TaxTMI 
TaxTMI 
2010 (10) TMI 667
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....ts, also produced thereat, revealed it to bear a claim in respect of depreciation at Rs. 216.28 lakhs in terms of section 32(1) of the Act. As the cost of the capital assets on which depreciation had been claimed stood already claimed and allowed as an application of income in the preceding years, the same would not be available for deduction once again by way of depreciation allowance thereon, was the view of the Assessing Officer (AO). A double deduction is not permissible under the scheme of the Act, i.e., unless there is clear statutory mandate to that effect, stands clarified in unequivocal terms by the hon'ble apex court in the case of Escorts Ltd. & Othrs. v. Union of India (1993) 199 ITR 43 (SC). In other words, the same cannot be a matter of inference, and in the absence of an express provision granting it, a double deduction in respect of the same expenditure cannot be allowed. Further, as depreciation entails no cash outgo, allowing it would amount to the assessee being required to spend less for charitable purposes to that extent. The same could thus be utilized for non-charitable purposes without it being hit by section 11 or, in any case, being....
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....he same or any other previous year. There is, as such, an express embargo on the claim of deduction u/s. 32(1)(ii) in respect of capital expenditure allowed u/s. 35(1)(iv), i.e., on a simultaneous claim under both the sections. There is no such restrictive provision in the present case for the said decision to be applicable (para 4.9). Accordingly, the entire claim of depreciation for Rs. 216.28 lakhs was allowed by him vide para 4.10 of the impugned order. Aggrieved, the Revenue is in appeal. 2.3 The assessee had also raised two additional grounds before him vide letter dated 26.6.2008. However, having allowed the assessee its entire claim for depreciation, he did not answer the said grounds (refer para 4.11 and 4.12), leading to a CO by the assessee. It's CO relates to the non-answering of some of specific grounds raised by it before the ld. CIT(A), i.e., it's Ground Nos. 4,5,6, 9A & 9B. 3. Before us, like submissions stood raised by either side. The ld. DR would submit that the allowance of depreciation is also violative of section 14A of the Act. The Revenue has further placed reliance on the decision in the case of CIT vs. Queen's E....
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....ered by the hon'ble court (refer para 4.2 of the order). Further still, as we shall presently see, there has been a material change in the law impacting the determination of book income u/s 11(1) since (refer para 4.6 of the order). The decision in the case of CIT v. Institute of Banking (supra), rendered without noticing the decision by the apex court in the case of Escorts Ltd. & Ors. v. UOI (supra) and, secondly, under the pre-amended law, cannot be considered as conclusive of the instant assessment framed under the amended law on the basis of the said decision by the apex court. Ratio of the decision by the apex court in the case of Escorts Ltd. & Ors. v. UOI (SC) 4.2 The first question that we need to address is qua the ratio of the judgment in Escorts Ltd. & Ors. vs. UOI (supra). This is as the ld. CIT(A), agreeing with the assessee, has clearly held that no such ratio of non-double deduction of the same expenditure, as stated by the AO, emanates from the said decision. We are afraid to say that it appears that he has not read the same. We say so as even as much as a bare browse of its catch notes, as reported in ITR, would show otherwise. ....
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....eduction, i.e., on the same expenditure or business outgoing, under the Act. 4.3 The second ratio of the decision is captured in and follows the following finding by it: (at pg. 46) "The deduction of the allowance on scientific research assets and that of depreciation are basically of the same nature intended to enable the assessee to write off certain items of capital expenditure against his business profits." When a capital asset is used for scientific purposes, it is ipso facto also an asset used for the purposes of the business. The deduction on account of capital expenditure per se and depreciation allowance on the capital asset/s it represents, though under different heads, is to the same effect and purpose, and thus of the same nature, i.e., to enable the write off of income to that extent. The said finding by the apex court is in fact incidental and integral to its decision qua double deduction, explaining its rationale/basis. This is as it found that the two deductions represented the same legislative intent, even though the corresponding provisions may not completely overlap and there may be some difference in the rationale of the two, as w....
