[2017]

83 taxmann.com 11 (Bangalore - Trib.)/[2015] 44 ITR(T) 291 (Bangalore -

Trib.)[09-10-2015]

[2017] 83 taxmann.com 11 (Bangalore - Trib.)

IN THE ITAT BANGALORE BENCH 'B'
Deputy Director of Income-tax (Exemptions), Circle 17(2), Bangalore
v.
Ohio University Christ College*
GEORGE GEORGE K, JUDICIAL MEMBER
AND JASON P. BOAZ, ACCOUNTANT MEMBER
IT APPEAL NOS. 1075 AND 1076 (BANG.) OF 2014
[ASSESSMENT YEARS 2008-09 AND 2009-10]
OCTOBER 9, 2015

Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of

income from property held under (Application of income) - Assessment year 2008-09 -
Trust can bring forward and set off preliminary expenses as application of income in
subsequent year[In favour of assessee]
The assessee had incurred certain preliminary expenditure in the year of setting up of the trust.
The same was amortized by the assessee-trust over a period of 5 years from the year of
incurring of expenditure. The unamortized expenditure had been brought forward and set off as
application of income in subsequent years. The Assessing Officer however disallowed said
preliminary expenses.
Held that the Commissioner (Appeals), was justified, in cancelling the disallowance made by the
Assessing Officer and in allowing the amortization of expenses.
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of
income from property held under (Application of income) - Assessment years 2008-09
and 2009-10 - Where teaching services had been rendered by faculty members from
foreign university in India and such services were utilized for purposes of trust's
objective of imparting education in India, payment made by trust to foreign university
for faculty teaching charges was allowable [In favour of assessee]
The assessee, a public charitable trust conducted MBA programmes in India in collaboration
with Ohio University, USA. The assessee had entered into an agreement with Ohio University,
USA, whereby Ohio University sent its faculty to the assessee's premises in India for teaching
purposes, for which the assessee made payment to Ohio University for providing the faculty and
other support services. The Assessing Officer disallowed such teaching expenses.
Held that the services had been rendered by the faculty members from Ohio University as the
classes were taken in Bangalore. The services had 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 was clear that the activities of the assessee-trust were conducted in India in
accordance with its objects. Merely because the payments were made outside India, it could not
be said that the charitable activities were also conducted outside the country. Thus the
Commissioner (Appeals) was right in deleting the addition/disallowance made in respect of
faculty teaching charges.
Section 11 of the Income-tax Act, 1961 - Charitable or religious trust - Exemption of
income from property held under (Accumulation of funds) - Assessment year 2009-10 -
Assessee's claim for accumulation of income could not be disallowed on ground that
purposes mentioned in Form 10 were not specific [In favour of assessee]
In view of decision in the case of DIT (Exemptions) v. Envisions [2015] 378 ITR 483 /232
Taxman 164/58 taxmann.com 184 (Kar.), the assessee's claim for accumulation of income could
not be disallowed on the ground that the purposes mentioned in Form 10 were not specific.
CASES REFERRED TO

Nachimuthu Industrial Association v. CIT [1999] 235 ITR 190 (SC) (para 4.1), CIT v. Trustees of
HEH The Nizam's Charitable Trust [1981] 131 ITR 497/7 Taxman 178 (AP) (para 4.4.1), CIT v.
Trustees of HEH Nizam's Religious Endowment Trust [1977] 108 ITR 229 (AP) (para 4.4.1), CIT
v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.) (para 4.4.2), CIT v. Thanthi Trust [1999]
239 ITR 502 (SC) (para 4.4.2), Gem & Jewellery Export Promotion Council v. Sixth ITO [1999]
68 ITD 95 (Mum.) (para 4.4.3), National Association of Software & Services Companies
(NASSCOM) v. Dy. Director of Income-tax (Exemptions) [2010] 130 TTJ 377 (Delhi) (para 4.4.3),
CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.) (para 5.2), CIT
v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 (SC) (para 6.4) and
DIT v. Envisions [2015] 378 ITR 483 /232 Taxman 164/58 taxmann.com 184 (Kar.) (para 7.4).
Dr. P.K. Srihari, Addl. CIT (D.R.), for the Appellant. K.R. Vasudevan, Adv., for the
Respondent.
ORDER

