1981-VIL-16-ITAT-

Equivalent Citation: ITD 001, 539,

Income Tax Appellate Tribunal BOMBAY

Date: 23.02.1981

EIGHTH INCOME-TAX OFFICER.

Vs

TRUSTEES OF MARATHI MISSION AND VICE VERSA.

BENCH

Member(s)  : K. T. THAKORE., Y. R. MEENA.

JUDGMENT

Per Shri K.T. Thakore, Accountant Member --- The appeal which is filed by the revenue and the cross-objection which is moved by the assessee relate to the assessment year 1975-76. As both this appeal as well as the cross-objection are inter-connected, they are disposed of by this combined order for the sake of convenience. The assessee is a charitable trust. The first contention raised by the revenue in its appeal is in regard to the decision of the Commissioner (Appeals) to allow depreciation of Rs. 84,882 on the assets owned by the assessee. The assessee-trust owned jeeps, machinery, etc., the written down value of which worked out to Rs. 8,48,822. It claimed depreciation at the rate of 10 per cent on an ad hoc basis against the income earned by it. The claim of the assessee was that the income for the purpose of considering the question of deduction as required under section 11(2) of the Income-tax Act, 1961 ("the Act") should be determined on commercial principles which would take into consideration the depreciation admissible to it on the value of the assets owned by it. The ITO negatived the claim of the assessee on two grounds. He firstly held that the assessee was not carrying on any business and as the depreciation allowance was confined to only computation of income from business, the claim for deduction of depreciation was not tenable. He next pointed out that the assessee has been allowed full deduction in respect of the capital expenditure incurred on purchase of jeeps, furniture and fixtures. Therefore, the claim for depreciation was not admissible.

2. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). Relying upon various decisions of the Tribunal on identical issue, it was claimed that the assessee's claim for depreciation in computing its income must be upheld. This contention found favour with the Commissioner (Appeals) who observed that section 11 provides for exemption of income derived from property held under trust only for charitable or religious purpose to the extent to which such income is applied to such purposes in India. The income referred to in section 11 is not the same as total income as provided for in the Act. The income which is to be determined under section 11 is the commercial income. Allowance of depreciation on assets which are subject to wear and tear is a normal outgoing in the computation of commercial income. Therefore, the claim for depreciation as made by the assessee was clearly allowable. In this view of the matter, he allowed deduction of Rs. 84,882.

3. Being aggrieved, the revenue has come up in appeal before us. The learned departmental representative, reiterating the same grounds which are set out in the order of the ITO, submitted that as the capital expenditure was allowed as deduction by treating it as application of income, no further deduction on account of depreciation was admissible. He next pointed out that claim for depreciation was allowable only in computing the income from business and the trust was not carrying on any business activity. Therefore, the claim of the assessee was not tenable. Shri Dastur, the learned counsel for the assessee, on the other hand, relied upon the decision of the Tribunal in IT Appeal Nos. 2440 to 2444. (Bom.) of 1976-77, reported in Taxes and Planning, April, 1979, in support of the contention that the claim for depreciation has been allowed in computing the income of the charitable trust. He next supported the order of the Commissioner (Appeals).

4. We have carefully considered the rival submissions. The submission canvassed on behalf of the revenue is that in view of full deduction allowed to the assessee-trust in respect of capital expenditure incurred by it on acquisition of various assets, the claim for deduction of depreciation was not at all tenable. The claim for deduction of depreciation is made on the ground that the income of trust has to be determined on normal commercial principles, while the deduction in respect of capital expenditure is taken into consideration in order to see whether the income as determined is utilised or applied towards the objects of the trust. Thus, the question of determination of income on the one hand and application of the same towards the objects of the trust are two different issues and the revenue, by mixing up both the concepts, has challenged the decision of the Commissioner (Appeals). Section 11 postulates determination of income of the trust on the one hand and after having determined the said income, it also provides that such income, if it is applied towards the objects of the trust or is accumulated is not exigible to tax. The claim for depreciation, therefore, falls for consideration when the income of the trust is required to be determined. The determination of income, therefore, has not to be confused with the application of income which is altogether a different concept and would come into play after the income is determined. Again section 11 speaks of determination of income of the trust which is different from computation of total income under the provisions of the Act. Thus, the claim for depreciation which may not be allowable in computing the total income would still be an outgoing when the income of the trust has to be determined on commercial principle. So far as the allowance of claim for depreciation is concerned, the decision cited by Shri Dastur fully supports the contention of the assessee. Therefore, in our opinion, there is no infirmity in the conclusion reached by the Commissioner (Appeals) that the claim for depreciation must be allowed in computing the income of the trust. We, therefore, decline to interfere with his decision on this point.

