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2019 (4) TMI 849 - AT - Income TaxExemption u/s 11 - allowability of depreciation on assets, the cost of which was already considered as application for charitable purpose in the year of acquisition - HELD THAT - Reference to the decision of the Hon ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne 1983 (8) TMI 44 - KARNATAKA HIGH COURT wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income We may also add that the legal position has since been amended by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f. 1.4.2015 by insertion of sub-section (6) to section 11. Carry forward of excess of expenditure incurred over its income for setting off against income of the succeeding years - HELD THAT - The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne 1983 (8) TMI 44 - KARNATAKA HIGH COURT . We are therefore of the view that there is no merit in the issue raised in this regard by the Revenue. Accordingly, the same are dismissed. Considering the expenditure incurred in subsequent year before filing of return of income as application for accumulation of income. Excess expenditure/application/deficit/loss of earlier years against income of the current year and in the light of the law laid down by Hon ble Supreme Court in the case of Nagpur Hotel Owner s Association case 2000 (12) TMI 99 - SUPREME COURT . AO is also directed to consider the written submissions filed by the assessee on this issue. Disallowance of expenditure incurred in foreign currency - Expenses incurred in foreign currency has to be considered as application for charitable purpose and incurred for the charitable purposes in India. See DIRECTOR OF INCOME-TAX (EXEMPTION) VERSUS NATIONAL ASSOCIATION OF SOFTWARE & SERVICES COMPANIES 2012 (5) TMI 204 - DELHI HIGH COURT .
Issues Involved:
1. Allowance of depreciation on assets considered as application for charitable purposes. 2. Entitlement of a charitable trust to carry forward excess expenditure for setting off against income of subsequent years. 3. Disallowance of expenditure incurred in foreign currency. 4. Consideration of expenditure incurred in subsequent year before filing of return of income as application for accumulation of income. Issue-wise Detailed Analysis: 1. Allowance of Depreciation on Assets Considered as Application for Charitable Purposes: The revenue contended that allowing depreciation on assets, whose cost was already considered as application for charitable purposes, would result in double benefit. The AO relied on the Supreme Court decision in Escorts Ltd., which held that no depreciation is allowable when capital expenditure on scientific research has already been deducted. However, the assessee cited Karnataka High Court decisions in All Saints Church and Society of Sisters of St. Ann, which allowed depreciation on such assets. The CIT(A) followed these decisions and allowed the claim of the assessee. The Tribunal upheld the CIT(A)'s decision, noting that depreciation is necessary to preserve the corpus of the trust and does not amount to double deduction. The legal position was clarified by a prospective amendment in the Finance (No.2) Act, 2014, effective from AY 2015-16, which disallows depreciation in such cases. However, for the relevant assessment years, the Tribunal found no merit in the revenue's appeal and dismissed it. 2. Entitlement of a Charitable Trust to Carry Forward Excess Expenditure for Setting Off Against Income of Subsequent Years: The AO denied the assessee's claim to carry forward excess expenditure, arguing there was no provision in the Act for such carry forward. The CIT(A), however, allowed the claim based on ITAT Bangalore's decision in Dr. T.M.A. Pai Foundation. The Tribunal upheld this view, citing multiple High Court decisions, including Maharana of Mewar Charitable Foundation and Institute of Banking Personnel Selection, which held that excess expenditure can be adjusted against income of subsequent years. This adjustment is considered application of income for charitable purposes. The Tribunal dismissed the revenue's appeal on this issue. 3. Disallowance of Expenditure Incurred in Foreign Currency: The AO disallowed expenditure incurred in foreign currency, arguing that only income applied in India qualifies for exemption under section 11(1)(a). The CIT(A) upheld this view, finding the relationship between the training institute and the beneficiaries to be commercial rather than charitable. The Tribunal, however, referenced the Delhi High Court's decision in Associated Chambers of Commerce & Industry of India, which allowed such expenses as they were in line with the main objects of the trust. The Tribunal concluded that the expenses incurred in foreign currency should be considered as application for charitable purposes in India and allowed the assessee's appeal on this issue. 4. Consideration of Expenditure Incurred in Subsequent Year Before Filing of Return of Income as Application for Accumulation of Income: The CIT(A) denied the assessee's request for accumulation of income, stating that the assessee showed excess expenditure over available income and could not apply for accumulation of non-existent funds. The Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for fresh consideration. The AO was directed to consider the request for accumulation in light of the Tribunal's decision on excess expenditure and the Supreme Court's ruling in Nagpur Hotel Owner’s Association. Conclusion: The appeals by the revenue were dismissed, and the appeals by the assessee were partly allowed. The Tribunal upheld the CIT(A)'s decisions on depreciation and carry forward of excess expenditure, allowed the foreign currency expenditure as application for charitable purposes, and remanded the issue of accumulation of income for fresh consideration by the AO.
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