Jason P. Boaz, Accountant Member - These appeals by the Revenue are directed against the
order of the Commissioner of Income Tax (Appeals), Mysore dt.20.09.2013 for Assessment
Years 2008-09 and 2009-10. These appeals being heard together and having certain common
issues are disposed off by way of this common order.
2. The facts of the case, briefly, are as under :—
2.1 The assessee, is a public charitable trust registered under Section 12A of the Income-tax
Act, 1961 (in short 'the Act'), established for the purpose of promoting education without any
profit motive. The assessee reportedly conducts MBA programmes in India in collaboration with
Ohio University, USA. For the Assessment Years 2008-09 & 2009-10, the assessee had filed the
returns of income declaring NIL income after application of income under Section 11 of the Act.
The returns were processed under Section 143(1) of the Act and subsequently the case was
selected for scrutiny. The assessments were concluded under Section 143(3) of the Act vide
orders dt.22.12.2010 for Assessment Year 2008-09 and dt.15.12.2011 for Assessment Year
2009-10, wherein additions/disallowances under various heads were made.
2.2 Aggrieved by the orders of assessment for Assessment Years 2008-09 and 2009-10, the
assessee preferred appeals before the CIT (Appeals), Mysore. The learned CIT (Appeals)
disposed off the appeals by way of a common order dt.20.9.2013 allowing the assessee's
appeals.
3. Revenue is aggrieved by the orders of the CIT (Appeals), Mysore for Assessment Years 2008-
09 and 2009-10 dt.20.9.2013 and has preferred these appeals, raising the following grounds :—
" A.Y. 2008-09 :
(A) Disallowance of faculty teaching charges payable to Ohio University amounting to
Rs.2,66,72,407:-

(1) The CIT (A) has erred in directing the assessing officer to allow deduction towards
faculty teaching charges payable to Ohio University, Athens, USA, on the ground that
the expendlture incurred outside India for the charitable purposes in India can be
considered as application of income in India, but without observing the fact that the
assessee has not utilized or spent any amount during the year under consideration and
 only made a book entry 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 11(1)(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.11(l)(a), the assessee is required to prove not only
that it has already incurred the expenditure and liability to pay the amount has
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 the income applied
towards the objects u/s 11(l)(a) and such application of income is with reference to
actual utilisation or expending of the Income in real sense rather than on the basis of
entries made in the books of account.
(5) The CIT (A) has erred in not following the decision of the Hon'ble Supreme Court In the
case of Nachimuttu Industrial Association v. CIT ([1999] 235 ITR 190) wherein it was
held that entries made in the books of accounts cannot be construed as payment made
out of the income of the year under consideration and, also, faded to notice the fact
that the earlier decision of the Hon'ble Supreme Court in the case of H.E.H. Nizams
Religious Endowment Trust v. CIT [1966] 59 ITR 582 (SC) was overruled in the case of
Nachimuttu Industrial Association.
(6) The CIT (A) has failed to appreciate the fact that in view of non-utilisation/non-
application of income to the extent of Rs. 2,66J2,407/-, being faculty teaching charges
payable to Ohio University, Athens, USA, in the year under consideration, it is not
relevant to discuss the second ground i.e., whether such amount is allowable as
deduction on the ground that the same has been incurred outside India or in India.
B) Set-off brought forward excess application of income/loss of earlier years :—

