THE COMMISSIONER OF INCOME TAX vs. M/S VENKATESHA EDUCATION SOCIETY

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ITA/243/2013HC KarnatakaKAHC01023072201301 August 2018Bench: S.SUJATHA,VINEET KOTHARI8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that depreciation is allowable under Section 32 of the Income Tax Act in the hands of a charitable trust. The Court relied on the Supreme Court's decision in 'CIT-III, Pune vs. Rajasthan and Gujarati Charitable Foundation Poona' and the Bombay High Court's judgment in 'CIT v. Institute of Banking Personnel Selection (IBPS)'. The Court reasoned that normal depreciation can be considered a legitimate deduction in computing the real income of the assessee on general principles or under Section 11(1)(a) of the Act. The argument that Section 32 was the only provision for depreciation was rejected. The Court further affirmed that income of a charitable trust derived from assets is required to be computed on commercial principles after providing for normal depreciation. The principle is that depreciation is a deduction for computing income, and allowing it does not amount to a double benefit when the initial expenditure was treated as application of income. Therefore, no substantial question of law arose, and the appeals filed by the Revenue were dismissed.

What were the facts?

The appeals were filed by the Commissioner of Income-Tax and the Assistant Commissioner of Income-Tax (Revenue) against the orders of the Income Tax Appellate Tribunal (ITAT) for assessment years 2003-04 and 2004-05. The ITAT had confirmed the orders of the Appellate Commissioner, which in turn had upheld the assessee's claim for depreciation. The assessee is M/s. Venkatesha Education Society, a charitable trust. The Revenue challenged the ITAT's decision to allow depreciation on assets whose cost had been treated as application of income in the year of acquisition. The appeals were filed under Section 260A of the Income Tax Act, 1961.

What were the issues?

1. Whether depreciation is allowable under Section 32 of the Income Tax Act, 1961, in the hands of a charitable trust, even if the cost of the assets has been fully allowed as application of income under Section 11 in the past years? The Revenue contended that depreciation is only allowable under Section 32 and that allowing it when the cost was already treated as application of income would result in a double benefit. The Assessee argued that normal depreciation is a legitimate deduction in computing the real income of the trust on general principles or under Section 11(1)(a). 2. Whether depreciation can be taken into account in computing the income of a trust from depreciable assets, when the full capital expenditure had been allowed as application of income in the year of acquisition? The Revenue's contention was that once the expenditure was treated as application of income, depreciation could not be claimed. The Assessee argued, and the Tribunal held, that treating expenditure as application of income in the year of acquisition does not preclude claiming depreciation on those assets in subsequent years.

Which sections of the Income-tax Act were involved?

Section 32,Section 11,Section 28,Section 29,Section 34,Section 260A

AI-generated summary — verify with the full judgment below

1/8 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 1st DAY OF AUGUST 2018

PRESENT

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

AND

THE HON’BLE Mrs.JUSTICE S.SUJATHA

I.T.A.No.242/2013 c/w I.T.A.No.243/2013

BETWEEN:

1.

THE COMMISSIONER OF INCOME-TAX

CENTRAL CIRCLE

C.R.BUILDING, QUEENS ROAD

BANGALORE

2.

THE ASSISTANT COMMISSIONER

OF INCOME-TAX

CENTRAL CIRCLE-1(2)

C.R.BUILDING, QUEENS ROAD

BANGALORE

…COMMON APPELLANTS

(BY Mr.K.V.ARAVIND, ADV.)

AND:

M/s. VENKATESHA EDUCATION SOCIETY NO.125, ARMSTRONG ROAD SHIVAJI NAGAR BANGALORE – 560 001

… COMMON RESPONDENT

(Mr.V.K.GURUNATHAN, ADV. FOR Mr.S.PARTHASARATHI, ADV.)

I.T.A No.242/2013 IS FILED UNDER SECTION 260A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 21.12.2012 PASSED IN ITA NO.100/BANG/2012 FOR THE ASSESSMENT

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YEAR 2003-04 PRAYING TO DECIDE FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF ITAT, BANGALORE IN ITA NO.100/BANG/2012 DATED 21.12.2012 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), BANGALORE.

I.T.A. No.243/2013 IS FILED UNDER SECTION 260A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 21.12.2012 PASSED IN ITA NO.101/BANG/2012 FOR THE ASSESSMENT YEAR 2004-05 PRAYING TO DECIDE FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF ITAT, BANGALORE IN ITA NO.101/BANG/2012 DATED 21.12.2012 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), BANGALORE.

THESE APPEALS COMING ON FOR HEARING, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-

JUDGMENT

Mr.K.V.Aravind, Adv. for Appellants-Revenue Mr.V.K.Gurunathan, Adv. for Respondent-Assessee

Both the learned counsel at the bar submitted that the issues involved in the present cases are squarely covered by the decision of this Court in ‘CIT vs. M/s. Agricultural Produce Market Committee’ in ITA No.239/2011 c/w ITA No.107/2017 decided on 19.06.2018 in which, following the ratio of the

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judgment of Hon’ble Supreme Court in ‘CIT-III, Pune vs. Rajasthan and Gujarati Charitable Foundation Poona’ [(2018) 89 taxmann.com 127 (SC)], this Court has held that the Depreciation is allowed under Section 32 of the Act in the hands of Charitable Trust also.

2.

The relevant portion of the aforesaid order including the quotation from the judgment of the Hon’ble Supreme Court is quoted below for ready reference: 5. “Learned Counsel at the Bar submitted that so far as the issue regarding claim of Depreciation under Section 32 of the Act is concerned, the controversy is no longer res integra, having been settled by the Hon’ble Supreme Court in the case of ‘Commissioner of Income Tax-III, Pune v. Rajasthan & Gujarati Charitable Foundation Poona’ [2018] 89 taxmann.com 127 [SC], by which the Hon’ble Supreme Court has affirmed the view taken by the Bombay High Court in ‘Commissioner of Income Tax v. Institute of Banking Personnel Selection

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(IBPS)’ [2003] 131 Taxman 386 [Bom.]. The relevant portion of the said Judgment of Bombay High Court as quoted by the Hon’ble Supreme Court and affirmed is quoted below for ready reference. “In the said judgment, [Bombay High Court] the contention of the Department predicated on double benefit was turned down in the following manner:

3.

As stated above, the first question which requires consideration by this court is : whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977- 78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building at the rate of 2.5 per cent and they also claimed depreciation on furniture at the rate of 5 per cent. The question which arose before the court for determination was: whether depreciation could be denied to the assessee, as

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expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the properly held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business shall be computed in accordance with section 30 to section 43C, That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for the business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act. The court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction

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on account of depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforestated Judgment of the Bombay High Court, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the department.

4.

Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income Tax (Exemption) v. Framjee Cawasjee Institute (1993) 109 CTR 463 (Bom). In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The Income Tax Officer held that depreciation could not be taken into account because, full capital expenditure had been allowed

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in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The appeal was rejected. The Tribunal, however, took the view that when the Income Tax Officer stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by, the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above judgment. Consequently, Question No. 2 is answered in the affirmative i.e., in favour of the assessee and against, the department.

After hearing learned counsel for the parties, we are of the opinion that the aforesaid view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same.”

6.

Since the issue regarding claim of Depreciation in the hands of the Charitable Trust is no longer

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res integra, We are of the opinion that no substantial question of law now arises in the present Appeals filed by the Revenue.”

3.

Accordingly, no substantial question of law arises for further consideration of this Court in the present appeals. Accordingly, the present appeals filed by the Revenue are also dismissed in similar terms. No costs.

Sd/- JUDGE

Sd/- JUDGE

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