2019 (1) TMI 1997 - AT - Income Tax

Exemption u/s 11 - CIT-A justification in holding that the dividend income which is exempt u/s 10 of the Act need not be considered for the purpose of 85% application of income - HELD THAT - Inclusion of dividend income (exempt) for the purpose of reckoning the 85% application of income is already settled in favour of the assessee in the case of DIT(E) vs Jasubhai Foundation 2015 (4) TMI 305 - BOMBAY HIGH COURT held that when the income from property held for charitable or religious purpose is not a matter covered or dealt with by section 10 that the Tribunal s view cannot be termed as perverse or vitiated by any error or law apparent on the face of the record. The clear language of these provisions enables us to uphold the order of the Tribunal.Ground No. 1 raised by the revenue is dismissed. Allowability of depreciation on assets as an application of income - whether the CITA was justified in allowing the claim of depreciation on assets also as an application of income eventhough the entire cost of fixed assets had already been claimed as application of income for the purpose of reckoning the limits of 85% application of income - HELD THAT - As we find that the issue is now settled by the recent decision of CIT vs Rajasthan and Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT held when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets what he really meant was that the amount spent on acquiring those assets had been treated as application of income of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years depreciation in respect of those assets cannot be taken into account. - Decided against revenue.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in holding that the dividend income exempt under section 10 of the Income Tax Act need not be considered for the purpose of 85% application of income to claim exemption under section 11.
2. Whether the CIT(A) was justified in allowing the claim of depreciation on assets as an application of income, despite the entire cost of fixed assets already being claimed as an application of income.

Issue-wise Detailed Analysis:

1. Dividend Income Exemption:
The first issue pertains to whether the dividend income, which is exempt under section 10 of the Income Tax Act, should be considered for the purpose of calculating the 85% application of income to claim exemption under section 11. The assessee, a trust registered under section 12A, had derived dividend income of Rs 1,69,47,000/- and claimed it as exempt, not considering it for the 85% application of income. The Assessing Officer (AO) contended that section 10 does not deal with income derived from property held under trust, implying that the dividend income should be included in the revenue income eligible for application under section 11. Consequently, the AO reworked the income computation, resulting in a higher taxable income for the assessee.

The CIT(A) relied on the decision of the Hon’ble Jurisdictional High Court in the case of DIT(E) vs Jasubhai Foundation (374 ITR 215) to grant relief to the assessee. The High Court had clarified that sections 10 and 11 fall under different chapters, with section 10 dealing with incomes not included in total income and section 11 dealing with income from property held for charitable or religious purposes. The High Court had concluded that income exempt under section 10 should not be considered under section 11 for the purpose of computing the total income of the trust. The Tribunal upheld this view, dismissing the revenue's appeal on this ground.

2. Depreciation on Assets:
The second issue involves the allowability of depreciation on assets as an application of income, even though the entire cost of fixed assets had already been claimed as an application of income. The AO disallowed the depreciation claim of Rs 3,27,323/-, arguing that it would result in a double deduction for the assessee.

The CIT(A) granted relief to the assessee by referring to the decision of the Hon’ble Jurisdictional High Court in CIT vs Institute of Banking Personnel (264 ITR 110), which held that allowing depreciation as an application of income does not amount to double deduction. The Tribunal further supported this view by citing the recent Supreme Court decision in CIT vs Rajasthan and Gujarati Charitable Foundation (402 ITR 441), which affirmed that depreciation on assets, the cost of which has been fully allowed as an application of income in the past, is permissible. The Supreme Court emphasized that the income of a charitable trust should be computed on commercial principles, allowing for normal depreciation.

Conclusion:
The Tribunal found no infirmity in the CIT(A)'s order granting relief to the assessee on both issues. The revenue's appeal was dismissed, and the CIT(A)'s decision was upheld. The Tribunal concluded that the dividend income exempt under section 10 need not be considered for the 85% application of income under section 11, and depreciation on assets is allowable as an application of income without resulting in double deduction. The appeal of the revenue was dismissed in its entirety.