2013 (1) TMI 846 - AT - Income Tax

Granting of exemption u/s 11 and then depreciation u/s 32 does not amount to granting double deduction because exemption u/s 11 is not a deduction but exemption of an income from the liability of tax on fulfillment of certain conditions.

Issues Involved:
1. Disallowance of depreciation by the Assessing Officer.
2. Alleged double deduction of depreciation on assets used for charitable purposes.
3. Applicability of Section 32 for depreciation to charitable trusts.
4. Upholding the Assessing Officer's order by the CIT (A).
5. Accumulation of income under Section 11(2) if depreciation is disallowed.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation by the Assessing Officer:
The revenue argued that the CIT (A) erred in deleting the disallowance of depreciation amounting to Rs. 11,55,974 made by the Assessing Officer. The Assessing Officer had disallowed the depreciation on the basis that the cost of the assets had already been allowed as a deduction on account of application of income, which would amount to a double deduction.

2. Alleged Double Deduction of Depreciation:
The revenue relied on the judgment of the Hon'ble Supreme Court in the case of Escorts Ltd. vs. Union of India (199 ITR 43), arguing that allowing depreciation on assets whose cost had already been deducted would result in a double deduction. The revenue also cited the judgment of the Kerala High Court in Lissie Medical Institutions vs. CIT (348 ITR 244), which supported the stance that depreciation should not be allowed if the cost of the asset was treated as application of income for charitable purposes.

3. Applicability of Section 32 for Depreciation to Charitable Trusts:
The revenue contended that since the income of the charitable trust was not assessable under the head "Profit and Gains from business and profession," depreciation under Section 32 should not be available. However, the CIT (A) and various High Courts, including the Gujarat High Court in CIT vs. Seth Maniklal Ranchoddas Vishram Bhavan Trust (198 ITR 594), held that the income of a charitable trust should be computed on the basis of commercial principles, which includes allowing depreciation.

4. Upholding the Assessing Officer's Order by the CIT (A):
The revenue prayed that the CIT (A) should have upheld the order of the Assessing Officer. However, the CIT (A) had observed that the judgment in Escorts Ltd. was distinguished by the Punjab & Haryana High Court in CIT vs. Tiny Tots Education Society (330 ITR 21), and since there was no specific provision in Section 11 restricting depreciation, the claim did not amount to double deduction. The ITAT also found that the income of the trust should be computed on commercial principles, as upheld by the Gujarat High Court.

5. Accumulation of Income under Section 11(2) if Depreciation is Disallowed:
The assessee argued that if depreciation is not allowed as an application of income, the amount should be allowed to be accumulated under Section 11(2). However, since the ITAT upheld the CIT (A)'s order allowing depreciation, this issue became infructuous.

Conclusion:
The ITAT dismissed the revenue's appeal, holding that allowing depreciation does not result in double deduction, as exemption under Section 11 is not akin to a deduction but an exemption from tax liability. The ITAT followed the judgment of the Gujarat High Court, which mandates computing the income of a charitable trust on commercial principles, including allowing depreciation. Consequently, the cross-objection filed by the assessee in support of the CIT (A)'s order was also dismissed as it became infructuous.

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