2017 (6) TMI 498 - AT - Income Tax

Revenue's Appeal Partly Allowed; Depreciation Disallowed, Accumulation Upheld. Unutilized Grants Remanded for Clarification.

Deputy Commissioner of Income-tax (E), Circle -1, Bengaluru Versus M/s. Peoples Education Society

The Tribunal partly allowed the Revenue's appeal, upholding the disallowance of depreciation as application of income and affirming accumulation on gross ... Disallowance of depreciation to assessee trust - Held that:- Depreciation is the exhaustion of the effective life of a fixed asset owing to 'use' or obsolescence.It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee. See Director of Income-tax, Exemptions v.Al- Ameen Charitable Fund Trust [2016 (3) TMI 462 - KARNATAKA HIGH COURT] Net receipts v. gross receipts in computation of application of income - Accumulation at 15% on gross receipts should be considered u/s.11(1)(a), and not on net receipts. See Jyothy Charitable Trust Versus The DCIT [2015 (11) TMI 1295 - ITAT BANGALORE] Treatment of unutilised grants as income - Held that:- The conclusion recorded by the CIT (A) do not clearly suggest that the inference was drawn by the CIT (A) based on the material already existing on record with the AO. In our view, it would always be advisble hat the first appellate authority should seek a remand report, in case the factual matrix are not clear from the records, from the AO. In the light of the above, we remand the matter to the file of the CIT (A) with a direction to seek a remand report from the AO on this issue, i.e., whether the grants received from other agencies including AICTE, were utilised for the specific purposes or not and whether the assessee has kept the said grants received by it in a separate bank account and has not merged the same with the regular account of the assessee. Claim for acquisition of capital assets from the borrowed fund - investment in fixed asset by using the loan - Held that:- Section 11 only contemplates the application of income and if the said income is applied for the aims and objectives of the trust, then the trust is entitled for exemption under the provision. The said analogy cannot be extended to acquisition of assets from the borrowed funds. If we hold so, then we would be equating the borrowed fund with the income of the trust. Under the law, it is the application of income and not of the fund that is required to be seen for the purpose of granting the exemption. In fact, the assessee would be entitled to exemption in view of the judgment in the matter of Janmabhoomi Press Trust (1999 (12) TMI 51 - KARNATAKA High Court), as and when the loan is repaid to the financial institutions. In view thereof, if the claim of the assessee that the borrowed funds were utilised for the objects of the trust, is entertained and accepted at this stage, it would tantamount to double benefit which cannot be the intention of the statute. CIT (A) erred in allowing the claim for acquisition of capital assets from the borrowed fund. - Decided in favour of revenue Issues Involved:1. Disallowance of depreciation as application of income.2. Net receipts vs. gross receipts in computation of application of income.3. Treatment of unutilized grants as income.4. Investment in fixed assets using loan amounts.Issue-wise Detailed Analysis:1. Disallowance of Depreciation as Application of Income:The Revenue contended that the assessee claimed depreciation on assets, which had already been accounted for as application of income during the year of investment, leading to a double deduction. The Revenue argued that this practice was not permissible. The assessee countered by referencing Section 11 of the Income Tax Act, which exempts income derived from property held under trust for charitable purposes, provided that 85% of the income is applied towards the trust's objectives. The assessee cited various High Court judgments, including CIT v. Society of the Sisters of St. Anne, which upheld that depreciation should be allowed as it preserves the corpus of the trust. The Tribunal concluded that the issue was covered by the Karnataka High Court's judgment in Director of Income-tax, Exemptions v. Al-Ameen Charitable Fund Trust, and dismissed the Revenue's appeal on this ground.2. Net Receipts vs. Gross Receipts in Computation of Application of Income:The Revenue argued that the Assessing Officer (AO) allowed accumulation of 15% of net receipts instead of gross receipts. The CIT (A) had allowed accumulation of 15% of gross receipts. The assessee referenced the Bangalore Tribunal's decision in Jyothi Charitable Trust, which supported the accumulation at 15% on gross receipts under Section 11(1)(a). The Tribunal found no distinguishable features in the Revenue's argument and dismissed this ground, affirming the CIT (A)'s decision.3. Treatment of Unutilized Grants as Income:The Revenue contended that the assessee received grants from various sources for educational activities but did not utilize them, instead showing them as liabilities in the Balance Sheet. The Revenue argued that the CIT (A) decided the issue without seeking a remand report from the AO. The assessee maintained that the grants were utilized for specific purposes and separate bank accounts were maintained. The Tribunal noted that the CIT (A) should have sought a remand report from the AO to clarify the factual matrix. Consequently, the Tribunal remanded the matter back to the CIT (A) to seek a remand report from the AO on the utilization and accounting of the grants.4. Investment in Fixed Assets Using Loan Amounts:The Revenue argued that the assessee availed loans for capital expenditure and invested in immovable properties, which should not be considered as application of income. The assessee explained that loans were taken against fixed deposits for general and capital expenditure, referencing the Karnataka High Court's judgment in CIT v. Janmabhoomi Press Trust, which allowed repayment of debt for construction as application of income. The Tribunal held that allowing the use of borrowed funds as application of income would result in double deduction, which is not permissible. The Tribunal concluded that the CIT (A) erred in allowing the claim for acquisition of capital assets from borrowed funds and allowed the Revenue's appeal on this ground.Conclusion:The appeal of the Revenue was partly allowed for statistical purposes, with the Tribunal upholding the disallowance of depreciation as application of income, affirming the accumulation on gross receipts, remanding the issue of unutilized grants, and disallowing the claim for acquisition of capital assets from borrowed funds.