THE MUSIC ACADEMY MADRAS,CHENNAI vs. DDIT, CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

This appeal of the assessee is directed against the order of

the Commissioner of Income Tax (Appeals) – 17, Chennai, dated

13.03.2015 and pertains to assessment year 2010-11.

disallowance of depreciation.

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submitted that the assessee was registered as charitable institution

under Section 12AA of the Income-tax Act, 1961 (in short 'the Act').

During the year under consideration, the assessee claimed depreciation of `63,14,533/- on the capital asset. However, the

Assessing Officer disallowed the claim of the assessee on the

ground that allowing the claim of depreciation would amount to

double deduction which is not permissible under the provisions of

Income-tax Act. According to the Ld. counsel, depreciation is

allowable while computing income under the head “business or

profession”. Referring to Section 11 of the Act, the Ld.counsel

submitted that Section 11 provides for exemption of income of the

trust on application. However, the income of the trust has to be

computed on commercial principles. The Ld.counsel placed his

reliance on various case laws to support the claim of depreciation,

including some of the orders of this Tribunal. Placing reliance on

the decision co-ordinate Bench of this Tribunal in ITO v. Sakthi

Foundation in I.T.A. No.2219/Mds/2014 dated 12.12.2014, the

Ld.counsel submitted that on identical set of facts, this Tribunal by

following its own earlier order in CMS Educational & Charitable

3 I.T.A. No.1098/Mds/15

Trust in I.T.A. No.2261/Mds/2012 dated 17.04.2013, directed the

Assessing Officer to allow depreciation. The Ld.counsel has also

filed a list of various judgments and submitted that in all these

cases, the claim of depreciation was allowed even though the

income of the trust was allowed as exempted on its application.

Therefore, at no stretch of imagination, the claim of depreciation can

be said that it would amount to double deduction.

provides for allowing depreciation for business asset or other asset,

the Ld.counsel for the assessee very fairly submitted that Section

32 of the Act provides for allowing depreciation only on business

asset. The Ld.counsel further clarified that the assessee is not

doing business, the assessee is claiming as charitable institution.

According to the Ld. counsel, while computing income on

commercial principle, irrespective of the provisions of Section 32 of

the Act, the assessee is eligible for depreciation. The Ld.counsel

further submitted that there is no conflict between computation of

income on commercial principle and the provisions of Section 32

which allows depreciation only on the commercial asset, which is

used for business.

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Representative, submitted that Section 32 of the Act provides for

allowing depreciation in respect of the asset which used for

business or profession. In this case, the assessee admittedly

registered as a charitable institution under Section 12AA of the Act.

The assessee is not doing any business or profession. If the

assessee claims that it is doing business or profession, then the

registration has to be cancelled under Section 12AA(3) of the Act

and the assessee will not be eligible for exemption under Section 11

of the Act. The Ld. D.R. has also clarified that the assessee is not

doing any business or profession. Therefore, the provisions of

Section 32 is not at all applicable to the charitable institution. The

Ld. D.R. further pointed out that Section 32 falls in Chapter IV of the

Act which provides for computation of business income. The claim

of the assessee under Section 11 falls in Chapter III of the Act

which says that certain kind of income do not form part of total

income. The Ld. D.R. further pointed out that it is not the case of

the assessee that any business was held as property under the

trust. The matter would stand in a different footing if the assessee

claims depreciation on the business which was held as property

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under trust under Section 11(4) of the Act. In the case before us,

according to the Ld. D.R., the assessee is claiming depreciation on

the asset which is used for charitable purpose. In fact, the asset

was used as a tool for carrying out object of the trust. Therefore,

Section 32 of the Act is not applicable at all. Hence, the assessee

is not eligible for depreciation under Section 32 of the Act. The Ld.