5. The next ground raised by the revenue reads as under:

"The Commissioner (Appeals) has also erred in holding that the entire surplus of Rs. 6,82,241 would be accumulated under section 11(2) while the amount actually invested out of the current year's income was only Rs. 4,22,682, which was allowed by the ITO."

The ITO determined the surplus to be applied for the objects of the trust at Rs. 4,22,682. In this connection, it may be mentioned that the assessee made an application in Form No. 10 on 27-6-1974 with its return of income for the assessment year 1974-75 seeking accumulation of its income for the previous year relevant to the assessment year 1974-75 and subsequent years for the purpose of construction of properties, purchase of furniture, purchase of dairy cattle, etc. The ITO found that the assessee had a bank balance of Rs. 28,04,192 with a scheduled bank at the beginning of the previous year and the increase in the balance during the year was only to the tune of Rs. 4,22,682. As against the increase in the balance as aforesaid, according to the ITO, the unapplied income worked out to Rs. 6,82,241. In other words, the ITO held that the assessee was entitled to accumulation of its income to the extent of Rs. 4,22,682 and not the entire amount of Rs. 6,82,241. This decision of the ITO was challenged in appeal before the Commissioner (Appeals). It was pointed out that the ITO had determined the surplus in a summary manner by determining the said surplus by deducting the opening balance of Rs. 28,04,192 from the closing balance of Rs. 42,26,445 as deposited in the bank. This was not the correct approach because the accumulation of surplus began right from the assessment year 1974-75 and the assessee was utilising the said surplus towards various objects of the trust for which the surplus was permitted to be accumulated. In fact, the assessee had deposited the entire surplus during the year under appeal with the scheduled bank and the expenditure was incurred out of the previous balance. These contentions found favour with the Commissioner (Appeals) who held that the entire surplus according to the audited statement qualified for deduction under section 11(2).

6. Being aggrieved, the revenue has come up in appeal before us. After hearing both the parties, we do not see any infirmity in the conclusion reached by the Commissioner (Appeals). The ITO, in our opinion, has proceeded on an erroneous basis holding that the surplus as determined for the year under appeal was only utilised for the purpose of making various investments. In fact, the accumulation has started right from the assessment year 1974-75 and so long as the surplus earned during the year is found to be deposited with the scheduled bank, which fact has not been disputed on behalf of the revenue, the basis adopted by the ITO by setting off the expenditure incurred during the year against the surplus cannot be accepted. Therefore, in our opinion, the Commissioner (Appeals) was justified in coming to the conclusion, as he did, that the assessee was entitled to deduction under section 11(2) of the entire surplus as determined on the basis of the audited statement.

7. Now, we turn to the cross-objection filed by the assessee which reads as under:

"That an amount of Rs. 10,50,311 received as grant from Government and local authorities should not be considered as income. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in considering grants from Government and local authorities amounting to Rs. 10,50,311 as the income of the Marathi Mission."

