TaxTMI 
TaxTMI 
TaxTMI 
2015 (8) TMI 89
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....venue in these appeals pertains to interpretation of Section 11(1) clause 'a' of the Income Tax Act, 1961. For the sake of convenience, the said clause is reproduced below:- Section 11(1) in The Income- Tax Act, 1995 (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property.? 3. The contention of Revenue is that depreciation allowed on capital assets cannot be treated as application of income under the said clause. In case depreciation was allowed and treated as application of income, then the assessee would be entitled to double deduction as purchase or acquisition of capital assets for consideration was also treated as application of income. It is submitted that purposi....
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....nsidered in any of these decisions. We, therefore, sought the views from the Central Board of Direct Taxes. Senior standing counsel, Sri P. K. R. Menon, appearing for the Revenue, produced clarification obtained from the Central Board wherein they have stated as follows : ''The Central Board of Direct Taxes is of the considered view that where an assessee has acquired an asset through application of income and has also claimed this amount as expenditure in its income expenditure account, depreciation on such asset would not be allowable to the assessee. Such notional statutory deductions like depreciation, if claimed as deduction while computing the income of the 'the property held under trust' under the relevant head of income, is required to be added back while computing the income for the purpose of application in the income expenditure account. This would imply that a correct figure of surplus from the trust property is reflected in the income and expenditure account of the trust to determine the income for the purpose of application under section 11 of the Income-tax Act. This would reduce the possibility of revenue leakage which may be a cause for generation of blac....
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....on of the Supreme Court in the case of Escorts Ltd. vs. Union of India, (1993) 199 ITR 43 (SC). We shall refer to this judgment subsequently. In order to appreciate the contention raised by the Revenue, we would like to give one example which would clarify the contention or the issue raised before us. An assessee, a charitable institution, say has income from property held under Trust of Rs. 1,00,000/-. As per mandate of clause 'a', 85% of the said amount i.e. Rs. 85,000/- should be spent in the said financial year. The said assessee spends and acquires a capital asset for Rs. 50,000/-. The purchase price for acquisition of the capital asset i.e. Rs. 50,000/- is treated as application of income for the purpose of clause 'a' to Section 11(1). On the capital asset, the assessee also claims depreciation say @ 20%. Accordingly, the assessee claims that the application of income would include Rs. 10,000/- which is to be allowed as depreciation as to this extent, the asset purchased has depreciated. In other words, Rs. 60,000/- is to be treated as application of money for the purpose of clause 'a' to Section 11(1). 6. Initially we were inclined to accept the submission raised by the Rev....
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....ally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period. '' ''At the end of its effective life, the assets ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found provision for depreciation is the setting aside, out of the revenue of an accounting period, the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through rising the asset for earning profits, and should, therefore, be charged against those profits as they are earned. '' ''If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until....
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....diture incurred for the purposes of the trust or otherwise.It should be noted, in this connection, that the amounts so added back will become chargeable to tax u/s. 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption u/s. 11(1). '' 8. The aforesaid paragraph quotes the Board Circular No.5-P (LXX-6) of 1968 dated 19.07.1968. 9. After the decision of the Kerala High Court in Lissie Medical Institution vs. CIT (supra), the Board issued a fresh circular or clarification dated 02.02.2012 and has observed:- The view of the CBDT to be conveyed to the Court in this regard is as under:- The Central Board of Direct Taxes is of the considered view that where an assessee has acquired an asset through application of income and has also claimed this amount as expenditure in its income expenditure account, depreciation on such asset would not be alloweable to the assessee. Such notional statutory deductions like depreciation, if c....
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....to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions. We are concerned only with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accounting principles, there is authority for the proposition that depreciation is a necessary charge in computingthe net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under Section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can the assessee again claim deduction on account of depreciation in respect of the same asset. The Supreme Court ruled that, under general principles of taxation, double deduction in regard to the same business outgoing is not intended unless clearly expressed. The present case is not one of this type, as rightly distinguished by the ....
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....ciety, (1989) 180 ITR 579 (M.P.), Commissioner of Income Tax vs. Institute of Banking, (2003) 264 ITR 110 (Bom), and CIT vs. Shakuntala Tharal Charitable Foundation, (2013) 358 ITR 452 (MP). 15. Kerala High Court was also conscious of the said decisions and the fact that Section 11(1)(a) had been interpreted in a different manner. It was in these circumstances that the Kerala High Court in the last portion of paragraph 6, as quoted above, has stated that the assessee would be entitled to write back depreciation and if done, the Assessing Officer would modify the assessment determining the higher income and allow recomputation of depreciation written back for the purpose of application of income for charitable purposes in future or subsequent years. This may lead to its own difficulties and problems as suddenly the entire depreciation written off would have to be added first and then in one year substantial application of income would be required. This may be impractical and would disturb the working of many a charitable institutions. The legal interpretation which has continued since 1984, if disturbed and implemented, would not appropriately resolved. Consistency and certainty is....