D.R. placed his reliance on the decision of this Bench of the

Tribunal in The Anjuman-E-Himayath-E-Islam v. ADIT(Exemption)

in I.T.A. No. 2271/Mds/2014 dated 02.06.2015 and also the

judgment of Kerala High Court in Lissie Medical Institution v. CIT

(2012) 348 ITR 344.

perused the relevant material available on record. The issue arises

for consideration is whether a charitable institution is eligible for

depreciation in respect of its asset, which was used as a tool for

carrying out its object. Depreciation is provided under Section 32 of

the Act, which reads as follows:-

“DEPRECIATION 32 (1) In respect of depreciation of-- (i) buildings, machinery, plant or furniture being tangible assets ; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

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owned, wholly or partly, by the assessee and used for the purposes of the business or profession the following deductions shall be allowed-- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed. (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:

Provided that no deduction shall be allowed under this clause in respect of--(a) any motor car manufactured outside India, where such motor car is acqired by the assessee after the 28th day of February, 1975 5but before the 1st day of April, 2001, unless it is used--(i) in a business of running it on hire for tourists; or(ii) outside India in his business or profession in another country ; and (b) any machinery or plant if the actual cost thereof is allowed as a deduction in one or more years under an agreement entered into by the Central Government under section 42:

Provided further that where any asset referred to in clause (i) or clause (ii) or clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this sub-section in respect of such asset shall be restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) 6or clause (ii) or clause (iia), as the case may be:

Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub-section in respect of such asset is restricted to fifty per cent. of the amount calculated at the percentage prescribed for an asset under clause (iia) for that previous year, then, the deduction for the balance fifty per cent. of the amount calculated at the percentage prescribed for such asset under clause (iia) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset :

Provided also that where an asset being commercial vehicle is acquired by the assessee on or after the 1st day of October, 1998, but before the 1st day of April, 1999, and is put to use before the 1st day of April, 1999, for the purposes of business or profession, the deduction in respect of

7 I.T.A. No.1098/Mds/15

such asset shall be allowed on such percentage on the written down value thereof as may be prescribed. Explanation For the purposes of this proviso,-- (a) the expression "commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi cab", "motor-cab", "tractor" and "road-roller" ; (b) the expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road- roller" shall have the meanings respectively as assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988).

Provided also that, in respect of the previous year relevant to the assessment year commencing on the 1st day of April, 1991, the deduction in relation to any block of assets under this clause shall, in the case of a company, be restricted to seventy-five per cent. of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of the Taxation Laws (Amendment) Act, 1991.

Provided also that the aggregate deduction, in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets or know- how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets allowable to the predecessor and the successor in the case of succession referred to in clause (xiii), clause (xiiib) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger, as the case may be, had not taken place, and such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them. Explanation 1.— Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or

8 I.T.A. No.1098/Mds/15

improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Explanation 2.— For the purposes of this sub-section "written down value of the block of assets" shall have the same meaning as in clause (c) of sub-section (6) of section 43; Explanation 3.— For the purposes of this sub-section, 10the expressions "assets" shall mean-- (a) tangible assets, being buildings, machinery, plant or furniture ; (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. Explanation 4.— For the purposes of this sub-section, the expression "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil- well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto) ; Explanation 5.— For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income ; (iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) :

Provided thatwhere an assessee, sets up an undertaking or enterprise for manufacture or production of any article or thing, on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf, in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in the State of West Bengal, and acquires and installs any new machinery or plant (other than ships and aircraft) for the purposes of the said undertaking or enterprise during the period beginning on the 1st day of April, 2015 and ending before the 1st day of April, 2020 in the said backward area, then, the provisions of clause (iia) shall have effect, as if for the words “twenty per cent.”, the words “thirty-five per cent.” had been substituted :

Provided further no deduction shall be allowed in respect of- (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person ; or

9 I.T.A. No.1098/Mds/15

(B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ; or (C) any office appliances or road transport vehicles ; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year ; (iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :

Provided that such deficiency is actually written off in the books of the assessee. Explanation For the purposes of this clause,-- (1) "moneys payable" in respect of any building, machinery, plant or furniture includes-- (a) any insurance, salvage or compensation moneys payable in respect thereof ; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, so, however, that where the actual cost of a motor car is, in accordance with the proviso to clause (1) of section 43, taken to be twenty-five thousand rupees, the moneys payable in respect of such motor car shall be taken to be a sum which bears to the amount for which the motor car is sold or, as the case may be, the amount of any insurance, salvage or compensation moneys payable in respect thereof (including the amount of scrap value, if any) the same proportion as the amount of twenty-five thousand rupees bears to the actual cost of the motor car to the assessee as it would have been computed before applying the said proviso (2) "sold" includes a transfer by way of exchange or a compulsory acquisition under any law for the time being in force but does not include a transfer, in a scheme of amalgamation, of any asset by the amalgamating company to the amalgamated company where the amalgamated company is 8an Indian company or in a scheme of amalgamation of a banking company, as referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), with a banking institution as referred to in sub-section (15) of section 45 of the said Act, sanctioned and brought into force by the Central Government under

10 I.T.A. No.1098/Mds/15

sub-section (7) of section 45 of that Act, of any asset by the banking company to the banking institution. (2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”

A bare reading of Section 32 of the Act clearly says that

depreciation has to be allowed while computing the taxable income

on building, machinery, plant, etc. which is owned wholly or partly

by the assessee and used for the purpose of business.

Depreciation is nothing but an inherent decline in the value of the

asset from wear and tear. In respect of the business assets, the

Parliament thought it fit in their wisdom to allow depreciation for

wear and tear of the building, machinery, plant, etc. Depreciation in

certain cases is treated as expenditure laid out over the years

during the life time of the machinery. In other words, the value of

the asset, machinery, etc. reduced pro tanto. This Tribunal is of the

considered opinion that the depreciation is spread over during the

effective life time of the machinery or asset, etc. used for business

by allowing the same as deduction on notional basis. The amount

11 I.T.A. No.1098/Mds/15

of depreciation allowed in a particular year is intended to represent

the life of the machinery such as expenditure during the above said

period. In other words, the value of the machinery was spread over

for the effective life time of the asset and a provision was made by

way of notional deduction to replace the machinery after expiry of its

entire life time. Therefore, the Legislature provided depreciation

under Section 32 of the Act as an incentive/allowance to the asset

which was used for the business or profession. This can be

construed as reduction in value in the balance sheet while

computing the income from business or profession.

wholly or partly by the assessee and “used for the purpose of

business or profession”. In view of the language employed by the

Parliament, the asset used for the purpose of business or

profession alone eligible for depreciation. The Income-tax Act does

not provide for depreciation in respect of the asset other than the

one which is used for business or profession. Therefore, it is for the

assessee to establish that the assessee is carrying on any business

or profession. In the case before us, the admitted case of the

assessee is that the assessee is not carrying on any business or

12 I.T.A. No.1098/Mds/15

profession. Therefore, whatever be the nature of the asset, which

was used as a tool for carrying out the object of the charitable

institution, cannot be construed as an asset which is used for the

business or profession of the assessee. Therefore, the assessee is

not eligible for depreciation under Section 32 of the Income-tax Act.

assessee is not claiming depreciation under Section 32 of the Act.

According to the Ld. counsel, the assessee is claiming depreciation

on the commercial principle. On a query from the Bench what is

meant by “commercial principle”?, he clarified that computation of

income of the Trust in a customary method of accountancy. On a

query from the Bench, the Ld.counsel has also clarified that there is

no conflict between the customary way of computation of income

and provisions of Section 32 of the Act. This Tribunal is of the

considered opinion that Section 32 provides for depreciation only in

respect of the asset which is used for the purpose of business or

profession. The commercial principle of computing income or the

customary practice of computing income may also provide for

depreciation only in respect of computing business or professional

income.

