M. DURAISWAMY, J.
1. Challenging the order passed in I.T.A.No.2271/Mds/2014 in respect of the Assessment Year 2009-2010 on the file of the Income Tax Appellate Tribunal, "A" Bench, Chennai, the assessee has filed the above appeal.
2. The brief case of the assessee is as follows:-
(i) According to the appellant, it is a society carrying on charitable activities in the nature of education, medical relief and relief to the poor. It runs Orphanages, Schools, Colleges, Industrial Training Centre and AHI Academy for Women. The society was registered under section 12AA of the Income Tax Act, 1961 vide order of the Commissioner of Income Tax dated 02.07.1975. For the Assessment Year 2008-2009, the appellant filed a return of income on 30.09.2009. In the said return, the appellant had claimed set off of excess application of income of the previous Assessment Year 2008-2009 to the tune of Rs.1,00,70,474/-. The same was processed under section 143(1) on 06.02.2011. The return of income was taken up for scrutiny and statutory notices were issued. In response to the same, the appellant furnished the details as called for in the notice.
(ii) The Assessing Officer, by order dated 14.12.2011, under section 143(3), disallowed the deduction under sections 23 and 24 of the Income Tax Act; restricted the excess application of income of previous Assessment Year 2008-2009 to Rs.23,96,355/- as against Rs.1,00,70,474/- claimed by the assessee on the ground that excess applications should be computed with reference to the gross receipts and not with reference to the minimum application of 85%; and disallowed the claim of depreciation on fixed assets to the extent of Rs.13,71,516/- as the cost of capital assets were already claimed as application of income. The taxable income was computed as Rs.13,03,861/-.
(iii) Aggrieved over the Assessment Order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who by order dated 18.07.2014, while upholding the order of assessment, disallowed depreciation, enhancing the assessment by directing the Assessing Officer to completely disallow the set off of excess application of income for the Assessment Year 2008-2009. While arriving at the said conclusion, the Commissioner of Income Tax (Appeals) held that there was no concept of carry forward provided in Chapter III of the.
(iv) According to the appellant, the Commissioner of Income Tax (Appeals) failed to follow the ratio laid down by the Hon'ble Division Bench of this Court reported in (2000) 242 ITR 20 [Commissioner of Income Tax v. Matriseva Trust]. Further, the appellant submitted that the observations made by the Commissioner of Income Tax (Appeals) about the decisions of the Hon'ble High Court's are in absolute contempt of the High Court and disregard of judicial hierarchy.
(v) Aggrieved over the order passed by the Commissioner of Income Tax (Appeals), the assessee preferred an appeal before the Income Tax Appellate Tribunal and the Tribunal also dismissed the appeal.
(vi) Aggrieved over the order passed by the Income Tax Appellate Tribunal, the assessee has filed the above appeal.
3. The appeal was admitted on the following substantial questions of law:
“ (i) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in disallowing depreciation claimed, on the wrong premise that the cost of the assets were already claimed as application of income
(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the Commissioner of Income Tax (Appeals) was right in not allowing set off to excess application of income of previous Assessment Years
(iii) Whether the Income Tax Appellate Tribunal was justified in passing an order in total non-consideration of the binding decisions of this Hon'ble Court on the issues under consideration and further endorsing the objectionable remarks of the Commissioner (Appeals) regarding the judgments of this Hon'ble Court"
4. Heard Mr. G. Baskar, learned counsel appearing for the appellant and Mr. J.Narayanasamy, learned Senior Standing Counsel appearing for the respondent.
5. So far as the 1st question of law is concerned, the learned counsel on either side submitted that the same was decided against the revenue and in favour of the assessee in the Judgment dated 13.12.2017 made in C.A.No.7186 of 2014 [Commissioner of Income Tax-III, Pune v. Rajasthan & Gujarati Charitable Foundation, Ponna] reported in (2018) 402 ITR 441 wherein the Hon'ble Supreme Court held as follows:-
" 1. These are the petitions and appeals filed by the Income Tax Department against the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the respondents-assessees. It is a matter of record that all the assessees are charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as ‘Act’). For this reason, in the previous year to the year with which we are concerned and in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable puruposes under Section 11(1)(a) of the. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of thewas that once the capital expenditure is treated as application of income for charitable purposes, the assessees had virtually enjoyed a 100 per cent write off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. Though it appears that in most of these cases, the CIT (Appeals) had affirmed the view, but theAT reversed the same and the High Courts have accepted the decision of theAT thereby dismissing the appeals of the Income Tax Department. From the judgments of the High Courts, it can be discerned that the High Courts have primarily followed the judgment of the Bombay High Court in ‘Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)’ [(2003) 131 Taxman 386 (Bombay)]. In the said judgment, the contention of the Department predicated on double benefit was turned down in the following manner:
“3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979- 80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of theprovides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department.
4. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income- tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when theO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as ‘application of income’ of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department.”
2. 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.
3. 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’.
4. 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 thevide 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.
5. 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."
