CIT KARNAL vs. MARKET COMMITTEE PIPLI

This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (for short, “the Act”) against the order of Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh dated 19.12.2008 in I.T.A. No.801/Chandi/ 2008 for the assessment year 2005-06, proposing to raise following substantial questions of law:- 1. “Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that depreciation was allowable on the capital assets, when deduction for capital expenditure incurred for acquisition of these capital assets has already been allowed as application of income of the trust?” 2. “Whether the Ld. ITAT’s decision to allow double deduction on depreciation when capital expenditure on the asset has already been allowed is justified in the light of the Apex Court’s decision in Escorts Ltd. Vs. UOI (199 ITR 43) to the effect that in the absence of clear statutory indication to the contrary, the statute should not be read as to permit an assessee two deductions on the same expenditure?”

The assessee has been constituted under the provisions of the Punjab Agricultural Marketing Produce Act, 1961 to regulate the marketing of agricultural produce. Under the scheme of the Act, certain amounts are required to be paid to the Marketing Board, which is a State level authority to supervise the working of Market Committees, so that the Market Board can discharge its statutory obligations. The assessee was registered under Section 12AA of the Act as charitable trust. The Assessing Officer disallowed the depreciation calculated as per statutory provisions on the ground that since income of the assessee was exempt from tax under Sections 11 to 13, allowing depreciation to ascertain whether 85% of funds were applied for purposes of trust, will amount to conferring double benefit. This view was affirmed by the CIT(A). The appeal of the assessee to the Tribunal was allowed on a statement that the matter was covered in favour of the assessee by another order of the Tribunal.

We have heard leaned counsel for the parties.

Learned counsel for the revenue submits that depreciation could not be allowed when income itself was exempt as it will confer double benefit which is not permissible as held by the Hon’ble Supreme Court in Escorts Ltd. and another v. Union of India and others [1993] 199 ITR 43

Learned counsel for the assessee submits that the Tribunal rightly decided the issue in favour of the assessee. He relied on the judgments in CIT v. Seth Manilal Ranchhoddas Vishram Bhawan Trust [1992] 198 ITR 598 (Guj) and CIT v. Institute of Banking Personal Selection (IBPS) (2003) 131 TAXMAN 386 (Bom), which have been followed by the Tribunal in its main order which has been impugned in connected I.T.A. No.151 of 2010 and judgments in CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad), CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar) and CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (M.P.).

We have considered the rival submissions. The Madras High Court in Rao Bahadur Calavala Cunnan Chetty Charities’s case (supra) observed:- “.......Taking into account the purpose for which the conditions of s.11(1)(a) are imposed, it would be clear that we have to consider the income as arrived at in the context of what is available in the hands of the assessee, subject of course to any adjustment for expenses extraneous to the trust. If the expression “income” is so understood, then we have to take the accounts of the assessee with reference to the receipts and deduct therefrom the expenses necessary for earning or looking after that income. The net amount that remains would be available for distribution or application for charitable purpose. In applying the income for charitable purposes, even capital expenditure may be incurred. Therefore, the nature of the expenditure in the hands of the entity which receives the money is not the criterion. So long as the assessee disburses the amount for charitable purposes, whether the amounts are utilised for capital or revenue purposes by the charity concerned, the assessee would have complied with that part of the requirement of s.11, namely, application of the income for charitable purposes. The authorities will have to find out as to whether they are really charitable purposes or not. Subject to such examination, the application of the income for charitable purposes will have to be excluded and it is only the balance that would require examination for finding out whether the assessee has complied with the rule of accumulation to the extent of Rs.10,000 or 25 per cent of the income, whichever is higher.” xx xx xx xx xx “In fact wherever the statute contemplated the income being computed in the manner set out in the provisions of the Act, appropriate words are used. For instance, in s.80E, which was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, after the expression “total income” the following words are added in brackets: “as computed in accordance with the other provisions of this Act”. This emphasises that wherever Parliament considered that the computation should be in accordance with the provisions of the Act, it introduced the concept by using appropriate language. In the absence of any such language in s.11(1), we consider that the computation as envisaged by the other provisions of the Act cannot be imported into s.11(1).

The Karnatka High Court in Commissioner of Income-Tax, Karnatka vs. Society of the Sisters of St. Anne.) [1984] 146 ITR 28 drawing support from Madras High Court in Rao Bahadur Calavala Cunnan Chetty Charities (supra) had recorded that if depreciation is not allowed as a necessary deduction for computing the income of a charitable institution then the corpus of the trust for deriving the income cannot be preserved and that the amount of depreciation debited to the account of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes. This decision was followed by Madhya Pradesh High Court in CIT v. Raipur Pallottine Society [1989] 180 ITR 579. Similar view was taken by Gujarat High Court in CIT v. Seth Manilal Ranchhoddas Vishram Bhawan Trust [1992] 198 ITR 598 by relying upon the aforesaid decisions. We are in respectful agreement with the view taken by Madras, M.P., Karnataka, Gujarat and Bombay High Courts referred to above. No contrary view has been brought to our notice.

In all fairness to the learned counsel for the Revenue, reference is made to the judgment of the Hon'ble Apex Court in Escort Limited's case (supra), on which reliance has been placed by the learned counsel for the Revenue. The Hon'ble Supreme Court in that case was dealing with a case relating to two deductions both under Sections 10(2)(vi) and 10(2)(xiv) of the 1922 Act or both under Sections 32(1)(ii) and 35(1)(iv) of the Act. The assessee therein had incurred expenditure of a capital nature on scientific research relating to the business which resulted into acquisition of an asset. The assessee had sought to claim a specified percentage of the written down value of the asset as depreciation and at the same time claimed deduction, in five consecutive years of the expenditure incurred on the acquisition of the asset. The apex Court observed:- “Where a capital asset used for scientific research related to the business of the assessee is also ipso facto an asset used for the purpose of the business, it is impossible to conceive of the Legislature having envisaged a double deduction in respect of the same expenditure, one by way of depreciation under section 32 of the Income Tax Act, 1961 and other by way of allowance under section 35 (1)(iv) of a part of the capital expenditure on scientific research, even though the two heads of deduction do not completely overlap and there is some difference in the rationale of the two deductions......” It was further recorded that:- “There is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions......”

In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. Judgment of the Hon’ble Supreme Court in Escorts Ltd. and another (supra) is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of Section 11. The questions proposed have, thus, to be answered against the revenue and in favour of the assessee.