The assessee-trust received a sum of Rs. 10,50,311 by way of grants-in-aid from the Government and local authorities. According to the ITO the grant-in-aid has to be treated as income by virtue of section 12 which provides that all voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes shall for the purpose or section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purpose. The contention raised by the assessee before the authorities below and before us was that the grant-in-aid had no character or attribute of income and, therefore, it was not includible in determining the income for the purpose of section 11. In support of this contention, reliance was placed on the decision in Crook's v. Seaham Harbour Dock Co. 16 TC 333 as also on the decisions in Sri Dwarkadheesh Charitable Trust v. ITO [1975] 98 ITR 557 and CIT v. Bal Utkarsh Society [1979] 119 ITR 137 (Guj.) It was further submitted that section 12 of the Act which fictionally treats voluntary contribution or donation as income would cover payments received by the trust voluntarily and the grant-in-aid could not be equated with the voluntary contributions or donations received by the trust. In order to appreciate the controversy raised before us we must first look to the relevant provisions of the Act. Section 12 reads as follows:

"Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly."

It is also necessary to consider the definition of income as set out in section 2(24)(iia) of the Act which reads as follows:

"(24) 'income' includes :

(iia) voluntary contributions received for a charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution."

According to section 12 as amended with effect from 1-4-1972, voluntary contributions received by a trust created wholly for charitable or religious purposes shall for the purpose of section 11 be deemed to be income derived from the property held under trust wholly for charitable or religious purposes. There is an exception in-built in the said section which excludes from the said deeming provisions the said contributions which are made with a specific direction that they shall form part of the corpus of the trust. Thus, voluntary contributions by fiction of law have to be treated as income of the trust. Section 2(24)(iia) provides that the expression "income" would include voluntary contributions received by the trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes other than contributions made with a specific direction that they shall form part of the corpus of the trust or the institution. It is in the light of these provisions that we have to consider whether the grant-in-aid received from Government or local authorities is hit by the provisions of section 12. Now, Shri Dastur's contention in this regard is that grant-in-aid cannot be equated with income as is understood. Therefore, when the nature of receipt has no character or attribute of income by itself, the fiction would not convert such grant-in-aid into income. He next pointed out that grant-in-aid is different from voluntary contributions inasmuch as the assessee is required to utilise the grant-in-aid towards specific purposes for which the same is granted. It is subject to full control by the Government and in case of default grant-in-aid may be required to be refunded or may be stopped altogether. In other words, Shri Dastur's argument was that if a receipt inherently lacked the character of income, the fiction would not operate at all. According to him, in Crook's case, it was held that unemployment grant could not be treated as only profits or gains liable to tax. On the other hand, the revenue's contention was that by operation of law, the grant-in-aid is stamped with the character of income---notional income---and, therefore, the authorities below were justified in treating the same as part of income.

8. We have carefully considered the rival submissions. We are inclined to hold that the grant-in-aid is to be treated as income in the hands of the assessee. The reasons in support of this conclusion are two fold. Firstly, the provisions of section 12 read with section 2(24)(iia), as set out earlier, create a fiction for a limited purpose of treating all voluntary contributions other than those received for specific purposes towards the corpus of the trust as income. Thus, the Legislature not only provided for treating such contribution as income by fiction of law but also placed such contribution under the expression "income" as set out in section 2(24)(iia). Thus, such voluntary contributions for limited purpose or section 11 assumes the character or attribute as income. The second reason is that the income for the purpose of section 11, as we have held earlier, has to be determined in accordance with the general commercial principles and this principle we have accepted in determining the outgoings for the purpose of determining the surplus available for the purpose of application. On parity of reasoning, therefore, the receipts which form part of surplus available for application must also enter the computation on the credit side in order to determine the applicability of income for the purpose of section 11(2). It is difficult to divorce grant-in-aid from income particularly when the grant-in-aid is granted with a view to meet the expenditure incurred by the institution. Now coming to the two authorities reported at Sri Dwarkadheesh Charitable Trust v. ITO and CIT v. Bal Utkarsh Society, we find on a close reading that the High Court was concerned with the provisions of section 12 as they stood prior to the amendment and, therefore, these decisions would not be of much assistance in resolving the controversy. The decision in Crook's case is founded on the general principle and would not be of much assistance to the assessee when a specific provision is made in the statute by virtue of section 12 read with section 2(24)(iia) and these provisions have to be given effect to in determining the income for the purpose of application of income towards the objects of the trust.

9. In the result, the appeal as well as the cross-objection are dismissed.

 

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