2015 (11) TMI 590 - AT - Income Tax

Assessee wins appeal on depreciation, advance fees treatment, and assessment enhancement

The Tribunal allowed the appeals of the assessee, determining that depreciation on fixed assets should be allowed even if the cost was claimed as ... Disallowance of depreciation - as per AO the assessee had already claimed exemption in respect of expenditure on the fixed assets being application of income u/s 11 - Held that:- The assessee is entitled for depreciation u/s 32 of the IT Act on the assets cost of which has already been claimed as application of income. See case of Institute of Banking Personnel Selection [2003 (7) TMI 52 - BOMBAY High Court ] - Decided in favour of assessee. Treating advance fee received from the students for the future academic year as income for the accounting year under consideration - Held that:- The assessee is following mercantile system of accounting which is based on accrual. The AO has not disputed the accounting policy and method of accounting adopted by the assessee consistently. The assessee has been showing the advance fee received for the next academic session which is outside the previous year in which such advance fee is received. Similarly, the assessee is also not claiming any expenditure which has been paid by the assessee during the year but pertains to next academic session which is outside the previous year in which such expenditure is paid. Therefore, the assessee is following a uniform accounting policy based on accrual and arising of income and expenditure. There is no dispute that even in the case of trust the income has to be understood in its commercial sense and there can be no computation of such income until the expenditure which is necessary for the purpose of earning the receipt is deducted there-from. This concept of accounting is well recognised by the accounting standard. Accordingly, on merits also, we do not subscribe the view taken by the CIT(A) on this issue when the assessee is consistently following mercantile/accrual basis of accounting both for the income as well as for expenditure recorded in the books of account. - Decided in favour of assessee. Issues Involved:1. Disallowance of depreciation on school fixed assets.2. Treatment of advance fee received from students for the future academic year as income for the current accounting year.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on School Fixed Assets:The primary issue revolves around the disallowance of depreciation amounting to Rs. 74,96,186/- on school fixed assets by the Assessing Officer (AO). The AO's rationale was that the assessee, a charitable trust registered under section 12AA of the Income-tax Act, 1961, had already claimed exemption for the expenditure on fixed assets as application of income under section 11.The assessee contested this disallowance before the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the AO's decision but directed that depreciation on assets where cost/expenses had been claimed as application of income should be excluded. The assessee further appealed to the Tribunal, arguing that depreciation should be allowed even if the cost of the assets had been claimed as application of income in earlier years. The assessee relied on several judicial precedents, including the judgment of the Bombay High Court in CIT vs. Institute of Banking Personnel Selection (264 ITR 110) and the jurisdictional High Court in CIT vs. Society of Sisters of St. Anne (146 ITR 28), which supported the claim for depreciation to preserve the corpus of the trust.The Tribunal, after considering the submissions and relevant material, noted that the issue was covered in favor of the assessee by the Bombay High Court's judgment. The Tribunal also referred to its own previous decisions and those of other benches, which consistently held that depreciation is allowable even if the cost of the assets was treated as application of income. Consequently, the Tribunal held that the assessee is entitled to claim depreciation under section 32 of the Income-tax Act on the assets, the cost of which had already been claimed as application of income.2. Treatment of Advance Fee Received from Students for Future Academic Year:The second issue pertains to the treatment of advance fees amounting to Rs. 2,81,90,128/- received from students for the subsequent academic year. The CIT(A) directed the AO to treat this advance fee as income for the current assessment year, arguing that the trustees were free to use the funds for educational purposes during the year.The assessee argued that it followed an accounting policy where income is recognized only when it becomes due, and advance fees for the next academic year were shown as liabilities in the balance sheet, not as income. The assessee referred to Accounting Standard 9 issued by the Institute of Chartered Accountants of India, which supports recognizing tuition fees over the period of instruction.The Tribunal observed that the CIT(A) enhanced the assessment without issuing a show cause notice to the assessee, violating section 251(2) of the Income-tax Act, which mandates giving the assessee a reasonable opportunity to show cause against such enhancement. The Tribunal also noted that the assessee consistently followed the mercantile system of accounting, recognizing income and expenses on an accrual basis. The Tribunal emphasized that the taxing authorities cannot disturb a consistent accounting policy without valid reasons.On these grounds, the Tribunal found the CIT(A)'s order unsustainable both procedurally and on merits. The Tribunal set aside the CIT(A)'s order on this issue, concluding that the advance fees received for the next academic session should not be treated as income for the current assessment year.Conclusion:The Tribunal allowed the appeals of the assessee, concluding that:1. The assessee is entitled to claim depreciation on fixed assets, even if the cost of those assets was claimed as application of income in earlier years.2. The advance fees received for the next academic session should not be treated as income for the current assessment year, and the CIT(A)'s enhancement of the assessment without due process was not sustainable.