6. Therefore, following the judgment reported in (2018) 402 ITR 441 [cited supra], the 1st question of law is decided in favour of the assessee and against the Revenue.
7. With regard to the 2nd and 3rd questions of law, Mr. G. Baskar, learned counsel appearing for the appellant-assessee, in support of his contentions, relied upon the following judgments:-
(i) (2017) 398 ITR 721 [Director of Income-Tax Exemption III, Chennai v. Medical Trust of the Seventh Day Adventists] wherein the Division Bench of this Court held as follows:-
" ..............28. T.C.A.No.949 of 2015 has been filed by the assessee raising the following two substantial questions of law:-
1. Whether on the facts and circumstances of the case, the Tribunal was right in disallowing the claim of depreciation on assets acquired by way of application of funds in the earlier years, contrary to judgments of several High Courts
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the excess application of the earlier year could not be set off against the income of the current year contrary to the judgment of this Honourable Court in the case of Matriseva Trust (2000) 242 ITR 20(Mad)
29. Learned senior counsel appearing for M/s.St. Thomas Orthodox Syrian Cathedral Parish Trust, the assessee, Mrs. Pushya Sitaraman would contend that the excess application of earlier years was liable to set off against the income of the current year and relied on the decision of the jurisdictional High Court in the case of Commissioner of Income Tax Vs. Matriseva Trust [(2000) 242 ITR 20]. While Sri. J.Narayanaswamy, learned counsel appearing for the Department does not seriously object to the argument advanced on merits, he would raise a technical objection to the effect that in the present case, the claim was made under a revised return. The original return of income was filed only on 31.10.2007 beyond 31.10.2006 when it was due and as such would debar the consideration of the claim made in the revised return.
37. Substantial question of law 1 is answered in favour of the assessee and question 2 is answered in favour of the assessee by way of remand. No costs."
(ii) (2018) 303 CTR 1 (SC) [Commissioner of Income Tax (Exemption) v Subros Educational Society] wherein the Hon'ble Supreme Court held as follows:-
"1. In this application filed by the Income Tax Department it is stated that Civil Appeal No. 5171 of 2016 arises out of Special Leave Petition (C)... CC No. 8982/2016 was tagged with other appeals and the batch matters were decided by this Court on 13.12.2017. However, the following question was also raised in the instant appeal which was not the subject matter of those appeals:
“(a) Whether any excess expenditure incurred by the trust/charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking Signature Not Verified Section 11 of the Income Tax Act, 1961” Digitally signed by ASHWANI KUMAR Date: 2018.04.17 15:25:43 IST Reason:
2. To this extent, Mr. K. Radhakrishnan, learned senior counsel appearing on behalf of the applicant/appellant is correct. Therefore, we have heard him on the aforesaid question of law as well but did not find any merit therein.
The miscellaneous application is dismissed."
(iii) (2000) 242 ITR 20 [Commissioner Of Income-Tax v. Matriseva Trust] wherein the Division Bench of this Court held as follows:-
"1. At the instance of the Revenue, the following questions have been referred to us for our consideration :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the donation of Rs. 31,050 made by the assessee to another institution, would tantamount to application of income for charitable purposes, thus satisfying the requirements of Section 11 and
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the deficiency of funds of this year could be set-off against the earlier year's surplus "
2. During the assessment year 1984-85, the assessee-trust had donated a sum of Rs. 31,050 to another charitable trust known as the service trust. The assessee-trust claimed exemption under Section 11 of the Act, which Was rejected by the Income-tax Officer. On appeal, the Commissioner (Appeals) had allowed the claim of the assessee. The Tribunal had confirmed the order of the Commissioner (Appeals).
3. With regard to the first question, this court in the decision reported in CIT v. Thanthi Trust [1982] 137 ITR 735 [LQ/MadHC/1981/36] , had held that the trust which has applied the money for charitable purposes was entitled to exemption without having to show how the money had been dealt with by the transferee institution. This court has answered the question referred there in favour of the assessee and against the Revenue.
4. Following the aforesaid decision of this court and for the reasons stated therein, we answer the first question referred to us in favour of the assessee and against the Revenue.
5. With regard to the second question, the Tribunal has held that the trust is entitled to set off the amount of excess application of the last year against the deficiency of Rs. 82,516 of the present assessment year.
6. When similar questions came up before the Rajasthan High Court and the Gujarat High Court in the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 and CIT v. Shri Plot Swetamber Murti Pujak Jain Mandal [19951 211 ITR 293, respectively, both the Rajasthan High Court and the Gujarat High Court have answered the questions in favour of the assessee and against the Revenue."
8. Mr. J. Narayanasamy, learned Senior Standing Counsel appearing for the respondent-revenue submitted that though there is no dispute with regard to the ratio laid down by the Hon'ble Division Bench of this Court in the Judgment reported in (2000) 242 ITR 20 [cited supra], the Tribunal has rightly held the issues against the assessee and in favour of the Revenue. Further, the learned Senior Standing Counsel submitted that the disallowance of deduction under sections 23 and 24 of the Income Tax Act was proper.