(1) The CIT (A) has erred in directing the assessing officer to allow set-off of excess
expenditure/application/deficit/loss pertaining to earlier asst. years against the income
of the A.Y. 2008-09 and carry forward of excess application/expenditure/deficit/loss of
the A.Y. 2008-09 to subsequent asst. years without appreciating the fact that as per the
scheme of taxation of charitable and religious trust/institution as codified u/s 11, 12
and 13, there is no provision for computing loss from property held under
trust/institution on account of excess application of income/funds of the trust.
(2) The CIT (A) has failed to appreciate the fact that the normal computation of income
under respective heads as envisaged u/s 14 r.w.S. 15 to 59 are not applicable to the
computation of income in respect of charitable and religious trust/institution for the
purpose of claiming exemption under section 11, 12 and 13 and, therefore, the
provisions relating to set-off of loss from one source against the income from another
source, set-off of loss from one head against income from another head and carry
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.11(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 with
the provisions of Sec.ll(l)(a) there is no concept of recognizing application/ utilization
over and above the income of the assessee and such application/ utilization is beyond
the purview of Section 11 and 12. In each assessment year, the assessee is required to
prove that it has applied or utilized the entire amount of income towards charitable or
religious purposes so as to avail the benefit of tax exemption on such income and,
therefore, excess application of income would not come Into picture and the same shall
be treated as Nil.
(5) The CIT (A) has failed to appreciate the fact that whenever the assessee incurs revenue
expenditure over and above the gross receipts out of the loan funds, corpus fund
donations, 15% of income accumulated in the earlier assessment years u/s 11(l)(a),
advance received, share capital or share application money received etc., then, the
taxable income of the assessee shall be considered as NIL. Further, the excess amount
of expenditure over and above the gross receipts cannot be considered as loss incurred
eligible for carry forward and set off against the income of subsequent assessment
years. Similarly, any capital expenditure incurred over and above the net surplus
eligible for application, cannot be carried forward and set off against the income of
subsequent assessment years.
(6) The CIT (A) has failed to follow the decision of the Hon'ble ITAT, Bombay in the case of
Income-tax Officer v. Trustees of Sri Sathya Sai Trust (33 ITO 320) wherein it was held
 that the deficit arising on account of application of funds/sums which are not in the
nature of income is not capable of being carried forward. Similarly, Hon'ble ITAT, Delhi,
in the case of Pushpavati Singhania Resaerch Institute for Lever, Renal and Digestive
Diseases v. Dy. DIT(E) [2009] 29 SOT 316 has held that any excess expenditure
incurred by a trust/ charitable institution in earlier years cannot be allowed to be
carried forward and set off against the income of subsequent assessment years. On the
other hand, the CIT (Al has placed reliance on the decision of Hon'ble Jurisdictional
High Court in the case of CIT v. SOCiety of the Sisters of St. Anne (146 ITR 28) which
is totally misplaced inasmuch as the issue involved in that case was relating to
allowability of depreciation as deduction while computing the income of the assessee
for the purpose of section l1(l)(a).
A.Y.2009-10:
(A) Disallowance of faculty teaching charges payable to Ohio University amounting to
Rs.2,OS,58,120/-:—
Please refer to the grounds of appeal on the same issue for the A.Y. 2008-09.
(B) Loss on account of foreign exchange fluctuation of Rs.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 US
dollar.
(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 Rs.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 31.03.2009 and the same has been accounted in the books as expenditure by
following the accounting principles. In reality, the assessee had not incurred any loss
on account of exchange fluctuation. It is only a notional loss computed on the basis of
restatement of the accounts at the end of the financial year.
(3) The CIT (A) has failed to observe that as per the taxation of charitable and religious
trust or institution as codified u/s 11, 12 and 13, any notional expenditure incurred
including exchange fluctuation loss cannot be allowed as expenditure or application of
income. Further, any expenditure or application of income shall be allowed by following
real income method of accounting and accordingly, there should be real application/
expenditure by way of actual payment to the parties concerned.

