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TMI Blog2015 (12) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... im of application of income. This requirement has been specified only for those trusts that have as its objects, the promotion of international welfare. In the case of the assessee in the case on hand, the objects of charitable activities for imparting higher education in India, has already been approved by the Department while granting the assessee trust registration. Also unable to concur with the view of the Assessing Officer that mere credit entries in favour of Ohio University in the assessee’s books of account cannot be taken by the assessee as being for charitable purposes as contemplated in Section 11 of the Act. Thus we uphold the decision of the learned CIT (Appeals) in deleting the addition/disallowance made in respect of faculty teaching charges as the word ‘applied’ does not mean ‘spent’ and even if the income has been earmarked and allocated for the purpose of carrying out the objects of the institution, it might be deemed to be applied for that purpose. - Decided in favour of assessee. Set off of brought forward excess application income/loss of earlier years - CIT(A) allowed claim - Held that:- The assessee had incurred certain preliminary expenditure in the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned CIT (Appeals), there are divergent decisions by various High Courts in the matter. While the Assessing Officer has relied on the decision of the Hon’ble Kerala High Court, the assessee has relied on the decision of the Hon’ble Delhi High Court. The learned CIT (Appeals) after noting the divergent views taken by different High Courts has decided the issue in favour of the assessee by observing that there is no decision of the jurisdictional High Court in the matter, the decision favourable to the assessee should be followed. As decided in Director of Income Tax, Exemptions And Others Versus Envisions [2015 (6) TMI 38 - KARNATAKA HIGH COURT ] as long as the objects of the trust are charitable in character and as long as the purpose or purposes mentioned in Form 10 are for achieving the objects of the trust, merely because of non-furnishing of the details, as how the said amount is proposed to be spent in future, the assessee cannot be denied the exemption as is admissible under sub-section 2 of Section 11 of the I.T.Act, 1961. - Decided in favour of assesse. - I.T. A. Nos.1075 & 1076/Bang/2014 - - - Dated:- 9-10-2015 - SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crediting the amount to Ohio University s account by following mercantile method of accounting and the actual payment of the same has happened in the subsequent asst. year implying that there was no real application of income within the meaning of section l1{l){a) during the F.Y. 2007-08 relevant to A.Y. 2008-09. 2) The CIT (A) has failed to appreciate the fact that the group of words such Income IS applied to such purposes in India as appearing u/s l1(l)(a) connotes the actual utilisation or payment or remittance of the money in the year in which such income is generated/received irrespective of the method of accounting followed by the assessee. 3) The CIT (A) has failed to appreciate the fact that in order to claim application of Income within the meaning of Sec.ll{l)(a), the assessee is required to prove not only that it has already incurred the expenditure and liability to pay the amounthas accrued, but also it has already paid/remitted the amount to the party concerned towards the discharge of such accrued liability. 4) The CIT (Al has failed to appreciate the fact that the method of accounting followed by the assessee has no relevance for the purpose of arriving at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward and set-off of loss against the income of subsequent years as envisaged u/s 70 to 79 are also not applicable to the chantable and religious trusts/institutions. 3) The CIT (A) has failed to appreciate the fact that the concept of application of income is embedded in the statute u/s 11 only to ensure that the income earned by the assessee by way of voluntary contributions as well as conducting some income generating activities such as running hospitals/ educational institutions is applied/utilized/expended towards the objects in order to allow exemption of such income from tax. 4) The CIT (A) has failed to appreciate the fact that application/ utilization towards the charitable or religious purposes is with reference to income quantified by applying the commercial principles which is otherwise taxable and therefore, such application / utilization shall be restricted to the income quantified. Once the assessee has applied/ utilized the entire amount of income, then by virtue of Sec.ll(l)(a) the income is exempt from tax. Accordingly, the purpose and scope of Sec.l1(1)(a) is to allow tax exemption after ensuring the application/utilization norms. Hence, in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion l1(l)(a). A.Y.2009-10: A) Disallowance of faculty teaching charges payable to Ohio University amounting to ₹ 2,OS,58,120/-:- Please refer to the grounds of appeal on the same issue for the A.Y. 2008-09. B) L oss on account of foreign exchange fluctuation of ₹ 70,58,026/-:- 1) The CIT (A) has erred in directing the AO to allow exchange fluctuation loss in respect of amounts due to Ohio University towards faculty teaching charges outstanding as on 31.03.2009 without appreciating the fact that the assessee had not really incurred any loss on account of exchange fluctuation but made entries in the books of accounts at the end of the financial year on the basis of prevailing value of rupee in terms of USdollar. 