RAJASTHAN HIGH COURT

COMMISSIONER OF INCOME ... VS M/S MUDGAL EDUCATION TRUST ON 17 APRIL, 2018

Summarised Judgement (Scroll for Complete Judgement)

By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeals of the department confirming the order of CIT(A).

Counsel for the appellant has framed following questions of law:-

Whether on the facts and in the circumstances of the case and in law the Hon'ble ITAT is right in dismissing the appeal filed by the revenue on the issue of disallowance of depreciation by ignoring the facts that assessees like charitable or religious institutions are governed by almost the separate or independent provisions of Section 11, 12, 12A, 12AA & 13 and these provisions are independent code in itself in Chapter III of the Income Tax Act, 1961 and claim of depreciation u/s 32 come under chapter IV of the Act under the head 'D'.

Whether on the facts and in circumstances of the case and in laws, the Hon'ble ITAT is right in holding that both depreciation and application of income are to be considered separately to determine the correct income without appreciating that the same tantamount to double deduction which is not correct as per the relevant provisions of the I.T. Act?

Judgement:

In that view of the matter, depreciation is rightly allowed. On the question of foreign trip after taking into consideration the student exchange programme the tribunal has come to the conclusion that it is covered under the purpose of the trust object and are done for the educational institution and benefit of the students, in our considered opinion, the expenses of foreign trip are also rightly allowed."

Hence, the appeals stand dismissed.

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Complete Judgement

Rajasthan High Court

COMMISSIONER OF INCOME ... VS M/S MUDGAL EDUCATION TRUST ON 17 APRIL, 2018

HIGH COURT OF JUDICATURE FOR RAJASTHAN

BENCH AT JAIPUR

D.B. Income Tax Appeal No. 13/2018

Commissioner Of Income Tax (Exemptions), 3Rd Floor, Kailash

Heights, Lal Kothi, Tonk Road, Jaipur

----Appellant

Versus

M/s Mudgal Education Trust, F-124, Ram Nagar Extension, Swez

Farm, Sodala, Jaipur

----Respondent

Connected With D.B. Income Tax Appeal No. 38/2018 Commissioner Of Income Tax (Exemptions), 3Rd Floor, Kailash Heights, Lal Kothi, Tonk Road, Jaipur.

----Appellant Versus Gurukul Shikshan Sansthan, Sikar.

Respondent D.B. Income Tax Appeal No. 39/2018 Commissioner Of Income Tax (Exemptions), 3Rd Floor Kailash Heights, Lal Kothi, Tonk Road, Jaipur Raj

Appellant Versus Jaipur Development Authority, J.l.n. Marg, Jaipur Raj

Respondent For Appellant(s) : Mr. Sameer Jain with Mr. Daksh Pareek For Respondent(s) : Mr. Siddharth Ranka with Mr. M. Iqbal, Ms. Naina Saraf HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Order 17/04/2018 (2 of 10) [ITA-13/2018] In all these appeals common questions of law and facts are involved, hence, they are decided by this common judgment.

By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeals of the department confirming the order of CIT(A).

Counsel for the appellant has framed following questions of law:

i) Whether on the facts and in the circumstances of the case and in law the Hon'ble ITAT is right in dismissing the appeal filed by the revenue on the issue of disallowance of depreciation by ignoring the facts that assessees like charitable or religious institutions are governed by almost the separate or independent provisions of Section 11, 12, 12A, 12AA & 13 and these provisions are independent code in itself in Chapter III of the Income Tax Act, 1961 and claim of depreciation u/s 32 come under chapter IV of the Act under the head 'D' - Profit and Gains of Business or profession and depreciation is allowed when the capital assets are used for the purpose of business?

ii) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is right in dismissing appeal filed by the revenue on the issue of disallowance of depreciation by ignoring the fact that in the case of charitable or religious institutions, the assessee is not eligible for any type of depreciation as the entire expenditure for the purchase of capital assets is allowed as a deduction and the same is treated as application of income u/s 11(1) and claiming depreciation on the same capital assets tantamount to double deduction and is not as per law as these capital assets are not use for the purpose of business or profession as provide u/s 32(1)?

