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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P.GEORGE
Per N.V. Vasudevan, Judicial Member
This is an appeal by the Assessee against the order dated 28.04.2014 of the CIT(Appeals)-V, Bangalore relating to A.Y. 2009-10.
The first issue that arises for consideration in this appeal is as to whether the CIT(Appeals) was right in directing the AO to allow
SP No. 230/Bang/2014& Page 2 of 12 depreciation on the capital assets, despite the fact that at the time when the capital assets were acquired, the same were treated as application of income in those years.
The assessee is a charitable trust running educational institutions. In the course of assessment u/s. 143(3) of the Act for AY 2008-09, the AO noticed from the details of depreciation claimed, that the depreciation was claimed on assets, the cost of acquisition of the said assets had been claimed by the assessee as capital expenditure towards application of funds towards the objects of the trust and allowed as such. According to the AO, allowing such a claim would amount to allowing double deduction. On the facts of the present case, he was of the view that the decision of the Hon’ble Supreme Court in the case of Escorts Limited & another Vs. Union of India 199 ITR 43 is squarely applicable, wherein it has been categorically held that when deduction u/s 35(2)(iv) is allowed in respect of capital expenditure on scientific research, no depreciation is allowable u/s 32 on the same asset.
The assessee pointed out before CIT(A) that Hon'ble High Court of Karnataka in the case of All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of St. Ann, 146 ITR 28 (Kar) has taken the view that where capital expenditure on acquisition of depreciable asset is considered as application of income for charitable purpose, allowing depreciation on the very same capital asset would not amount to double allowance. The SP No. 230/Bang/2014& Page 3 of 12 assessee also pointed out that the decision of Escorts Ltd. (supra) will not be applicable as it was rendered on a different set of facts.
The CIT(A) however, held that allowance of depreciation when the cost has already been recovered by way of exemption as application of income amounts to double deduction and double benefit on the same asset. The CIT(A) referred to the decision of the of Hon'ble High Court of Kerala in the case of DDIT(E) v. Lissie Medical Institutions, 348 ITR 344 (Ker) wherein it was held that allowing depreciation of a depreciable asset when the cost of acquisition of depreciable asset was allowed as application of income for charitable purpose amounts to double depreciation and therefore depreciation cannot be allowed. The CIT(A) also observed that the decision of the Hon’ble Karnataka High Court in CIT v.
Society of Sisters of St. Anns, 146 ITR 28, wherein it was held that depreciation if not allowed as a necessary deduction for computing the income from charitable institutions then there is no way to preserve the corpus of the trust for deriving income, did not take cognizance of the provisions of Sec.11(2) of the Act which permits upto 15% of the income (before depreciation) being available for accumulate or appropriate towards corpus/earmarked fund, without any condition of application within stipulated period of 6 years (then 10 years). According to CIT(A), this part of income could be accumulated over an indefinite period for replacing or adding any capital asset, which would depreciate and/or outlive utility or SP No. 230/Bang/2014& Page 4 of 12 become obsolete. According to CIT(A), in any case, nothing prohibits the trustees to apply the income of any year for acquiring a capital asset to substitute a depreciated asset. Aggrieved by the order of CIT(Appeals), the Assessee has preferred the present appeal before the Tribunal.
We have heard the rival submissions. We have heard the submissions of the ld. DR, who relied on the order of AO. He also placed reliance on the decision of the Hon’ble Delhi High Court in the case of DIT(E) Vs. Charanjiv Charitable Trust (2014) Taxmann.com 300 (Delhi) wherein it was held that allowing depreciation on assets, the cost of acquisition of which was already considered as application of income is not permissible.
We have considered the order of the AO. Identical issue came up for consideration before ITAT Bangalore Bench in the case of DDIT(E) v.
Cutchi Memon Union (2013) 60 SOT 260 Bangalore ITAT, wherein similar issue has been dealt with by this Tribunal. In the aforesaid case, the assessee claimed depreciation and the AO denied depreciation on the ground that at the time of acquiring the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition. The AO took the view that allowing depreciation would amount to allowing double deduction and placed reliance on the decision of Hon'ble Supreme Court in Escorts Ltd. (supra). The CIT(A), however, allowed the SP No. 230/Bang/2014& Page 5 of 12 claim of assessee. On further appeal by the Revenue, the Tribunal held as follows:-
“20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon’ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H) , following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon’ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon’ble Court in the aforesaid decisions.