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....is incurred, leading to proprietary rights in a tangible or intangible asset(s), which has an estimated useful life. Depreciation only recognises the proportionate charge in its respect over the said life. If not so charged, the income would be overstated to that extent. At the end of its life, there would be no asset with the enterprise (except its salvage value, if any, and which most accounting texts stipulate for being also taken into account while determining the charge of depreciation), and the value to that extent lost there-to. Income, by definition, is what arises or inures (over a given period) over and above an existing (net) asset base or net- worth, i.e., as obtaining at the commencement of the said period, or accretion to capital. Each of the decisions cited by the assessee (refer para 2.2 above) advert to this principle and its relevance in determining the real or accounting income, with the hon'ble court in CIT vs. Raipur Pallottine Society (supra) explaining the concept of depreciation in explicit terms. Even the depreciation rate is not notional, and has a direct relation with the useful life ....
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..... vs. UOI (supra) clarifies this aspect of the matter also.... Double deduction - An analysis 4.5 We, next, deal with the question of whether allowing depreciation on capital assets, expenditure on which stands allowed u/s. 11(1) as an application of income, amounts to a double deduction or not. This is as doubt may be expressed that though deduction u/s. 35 is in computing the taxable income, the exemption u/s. 11 is toward application of income, which would arise only after determination thereof. To begin with, we think that the question is rendered academic in view of the consideration of the matter by the apex court in the case of Escorts Ltd. vs. UOI (supra) in all its facets, as also sought to be emphasized hereinabove. However, in view of the apparent difference afore-stated; the deductions therein being u/ss. 32 and 35, as against exemption u/s. 11 in respect of application of income and deduction u/s. 32, we may examine this aspect in some detail. 4.5.1 The Revenue's sole case being based and hinging on the inadmissibility of double deduction, we may, at first, see as to how the ld. CIT(A) has dealt with this aspect of the matter. Both ....
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....rring the expenditure. In other words, the stand is inconsistent with the accounting theory, and which is what also led the apex court in Escorts Ltd. & Othr. vs. UOI (supra) to hold, even observing that though the objectives of the two deductions, u/ss. 32 & 35, may be different and not completely overlap, yet are of the same nature. The controversy, if one may use that word, arises from mixing the two bases, i.e., cash and accrual, both equally valid in themselves, particularly where these have statutory recognition, but yet could not obtain simultaneously. While depreciation is claimed and allowed on accrual basis, as depletion of capital to that extent, the corresponding expenditure is claimed on cash basis. This is precisely the dichotomy which the AO points out when he says that allowing depreciation would lead to a anomalous situation whereby while the income would be reduced by the amount of depreciation, a non-cash charge, the assessee would have resources with it which it is not obliged to apply for charitable purposes and could be utilised for non- charitable purposes without attracting liability to tax. In fact, what he states is a truism and what the assess....
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....same effect and purpose. Would it matter, one may ask, if, say, instead of allowing deduction on account of capital expenditure per se, section 35 of the Act (which allows deduction on capital expenditure on scientific research assets) were to be worded to say that deduction is allowed in computing business income of an entity to the extent applied by it toward capital expenditure or acquisition of capital assets, i.e., in the area of scientific research? The only difference is that while in the case of deduction u/s. 35, the income is to be applied in assets used for scientific research, in the case u/s. 11 the income is to same is to used for charitable or religious purposes, as the case may be, for which the trust/institution is formed. The difference as such is only in the underlying objective which the capital expenditure is incurred to achieve, i.e., scientific research in one case, and charitable or religious purpose in the other, with the Act using the tax break as the fiscal incentive to promote the same. A capital asset or capital expenditure, to the extent funded there-from, is only an application of income. Accounting principles do not permit a d....