iii) Whether on the facts and in circumstances of the case and in laws, the Hon'ble ITAT is right in holding that both depreciation and application of income are to be considered separately to determine the correct income without appreciating that the same tantamount to double deduction which is not correct as per the relevant provisions of the I.T. Act?

iv) Whether on facts and in the circumstances of the case and in law, the Hon'ble ITAT is right in dismissing the appeal filed by the revenue on the issue of disallowance of depreciation placing reliance on their own decision without appreciating the fact that the Hon'ble Kerala High Court in the case of Lissie Medical Institutions vs. CIT (348 ITR 344) has held that depreciation cannot be allowed on assets, where cost of such assets has already been allowed as application of income in the year of acquisition/purchase of asset?

v) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is right in dismissing the appeal filed by the revenue on the issue of disalowance of depreciation placing reliance on their own decision without appreciating the fact that the Hon'ble Supreme Colurt in the case of Escorts Ltd., & Another vs. Union of India (199 ITR 43), while dealing with the issue of allowance expenditure on scientific research u/s 35(1)(iv) [corresponding to section 10(2)(xiv) of the Income Tax Act, 1922] held that any expenditure of capital nature (or incurred towards purchase of capital assets) on scientific research allowed as deduction u/s 35(1)(iv) cannot be allowed as deduction u/s 35(1)(iv) cannot be allowed once again as deduction in the form of depreciation on such capital assets?"

Counsel for the appellant has relied upon the decision of the Supreme Court in the case of Lissie Medical Institutions vs. Commissioner of Income Tax, Civil Appeal No. 5091/2013 decided on 12th December, 2017 which reads as under:-

"On perusal of the judgment of the High Court we find that though the question of law is answered in favour of the Revenue. However, at the same time, the Appellant was granted relief in the following terms.:

We find force in this contention because Assessee cannot be taken by surprise by disallowing depreciation which, was being allowed for several years and to demand tax for one year after making disallowance. We feel Assessee should be allowed to write back the depreciation for this year and even for previous year and then allow the same to be carried forward for application for subsequent years. It is for the Assessee to write back depreciation and if done the AO will modify (4 of 10) [ITA-13/2018] the assessment determining higher income and allow recomputed income with the depreciation written back by the Assessee to be carried forward for subsequent years for application for charitable purposes.

2. Since the High Court has also already given the benefit for other assessment years we do not find any reason to interfere with the order passed by the High Court. The appeal is accordingly dismissed. In view of the aforesaid, the application for intervention is not pressed as we have not gone into the merits of the case."

He further relied upon the decision of Supreme Court in CIT-

III, Pune vs. Rajasthan and Gujarati Charitable Foundation Poona and other connected matters (Civil Appeal 7186/2014) decided on 13th December, 2017 which reads as under:-

"After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High court correctly states the principles of law and there is no need to interfere with the same.

It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in 'Lissie Medical Institutions v. Commissioner of Income Tax'. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.

It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well. For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters."

He contended that the issue is required to be decided in accordance with law.

However, counsel for the respondents has relied upon the decision of this Court in case of Commissioner of Income Tax vs. (5 of 10) [ITA-13/2018] M/s Mahima Shiksha Samiti (708/2008) decided on 23 rd May, 2017, wherein it has been held as under:-

"6.1 He also relied upon the following decisions:- 3.3(i) In Queen's Education Society vs. CIT reported in (2015) 372 ITR 699 (SC), the Supreme Court held as under:-