13 I.T.A. No.1098/Mds/15

computing income under different heads. Depreciation is provided

under Section 32 of the Act when computing income under the head

“Income from business or profession”. In respect of other heads, no

depreciation is provided under the scheme of the Act. The income

of the trust is exempted on application and accumulation as

provided under the Act. If any violation, the income of the trust is

liable for taxation, in such a case, if the income is assessed as

income from business or profession, the assessee may be eligible

for depreciation. The assessee is certainly not entitled for

depreciation, when the income was exempted on application or

accumulation as provided under the scheme of the Act. The

charitable institution under the scheme of Income-tax Act is on a

different footing. The entire income of the assessee-trust from the

property held under trust do not form part of total income under

Section 11 of the Act provided the same is applied for charitable

object. Section 11 of the Act also provides for accumulation of 15%

of income for future application for the object of the trust. Therefore,

the business and charitable institution are two different categories in

the scheme of Income-tax Act. This Tribunal is of the considered

14 I.T.A. No.1098/Mds/15

opinion that the customary way of computing income or the

commercial principle of computing income cannot override the

specific provision of Income-tax Act. The Income-tax Act does not

provide for allowing depreciation other than the asset which was

used for business or profession. There is no other provision in the

Income-tax Act other than Section 32 of the Act for allowing

depreciation. Therefore, the claim of the assessee that the

depreciation has to be allowed on commercial principle or

customary principle of computation of income is contrary to the

specific provision, namely, Section 32 of the Act.

conflict between customary practice, commercial principle and

provisions of Section 32, which one will prevail? The obvious

answer to this question is the statutory provision, namely, Section

32 of the Act will prevail over the customary practice and

commercial principle. Therefore, even on customary practice or

commercial principle whereby the assessee claims depreciation

while computing the income, Section 32 of the Act is a specific

provision under Income-tax Act, which is contrary to commercial

principle or customary practice. Therefore, this Tribunal is of the

15 I.T.A. No.1098/Mds/15

considered opinion that Section 32 will prevail over the customary

practice or commercial principle. Hence, the assessee is not

eligible for depreciation in respect of building, plant, machinery, etc.

which are not used for the purpose of business or profession.

doing business, then the assessee is not eligible for exemption

under Section 11 of the Act and as rightly submitted by the Ld.

Departmental Representative, the registration under Section 12AA

of the Act has to be cancelled under Section 12AA(3) of the Act.

Moreover, the assessee will not be eligible for exemption under

Section 11 of the Act if it is carrying on any business activity.

Therefore, this Tribunal is of the considered opinion that the

assessee is not eligible for depreciation.

in view of Section 11(4) & (4A) of the Act, if the property held under

trust is a business undertaking, then the income of the business

undertaking, which was so held as property held under trust, has to

be computed by applying the provisions of Income-tax Act under

Chapter IV. While computing income of the business undertaking,

all expenditure, including depreciation, has to be allowed and the

16 I.T.A. No.1098/Mds/15

income of such business undertaking which was held under Trust

has to be allowed as exemption under Section 11 on application

and accumulation. In this case, as rightly submitted by the Ld. D.R.,

no business undertaking was held under trust as provided under

Section 11(4) & (4A) of the Act. The assessee is claiming

depreciation in respect of asset which was used as tool for carrying

out charitable object of the institution. When the asset was used as

tool for carrying out the object of the charitable institution, such

activity cannot be construed as a business or profession of the

assessee. Therefore, Section 32 of the Act is not applicable in this

case.

decisions cited by the Ld.counsel for the assessee, which are as

under:-

17 I.T.A. No.1098/Mds/15

After going through all the judgments / decisions, we find that the

conflict between the commercial principle or customary practice in

computing income and the provisions of Section 32 were not

brought to the notice of the Courts / Tribunal. Therefore, those

judgments / decisions are not applicable to the facts of the case.

appeal of the assessee. Accordingly, the same is dismissed.

18 I.T.A. No.1098/Mds/15

Order pronounced on 22nd April, 2016 at Chennai.

sd/- sd/- (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 22nd April, 2016.

Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-17, Chennai-34 4. DIT (Exemptions), Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.