2014 (11) TMI 733 - HC - Income Tax

Entitlement for depreciation - Whether a charitable institution, which has purchased capital assets and treated the amount spent on purchase of the capital asset as application of income, is entitled to claim depreciation on the same capital asset utilised for business Revenue was of the view that this would amount to double deduction Held that - The issue has been examined in depth and detail twice and thus there is no error in the orders passed by the Tribunal - in Director of Income Tax (Exemption) Versus Charanjiv Charitable Trust 2014 (3) TMI 760 - DELHI HIGH COURT the Tribunal has overlooked that the cost of the assets has already been allowed as a deduction as application of income, as held by the CIT(A) as well as the AO - allowing depreciation in respect of assets, the cost of which was earlier allowed as deduction as application of income of the trust, would actually amount to double deduction - the cost of asset had been allowed as a deduction and thereafter depreciation was being claimed - where any income is required to be applied, accumulated or set apart for application, then for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of an asset, the acquisition of which has been claimed as application of income under this Section in the same or any other previous year - The legal position would undergo a change in terms of Section 11(6), which has been inserted and applicable with effect from 1st April, 2015 and not to the assessment years in question - The newly enacted sub-section relates to application of income Decided against revenue.

Issues Involved:
1. Whether a charitable institution, which has purchased capital assets and treated the amount spent on purchase of the capital asset as application of income, is entitled to claim depreciation on the same capital asset utilised for business.
2. Whether allowing depreciation on such capital assets would amount to double deduction.

Detailed Analysis:

Issue 1: Claim of Depreciation by Charitable Institutions
The main issue in the appeals is whether a charitable institution can claim depreciation on capital assets that have already been treated as application of income. The respondent-assessees are charitable institutions to whom Sections 11 to 13 of the Income Tax Act, 1961 apply. The Revenue argued that allowing depreciation on these assets would result in double deduction.

The High Court referred to its earlier judgment in Director of Income Tax versus Vishwa Jagriti Mission (2013) 262 CTR 558, which held that depreciation should be allowed based on commercial accountancy principles when computing business income. The court distinguished this from the Supreme Court's decision in Escorts Limited versus Union of India, (1993) 199 ITR 43 (SC), which denied depreciation under Section 32 because the entire expenditure on the capital asset had already been allowed under Section 35(2)(iv).

The court noted that the Supreme Court in Escorts was not dealing with a charitable trust and the computation of income for application to charitable purposes. Various High Courts, including in CIT versus Society of the Sisters of St. Anne, (1984) 146 ITR 28 (Kar.), have consistently held that income of charitable institutions should be computed on commercial principles, allowing for depreciation to preserve the corpus of the trust.

Issue 2: Double Deduction
The Revenue's argument that allowing depreciation would result in double deduction was addressed by the court through several precedents and circulars. The High Court of Kerala in Lissie Medical Institutions versus Commissioner of Income Tax, (2012) 348 ITR 344 (Ker) took a different view, suggesting that if the cost of the asset is treated as application of income, its cost should be considered nil, leading to no depreciation. However, this view was not adopted by the Delhi High Court.

The court in Indian Trade Promotion Organisation (supra) explained that the application of income under Section 11(1) does not equate to the expenditure provisions in other sections like Section 35. The court emphasized that Section 11(1) deals with the application of income for charitable purposes and not with the computation of income in the same manner as business income under Chapter IV-D.

The court also referred to the Finance (No. 2) Act of 2014, which inserted sub-section (6) to Section 11, effective from 1st April 2015. This sub-section states that income should be determined without any deduction or allowance by way of depreciation if the acquisition of the asset has been claimed as application of income. However, this change was not applicable to the assessment years in question.

Conclusion:
The appeals were dismissed, affirming that depreciation on capital assets used for charitable purposes should be allowed based on commercial principles. The court held that the Revenue's argument of double deduction was not applicable in the context of charitable institutions as per the existing legal framework and precedents. The applications for condonation of delay in the case of M/s Sanskriti Educational Society were also dismissed as the appeals lacked merit.

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