(C) Disallowance of preliminary expenses of Rs.l,08,292/-:

Please refer to the grounds of appeal for the A.Y. 2008-09 on the issue of set- off of brought
forward excess application of income/loss of earlier years which are applicable to the issue
under reference.
(D) Disallowance of accumulation of income u/s 11(2) of Rs.26,72,071:—

(1) The CIT(A) has erred in holding that the purchase of fixed assets & equipments,
besides, fulfillment of objects of the trust can be construed as specific purposes as
envisaged u/s 11(2) without appreciating the fact that the assessee had failed to
declare specific purposes for which the income is being accumulated u/s 11(2) except
stating that 'purchase of fixed assets and equipments and used as per the objectives of
the trust' and such general purposes cannot be construed as specific purposes as
envisaged u/s 11(2).
 (1) The CIT (A) has failed to appreciate the fact that the assessee has not identified the
specific amount with purpose meant for accumulation u/s 11(2) giving the particulars
of mode of investment/deposit of the same such as, amount of Income invested in fixed
deposits with FD No., name and address of the bank & branch etc., and amount of
income invested in other modes, such as; mutual funds, shares, bonds etc. and,
therefore, the assessee has violated the conditions stipulated u/s 11(2) r.w.s. 11(5).
(2) The CIT (A) has erred in not observing the statutory requirement that declaration of
assessee's intention to accumulate/ set-apart certain amount of Income which could not
be applied in the 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).

(3) 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)
v. Trustees of Singhania Charitable Trust (199 ITR 819) and Hon'ble High Court of
Madras in the case of CIT v. 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 Officer observed that the assessee
had claimed application of income under Section 11 of the Act which included the faculty
teaching charges to Ohio University towards academic expenses. The Assessing Officer
disallowed the assessee's claim for the following reasons :—

