IN THE HIGH COURT OF KARNATAKA AT BENGALURU ON THE 7TH DAY OF JANUARY, 2019 BEFORE THE HON'BLE MR. JUSTICE RAVI MALIMATH AND THE HON'BLE MR. JUSTICE MOHAMMAD NAWAZ INCOME TAX APPEAL NO.209 OF 2010 BETWEEN:
1. THE COMMISSIONER OF INCOME-TAX, NO.55 OF 1, SHILPASHREE, VIDYARANYA COMPLEX, VISHVESHWARANAGAR, MYSURU-570 008.
2. THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE-2, NO.55 OF 1, SHILPASHREE, VIDYARANYA COMPLEX, VISHVESHWARANAGAR, MYSURU-570 008.
AND:
... APPELLANTS (BY SRI. JEEVAN J. NEERALGI, ADVOCATE) SRI. ADICHUNCHANAGIRI SHIKSHANA TRUST, ADICHUNCHANAGIRI KSHETRA, NAGAMANGALA TALUK, MANDYA DISTRICT.
... RESPONDENT (BY SRI. A. SHANKAR, SENIOR COUNSEL FOR SRI. M. LAVA, ADVOCATE) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961, PRAYING TO (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN; (2) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN INCOME TAX APPEAL NO.775/BANG/2009 DATED 29.01.2010 AND CONFIRM THE ORDER PASSED BY THE ADDITIONAL COMMISSINER OF INCOME TAX, RANGE- 2, MYSORE, INL THE INTEREST OF JUSTICE AND EQUITY.
THIS INCOME TAX APPEAL COMING ON FOR FINAL HEARING THIS DAY, RAVI MALIMATH, J., DELIVERED THE FOLLOWING:
J U D G M E N T The assessee is a charitable trust having its office at Nagamangala Taluk, Tumakuru District. It has been in existence since 1973.
2. The Trust has got registered under Section 12A of the Act on 17.07.1974. It is running various educational institutions throughout the State of Karnataka. During the financial year 2006-07, the Trust was also running a hospital by the name and style of “BGS Appolo Hospital” at Mysuru, in collaboration with M/s. Appolo Hospital Enterprises Limited (AHEL), Chennai.
3. The Assessee filed its return of income on 31.10.2006 admitting a total income of Rs.nil. The return of Income was processed under Section 143(1) by the Income Tax Officer, Mandya. The case was selected for scrutiny in accordance with the scrutiny guidelines issued by the Central Board of Direct Taxes. Notice under Section 143(2) was issued and served on the assessee on 23.08.2007. In response to the same, the Internal Auditor has appeared and represented the case and produced various documents and books of account for verification.
4. On the question of depreciation, the Trust had claimed deduction towards depreciation allowance amounting to Rs.8,41,36,636/- which includes depreciation of the building block of Rs.4,92,10,011/-. The Assessing Officer came to the conclusion that the asseessee is not entitled to claim deduction of any amount twice, while arriving at the income of the concern. Accordingly, the depreciation claimed by the assessee in respect of the buildings amounting to Rs.4,92,10,011/- which was already allowed in the earlier assessment years, was disallowed for the purpose of computing exemption under Section 11 of the Act.
5. So far as the disallowance under Section 40(a)(ia) is concerned, a survey under Section 133A was conducted in the case of M/s. BGS Medical Foundation, known as BGS Appolo Hospital, Mysuru on 16.03.2007. As a result of the survey, it came to light, that the hospital has not deducted taxes as required under the TDS provisions in respect of 40% of payments made to the doctors as envisaged under Section 194J of the Act. Therefore, an amount of Rs.65,32,000/- was disallowed by invoking Section 40(a)(ia) of the Act. On the very same reason, an amount of Rs.45,69,998/- was disallowed on account of operation management service charges.
6. Aggrieved by the same, an appeal was filed before the Commissioner of Income Tax. The appeal was dismissed. The same was challenged before the Tribunal. The Tribunal relied on the earlier judgment of the High Court of Bombay as well as the judgment of this Court in the case of COMMISSIONER OF INCOME TAX VS. SOCIETY OF THE SISTERS OF ST. ANNE reported in 146 ITR 28 and held that the depreciation is to be deducted, to arrive at an income available to charitable or religious purposes.
