M/S INTEGRATED EDUCATION RESEARCH CENTRE FOR ENGINEERING AND MANAGEMENT,KOLKATA vs. CIT(EXEMPTIONS), KOLKATA, KOLKATA

Per N.V. Vasudevan, Judicial Member The Assessee had filed the above stay application praying for an

order of stay of recovery of outstanding demand of Rs.24,07,700/-. When

the stay application came up for hearing, with the consent of parties the

appeal itself was taken up for hearing. The appeal by the Assessee is an

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appeal against the order dated 9.12.2015 of CIT(Exemptions), Kolkata,

passed u/s.263 of the Income Tax Act, 1961 (Act), relating to AY 2011-12.

purpose of providing education. The Assessee filed return of income for

A.Y.2012-13, declaring total income of Rs.nil. The ITO, Exemption-1,

Kolkata who was the Assessing Officer (AO) of the Assessee completed the

assessment u/s.143(3) of the Act, determining total income of the Assessee

at Rs.41,615/-. The Assessee had claimed depreciation of Rs.68,43,455/- as

allowable expenditure against receipts of the Assessee during the previous

year. The same was allowed by the AO in the assessment completed

u/s.143(3) of the Act by order dated 30.6.2014.

aforesaid order of the AO allowing depreciation of Rs.68,43,455/- as

allowable expenditure against receipts of the Assessee during the previous

year was erroneous and prejudicial to the interest of the revenue. According

to the respondent depreciation was claimed on assets whose cost of

acquisition in the previous year in which it was acquired had been claimed

by the assessee as capital expenditure and as application of funds towards

the objects of the trust and allowed as such in such assessments. According

to the respondent, allowing depreciation on the very same assets the cost of

acquisition was allowed as application of funds for charitable purpose would

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amount to allowing double deduction, once at the time of acquisition of the

asset as application for charitable purpose and again in the form of

depreciation on the very same cost over a number of years of life of the

asset. The respondent 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 was squarely applicable, wherein it was held that when

deduction u/s 35(2)(iv) is allowed in respect of capital expenditure on assets

used for scientific research, no depreciation is allowable u/s 32 on the same

asset. The respondent accordingly issued a show cause notice dated

28.10.2015 proposing to revise the order of the AO passed u/s.143(3) of the

Act dated 30.6.2014.

pointed out that in several decisions rendered by various High Courts, it has

been held that depreciation can be claimed even on assets whose cost of

acquisition in the previous year in which it was acquired had been claimed

by the assessee as capital expenditure and as application of funds towards

the objects of the trust and allowed as such in such assessments. The

following are some of the judicial pronouncements referred to by the

Assessee in its reply to the show cause notice u/s.263 of the Act.

(i) CIT Vs. Institute of Banking Personnel Selection (IBPS) (2003) 264 ITR 110(Bom).

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(ii) Society of Sisters of St. Ann, 146 ITR 28 (Kar) (iii) CIT Vs. Desh Bhagat Memorial Education Trust (2011) 37(1) ITCL 131 (P & H) (iv) CIT Vs. Sheth Manilal Ranchhoddas Vishram Bhavan Trust 198 ITR 598(Guj.) (v) CIT Vs. Rajpur Pallottine Socieity 180 ITR 579 (MP) (vi) Jyotirmai Club ITA No.647 of 2004 dated 10.11.2014 following its own decision in the case of Siliguri Regulated Matrket Committee. (vii) DIT(E) Vs. Framjee Cawasjee Institute 109 CTR 463 (Bom) (viii) DIT(E) Vs. Chiranjiv Charitable Trust 43 Taxmann.com 300 (Del.) In the aforesaid decisions a view was 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 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.

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therefore depreciation cannot be allowed. The respondent also distinguished

the cases cited by the Assessee as follows:

“3.11 Let us now discuss the High Court orders stated that claim of depreciation is allowable even if the cost of the assets are taken as application. Such cases are mentioned in SI no. [ix] to (xi) under Para 3.8. The Ld. A/R placed reliance on 2 cases this list. 3.12. In the case of DIT(E) vs. Framjee Cawasjee Institute (supra) and CIT vs. Institute of Banking Personnel Selection [supra) [relied upon by the Ld. A/R] the Honble Mumbai High Court held that depreciation is allowable to tile charitable trusts even if the cost of such assets has been treated as application. In CIT vs. Institute of Banking Personnel Selection (supra) while coming to this conclusion the Hon'ble Court followed the decision of Munisuvarat Jain Tax (supra). In the case of Munisuvarat Jain the point of argument of the revenue before the court was that depreciation can be claimed u/s 32 of the Act. Therefore an entity whose income is computed according to the commercial principle, (like trusts registered u/s 12A of the Act) and not in accordance with Chapter IV of the Act. is not entitled to claim of depreciation. In this case the Hon' ble Bombay High Court restricted its decision on this issue and decided that depreciation is allowoble although the assessee is not covered under Chapter IV of the Act. The Hon'ble Bombay High Court. in this case did not pass any comment on the issue of double deduction. However while Hon'ble Bombay High Court decided the rnatter in the case Institute of Banking Personnel Selection (supra) following this judgment on the issue of depreciation, allowed the claim even when the cost of the asset is taken as application in the year of its procurement. In both the cases i.e. Framjee Cawasjee Institute (supra) and Institute of Banking Personnel Selection (supra) the Hon’ble Mumbai High Court decided against the revenue on this issue but the relevant judgment of apex court in Escorts Ltd. (supra) were not brought to the notice of the Hon’ble Mumbai High Court. So these judgment was made per incurium, But as no Special leave Petition was filed by department before the Hon'ble Supreme Court of India, it gave rise to the notion (all over Tax India) that deportment had accepted the said judgements and henceforth it is the good law. However the department in reality did not accept the judgements rather noted that the department did not accept the judgments and still hold the ratio of Escorts Ltd. v. Union of India [supra) as good law. Special Leave Petitions were not filed because of the restriction regarding monetary limit of filing appeals. 3.13 In the case of CIT Siliguri vs. Siliguri Regulated Market Committee (supra) {not cited by the Ld. A/R Hon’ble Kolkata High Court decided that