The issue raised by the revenue in the ground of appeal
is thus no longer res integra and has been decided by the Hon’ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR
16. (P&H). The Hon’ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon’ble Punjab & Haryana High Court made a reference to the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon’ble Supreme Court was dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon’ble SP No. 230/Bang/2014& Page 6 of 12 Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon’ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference.
22. Consequently, ground No.5 raised by the revenue is dismissed.”
The decision of the Hon’ble Delhi High Court in the case of Charanjiv Charitable Trust (supra) is contrary to the decision of the Hon’ble Karnataka High Court in the case of Society of Sisters of Anne (supra). We are bound to follow the view of the Hon’ble Karnataka High Court which is the jurisdictional High Court as far as the Bangalore Bench of ITAT is concerned. We therefore prefer to follow the decision of the Hon’ble Karnataka High Court. We may also add that the legal position has since been amended by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f. 1.4.2015 by insertion of sub-section (6) to section 11 of the Act, which reads as under:- “(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”
SP No. 230/Bang/2014& Page 7 of 12
As already stated, the aforesaid amendment is prospective and will apply only from A.Y. 2015-16. In view of the above legal position, we are of the view that the order of the CIT(A) is not just and proper. The claim of the Assessee for deduction on account is therefore directed to be allowed. Consequently the first issue is decided in favour of the Assessee.
The next issue raised by the Assessee in its grounds of appeal is with regard to disallowance of accumulation of income u/s 11(2) of the Act.
During the year the assessee had accounted an amount of Rs.75,00,000 as accumulation u/s 11(2) of the IT Act. The purpose of the accumulation was submitted as under:-
“To improve/develop the buildings of the trust and conduct educational/charitable activities”
According to the AO, the purpose appeared to be not for any determinable purpose or purposes but in general for educational and charitable activities in a blanket manner. Such accumulation according to the AO was not permissible u/s.11(2) of the Act. The Assessee submitted before AO that the purpose given for the purpose of accumulation was specific and the claim for accumulation should be allowed. According to the AO, the purpose of accumulation as given above was very general in nature. Hence the AO disallowed the claim of the Assessee for SP No. 230/Bang/2014& Page 8 of 12 accumulation of income claimed by the assessee u/s 11(2) of the IT Act for an amount of Rs. 75,00,000 and brought the same to tax.
On appeal by the assessee, the CIT(Appeals) upheld the order of the AO by following the decision of the Hon’ble Madras High Court in the case of M.C. Muthiah Chettiar Trust 245 ITR 400 (Mad) wherein following the decision of the Hon’ble Calcutta High Court in the case of DIT Vs. Singhania Charitable Trust 199 ITR 819 (Cal), it was held that the purpose of accumulation has to be mentioned specifically otherwise the accumulation claimed can be disallowed.
Aggrieved by the order of the CIT(A) the Assessee has preferred the present appeal before the Tribunal.
We have heard the rival submissions. The learned DR relied on the order of the CIT(A) and the reasons given by him. The learned counsel for the Assessee relied on decision of the Hon’ble Delhi High Court in the case of DIT(E) Vs. Daulat Ram Education Society 278 ITR 260 (Delhi). The Hon’ble Delhi High Court in the said case has held that that purpose mentioned in Form 10 for accumulation of income need not be specific and that accumulation of income under section 11(2) cannot be denied even if purpose/objects mentioned in Form 10 are general.
We have given a very careful consideration to the rival submissions.
There appears to be divergent views on the issue. The view expressed by SP No. 230/Bang/2014& Page 9 of 12 the Hon’ble Madras High Court Hon’ble Madras High Court in the case of M.C.Muthiah Chettiar Trust 245 ITR 400 (Mad) following the decision of the Hon’ble Calcutta High Court in the case of DIT Vs. Singhania Charitable Trust 199 ITR 819 (Cal) supports the view taken by the Revenue authorities. The decision of the Hon’ble Delhi High Court in the case of DIT(E) Vs. Daulat Ram Education Society 278 ITR 260 (Delhi) supports the stand taken by the Assessee. The view favourable to the Assessee, in the absence of decision of Hon’ble jurisdictional High Court, has to be followed. We also find that similar issue raised by the Assessee in this appeal was also considered by this Tribunal in the case of DDIT(E) v. Gokula