7. So far as Section 40(a)(ia) is concerned, the Tribunal once again relied on the judgment of St.
Anne’s case and also on the judgment of the Calcutta High Court in the case of DIRECTOR OF INCOME TAX (E) VS. GIRIDHARILAL SHEWNARAIN TANTIA TRUST reported in 199 ITR 215 and the judgment of the Madras High Court in the case of COMMISSIONER OF INCOME TAX VS. RAO BAHADUR CALAVALA CUNNAN CHETTY CHARITIES (1982) reported in 135 ITR 485 and held that, in the case of a trust, income will have to be calculated in a commercial manner and it is not to be computed under the Income Tax Act. Hence, it was and held that the Commissioner of Income Tax (A) was not justified in holding that those provisions Section 40(a)(ia) can be invoked for disallowing the expenses on which tax has not been deducted at source.
7. Questioning the findings of the Tribunal, the Revenue has filed this appeal. By the Order dated 14.06.2011, the appeal was admitted to consider the following substantial questions of law:
“i. Whether the Tribunal was correct in holding that Rs.65,32,000/- 40% of professional charges paid to doctors through bearer cheques (60% paid by A/c. payee cheques) without deducting TDS cannot be disallowed u/s. 40(a)(ia) of the Act as the provisions of Section 11 of the Act was applicable to the assessee?
ii. Whether the Tribunal was correct in holding that professional fee of Rs.45,69,998/- paid to Apollo Hospital for managing and running BGS Medical Foundation would not attract Section 194J of the Act and Section 40(a)(ia) of the Act as the provisions of Section 11 of the Act was applicable to the assessee?”
8. So far as the first substantial question of law is concerned, the learned counsel submits that the same is covered by the judgment of the Hon’ble Supreme Court reported in the case of COMMISSIONER OF INCOME TAX VS. RAJASTAN AND GUJRATI CHARITABLE FOUNDATION reported in (2018) 402 ITR 441 (SC). Therein, the Hon’ble Supreme Court considered a batch of cases on the very same question of law, which also arose in the case of very same Assessee herein. Therein, the question of law considered by the Hon’ble Supreme Court was, when the Income Tax Officer states 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 the income’ of the Trust in the year in which the income was spent in acquiring those assets. Therefore, it had been meant that in computing the income from those assets in the 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. Therefore, the first substantial question of law held in favour of the assessee and against the Revenue.
9. Hence, following the aforesaid judgments, the first substantial question of law is answered in favour of the assessee and against the Revenue.
10. So far as the second substantial question of law is concerned, the learned counsel for the Revenue contends that the Tribunal committed an error in holding that the provision under Section 40(a)(ia) can be invoked for disallowing the expenses on which tax has not been deducted at source.
11. The same is disputed by the learned counsel for the respondent.
12. Section 40(a)(ia) of the Income Tax Act reads as follows:
“Section 40 – Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, -
(a) in the case of any assessee – xxxxx (ia) [thirty percent of any sum payable to a resident], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139:] [Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub- section (1) of section 139, [thirty per cent of] such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :] [Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub- clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.] 13. The aforesaid section would be applicable to the amount chargeable under the head “Profit and gain of the business or profession”. Section 11 is with regard to the income from property held for charitable or religious purpose. Subsequently, an explanation was inserted which would come into effect from 01.04.2019 by the Finance Act, 2018 which reads as follows :
“Explanation 3 – For the purpose of determining the amount of application under clause(a) or Clause (b), the provisions of sub-clause(ia) of clause (a) of Section 40 and sub-sections (3) and (3A) of Section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”.
14. Therefore, the reading of the subsequent insertion itself would clearly indicate that the application under Clause(a) or Clause(b), the provisions of sub-clause(ia) of clause (a) of Section 40 and sub-sections (3) and (3A) of Section 40A, shall, mutatis mutandis, apply as they apply in computing the income chargeable under the head “Profits and gains of business or profession”. Therefore it clearly indicates that the same would stand applicable only from 01.04.2019. Therefore, the contention of the Revenue cannot be accepted. Hence, we hold that the Tribunal was justified in holding the said issue in favour of the Assessee and against the revenue.
15. On the same analogy, with reference to the amendment in Section 11(6) of the Act amended by Finance Act No.2 of 2014, the amendment was made and deducted from the assessment year 2015-16. In the instant case, the assessment would be with effect from 1st April 2019. Therefore, on this ground also, we do not find any material to interfere in the Order passed by the Tribunal. Consequently, the second substantial question of law is answered in favour of the Assessee and against the Revenue.
16. The appeal is disposed off accordingly.
Sd/- Sd/-
JUDGE JUDGE snc