M/S KRUPANIDHI EDUCATION TRUST,BANGALORE vs. DIT, BANGALORE

This appeal by the assessee is against the order dated 12.3.2014 of DIT(Exemptions), Bangalore passed u/s. 263 of the Act.

The assessee is a trust running various educational institutions. Assessment u/s. 143(3) of the Act was completed by the AO for the A.Y. 2009-10 by an order dated 30.12.2011. The DIT(E), on perusal of the assessment records was of the view that the order of assessment dated 30.12.11 was erroneous and prejudicial to the interests of Revenue. The DIT(E) noticed that the AO completed the assessment denying the exemption of capital expenditure claimed u/s.11(1)(a) of the Act as application of income of the Trust, since the registration u/s.12A of the Act had been cancelled by the DIT(E). He further noticed from the details of depreciation claimed, that the depreciation was claimed on the opening WDV which is inclusive of assets acquired during earlier years, wherein the expenditure towards acquisition of the said assets has already been claimed by the assessee as capital expenditure towards application of funds towards the objects of the trust and allowed as such in earlier years. According to the DIT(E), doing so amounted 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.

Accordingly, a show cause notice u/s. 263 of the Act was issued by the DIT(E). The assessee pointed out 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 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 DIT(E), 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. In coming to the aforesaid conclusion, the CIT referred to the decision of Hon'ble Supreme Court in P.K. Badiani v. CIT, (1976) 105 ITR 642 (SC) wherein it was observed that allowance of depreciation is to replace the value of an asset to the extent it is depreciated during the period of account relevant to assessment year and as the value to that extent had been lost, the corresponding allowance of depreciation takes place. He also referred to the decision in Mysore Minerals Ltd. v. CIT, (1999) 239 ITR 775 wherein it was observed that the concept of depreciation suggests that tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset in utilising the capital asset and thereby losing gradually investment cost by wear and tear and need to replace the same by having lost its value fully over a period of time. The DIT(E), concluded as follows:-

The DIT(E) also placed reliance on the decision 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 DIT listed out the details of application of income and claim of depreciation in a chart in para 11 of his order which reads thus:-

The DIT(E) finally concluded that order of AO was erroneous and prejudicial to the interests of Revenue and accordingly set aside the assessment with a direction to rework the depreciation allowable on the WDV of assets, after taking into account the cost of assets which has already been allowed as application of income in the previous years and no depreciation should be allowed on such assets.

Aggrieved by the order of DIT(E), the assessee has preferred the present appeal before the Tribunal.

We have heard the submissions of the ld. DR, who relied on the order of CIT. The ld. counsel for the assessee relied on the decision of 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.

We have given a very careful consideration to the rival submissions. Identical issue was considered by this Tribunal in the case of Cutchi Memon Union (supra). 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 claim of assessee. On further appeal by the Revenue, the Tribunal held as follows:-

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

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:-

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 jurisdiction u/s. 263 of the Act ought not to have been exercised by the DIT(E). We may also add that two views are possible on the issue and even on this basis, invoking jurisdiction u/s. 263 of the Act is not permissible. We therefore quash the order u/s. 263 and allow the appeal of the assessee.

In the result, the appeal by the assessee is allowed.