2) The CIT (A) has failed to appreciate the fact that the assessee did not pay the faculty teaching charges to Ohio University to the extent of ₹ 2,OS,58,120/- during the year under consideration and the same is reflected under current liabilities as on 31.03.2009, but created provision towards loss on account of exchange fluctuation as on 30.03.2009 based on the difference between dollar rate as on the date of billing and as on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same assessment year as provided u/s 11(2) is mandatory and absolute and the same should be spelt out in clear terms in the statutory Form No.10 filed along with the return of income. In this regard, the assessee should furnish the specific details of amount of income accumulated, the purpose for which the specified amount is accumulated and the period of accumulation or the year (s) in which the accumulated income will be utilized for the intended purposes. Also, the assessee is required to Invest or deposit such accumulated income in the forms or modes specified in section 11(5). 4) The CIT(A) has failed to appreciate that there is no decision of jurisdictional High Court on this issue and majority of the decisions of other High Courts are in favour of the revenue including the decisions of Hon ble High Court of Calcutta in the case of DIT(E) Vs. Trustees of Singhania Charitable Trust (199 ITR 819) and Hon ble High Court of Madras in the case of CIT Vs. Muttaiah Chettiar Family Trust (245 ITR 400). 4. A. Disallowance of Faculty Teaching Charges payable to Ohio University (for both A.Ys. 2008-09 2009-10). 4.1 In the course of assessment proceedings, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 11(1)(a) of the Act connoted actual payment and since it has not happened, the assessee is not entitled for application of income. In support of Revenue s contentions, the learned Departmental Representative placed reliance on the decision of the Hon ble Apex Court in the case of Nachimuthu Industrial Association (235 ITR 190) (SC). 4.4.1 Per contra, the learned Authorised Representative for the assessee supported the impugned orders of the learned CIT (Appeals). It was submitted that the assessee has actually incurred the said expenditure towards factulty teaching charges payable to Ohio University, USA and therefore it should be considered as having been applied under Section 11(1)(a) of the Act. In support of its contention, reliance was placed on the decision in the case of CIT Vs. Trustees of HEH Nizam s Charitable Trust (1981) 131 ITR 497 (A.P.) wherein it was held that the term applied does not mean spent . It was also submitted that the decision rendered in the case of CIT V Trustees of HEH Nizam s Religious Endowment Trust (1977) 108 ITR 229 is distinguishable on facts and is not applicable to the assessee. 4.4.2 The learned Authorised Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o University had filed returns of income in India offering this income to tax and paid taxes accordingly. 4.5.2 It is also not disputed that the services have been rendered by the faculty members from Ohio University as the classes were taken in Bangalore. The services have been utilized for the purposes of the Trust s objectives in India, viz. of imparting higher education in India. Ohio University has also offered the income earned by it from the assessee trust to tax in India. In the light of the above mentioned facts, it is clear that the activities of the assessee trust were conducted in India in accordance with its objects. 4.5.3 As regards the payments being made out of India, we concur with the view of the learned CIT (Appeals) that merely because the payments are made outside India, it cannot be said that the charitable activities were also conducted outside the country. In this regard, the judicial decisions of the ITAT, Mumbai and Delhi Benches, cited by the assessee, squarely apply to the case on hand. In the case of Gem and Jewellery Export Promotion Council V. ITO, reported in 68 ITD 95 (Mum), the Mumbai Bench of the Tribunal at para 33 thereof held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ict the application of income within the territory of India. The charitable purpose for which the income should be applied for claiming exemption under s. 11(1)(a) should be in India. In this case, it is not disputed that the trade delegation had been sent abroad for the benefit of the entire trade in India. The exports are made from India and the purpose for sending the delegation was to increase the possibilities of exports out of India. We accordingly hold that since the assessee has applied the income for charitable purposes in India, the mere fact that the expenditure has been incurred out of India, does not disqualify the expenditure from exemption under s. 11(1)(a). In the case of NASSCOM V DDIT in 130 TTJ 377 (Del), the Delhi Bench of the Tribunal at para 11 thereof has held as under :- 11. . A perusal of the provisions of s. 11(1)(a) of the Act clearly shows that the words used are is applied to such purpose in India . The words are not is applied in India . The fact that the legislature has put the words to such purpose between is applied and in India shows that the application of income need not be in India, but the application should result and shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemplated in Section 11 of the Act. In