19. It is clear, therefore, that the Uttarakhand High Court has erred by quoting a non existent passage from an applicable judgment, namely, Aditanar and quoting a portion of a property tax judgment which expressly stated that rulings arising out of the Income Tax Act would not be applicable. Quite apart from this, it also went on to further quote from a portion of the said property tax judgment which was rendered in the context of whether an educational society is supported wholly or in part by voluntary contributions, something which is completely foreign to Section 10(23C) (iiiad). The final conclusion that if a surplus is made by an educational society and ploughed back to construct its own premises would fall foul of Section 10(23C) is to ignore the language of the Section and to ignore the tests laid down in the Surat Art Silk Cloth case, Aditanar case and the American Hotel and Lodging case. It is clear that when a surplus is ploughed back for educational purposes, the educational institution exists solely for educational purposes and not for purposes of profit. In fact, in S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax MANU/SC/0107/1998 : (1998) 2 SCC 584, this Court in the context of benefit claimed Under Section 11 of the Act held:

9. In the present case, the Assessee is not claiming any benefit Under Section 11(2) as it cannot; because in respect of this assessment year, the Assessee has not complied with the conditions laid down in Section 11(2). The Assessee, however, is entitled to claim the benefit of Section 11(1)(a). In the present case, the Assessee has applied Rs. 8 lakhs for charitable purposes in India by purchasing a building which is to be utilised as a hospital. This income, therefore, is entitled to an exemption Under Section 11(1). In addition, Under Section 11(1)(a), the Assessee can accumulate 25% of its total income pertaining to the relevant assessment year and claim exemption in respect thereof. Section 11(1)(a) does not require investment of this limited accumulation in government securities. The balance income of Rs. 1,64,210.03 constitutes less than 25% of the income for Assessment Year 1970-71. Therefore, the Assessee is entitled to accumulate this income and claim exemption from income tax Under Section 11(1)(a). We set aside the judgment of the Uttarakhand High Court dated 24th September, 2007. The reasoning of the ITAT (set aside by the High Court) is more in consonance with the law laid down by this Court, and we approve its decision.

 (ii) In Chief Commissioner of Income Tax, Chandigarh vs. St. Peter's Education Society (2016) 385 ITR 66 (SC), the Supreme Court observed as under:-

We may record at this stage that there was a difference of opinion among various High Courts on the aforesaid issue. While summarizing the law, this Court approved the judgments of Punjab and Haryana High Court, Delhi and Bombay High Courts and reversed the view taken by the Uttarakhand High Court. In so far as the judgment of the Punjab and Haryana High Court is concerned, it was given in the case of Pinegrove International Charitable Trust v. Union of India MANU/PH/0146/2010 : [2010] 327 ITR 73 (P&H). The relevant para in this behalf which also states as to how such cases are to be dealt with reads as under: "25. We approve the judgments of the Punjab and Haryana, Delhi and Bombay High Courts. Since we have set aside the judgment of the Uttarakhand High Court and since the Chief Commissioner of Incometax's orders cancelling exemption which were set aside by the Punjab and Haryana High Court were passed almost solely upon the law declared by the Uttarakhand High Court, it is clear that these orders cannot stand. Consequently, the Revenue's appeals from the Punjab and Haryana High Court's judgment dated January 29, 2010, and the judgments following it are dismissed. We reiterate that the correct tests which have been culled out in the three Supreme Court judgments stated above, namely, Surat Art Silk Cloth, Aditanar and American Hotel and Lodging, would all apply to determine whether an educational institution exists solely for educational purposes and not for purposes of profit. In addition, we hasten to add that the 13th proviso to Section 10(23C) is of great importance in that assessing authorities must continuously monitor from assessment year to assessment year whether such institutions continue to apply their income and invest or deposit their funds in accordance with the law laid down. Further, it is of great importance that the activities of such institutions be looked at carefully. If they are not genuine, or are not being carried out in accordance with all or any of the conditions subject to which approval has been given, such approval and exemption must forthwith be withdrawn. All these cases are disposed of making it clear that the Revenue is at liberty to pass fresh orders if such necessity is felt after taking into consideration the various provisions of law contained in Section 10(23C)read with Section 11 of the Income-tax Act." In all those appeals which have come from the High Court of Punjab and Haryana and filed by the Department of Income-tax except one from the Gujarat High Court, the High Court has followed its aforesaid judgment in Pinegrove International Charitable Trust. Since this view stands approved, all these appeals are dismissed.

