2013 (2) TMI 755 - AT - Income Tax

Whether loan taken was utilized for acquiring fixed can be considered as application of income u/s 11 - Can depreciation be considered as application of income - can set off of excess expenditure of earlier years be allowed when there is no such claim in the return - Held that - Acquisition of fixed assets was only for the purpose of Trust - Loan raised is never income derived from the property held under trust - Utilization of such loan will also be not an application of income derived from property held under trust - Contention of the assessee that once loan had gone into common kitty, a presumption has to be taken that money expended for acquiring capital asset had first gone out of own funds and then out of loan funds, cannot be accepted - Decided against the assessee Held that - While computing the income of the Trust, commercial principle had to be followed and depreciation had to be allowed - depreciation has to be considered as an application of income derived from property held under Trust - Decided in favor of assessee Held that - Trust was entitled to set off the amount of excess application of income of prior years against deficiency of current year - claim of the assessee ought have been entertained if such claim was found factually correct

Issues Involved:
1. Whether the capital expenditure incurred out of borrowed funds can be considered as an application of income.
2. Whether the sum of Rs. 4 Crores placed as security with University of Health Sciences can be considered as an application of income.
3. Whether depreciation can be considered as an application of income.
4. Whether set-off of excess application of earlier years can be allowed against the income of the current assessment year.

Detailed Analysis:

1. Capital Expenditure Out of Borrowed Funds:
The primary issue was whether the capital expenditure incurred out of borrowed funds could be treated as an application of income. The Assessing Officer (A.O.) found that the assessee had taken loans amounting to Rs. 15,03,70,801/- and used Rs. 12,85,43,524/- for acquiring fixed assets. The A.O. opined that spending from loans could not be considered as an application of income as per Section 11(1)(a) of the Income-tax Act, 1961. The assessee argued that the funds went into a common kitty and thus the expenditure should be considered as an application of income. However, the Tribunal held that loans utilized for acquiring fixed assets could not be considered as income derived from property held under the Trust applied for the purposes of the Trust, as this would result in double allowance when the loan is repaid.

2. Rs. 4 Crores Placed as Security:
The second issue was whether Rs. 4 Crores placed as security with the University of Health Sciences could be considered as an application of income. The CIT(Appeals) accepted this amount as an application of income, not in the nature of capital expenditure. However, the Tribunal noted that this evidence was not presented before the A.O. and required verification. The Tribunal agreed that if the sum was used as a security deposit for starting new colleges, it could be considered as an application of income and not for acquiring fixed assets.

3. Depreciation as Application of Income:
The third issue was whether depreciation could be considered as an application of income. The Tribunal referred to various High Court decisions, including those of the Punjab & Haryana High Court, Karnataka High Court, Calcutta High Court, and Gujarat High Court, which supported the assessee's claim that depreciation should be considered while computing the application of income. The Tribunal concluded that depreciation should be allowed as an application of income derived from property held under the Trust.

4. Set-off of Excess Application of Earlier Years:
The final issue was whether the excess application of earlier years could be set off against the income of the current assessment year. The Tribunal referred to the decisions of the Gujarat High Court and the jurisdictional High Court, which supported the carry forward and set-off of excess expenditure of earlier years. The Tribunal noted that although the assessee did not make this claim in the return, the A.O. should have considered it. The Tribunal concluded that the assessee was entitled to claim carry forward of excess expenditure for setting off against the income of the impugned assessment year.

Conclusion:
The Tribunal set aside the orders of the lower authorities and remitted the issues back to the A.O. for fresh consideration in accordance with the law. The appeal of the assessee was partly allowed, and the appeal of the Revenue was allowed for statistical purposes. The Tribunal also observed that the expenditure claimed by the assessee lacked any element of charity, but since the lower authorities had accepted the claim, the Tribunal had no leeway to decide on this aspect.

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