Depreciation Disallowance Ruling: Section 11(6) Prospective Application

The Tribunal upheld the Revenue's view that Section 11(6) of the Income Tax Act, 1961 applies prospectively from AY 2015-16, disallowing depreciation on assets if their cost was previously claimed as an application of income. The appeal of the assessee was dismissed, affirming the disallowance of depreciation amounting to Rs. 7,95,37,619.

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Issues Involved:

1. Applicability of Section 11(6) of the Income Tax Act, 1961.
2. Retrospective vs. Prospective application of Section 11(6).
3. Allowance of depreciation on assets acquired prior to the amendment.
4. Interpretation of "application of income" and "depreciation" under Section 11.

Detailed Analysis:

1. Applicability of Section 11(6) of the Income Tax Act, 1961:

The primary issue revolves around whether the assessee trust can claim depreciation on assets acquired before the amendment brought by Finance Act No. 2/2014, effective from 01-04-2015. The assessee argued that Section 11(6) is prospective and should not affect assets acquired before the amendment. The Revenue, however, contended that depreciation cannot be claimed if the cost of acquisition was already treated as an application of income.

2. Retrospective vs. Prospective Application of Section 11(6):

The assessee cited the Supreme Court's decision in Civil Appeal No. 7186 Of 2014 - CIT -III, PUNE Vs. Rajasthan And Gujarati Charitable Foundation Poona, arguing that the amendment is prospective. The Revenue agreed that the amendment is prospective but maintained that from AY 2015-16 onwards, depreciation cannot be claimed on assets if their cost was previously claimed as an application of income.

3. Allowance of Depreciation on Assets Acquired Prior to the Amendment:

The assessee argued that there was no dispute on the allowance of depreciation up to AY 2016-17 for assets acquired before AY 2015-16. They contended that the amendment should not apply retrospectively to these assets. The Revenue countered that the intent of Section 11(6) was to prevent double benefits and ensure that income applied for charitable purposes is not claimed again as depreciation.

4. Interpretation of "Application of Income" and "Depreciation" under Section 11:

The assessee emphasized that Section 11(6) provides two mutually exclusive options: claiming the cost of acquisition as an application of income or claiming depreciation. They argued that the section should not be interpreted to disallow depreciation on assets acquired before AY 2015-16. The Revenue pointed out that the amendment aimed to rationalize the provisions to prevent double benefits and that the language of Section 11(6) clearly prohibits depreciation if the cost was previously claimed as an application of income.

Judgment:

The Tribunal concluded that the plain language of Section 11(6) is clear and unambiguous, prohibiting the allowance of depreciation on assets if their cost was previously claimed as an application of income. The Tribunal upheld the Revenue's view that the amendment is prospective and applies from AY 2015-16 onwards, but it also affects assets acquired before the amendment if their cost was claimed as an application of income. The appeal of the assessee was dismissed, affirming the order of the CIT(A) and the disallowance of depreciation amounting to Rs. 7,95,37,619.

Conclusion:

The Tribunal held that Section 11(6) of the Income Tax Act, 1961, which disallows the deduction of depreciation on assets whose cost has been claimed as an application of income, is applicable prospectively from AY 2015-16. However, it also affects assets acquired before this date if their cost was claimed as an application of income. The appeal of the assessee was dismissed, and the disallowance of depreciation was upheld.

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