2021 (8) TMI 1363 - HC - Income Tax

Assessment of trust - depreciation on the assets even though the cost of purchase of asset was already treated as application of income under Section 11 - HELD THAT - Substantial question of law No.1 has to be answered against the Revenue in the light of the decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. Rajasthan and Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT wherein it was held that normal depreciation could be considered as legitimate deduction in computing real income of assessee on general principles or u/s.11 (1)(a) of the Act. Accordingly, the substantial question of law No.1 is answered against the Revenue by complying the above decision. Construction contract as granted to the firm in which the managing trustee was a partner would tantamount to service as contemplated under Section 13(2)(c) - How sub-section (2) of Section 13 should be interpreted and whether there is a deemed provision? - HELD THAT - We find from the order passed by the CIT(A) which has been confirmed by the Tribunal that there has been no discussion on such aspects, nor the Assessee raised such issue. Nevertheless the issue, being ultimately a legal issue, involves question of fact and law for the Tribunal is required to take a fresh decision considering all issues and also the effect of sub-section (2) of Section 13. In the result, the matter is remanded to the Tribunal to decide the issue regarding whether there was a violation committed by the Assessee Trust under Section 13(1)(c) read with 13(2) and Section 13(3) of the Act in respect of building contract awarded to a firm in which managing trustee was a partner and the firm having earned profit, whether the Assessee is entitled for exemption under Section 11.

Issues Involved:
1. Entitlement to claim depreciation on assets treated as application of income under Section 11.
2. Violation of Section 13(1)(c) read with Section 13(2) and Section 13(3) due to awarding a building contract to the Managing Trustee.
3. Denial of exemption under Section 11 due to investment in gold bullion violating Section 11(5) read with Section 13(1)(d).

Issue-wise Detailed Analysis:

1. Entitlement to Claim Depreciation on Assets:
The first issue concerns whether the assessee is entitled to claim depreciation on assets whose purchase cost was already treated as an application of income under Section 11. The court noted that this issue was conceded and had to be answered against the Revenue based on the Supreme Court's decision in Commissioner of Income Tax Vs. Rajasthan and Gujarati Charitable Foundation Poona (2018) 402 ITR 0441 (SC). The Supreme Court held that normal depreciation could be considered a legitimate deduction in computing the real income of the assessee on general principles or under Section 11(1)(a) of the Act. Hence, the first substantial question of law was answered against the Revenue.

2. Violation of Section 13(1)(c) Due to Building Contract:
The second issue revolves around whether awarding a building contract to a firm in which the Managing Trustee was a partner violates Section 13(1)(c) read with Section 13(2) and Section 13(3). The assessing authority initially held that the transactions violated the provisions of Section 13(1)(c) and 13(1)(d), making Section 11 inoperative and bringing the surplus to taxation. However, the CIT(A) allowed the appeal, noting that the contract was awarded on a competitive basis, and the profit earned was reasonable. The Tribunal upheld these findings.

The court highlighted the need to interpret sub-section (2) of Section 13, which is a deeming provision, and to determine whether the construction contract qualifies as "service" under Section 13(2)(c). The court found that the CIT(A) and the Tribunal did not sufficiently discuss these aspects. Therefore, the matter was remanded to the Tribunal to decide whether there was a violation under Section 13(1)(c) read with Section 13(2) and Section 13(3) and whether the assessee is entitled to exemption under Section 11.

3. Denial of Exemption Due to Investment in Gold Bullion:
The third issue pertains to the denial of exemption under Section 11 due to the investment in gold bullion, which allegedly violated Section 11(5) read with Section 13(1)(d). The court referred to a previous decision in the assessee's own case (T.C.A. No. 890 of 2019), where the matter was remanded to the Tribunal for reconsideration. The Tribunal had previously concluded that the purchase of gold was an investment in violation of Section 11(5), but the court found that the assessee had not been given an adequate opportunity to present their case. The court emphasized that the issue should be reconsidered, allowing the assessee to argue their position under the proviso (iia) to Section 13(1)(d), which allows holding non-specified investments for a period of one year from the end of the previous year in which the asset was acquired.

Conclusion:
The first substantial question of law was answered against the Revenue based on the Supreme Court's decision. The second and third substantial questions of law were remanded to the Tribunal for fresh consideration. The Tax Case Appeal was dismissed regarding the first issue and partly allowed for the second and third issues, with no costs.

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