(i) Merely making an entry in the books of accounts cannot be considered as application
of income for charitable purposes as contemplated in section 11 of the Act. The word
'applied' in section 11 of the Act implied 'spending or utilization of income.' This
principle has been affirmed by the Hon'ble Apex Court in Nachimuthu Industrial
Association v. CIT [1999] 235 ITR 190.
(ii) The assessee has to apply the income for charitable purposes only in India. If the
income of the Trust is applied outside India, the income is exigible to tax. After
31.3.1952, the income applied outside India by Trusts is exempt only under a general
or special order of CBDT;
(iii) The assessee did not prove that the payments made to Ohio University resulted in
charitable purposes in India.
4.2 On appeal by the assessee, the learned CIT (Appeals) upheld the assessee's claim and
deleted the disallowances made by the Assessing Officer by relying on the decision rendered by
the CIT (Appeals) in the assessee's own case for Assessment Year 2007-08. The learned CIT
(Appeals), while allowing the assessee's claim, observed that the application should be for
charitable purposes in India and if the payment is made outside the country in furtherance of
charitable purpose in India, it can be counted as application for charitable purposes in India.
The learned CIT (Appeals) also noted that the Permanent Establishment (PE?) of Ohio
University in India has offered these payments as income in India and has paid taxes thereon in
India.
4.3 The learned Departmental Representative assailed the impugned orders of the learned CIT
(Appeals) on this issue and supported the order of the Assessing Officer. It was submitted that
the assessee has only made entries in the books of accounts in the relevant periods and had not
utilized or spent the amount during the year and the actual payment of the same had happened
in the subsequent year only and as such there was no application of income during the relevant
year under consideration. It was submitted that the phrase "such income is applied to such
purposes in India" appearing 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 (supra).
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 v.
Trustees of HEH The Nizam's Charitable Trust [1981] 131 ITR 497/7 Taxman 178 (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 (AP) is distinguishable on facts and is not applicable to the assessee.
4.4.2 The learned Authorised Representative also submitted that the Assessing Officer had
misdirected himself in holding that the amounts have to be actually spent in the year under
consideration, to be considered for application of income. It was submitted that even if the
payment is ear-marked and allocated for charitable purpose, it should be taken to be applied for
charitable purpose. In support of the assessee's contention, the learned Authorised
Representative for the assessee placed reliance on the decisions in the case of CIT v.
Radhaswami Satsang Sabha [1954] 25 ITR 472 (All.) and CIT v. Thanthi Trust [1999] 239 ITR
502 (SC).
4.4.3 The learned Authorised Representative further submitted that merely because the
payment was made outside India, this does not mean that the charitabale purpose was outside
India. It was submitted that the charitable activities were rendered in India and just because
the payment was made to parties outside India, it does not change the fact that the charitable
activities were carried out in India. In support of this contention, the learned Authorised
Representative placed reliance on the decision of the various Tribunals in the cases of Gem &
Jewellery Export Promotion Council v. Sixth ITO [1999] 69 ITD 95 (Mum) and National
Association of Software & Services Companies ('NASSCOM') v. Dy. DIT (Exemptions), [2010]
130 TTJ 377 (Delhi).
4.5.1 We have heard the rival contentions and perused and carefully considered the material on
record; including the judicial pronouncements relied upon by both parties. The basic facts, not
in dispute, are that the assessee has entered into an agreement with Ohio University, USA,
whereby Ohio University sends its faculty to the assessee's premises in India for teaching
purposes, for which the assessee makes payment to Ohio University for providing the faculty
and other support services. In terms of the agreement, the assessee is required to pay a sum of
USD 9,000 per student for the 18 month duration of the course (i.e. USD 3,000 per student for
6 months period.) At the end of the year, as the payments had not yet been made, the assessee
had accrued the amount in its books of account and the actual remittance was made in the
subsequent year. The assessee had deducted tax at source on the amounts so credited towards
faculty teaching charges on the basis of income accruing/arising to Ohio University in India by
virtue of a PE in India. Further Ohio 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 & Jewellery Export Promotion Council (supra), the Mumbai Bench of the
Tribunal at para 33 thereof held as under :—
"33. A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement
under s. 11 is for application of income for purposes in India and it does not restrict 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. We have considered the rival submissions. 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 should be for the purpose of charitable and
religious purpose in India. Undisputedly, the assessee is registered under s. 12A as a
charitable institution. It is also not disputed that the activities of the assessee are
charitable. It is also not the case of the Revenue that the expenditure incurred by the
assessee in Hanover, Germany has not resulted in the benefit being derived in India. In
these circumstances, it cannot be said that the expenditure incurred by the assessee in
Hanover, Germany, which resulted in and which was for the purpose of attaining the
charitable object in India, is not application of income. This view is also supported by the
 decision of a Co-ordinate Bench of this Tribunal in the case of Gem & Jewellery Export