We, however, make it clear that observations made in para. 25, reproduced above, shall apply in these cases.

One appeal is from the Gujarat High Court which has also followed the view taken by the Punjab and Haryana High Court in Pinegrove International Charitable Trust, which also stands dismissed. We also make it clear that the observations made in para. 25 in Queen's Educational Society v. CIT MANU/SC/0287/2015 : [2015] 8 SCC 47 : [2015] 372 ITR 699, 729 (SC) shall be followed.

6.2 He strongly relied on decision of this Court in the case of Jhunjhunu Academy Sammittee Vs. Income Tax Officer Jhunjhunu, D.B. Income Tax Appeal No. 123/2006, decided on 8th February, 2017, this Court while considering the identical question observed as under:

"15. Before coming to the basic contentions, it is not in dispute that the appellant is as by name itself suggests that it is an academic Samiti carrying on activities of educational purpose for establishing any educational institution. There is need of infrastructure and expansion of every activity whether it is a residential accommodation or physical or competitive requirement or other requirement and also the maintenance of the institution is a mandatory for which one has to collect the funds.

16. From the record it seems that an endeavour is made that during the relevant year they have a surplus fund which is prescribed or described by the authority as a profit and compared to the expenses or the other income which has been received as 34,91,251/-. Thus, it has been stated that there is profit of 33 per cent.

17. In our view, any educational institution which is required to be run they have to have a surplus fund for educational activity to sustain the consistency in the efficiency and very purpose of collecting donation is to sustain activity of institution. Merely, because surplus fund it cannot be envisaged as profit, the institution has not crossed one crore limit and they are well within their prescribed limit. The income was received by the trust which is reflected in the books of accounts.

18. In our view, the view taken by the authority is required to be reversed and it is required to be looked into the foundation of the ratio laid down by the Supreme Court in the case of Queen's Education Society (supra) where funds which has been surplus is within a corpus fund and it has been kept as reserve fund which is not in dispute and they have not crossed the limit of one crore.

19. Taking into consideration the aforesaid, we are of the opinion that the contention raised by Mr. Jhanwar is required to accepted. 20. Therefore, the first question, we answering in favour of the assessee that it is an income entitled for exemption under Section 23C(iiiad) of the Act."

7. Thus, in view of the above, all the issues are required to be answered in favour of assessee and against the Department. "

He has further relied upon the decision of this Court in case of Commissioner of Income Tax vs. M/s Compucom Foundation and other connected matters (DBITA No. 209/2017) decided on 14th November, 2017, wherein it has been held as under:-

"4. Now the issue is squarely covered as stated by counsel for the respondent in case of Commissioner of Income Tax-II vs. Krishi Upaj Mandi Samiti (DBITA No. 32/2010) decided on 16th January, 2015 wherein it has been held as under:-

"5. The assessee is a charitable institution registered under Section 12-A of the Act of 1961 and 100% capital expenditure was availed by it against the asset concerned i.e. a building. Section 32(1) of the Act of 1961 provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. Income of a charitable trust like the present assessee derived from the depreciable heads is also liable to be computed on commercial basis, however, while doing so it is to be kept in mind that ultimately assessee is a charitable institution and its income for tax purposes is required to be determined by taking into consideration provisions of Section 11 of the Act of 1961 after extending normal depreciation and deductions from its gross income. In computing the income of a charitable institution/trust depreciation of assets owned by such institution is a necessary deduction on commercial principles, hence, the amount of depreciation has to be deducted to arrive at the income available.

6. In view of the discussions made above, we find ourselves in agreement with the view taken by Bombay High Court in Director of Income Tax v. Framjee Cawasjee Institute and in CIT vs. Institute of Banking Personnel. The substantial question framed in the instant matter, thus, is answered in the terms that the Income Tax Appellate Tribunal rightly allowed depreciation claimed by the assessee on capital assets for which capital expenditure was already given in the year under consideration."