9. On a careful consideration of the materials available on record and the submissions made by the learned counsel on either side, it could be seen that the appellant is a Trust registered under section 12AA which runs an orphanage and other educational institutions. The appellant, in the earlier assessment, i.e. 2008-2009, had made excess application of income towards its objects. The appellant calculated the excess application by deducting the 85% of its income from the total application of its income towards its objects. The Income Tax Officer determined the excess application by deducting 100% of its income from the total application of income towards its objects. The Income Tax Officer allowed carry forward and set off of such excess application of income of assessment and disallowed the set off of excess application pertaining to the Assessment Year 2008-2009 and thereby enhanced the income of assessment for the Assessment Year 2009-2010. The appellant computed the rental income as per sections 22 to 27 of the. On such computed income, application for charitable purposes was determined. The Income Tax Officer took into consideration the gross rental receipt and did not consider the claim of depreciation.
10.1 As per the Income Tax Act, "income" means "net income", which is taxable. Income from property should be computed as per sections 22 to 27 of the and the income from business have to be computed under sections 28 and 44 of the. Such computed income is exempted from tax under sections 11 and 13, if 85% of the same is spent on the charitable objects. Once the income is computed and determined 85% of such computed income should be utilized for charitable objects.
10.2. Section 11(1)(a) of theprovides that "income derived from property held under Trust wholly for charitable or religious purpose" shall not be included in the total income to the extent such income is applied for charitable or religious purpose in India. The Act also provides that upto 15% of such income is accumulated or set apart, then, that shall also not be included in the total income.
10.3. Section 11(1)(d) of theprovides that income in the form of voluntary contribution made with specific direction that they shall form part of the corpus of the Trust or Institution will also not be included in the total income.
10.4 Section 2(24) of thedefines "income", which includes any "voluntary contribution received by the Trust created wholly or partly of charitable or religious purposes". Further, explanation to section 11(1)(a)(b) read with section 12(1) of theprovides that any voluntary contribution received other than with specific direction that they shall form part of the corpus of the Trust or Institution created wholly for charitable or religious purpose shall be deemed to be the "income derived from property held under Trust".
11. On a combined reading of all these provisions, it is clear that when the assessee-Trust applies 85% of its income received by way of voluntary contributions other than the voluntary contributions received with specific directions and the income derived from property held under Trust, then, such income shall not be included in the total income of the Trust. Further, the balance 15% of such income even if accumulated or set apart shall also not be included in the total income of the Trust.
12. The Tribunal, while dismissing the appeal, observed that when the Trust applies its fund from its corpus, accumulated fund, sundry creditors or from the loan obtained by the trust, then, such funds which are applied cannot be said to be funds applied from the income of the Trust. Further, the Tribunal held that there cannot be a case where the Trust can apply its income more than the income received by it for the purpose of section 11(1)(a) and (b) of the.
13. In the Judgment reported in (2000) 242 ITR 20 [cited supra], the Hon'ble Division Bench of this court, while deciding the substantial questions of law as to the set off of the deficiency of funds of this year against the earlier year surplus is concerned, categorically decided the same in favour of the assessee and against the Revenue. Though the appellant-assessee relied upon the said Judgment before the Income Tax Appellate Tribunal, the Tribunal did not consider the same. The Commissioner of Income Tax (Appeals), went beyond its jurisdiction and commented on the Judgments of the High Courts. The relevant portion of the order of the Commissioner of Income Tax (Appeals) reads as follows:-
"Perusal of the above Judgments of the Hon'ble High Courts reveals that some of the High Courts simply followed the decision of other High Court and allowed the set-off without appreciating the issues of set-off"
14. It is needless to say that the Commissioner of Income Tax (Appeals) is bound by the Judgments/Orders of the High Courts. The Commissioner of Income Tax (Appeals) was not sitting over appeal on the Judgments of the Hon'ble High Courts. If the Judgments/Orders of the High Courts are applicable to the facts and circumstances of the case pending before the Commissioner of Income Tax (Appeals), he must follow the Judgments/Orders of the Hon'ble High Courts without any deviation. The observation made by the Commissioner of Income Tax (Appeals) is unwarranted and cannot be appreciated in any manner.
15. The Tribunal and the Commissioner of Income Tax (Appeals) should have followed the ratio laid down by the Hon'ble Division Bench of this Court in the Judgment reported in (2000) 242 ITR 20 [Commissioner of Income Tax v. Matriseva Trust]. But, the Tribunal and the Commissioner of Income Tax (Appeals) did not consider the said Judgment while deciding the appeals. Hence, we are of the considered view that the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) are liable to be set aside. Accordingly the same are set aside and the matter is remitted back to the Assessing Officer to decide the matter afresh taking into consideration the ratio laid down in the Judgment of the Hon'ble Division Bench of this court reported in (2000) 242 ITR 20 [Commissioner of Income Tax v. Matriseva Trust] after giving opportunity of hearing to the appellant-assessee.
With these observations, the Tax Case Appeal is allowed. No costs. Consequently, the connected Miscellaneous Petition is closed.