Promotion Council (supra), wherein, it has been held as follows :
"A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under
s. 11 is for application of income for purposes in India and it does not restrict 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 (supra), 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
should be for the purpose of charitable and religious purpose in India. Undisputedly, the
assessee is registered under s. 12A as a charitable institution. It is also not disputed that
the activities of the assessee are charitable. It is also not the case of the Revenue that the
expenditure incurred by the assessee in Hanover, Germany has not resulted in the benefit
being derived in India. In these circumstances, it cannot be said that the expenditure
incurred by the assessee in Hanover, Germany, which resulted in and which was for the
purpose of attaining the charitable object in India, is not application of income. This view is
also supported by the decision of a Co-ordinate Bench of this Tribunal in the case of Gem &
Jewellery Export Promotion Council (supra), wherein, it has been held as follows :
 "A bare reading of the sub-s. 11(1)(a) does not leave us in doubt that the requirement under
s. 11 is for application of income for purposes in India and it does not restrict 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)."
4.5.4 We also do not concur with the Assessing Officer's view that a specific exemption is
required from CBDT for making claim 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.
4.5.5 We are 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. 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 irrelevant for purposes of finding out whether there has been an application of
the funds….'
4.5.6 We also find in the cases of Radhaswami Satsang Sabha (supra) and Thanthi Trust
(supra), it has been held that 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.
In view of the facts and circumstances and the legal matrix of the case on hand, as discussed
above, we uphold the decision of the learned CIT (Appeals) in deleting the
addition/disallowance made in respect of faculty teaching charges. Consequently, the grounds
raised by Revenue at A (1 to 5) for both A.Ys 2008-09 and 2009-10 are dismissed.
5. B & C : Set off of brought forward excess application of income/loss of income/loss of earlier
years ( B for A.Y. 2008-09 and C for A.Y. 2009-10).
5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee
had claimed application of income on account of expenditure of earlier years, which has been
brought forward and set off in the year under consideration. The Assessing Officer disallowed
the same on the ground that there is no express provision in the Act permitting the adjustment
of earlier years brought forward expenses as application of income in the current year.
According to the Assessing Officer, the application of income for charitable purposes must be
during the relevant previous year. Since the income of the trust is exempt from tax, the
question of deficit does not arise and also the trust is required to utilize 85% of the income of
the previous year for charitable purposes during the year. In this view of the matter and for the
above reasons, the Assessing Officer disallowed the assessee's claim of expenditure of earlier
years being brought forward and set off during the year.
5.2 On appeal, the learned CIT (Appeals) allowed the amortization of the expenditure as
claimed by the assessee and deleted the disallowance made by the Assessing Officer by placing
reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of the
Sisters of St. Anne [1984] 146 ITR 28/16 Taxman 400 (1984) and CBDT Circular No.5-P(LXX)-6
of 1968.
5.3.1 We have heard the rival contentions of both the learned Departmental Representative 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 1/5th 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 being a
notional income (expenditure ?) cannot be allowed to be debited to the expenditure account
of the trust. This contention appears to proceed on the assumption that the expenditure
should necessarily involve actual delivery of or parting with the money. It seems to us that it
need not necessarily be so. The expenditure should be understood as necessary outgoings.
The depreciation is nothing but decrease in value of property through wear, deterioration or
obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. In
Spicer & Pegler's Book-Keeping and Accounts, 17th Edn., pp. 44, 45 & 46, it has been noted
as follows:
"Depreciation is the exhaustion of the effective life of a fixed asset owing to 'use' or
obsolescence. It may be computed as that part of the cost of the asset which will not be
recovered when the asset is finally put out of use. The object of providing for depreciation is
to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the
amount of the provision, made in respect of an accounting period is intended to represent
the proportion of such expenditure, which has expired during that period."
"At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has
expired and the asset will have to be replaced or a substitute found. Provision for
depreciation is the setting aside, out of the Revenue of an accounting period, the estimated
amount by which the capital invested in the asset has expired during that period. It is the
provision made for the loss or expense incurred through using the asset for earning profits,
and should, therefore, be charged against those profits as they are earned."
"If depreciation is not provided for, the books will not contain a record of revenue or capital.
If the asset were hired instead of purchased, the hiring fee would be charged against the
profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and
the true profit cannot be ascertained until a suitable charge for the use of the asset has
been made. Moreover, unless provision is made for depreciation, the balance sheet will not
present a true and the fair view of the state of affairs; assets should be shown at a figure
