2016 (6) TMI 1181 - HC - Income Tax

Depreciation allowable under Section 11 - whether there is no double claim of capital expenditure? - effect of amendment to Section 11(6) - Held that - The question involved in this case is no more res integra. This question was considered by this Court as far back as in the year 1984, in the case of Society of the Sister s of ST. Anne 1983 (8) TMI 44 - KARNATAKA High Court held that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression total income has been defined under s. 2(45) of the Act to mean the total amount of income referred to in s. 5 computed in the manner laid down in this Act . The word income is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word income , therefore, is a much wider term than the expression profits and gains of business or profession . Net receipt after deducting all the necessary expenditure of the trust (sic). Depreciation is the exhaustion of the effective life of a fixed asset owing to use or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee. See Director of Income Tax Vs. Al-Ameen Charitable Fund Trust 2016 (3) TMI 462 - KARNATAKA HIGH COURT

Issues Involved:
1. Disallowance of depreciation by the Tribunal.
2. Reliance on previous decisions by the Tribunal.
3. Applicability of the Kerala High Court decision in Lissie Medical Institutions vs. CIT.
4. Applicability of the Supreme Court decision in Escorts Ltd. & another vs. Union of India.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation by the Tribunal:
The Tribunal dismissed the Revenue's appeal regarding the disallowance of depreciation, relying on its previous decision in the case of ACIT vs. International Institute of Information Technology. The Revenue contested this, arguing that the decision was not accepted and was under appeal to the High Court under Section 260A.

2. Reliance on Previous Decisions by the Tribunal:
The Tribunal referenced several decisions, including those of the Bombay High Court (Institute of Banking), the Co-ordinate Bench of the Tribunal in the assessee's own case, the Madhya Pradesh High Court (CIT vs. Devisakuntala Tharal Charitable Foundation), and the Delhi High Court (DIT vs. Vishwa Jagiriti Mission). The Revenue argued that these decisions were not adequately appreciated and that the Kerala High Court's decision in Lissie Medical Institutions vs. CIT should have been considered.

3. Applicability of the Kerala High Court Decision:
The Revenue argued that the Kerala High Court in Lissie Medical Institutions vs. CIT held that depreciation cannot be allowed on assets where the cost has already been allowed as an application of income in the year of acquisition. The Tribunal did not consider this decision, which the Revenue claimed was relevant.

4. Applicability of the Supreme Court Decision:
The Revenue also cited the Supreme Court's decision in Escorts Ltd. & another vs. Union of India, which dealt with the allowance of expenditure on scientific research under Section 35(1)(iv) of the Act. The Court held that capital expenditure allowed as a deduction cannot be allowed again as depreciation. The Tribunal's decision did not consider this precedent according to the Revenue.

Judgment Analysis:

The High Court noted that similar questions were previously considered in the case of The Director of Income Tax vs. Al-Ameen Charitable Fund Trust, where the appeal of the Revenue was dismissed. The Court reiterated that the issue of depreciation for charitable institutions is governed by Section 11 of the Income Tax Act, which is different from business income under Chapter IV of the Act.

The Court emphasized that depreciation is an allowable deduction for charitable institutions to compute real income, as established in the case of Society of Sisters of St. Anne. The Court rejected the Revenue's argument of double deduction, stating that depreciation is a necessary outgoing to preserve the corpus of the trust.

The Court also discussed the amendment to Section 11(6) effective from 01.04.2015, which disallows depreciation if the asset's cost was already claimed as an application of income. However, this amendment is prospective and not applicable to the assessment years in question.

The Court distinguished the Supreme Court's decision in Escorts Ltd., noting that it was specific to scientific research expenditure and not applicable to charitable trusts under Section 11. The Court also found that the Kerala High Court's decision in Lissie Medical Institutions, based on Escorts Ltd., was not applicable to the present case.

Ultimately, the High Court dismissed the Revenue's appeal, holding that no substantial question of law arose for consideration, as the issues were already settled by previous decisions. The application for condonation of delay was also dismissed as redundant.

Conclusion:
The High Court upheld the Tribunal's decision allowing depreciation for charitable institutions under Section 11 of the Income Tax Act, dismissing the Revenue's appeal based on settled legal principles and previous judgments.

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