2015 (6) TMI 1149 - AT - Income Tax

Accumulation of income for application to the extent of 15% of net receipts u/s. 11(1)(a) - allowance at 15% of gross receipts or net receipts i.e.; gross receipts less Revenue expenditure - Held that - The assessee is to be allowed accumulation of income for application for charitable purposes u/s. 11(1)(a) of the Act at 15% of gross receipts following the decision in the case of Bai Sonabai Hirji Agiary Trust v ITO (2004 (9) TMI 300 - ITAT BOMBAY-E). - Decided in favour of assessee

Issues Involved:
1. Allowance of depreciation on capital assets treated as application of income.
2. Computation of accumulation of income under Section 11(1)(a) of the Income Tax Act.

Issue 1: Allowance of Depreciation on Capital Assets Treated as Application of Income

The primary issue was whether the CIT(Appeals) was correct in directing the AO to allow depreciation on capital assets, which had already been treated as an application of income when acquired. The AO disallowed the depreciation claim, arguing that it would amount to a double deduction, referencing the Supreme Court decision in Escorts Limited & another Vs. Union of India 199 ITR 43.

The Assessee countered, citing the Karnataka High Court decisions in All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of St. Ann, 146 ITR 28 (Kar), which held that allowing depreciation on capital assets does not constitute a double allowance. The CIT(A) sided with the AO, referencing the Kerala High Court decision in DDIT(E) v. Lissie Medical Institutions, 348 ITR 344 (Ker), which supported the view of double deduction.

The Tribunal, however, referred to the ITAT Bangalore Bench decision in DDIT(E) v. Cutchi Memon Union (2013) 60 SOT 260, where it was held that depreciation is necessary to preserve the corpus of the trust and should be allowed to compute income in a normal commercial manner. The Tribunal also noted that the Punjab & Haryana High Court in CIT v. Market Committee, Pipli, 330 ITR 16 (P&H) supported this view, distinguishing the Supreme Court's decision in Escorts Ltd. The Tribunal concluded that the Karnataka High Court's decision in Society of Sisters of St. Ann should be followed as it is the jurisdictional High Court for the Bangalore Bench of ITAT.

The Tribunal also acknowledged a prospective amendment by the Finance (No.2) Act, 2014, effective from AY 2015-16, which disallows depreciation if the acquisition cost was claimed as an application of income. However, this amendment did not apply to the assessment years in question. Thus, the Tribunal directed that the Assessee's claim for depreciation be allowed, deciding the issue in favor of the Assessee.

Issue 2: Computation of Accumulation of Income Under Section 11(1)(a)

The second issue was whether the accumulation of income under Section 11(1)(a) should be computed on gross receipts or net receipts (gross receipts minus revenue expenditure). The Assessee claimed accumulation at 15% of gross receipts, while the AO contended it should be 15% of net receipts, resulting in no accumulation for the Assessee as gross receipts after revenue expenditure were nil.

The Tribunal referred to the Special Bench Mumbai decision in Bai Sonabai Hirji Agiary Trust Vs. ITO, 93 ITD 0070 (SB), which held that accumulation should be computed on gross income, not net income. The Tribunal also cited the Supreme Court decision in CIT vs. Programme for Community Organization, which supported the view that accumulation should be on gross income derived from property, not after deducting expenditures.

Following these precedents, the Tribunal held that the Assessee's claim for accumulation under Section 11(1)(a) should be allowed as claimed, based on gross receipts.

Conclusion:

The Tribunal allowed the appeals by the Assessee on both issues, directing that depreciation on capital assets be allowed and accumulation of income under Section 11(1)(a) be computed on gross receipts. The judgments were pronounced in open court on June 23, 2015.

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