIT(A) - IV, Hyd.
4) (DIT (E), Hyd.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File
Description Date Intls
S.No.
1. Draft dictated on Sr.P.S./P.S
2. Draft placed befor e auth or Sr.P.S/PS
Draft pr opose d & placed bef ore the secon d JM/AM
3 Mem ber
4 Draft discussed/appr oved b y second JM/AM
Mem ber
5 Appro ved Draft com es to the Sr.P.S./PS Sr.P.S./P.S
6. Kept for pro nou ncem ent on Sr. P.S./P.S.
7. File sent to the Bench Clerk Sr.P.S./P.S
8 Date on which file go es to the Head Cle rk
9 Date of Dispatch of or der