2011 (6) TMI 256 - AT - Income Tax

Charitable trust - Depreciation - Application of income - dual benefit - held that - The entity has effectively capitalized the income. - The same would, over time, secure it deduction - by way of depreciation - for the entire capital cost incurred, so that the same is not considered as a part of income and, consequently, not subject to tax to that extent. How, then, can another claim for application of the said capitalized income, and with reference to the same capital asset(s), arise? Capital expenditure as being toward income (so that it has to be allowed proportionately over the period of utility of the expenditure), and at the same time out of it. The income to be applied is only one determined following the principles of commercial accounting, i.e., to arrive at what can be said to be available for application with it, so that there is no overlap between the two. - Claim of depreciation rejected in respect of capital goods where the cost of such asset allowed by way of application u/s 11(1)

Issues Involved:
1. Maintainability of depreciation allowance claimed by a charitable trust on assets whose cost has already been allowed as application of income under section 11(1) of the Income-tax Act.
2. Whether the allowance of depreciation and deduction qua the application of income amounts to a double deduction.
3. Applicability of the decision in the case of Escorts Ltd. v. Union of India in the context of charitable trusts.
4. Impact of section 11(1)(d) on the claim of depreciation.
5. Relevance of various judicial precedents cited by both parties.

Issue-wise Detailed Analysis:

1. Maintainability of Depreciation Allowance:
The core issue is whether the depreciation allowance claimed by the assessee-trust under section 32(1) of the Income-tax Act, 1961, is maintainable when the entire cost of the assets has already been allowed as an application of income under section 11(1). The Tribunal found that the cost of the assets, having been allowed as an application of income, resulted in a nil Written Down Value (WDV), leaving no amount available for depreciation. This was seen as a double deduction, which is prohibited by law.

2. Double Deduction:
The Tribunal referenced the decision in the case of Escorts Ltd. v. Union of India, which prohibits double deduction. It was argued that both claims-depreciation on capital assets and the deduction of the cost of said assets-are essentially the same, aiming to write off the underlying capital expenditure. The Tribunal found that allowing both claims would lead to a double deduction, which is not permissible under the Act. The Tribunal emphasized that the two claims are mutually exclusive and cannot be considered simultaneously.

3. Applicability of Escorts Ltd. Decision:
The Tribunal upheld the view that the decision in the case of Escorts Ltd. is applicable to the present case. The decision in Escorts Ltd. clarified that a double deduction for the same expenditure is not permissible. The Tribunal found that the same principle applies to the case of charitable trusts, where claiming depreciation on assets whose cost has already been allowed as an application of income would amount to a double deduction.

4. Impact of Section 11(1)(d):
The Tribunal discussed the amendment to section 11(1) with the insertion of clause (d) effective from 1-4-1989, which de-links corpus donations from the requirement of application. The Tribunal found that this amendment does not change the fundamental principle that a double deduction is not permissible. The Tribunal noted that the differential treatment of depreciation based on whether the asset is funded from corpus donations or regular income is consistent with the law and does not lead to any incomprehensible or prejudicial outcome.

5. Judicial Precedents:
The Tribunal reviewed various judicial precedents cited by both parties. It found that the decisions in the cases of CIT v. Marketing Committee, Pipli, and CIT v. Tiny Tots Education Society, which were rendered after considering the decision in Escorts Ltd., explicitly stated that there is no double deduction, and thus, the decision in Escorts Ltd. is not applicable. However, the Tribunal noted that these decisions do not bind it, as they are not from the jurisdictional High Court. The Tribunal also distinguished other cited decisions, such as CIT v. Rao Bahadur Calavala Cunnan Chetty Charities and S.RM. M.CT.M. Tiruppani Trust v. CIT, finding them not relevant to the issue of double deduction in the present case.

Conclusion:
The Tribunal concluded that the claim for depreciation on assets whose cost has already been allowed as an application of income amounts to a double deduction, which is prohibited by law. The Tribunal upheld the Revenue's appeal and dismissed the appeal and cross-objection by the assessee, affirming its findings in the case of Lissie Medical Institutions.

Result:
The Revenue's appeal is allowed, and the appeal and cross-objection by the assessee are dismissed.

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