which represents that part of their value on acquisition, which has not yet expired."
9. In CIT v. Indian 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. v. 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 system is followed, the depreciation allowance in
respect of the trust property should be allowed.'
5.3.3 Further, the CBDT Circular No.5-P (LXX) - 6 of 1968 cited by the assessee makes it clear
that income should be understood in its commercial sense; in the case of trusts also and
therefore the commercial principle enunciated by the Hon'ble Karnataka High Court in the
above referred case of Sisters of St. Anne (supra) applies to trusts as well. In view of the factual
and legal matrix of this issue in the case on hand as discussed above, we concur with the
decision of the learned CIT (Appeals) in cancelling the disallowance made by the Assessing
Officer and in allowing the amortization of expenses. Consequently, Ground No. B (1 to 6) of the
Revenue's appeal for Assessment Year 2008-09 and Ground No.C for Assessment Year 2009-10
are dismissed.
6. B. Loss on account of foreign exchange fluctuation - A.Y. 2009-10.
6.1 This issue is related only to Revenue's appeal for Assessment Year 2009-10. In the course of
assessment proceedings, the Assessing Officer observed that the assessee had claimed
application of income on account of foreign exchange fluctuation of an amount of Rs.70,58,026.
The Assessing Officer was of the view that when the application of programme fee itself was
denied exemption under Section 11 of the Act, the exchange fluctuation expenditure cannot be
allowed and disallowed the assessee's claim.
6.2 On appeal, the learned CIT (Appeals) held that since programme fee payments by the
assessee to Ohio University, USA has been allowed as application of income, the connected
exchange fluctuations are also to be allowed and consequently deleted the disallowance made
by the Assessing Officer.
6.3 Before us, the learned Departmental Representative was heard in respect of the Grounds
raised, assailed the impugned order of the learned CIT (Appeals). The learned Departmental
Representative supported the order of the Assessing Officer on this issue.
6.4 Per contra, the learned Authorised Representative for the assessee supported the impugned
order of the learned CIT (Appeals). It was contended that the trust income has to be understood
in its commercial sense and foreign exchange loss has to be allowed for computation of trust
income. In support of the assessee's contentions, the learned Authorised Representative placed
reliance on the decision of the Hon'ble Apex Court in the case of CIT v. Woodward Governor
India (P) Ltd. [2009] 312 ITR 254/179 Taxman 326 (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
has shown accumulation of income under Section 11(2) of the Act. According to the Assessing
Officer, the purpose of accumulation of income as declared in Form No.10 is not specific since
the assessee has only stated that these were for fulfillment of the objectives of the Trust. The
Assessing Officer disallowed the said accumulation on the ground that the assessee did not
mention the specific purpose of the accumulation.
7.2 On appeal, the learned CIT (Appeals) deleted/cancelled the disallowance made by the
Assessing Officer in respect of accumulation of income and allowed the assessee's claim. While
doing so, the learned CIT (Appeals) observed that there are conflicting decisions in this regard
and therefore the view in favour of the assessee is held to be applicable.
7.3 The learned Departmental Representative was heard in support of the grounds raised and
while assailing the impugned order of the learned CIT (Appeals), placed reliance on finding in
the order of the Assessing Officer on this issue.
7.4 Per contra, the learned Authorised Representative for the assessee submitted that the
assessee had disclosed the purpose of accumulation of income in Form No.10, as purchase of
fixed assets and fulfillment of the objects of the trust. It was also submitted that the Hon'ble
High Court of Karnataka in the case of DIT v. Envisions [2015] 58 taxmann.com 184/378 ITR
483/232 Taxman 164 (Kar.) has held that as long as the objects of the trust are charitable in
character and purposes mentioned in Form No.10 are for achieving the objects of the Trust,
merely because the details about plan of such expenditure has not been given, the same would
not be sufficient to deny the assessee benefit under Section 11(2) of the Act. It was submitted
by the learned Authorised Representative that the cited decision of the Hon'ble Karnataka High
Court (supra) is squarely applicable to the assessee in the case on hand.
7.5.1 We have heard the rival contentions and perused and carefully considered the material on
record, including the judicial pronouncements cited. The purposes mentioned by the assessee
trust in Form No.10 were 'for use in purchase of fixed assets' and for use in other purposes, 'for
fulfillment of the objects of the trust.' The Assessing Officer disallowed the assessee's claim for
accumulation of income on the grounds that the purposes mentioned in Form No.10 was not
specific. As pointed 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.
7.5.2 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 Envisions (supra) 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 objects, are both charitable. Merely because more than one
purpose has been specified and details about the plan of such expenditure has not been
given, the same would not, in our view, be sufficient to deny the benefit under Section 11(2)
of the Act to the assessee. 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."
Respectfully following the aforesaid decision of the Hon'ble High Court of Karnataka in the case
of Envisions (supra), we decide the issue in favour of the assessee. Consequently, Ground D of
the Revenue's appeal for Assessment Year 2009-10 is dismissed.
8. In the result, Revenue's appeals for both Assessment Years 2008-09 and 2009-10 are
dismissed.
¦¦
*In favour of assessee.