2012 (7) TMI 62 - AT - Income Tax

Exemption under section 11(1)(a) - assessee-trust was created under a Will with a view to undertake two objects of spreading Sanskrit language and practicing ayurvedic system of medicines - with efflux of time, the main activity of the assessee has become predominantly of providing medical relief through allopathic system of medicines Held that - for claiming exemption u/s 11(1)(a) the assessee will have to adhere to the objects for which it was formed. Accordingly, it is held that since medical relief through allopathic treatment does not fall within the ambit of the objects mentioned in the Will, the income and expenditure from this activity will have to be treated separately. A consequence of this finding is that surplus from this activity cannot form subject matter of exemption u/s 11. Principle of res-judicata - Action of cancelling registration - held that - The conduct of the revenue itself shows that cognizance was taken of the fact that the trustees exceeded their authority under the Will. However, due to inadequacy in legal framework, the department had to ultimately assess income under Chapter III. The decision in the case of Allahabad Agricultural Institute (2007 (3) TMI 208 (HC)) shows that the AO could have made a departure from past even in earlier years. In the light of the aforesaid decision, grant of benefit u/s 11(1)(a) would be beyond the purview of law. In such a situation, the rule of consistency cannot prevail over the well entrenched principle of res-judicata. As discussed earlier by references to the decision in the case of Pragati Construction Co. (2003 (12) TMI 281 (Tri)) and All India J.D. Educational Society (2010 (11) TMI 668 (HC)). Therefore, we are of the view that the AO was well within his right to examine the facts of this year independently. Since there were pressing reasons to make a departure, he was well within his right to do so. Whether deduction of depreciation on fixed assets is allowable when full cost of the assets had been allowed in earlier years u/s 11 as application of income, thereby allowing the deduction of the same expenditure twice over - assessee is not entitled to exemption u/s 11 in respect of expenditure incurred on medical relief through allopathic system of medicine. The income and expenditure from these activities have to be segregated, which has to be taken as profit available for the purpose of pursuing the main object of Sanskrit and ayurvedic system of medicines Held that - depreciation on assets used for providing relief through ayurvedic system of medicine or research are entitled to deduction of depreciation notwithstanding the fact that the cost has been allowed to be written off in the past u/s 11(1)(a). Thus, this ground is also partly allowed - appeal is partly allowed

Issues Involved:
1. Exemption under sections 11 and 12 of the Income-tax Act, 1961.
2. Deduction of depreciation on fixed assets.

Detailed Analysis:

Issue 1: Exemption under sections 11 and 12 of the Income-tax Act, 1961

Background and Revenue's Argument:
The revenue contended that the assessee-trust, created under a Will to promote Sanskrit and Ayurvedic medicine, had deviated from its original objects. The trust's activities predominantly involved providing medical relief through the allopathic system of medicine, which was not in accordance with the trust's original objects. Consequently, the registration granted to the assessee was no longer valid, and the exemption under sections 11 and 12 should not be allowed.

Assessee's Argument:
The assessee argued that it was still adhering to its object of improving the Ayurvedic system of medicine and that the use of allopathic medicine was in aid of this objective. The trust claimed that providing medical relief through allopathic medicine was also a charitable purpose under section 2(15) of the Act, and hence, it should be entitled to the exemption.

Tribunal's Findings:
The Tribunal noted that the trust's predominant activities had shifted from Ayurvedic to allopathic medicine, and the object of promoting Sanskrit was not followed at all. It concluded that the trust had exceeded its objects as per the Will, and thus, the activities were not in accordance with the mandate of the Will.

Legal Precedents and Interpretation:
The Tribunal referred to various legal precedents, including:
- M. Visvesvaraya Industrial Research & Development Centre v. ITAT
- Cane Development Council v. CIT
- CIT v. Red Rose School
- New Life In Christ Evangelistic Association (NLC) v. CIT
- Aggarwal Mitra Mandal Trust v. DIT (Exemption)
- Surat Tennis Club v. Asstt. CIT

These cases established that registration under section 12A does not automatically entitle an assessee to exemption under sections 11 and 12. The AO must examine each year whether the activities are in accordance with the objects of the trust.

Conclusion:
The Tribunal held that since the trust's activities predominantly involved allopathic medicine, which was beyond the scope of its original objects, the income and expenditure from these activities must be segregated. The trust was not entitled to exemption under sections 11 and 12 for the income derived from allopathic medical relief.

Issue 2: Deduction of Depreciation on Fixed Assets

Background and Revenue's Argument:
The revenue argued that the assessee claimed depreciation on fixed assets whose full cost had been allowed as an application of income in earlier years under section 11. Citing the Supreme Court's decision in Escorts Ltd. v. Union of India, the revenue contended that allowing depreciation would result in a double deduction.

Assessee's Argument:
The assessee relied on the decision in CIT v. Institute of Banking Personnel Selection (IBPS), where it was held that depreciation on assets, the cost of which had been fully allowed as an application of income under section 11, should be allowed.

Tribunal's Findings:
The Tribunal noted that different courts had different views on this issue. It referred to the decisions in:
- Escorts Ltd. v. Union of India
- Dy. DIT (Exemption) v. Adi Sankara Trust
- CIT v. Institute of Banking Personnel Selection (IBPS)

The Tribunal concluded that for activities related to allopathic medicine, the decision in Escorts Ltd. applied, and depreciation was not admissible. However, for activities related to Ayurvedic medicine, the decision in Institute of Banking Personnel Selection (IBPS) was followed, and depreciation was allowed.

Conclusion:
The Tribunal held that depreciation on assets used for providing relief through the Ayurvedic system of medicine or research was deductible, notwithstanding that the cost had been allowed to be written off in the past under section 11(1)(a). However, for assets used in allopathic medical relief, depreciation was not admissible.

Final Judgment:
The appeal was partly allowed, with the Tribunal ruling that the assessee was not entitled to exemption under sections 11 and 12 for income derived from allopathic medical relief and that depreciation on assets used for allopathic activities was not deductible.

← Previous Next →