2014 (11) TMI 733 - HC - Income Tax

Charitable Institution Denied Depreciation on Capital Assets Under Section 11(6) Pre-Amendment Rules

Director of Income Tax (Exemption) Versus M/s. Indraprastha Cancer Society, M/s. Sanskriti Educational Society, M/s. Abul Kalam Azad Islamic Awakening

The HC upheld the Tribunal's decision denying depreciation to a charitable institution that had treated the purchase cost of capital assets as application ... Entitlement for depreciation - Whether a charitable institution, which has purchased capital assets and treated the amount spent on purchase of the capital asset as application of income, is entitled to claim depreciation on the same capital asset utilised for business – Revenue was of the view that this would amount to double deduction – Held that:- The issue has been examined in depth and detail twice and thus there is no error in the orders passed by the Tribunal - in Director of Income Tax (Exemption) Versus Charanjiv Charitable Trust [2014 (3) TMI 760 - DELHI HIGH COURT] the Tribunal has overlooked that the cost of the assets has already been allowed as a deduction as application of income, as held by the CIT(A) as well as the AO - allowing depreciation in respect of assets, the cost of which was earlier allowed as deduction as application of income of the trust, would actually amount to double deduction - the cost of asset had been allowed as a “deduction” and thereafter depreciation was being claimed - where any income is required to be applied, accumulated or set apart for application, then for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of an asset, the acquisition of which has been claimed as application of income under this Section in the same or any other previous year - The legal position would undergo a change in terms of Section 11(6), which has been inserted and applicable with effect from 1st April, 2015 and not to the assessment years in question - The newly enacted sub-section relates to application of income – Decided against revenue. ISSUES: Whether a charitable institution that has purchased capital assets and treated the expenditure as application of income under Section 11(1)(a) of the Income Tax Act, 1961, is entitled to claim depreciation on the same capital asset for computing business income.Whether allowing depreciation in such circumstances amounts to double deduction.Whether the income of a charitable institution should be computed on commercial accounting principles, including allowance for depreciation.The legal effect of the Finance (No. 2) Act, 2014, inserting sub-section (6) to Section 11, on the claim of depreciation where the cost of the asset has been claimed as application of income. RULINGS / HOLDINGS: On the entitlement to claim depreciation by charitable institutions on capital assets acquired by application of income, the Court held that the income of the assessee should be computed on commercial principles and 'depreciation on fixed assets utilised for the charitable purposes should be allowed.'The Court distinguished the Supreme Court decision in Escorts Limited v. Union of India, noting that it concerned a different statutory provision (Section 35(2B)(c)) and did not apply to charitable trusts; thus, 'double deduction in regard to the same business outgoing is not intended unless clearly expressed' does not preclude depreciation claims in the charitable trust context.The Court recognized that if the cost of the capital asset is allowed as application of income under Section 11(1)(a), then depreciation on the same asset should not be allowed as it would amount to double deduction, as clarified by the CBDT circular dated 2nd February 2012.The Court observed that the Finance (No. 2) Act, 2014, inserted Section 11(6) to explicitly prohibit deduction by way of depreciation or otherwise where the cost of the asset has been claimed as application of income, but this provision applies prospectively from 1st April 2015 and not to the assessment years in question.The Court dismissed appeals filed by the Revenue, holding that prior to the insertion of Section 11(6), the legal position was that depreciation could be allowed in computing income of charitable institutions, provided the cost of the asset was not simultaneously claimed as application of income. RATIONALE: The Court applied the legal framework under Sections 11 to 13 of the Income Tax Act, 1961, which govern income computation and exemption for charitable institutions, and relevant accounting principles.It relied on precedent from this Court in Director of Income Tax v. Vishwa Jagriti Mission, which held that income of charitable trusts should be computed on commercial accounting principles, including allowance for depreciation, to preserve the corpus of the trust.The Court distinguished the Supreme Court's ruling in Escorts Limited, emphasizing that it dealt with capital expenditure under Section 35(1) and not charitable trusts or Section 11(1)(a), and thus the prohibition on double deduction there does not apply here.The Court referred to CBDT Circular No. 5-P (LXX-6) dated 19 July 1968 and the CBDT clarification dated 2 February 2012, which interpret 'income' in a commercial sense and require adding back notional deductions like depreciation when the cost of the asset has been claimed as application of income, to avoid revenue leakage and generation of unaccounted income.The Court noted that the Finance (No. 2) Act, 2014, inserted sub-section (6) to Section 11 to clarify and change the legal position prospectively, reflecting a legislative response to the controversy.The Court rejected the Revenue's contention for condonation of delay in certain appeals on the ground that the merits did not favor the Revenue's position.