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....rom another angle. It may be said, without merit though, that while user is an essential condition for the claim of depreciation, application of income would take place on investment in the capital asset, so that the two are attended with a difference. The poser is misconceived. Would it mean that a capital asset, allowed as an application of income at its cost, would have to be used for charitable purposes only in the year it is paid for, and could well be used for other purposes, or not used at all, in the subsequent years? That would be clearly preposterous. Why, one may ask, should it be so used even for that year, i.e., why not for one month, or one week, or even one day after being paid for, i.e., the instant the transaction is complete? The application of income is only to be for public charitable purposes, and it is only the continued user of the asset for the stated purpose(s) (for its life/till retained) that would validate the premise or assumption on which deduction/exemption stands claimed and allowed. The application of income for charitable purposes, though deemed to be complete as soon as the capital ....
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....lowed by way of application of income on incurring the capital expenditure. The subsequent user would not, therefore, become entitled to a new claim for depreciation but only validates the claim of having applied the income for public charitable purposes; the implicit condition on which the same stood allowed by the Revenue in the first instance. In sum, there is complete congruence between the rationale of the two deductions, i.e., qua application of income and depreciation. 4.5.5 In our view, there is, as such, a clear case of double deduction, and not considering it as so would be a travesty of the concept of income. The proposition for non-double deduction (of the same expenditure), as also explained by the apex court, is basic and fundamental to the Act. It would be akin to taxing the same income twice. The reason for the controversy: Section 11, amended since 4.6 Now we may advert to the relevant provision, which reads as: Income from Property Held by a Charitable or Religious Institution "11. (1) Subject to the provision of s. 60 to 63, the following income shall not be included in the total income of the pro....
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....sp;as otherwise, income, since capitalized therein, would not be able to be maintained; the actual loss arising on the exhaustion of capital (value) on account of depletion of the asset being not provided for or compensated by setting aside income to that extent. No doubt, double deduction obtains, but the same is perfectly valid. This is as the same is only on account of deeming what is essentially a capital contribution and not `income' as income, in gross violation of the accounting concept of income, and the resulting `double deduction' is only apparent and not real. The fresh contributions, i.e., for capital purposes, would again be treated as 'income'. It would be readily seen that non allowance of depreciation (on the asset acquired earlier) would result in no increase in the capital base or capacity, i.e., which is its purpose and ought to be the result, the same only going to substitute the former asset, since exhausted. Why, we see it all the time in the case of business enterprises, where the capital assets are funded by infusion of cap....
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....osited, the same would pose no problem as the income has to be considered only in terms of the Act. This is precisely the reason that the higher courts of law, as well as the tribunal, have accorded approval to the repayment of loan liability assumed for incurring capital expenditure for charitable purposes as application of income in the year of, and to the extent of, such repayment. 4.7 Incidental Issues Section 14 A: Whether applicable? We may also deal with the Revenue's contention of the claim for depreciation being debased in view of violation of section 14A. We do not consider the Revenue's claim as valid.We have already explained that depreciation is an expenditure and is chargeable against profits, while deduction claimed and already allowed is for the application of income, i.e., as determined after providing for depreciation. However, where the income to the extent of the capital expenditure stands already written off, as having been applied towards the same, no further claim on account of depreciation thereon, being only on the premise that income is to be reckoned after providing for proportionate share of such capital expenditure, would hold, an....
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....uch assets by the assessee or violation of its charter. 4.8 Conclusion We may clarify that we have not in any manner suggested a prescription against allowance of depreciation on capital assets held by a public charitable institution for its purposes. Depreciation is an accepted charge for computing book income, as well as income under the head 'profits and gains of business or profession' and 'income from other sources', i.e., under Chapter IV D and IV F of the Act. All that we have said is that allowance thereof on the same capital expenditure, i.e., which already stands `allowed' as deduction by way of application of income, in computing income under the Act, which is to accord with the principles of commercial accounting, is not permissible, even if the depreciation is to be allowed under the Act, serve as it does the same purpose and is on the same footings, citing our reasons for the same in detail, drawing extensive support from the decision in the case of Escorts Ltd. & Othrs. v. UOI (supra) holding of the same as squarely covering the proposition. It follows as a corollary that where the cost of an asset has not been so allowed, depreciation thereon would ....