this regard, the decision in the case of Trustees of HEH Nizam s Charitable Trust (supra) cited by the assessee squarely applies to the assessee s case. In the cited case, the trust had debited certain amounts to the income and expenditure account and claimed the same as application of income for the purposes of Section 11 of the Act even though the amounts were disbursed by the Trust after the accounting year. Further, the amounts debited to the income and expenditure account but which were not actually disbursed were shown as liabilities in the balance sheet. The Hon ble Andhra Pradesh High Court which upholding the decision of the Hyderabad Bench of the Tribunal held as under :- We agree with the Tribunal that it is not correct to equate the word applied with the word spent . If the legislature intended that the amounts should actually be spent, there was nothing preventing it from using that word. There cannot be any doubt that the money which was sanctioned was applied for a specific purpose as there was nothing else to be done except the actual payment. The Tribunal was right in holding that the actual payment is irrele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for Revenue and the learned Authorised Representative for the assessee and perused and carefully considered the material on record, including the judicial pronouncements cited. The facts of the issue before us is that the assessee had incurred certain preliminary expenditure in the year of setting up of the trust. The same is amortised by the assessee trust over a period of 5 years from the year of incurring of expenditure. The fact of amortization was not disputed by the Assessing Officer in the assessment proceedings for Assessment Year 2007-08 where the entire amount was added back claiming 1/5 th of the expenditure. The un-amortised expenditure has been brought forward and set off as application of income in subsequent years, including the to assessment years, 2008-09 and 2009-10 which are under consideration. 5.3.2 We find that the issue before us is directly related to the issue decided by the Hon ble Karnataka High Court in the case of Sisters of St. Anne (supra)cited by the assessee. In the said case, the Hon ble Karnataka High Court at paras 8 to 10 thereof has held as under :- 8. .... But still the contention for the Revenue is that the depreciation allowance bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jute Mills Association (1982) 134 ITR 68 (Cal), the Calcutta High Court, while construing the expression expenditure incurred in s. 44A of the Act, observed: Depreciation claimed shall include the expenditure incurred. 10. There are only two recognised methods of accounting : (i) cash basis, (ii) mercantile basis. Under the cash basis only cash transactions are recorded. It is only cash receipts and cash payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. vs. CIT (1953) 23 ITR 230 at 230 (SC) in the following words : The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book-keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. It is not in dispute that if the mercantile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the Hon ble Apex Court in the case of CIT Vs. Woodward Governor India (P) Ltd. reported in 312 ITR 254 (2009) (SC). 6.5 We have heard the rival contentions and perused and carefully considered the material on record. The basic facts of the matter on this issue are not in dispute. In the year under consideration, the assessee had incurred expenditure towards programme fees payable to Ohio University, USA We have already held at paras 4 to 4.5.6 of this order (supra) that these payments come under the purview of application of income for charitable purpose in India. Having held so, we have no hesitation in holding that foreign exchange fluctuation expenses related to the programme fee is also a deductible expenditure as held by the Hon ble Apex Court in the case of Woodward Governor India (P) Ltd. (supra). In this view of the matter, we uphold the decision of the learned CIT (Appeals) in the impugned order on this issue and consequently dismiss Revenue s grounds at B for Assessment Year 2009-10. 7. D. Disallowance of Accumulation of Income (for A.Y. 2009-10) 7.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out by the learned CIT (Appeals), there are divergent decisions by various High Courts in the matter. While the Assessing Officer has relied on the decision of the Hon ble Kerala High Court, the assessee has relied on the decision of the Hon ble Delhi High Court. The learned CIT (Appeals) after noting the divergent views taken by different High Courts has decided the issue in favour of the assessee by observing that there is no decision of the jurisdictional High Court in the matter, the decision favourable to the assessee should be followed. 7.5.1 In the proceedings before us, the learned Authorised Representative for the assessee submitted that the Hon ble High Court of Karnataka, the jurisdictional High Court, has since decided the issue in the case of DIT (E) V Envisions in ITA No.752/2009 dt.13.3.2015 (reported in 58 taxmann.com 184) (Kar) is squarely on the subject. In the said decision, the Hon ble Court at para 10 of its order has held as under :- 10. In the present case, we find tht the revenue does not dispute the fact that all the three purposes specified by the assessee in Form 10 are for achieving the objects of the trust, and that the purposes as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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