4.1. He has relied upon another decision in case of Commissioner of Income Tax vs. Mahima Shiksha Samiti (DBITA No. 262/2017) decided on 3 rd October, 2017 wherein it has been held as under:- "17. On the other issue, whether the expenses which are granted or which has been considered by the authority, he relied upon the judgment of this court in Commissioner of Income Tax, Jaipur-II vs. Consulting Engineering Group Ltd. (2014) 365 ITR 284 wherein it has been held as under:-

17. In view of what we have discussed hereinabove, on all the three issues, the Tribunal, after appreciation of evidence, has come to the conclusion that the disallowance out of job work charges, soil testing and surveying charges and directors' remuneration is not proper and it had been rightly deleted by the CIT(A) and we do not find any infirmity or perversity in the said order of the Tribunal. It is purely a finding of fact and no question of law much less substantial question of law can be said to emerge out of the said order of the Tribunal so as to call for any interference of this Court. In our view, no substantial question of law arises out of the order passed by the Tribunal.

Consequently, the appeal, being devoid of merit, is hereby dismissed in limine. No order as to costs.

18. He contended that the view taken by the tribunal is on consideration of facts and it is not a question of law.

19. He has relied upon the judgment of this court in Murari Lal Khandelwal vs. CIT (2003) 263 ITR 642 wherein it has been held as under:-

4. Learned counsel for the assessee Mr. Jhanwar submits that the amount of salary claimed on account of payment to the sons i.e., Anoop and Alock was reasonable, as both are looking after the business and assessee has got paralytic attack in the year 1983, therefore, the payment of salary to these persons at the rate of Rs. 6,000 and Rs. 5,000 per month, respectively, was justified.

5. The facts on record reveal that both are graduates and Anoop, to whom assessee has paid Rs. 6,000 p.m. in the year under consideration was getting only Rs. 1,000 p.m. just in the preceding year. So far paralytic attack to the assessee is concerned, it happened in the year 1983. The assessee has carried on the business even after paralytic attack without the help of these two sons.

6. We also notice that in the preceding year i.e., 1991, assessee has disclosed income of Rs, 70,000. This year he has disclosed only income of Rs. 45,673. On these facts, there is no justification of paying such heavy salary to the sons of the assessee, who are employed by the assessee for the purpose of his business.

7. It is also pertinent to note that what should be the reasonable salary is basically a question of fact and Tribunal is a fact-finding final body in this regard. Finding of the Tribunal cannot be said to be perverse on these facts. No interference is called for in the order of Tribunal. In the result, we answer the question in affirmative i.e., in favour of the Revenue and against the assessee.

20. On the first issue as stated above, the same is required to be answered in favour of the assessee that u/s 11 & 13, the expenses which are transferred to the private university while holding Sec.13 definition (10 of 10) [ITA-13/2018] and explanation and substantial controlled or substantial transferred are not in their name. It may be private institution which is a creation of statue having controlled by the same trustee and will not indirectly covered u/s 13 merely because the trustees of the beneficiaries of the trust or any person controlling the trust which is part of another institution. The object is to see where even transfer for educational purpose or not that has been done. In that view of the matter, the contention that the university will be covered u/s 13, in our considered opinion merely because same trustees or the directors or the persons are there, Sec.13 except with the explanation is required to be considered and the tribunal has rightly considered that the trustees will not be covered u/s 13.

21. Regarding depreciation in view of the amendment Sec.11(6) it will be prospective and in view of jurisdictional high court judgment binding on us and we are following the same.

22. In that view of the matter, depreciation is rightly allowed. On the question of foreign trip after taking into consideration the student exchange programme the tribunal has come to the conclusion that it is covered under the purpose of the trust object and are done for the educational institution and benefit of the students, in our considered opinion, the expenses of foreign trip are also rightly allowed."

5. In view of the above, the issue is required to be answered in favour of the assessee against the department."

In our considered opinion, in view of the judgment of this Court in Mahima Shiksha Samiti (supra), no substantial question of law arises.

Hence, the appeals stand dismissed.

(INDERJEET SINGH),J (K.S.JHAVERI),J A.Sharma/6-8