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claim of depreciation is to be allowed even if the cost of the asset is treated as application. In that case tile following judgments were referred: i.ClT vs. Institute of Banking Personnel Selection reported in 264 ITR 110 {Mumbai} [2004] ii. CIT Vs. Market Committee, Pipli reported in 330 ITR 16 (Punjab & Haryana) [2011 ] iii. CIT vs. Trustee of H.E.H. Nizam's Supplemental Religious Endowment Trust reported in 127 ITR 378 (A.P.) [1981] iv. ClT vs. Rcao Bahadur Calavala Cunnan Chetty Charities reported in [1982) 135 ITR 485 [Mad} v. ClT vs. Bhoruka Public Welfare Trust reported in 240 ITR 513 (Cal) [19991 vi. CIT vs. Jayashree Chaity Trust reported in 159 ITR 280 (Co') [1986] vii. Escorts Ltd.( J.K. Synthetics Ltd.) vs Union of India 199 ITR 43 (SC) (1993)

It is noted that in any of the case mentioned above, other than Institute of Banking Personnel Selection (supra), Market Committee, Pipli (supra), and Escorts Ltd. (supra), the issue at hand was not the situation where claim depreciation leads to double deduction. The cases of Lissie Medical Institutions vs. Commissioner of Income Tax (supra) and Chiranjiv Charitable Trust (supra) were neither referred to nor discussed. Further, although the name of Escorts Ltd. (supra) was mentioned in the list of cases referred to, not a single line of discussion was made on this case in the body of the order. The detail of the order of the Apex Court was not brought to the attention of the Hon'ble Kolkata High Court.

3.14 In the case of Market Committee, Pipli (supra) the Hon'ble Punjab & Haryana High Court allowed claim of depreciation as allowable expenses but not as application, in cases where the cost of asset has been treated as application. Ld. A./R also relied upon this case and the assessee had made computation accordance with this case law. The Honble Court observed that if claim of depreciation is allowed as expenses no double deduction would take place. In this judgment case of Escorts Ltd. (supra) was discussed. But one very important fact was not brought to the attention of the Hon'ble Court. Allowing claim of depreciation as allowable expenses mean the assessee is getting a benefit of 85% of such claim. While allowing the claim of depreciation as application the assessee gets 100% benefit of such claim. Thereby in essence if remains a case of double deduction on one outgoing. In one case it's a case of 100% double deduction in another 85% of double deduction. But tin both the cases allowance of claim of depreciation (either as expenses or as application), when the cost of the assets have been treated as application leads to double deduction”

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“(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.” 7. According to the respondent the aforesaid amendment was clarificatory in nature. The respondent however did not hold that the amendment is retrospective but merely observed that since the amendment is clarificatory the intention of the legislature was always that the no double deduction should be allowed to an Assessee. In coming to the above conclusion, the respondent placed reliance on the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) wherein the decision was rendered in the context of Section 35(2)(iv) of the Act [as it stood prior to 1- 4-1980 ) which provided that where capital expenditure is incurred on carrying out scientific research after the 31st day of March 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. The Assessees after getting deduction of entire capital expenditure as deduction u/s.35(2)(iv) of the Act were also claiming simultaneously allowance or deduction in respect of the same expenditure once again under section 32 of the Act on account of depreciation on the very same asset. There was a controversy as to whether such a claim for depreciation was valid or not. Finance (No. 2) Act, 1980 intervened. It amended section 35(2)(iv) to read as follows:

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"(iv)where a deduction is allowed for any previous year under this section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed under clauses (i), (ii), (iia ), (iii) and (vi) of sub-section (1) of section 32 for the same or any other previous year in respect of that asset;" The question before the Hon’ble Court was whether 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. The Hon’ble Supreme Court held in the affirmative. The further question before the Hon’ble Court was what is the effect of the statutory amendment by insertion of Sec.35A(2)(iv) of the Act. The Hon’ble Court held that even in absence of clear statutory indication to contrary, statute should not be read so as to permit an assessee two deductions viz., both under sections 32(1)(ii) and 35(2)(iv) of Act, qua same expenditure. The respondent therefore held that the legislature would never have intended to give double deduction for the same outgoing and that there was the amendment by insertion of Sec.11(6) of the Act was merely clarificatory. The CIT accordingly revised the order of the AO by observing as follows:

3.20. In view of the all above, assessment order passed by assessment order passed by assessing office in this case for assessment year 2012-13 by allowing claim of depreciation of Rs.68,43,455/- is erroneous in so far as it is prejudicial to the interest of revenue. Hence the same is disallowed. The depreciation in this year was claimed to justify or to make up the application of income. No such claim was made in preceding and succeeding years as sufficient assets purchased were available for application. 3.21 Hence, the income of the assessee is computed as below : Total Receipts as per Income & Expenditure A/C. Rs.3,8435,539 Less : Revenue & Capital Expenditure Rs.2,68,03,157 Rs.1,16,32,382 Less: Statutory accumulation @15% of Rs.3,84,35,539 Rs. 57,65,330 Revised Total Income Rs. 58,67,052 Rounded off Rs. 58,67,050” 8. Aggrieved by the aforesaid order of the CIT, the Assessee has preferred the present appeal before the Tribunal.

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“1.For that, the order of the Ld. ClT (E) is arbitrary, illegal and bad in law. 2. For that on the facts and circumstances of the Ld. CI.T(E) erred in applying the provisions of section 263 and enhancing the assessment by disallowing the depreciation allowed by the AO on the assets, completely by passing the judgment of the jurisdictional High Court which was binding on him to maintain judicial discipline. 3. For that even otherwise the order of the Ld. CIT(E) is bad in law when he himself refers to two opinions on the issue of allowability of the depreciation on the assets which was rightly allowed by the AO. 4.For that on the facts and circumstances of the case the disallowance made by the CIT may be deleted. 5. For that on the facts and in the circumstances of the case the assessee may be awarded the cost of appeal for not following the principles settled by the Jurisdictional High Court. 6. For that on the facts and circumstances of the case the order of the ClT(E) be modified and the assessee be given the relief prayed for. 7. For that the assesee craves leave to add, alter or amend any ground before or at the time of hearing.” 10. We have heard the submissions of the ld. DR, who relied on the order

of respondent. The learned counsel for the Assessee reiterated the stand of

the Assessee as reflected in the reply to the show cause notice u/s.263 of the

Act.

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

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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 Socieity (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) has been referred to and distinguished by the Hon’ble Court in

the aforesaid decisions. The issue raised by the respondent in the impugned

order is 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 &

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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 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. The Hon’ble Calcutta High Court in the case of Jyotirmai

Club (supra) has also taken the same view. In the case of Siliguri Vs.

Siliguri Regulated Market Committee (supra), the Hon’ble Jurisdictional

High Court has also taken the same view. The respondent has however

observed in his order that the Calcutta High Court in the aforesaid decisions

has not properly considered the decision in the case of Escorts Ltd.(supra).

Such observations in our view would not be appropriate and cannot be the

basis not to follow the decision of Hon’ble High Court.

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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 was admittedly effective only from 1.4.2014 and did not apply to AY 12-13.

under the Act. He can then exercise his powers in revision, if he is satisfied that any order passed by the AO is erroneous and prejudicial to the interest of the Revenue. The Supreme Court has held that both these elements – ‘erroneous’ and ‘prejudicial to the interests of the Revenue’ – must be satisfied for having recourse to S.263 (Malabar Industrial Co. 243 ITR 83). Every loss of tax to the Revenue cannot be treated as being "prejudicial to the interest of the Revenue". For example, when the Assessing Officer takes

recourse to one of the two courses possible in law or where there are two views possible and the Commissioner does not agree with the view taken by the Assessing Officer which has resulted in a loss as held by the Hon’ble

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Supreme Court in the case of CIT v Max India Ltd. (2007) 295 ITR 282

(SC). Assuming all that is stated by the respondent in the impugned order is

to be accepted as correct, even then no revision could be made u/s.263 of the

Act for the reason that two views are possible on the issue raised by the

respondent in the impugned order. It is clear from the order of the

respondent that two divergent views have been expressed by Hon’ble High

Courts in the matter. The decision rendered by the Hon’ble Calcutta High

Court being that of the jurisdictional high court, the view taken by the

Assessee has to be accepted as correct. We are also of the view that it would

not be proper on the part of the respondent to contend that the decision of

the Hon’ble Supreme Court in the case of Escorts Ltd. (supra) was not

brought to the notice of the Hon’ble Calcutta High Court. In the given facts

and circumstances of the case exercise of jurisdiction u/s.263 of the Act

would not be proper. We therefore quash the order u/s.263 of the Act and

allow the appeal of the Assessee.

the view that the stay application filed by the Assessee has become

infructuous and the same is dismissed as infructuous.

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Pronounced in open court on the 1st day of June , 2016.

Sd/- Sd/- (M.BALAGANESH) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER. Kolkata, Dated, the 1st day of June, 2016. RG/PS Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Kolkata. 6. Guard file By order

Assistant Registrar, ITAT Kolkata Benches