2014 (7) TMI 626 - AT - Income Tax

Tribunal upholds depreciation allowance despite exemption under Income Tax Act

The Tribunal upheld the order of the CIT(A) allowing depreciation on assets despite exemption under section 11 of the Income Tax Act. It determined that ... Allowability of depreciation as capital expenses - Entire cost of capital expenditure already allowed as deduction u/s 11 of the Act – Revenue was of the view that double deduction is not allowable and exemption is allowed to the assessee in respect of investment in capital assets u/s 11 by holding that the same is application of income for charitable purposes, allowing depreciation on those assets amounts to double deduction - Held that:- The stand of the Revenue is not correct because allowing exemption u/s 11 is not equal to allowing deduction - Allowing exemption means that the income is not liable to tax but the income remains the same and it does not get reduced, although such income is not taxable because of the operation of section 11(1) of the Act - exemption is allowed at the time of acquisition of assets and depreciation is allowed at the time of user of assets, it does not amount to double deduction – Relying upon CIT vs. Society of Sisters of St. Anne [1983 (8) TMI 44 - KARNATAKA High Court] - income of the assessee trust has to be computed on commercial principle after allowing all deductions including depreciation – thus, there is no reason to interfere in the order of the CIT(A) – Decided against Revenue. Issues:Appeal against order allowing depreciation on assets with exemption under section 11 of the Income Tax Act, 1961.Analysis:The Revenue appealed against the order directing the Assessing Officer to allow depreciation of a specific amount to the assessee, contending that it would result in double deduction as the entire cost of the asset had been allowed as a deduction under section 11. The Revenue relied on the judgment of the Supreme Court in Escorts Ltd. v. Union of India (1993) to support their argument that no further depreciation should be allowed on the same asset after deduction of capital expenditure. The Revenue sought to vacate the order of the CIT(A) and restore the assessment order passed by the Assessing Officer.The Revenue's argument was based on the interpretation that allowing exemption under section 11 did not equate to allowing a deduction, and thus, allowing depreciation on the assets would lead to double deduction. However, the Tribunal disagreed with the Revenue's stance, explaining that exemption under section 11 does not reduce the income but renders it non-taxable. The Tribunal emphasized that since the exemption was allowed at the time of asset acquisition and depreciation at the time of asset use, it did not amount to double deduction. The Tribunal referenced various judicial pronouncements cited by the assessee's representative, supporting the computation of the trust's income on commercial principles after allowing all deductions, including depreciation. Consequently, the Tribunal declined to interfere with the CIT(A)'s order and dismissed the Revenue's appeal.In conclusion, the Tribunal upheld the order of the CIT(A) allowing depreciation on assets despite exemption under section 11, emphasizing that the exemption did not result in a reduction of income and therefore did not lead to double deduction. The Tribunal's decision was based on the distinction between exemption and deduction under the Income Tax Act, supported by relevant judicial precedents.