Application of income: depreciation and permitted FDR investments count toward the 85% application requirement, reducing taxable income.

Depreciation on assets whose cost was earlier treated as application of income is allowable for computing applied funds; the claim of depreciation was accepted. Net additions to fixed deposit receipts invested in modes permitted by statute qualify as application of income for the previous year and were allowed. The 85 percent application computation must use receipts after adjusting expenditure, and where application meets the 85 percent requirement no statutory notice was required; the contrary finding was set aside. In consequence, the appellate enhancement of taxable income was quashed and recomputation directed resulting in nil taxable income on the facts.

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Issues: (i) Whether depreciation claimed on assets whose cost was allowed earlier as application of income is allowable; (ii) Whether investment in fixed deposit receipts (FDRs) in the modes specified under section 11(5) qualifies as application of income for deduction under section 11; (iii) Whether computation of 85% of income for application purposes should consider receipts after adjusting expenditure and affect requirement of notice under section 11(2); (iv) Whether the Assessing Officer/CIT(A) correctly enhanced the taxable income and erred in para 6.6.

Issue (i): Whether depreciation on assets, the cost of which was earlier treated as application of income, is allowable for computing application of income for the previous year.

Analysis: The Court considered jurisdictional High Court authority holding that where income is exempt, depreciation reduces the income for determining percentage of funds to be applied; double deduction is not accepted by Revenue where depreciation is required to be taken into account to compute applied funds. The Tribunal followed the High Court precedents and applied those principles to the facts.

Conclusion: Depreciation of Rs. 2,16,39,334/- is allowable; the claim of depreciation in the year is accepted (in favour of the assessee).

Issue (ii): Whether net additions to FDRs invested in modes specified by section 11(5) qualify as application of income under section 11(1).

Analysis: The provisions of section 11(5) list permitted modes of investment; the entity's memorandum of association permitted investment as per section 11(5); the assessee invested surplus in FDRs meeting section 11(5) requirements and had similar investments accepted in earlier assessment years. The Tribunal applied the statutory test in section 11(2)/11(5) and the consistency principle given earlier assessments.

Conclusion: The investment in FDRs (net additions) qualifies as application of income of the previous year and is allowed (in favour of the assessee).

Issue (iii): Whether 85% computation for application of income should be based on receipts after adjusting expenditure and whether a notice under section 11(2) was required.

Analysis: Only 85% of the income (receipts after adjusting expenditure) is to be considered for application requirement. Where application of income (including fixed assets and permitted investments) equals or exceeds receipts such that 85% requirement is met, there is no obligation to issue notice under section 11(2); statutory conditions in section 11(2) were examined and applied.

Conclusion: The computation of applied income must consider 85% of income after expenditure; no notice under section 11(2) was required in the facts, and the CIT(A)'s contrary observation is set aside (in favour of the assessee).

Issue (iv): Whether the Assessing Officer/CIT(A) correctly enhanced the assessed income and the consequential enhancement in para 6.6.

Analysis: In light of conclusions on depreciation and FDRs being application of income, the surplus computed by the authorities was incorrect; prior acceptance of investment treatment and the corrected computations lead to different taxable result.

Conclusion: The enhancement of income made by the CIT(A) is set aside; the Assessing Officer is directed to adopt income at nil (partly in favour of the assessee).

Final Conclusion: The Tribunal allowed grounds relating to allowance of depreciation, qualification of FDR investments as application of income, and correct computation under section 11/12, set aside the CIT(A) enhancement, and directed recomputation leading to nil taxable income; an alternate ground regarding adjustment of earlier excess expenditure was dismissed as not adjudicated.

Ratio Decidendi: Where a trust or society invests surplus in modes specified under section 11(5) and applies expenditure (including permitted investments and allowable depreciation) such application counts for section 11(1) purposes; depreciation on assets may be allowed for computing applied funds despite prior allowance of asset cost as application, and 85% application requirement is to be computed on receipts after adjusting expenditure.

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