2016 (6) TMI 256 - AT - Income Tax

Revision u/s 263 - as per CIT(A) AO allowing depreciation as allowable expenditure against receipts of the Assessee - trust during the previous year was erroneous and prejudicial to the interest of the revenue - Held that - If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne (1983 (8) TMI 44 - KARNATAKA High Court ). It was held in CIT Vs. Tiny Tots Education Socieity (2010 (7) TMI 377 - Punjab and Haryana High Court ) that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. In view of the aforesaid decisions on the issue, we are of the view that the order of the respondent cannot be sustained. The amendment by the Finance Act (No.2), 2014 by insertion of Sec.11(6) of the Act specifically providing for not allowing any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year was admittedly effective only from 1.4.2014 and did not apply to AY 12-13. In the given facts and circumstances of the case exercise of jurisdiction u/s.263 of the Act would not be proper. We therefore quash the order u/s.263 of the Act and allow the appeal of the Assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether depreciation can be claimed on assets whose cost of acquisition has already been claimed as capital expenditure and application of income for charitable purposes.
2. Validity of the CIT's revision order under Section 263 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Depreciation on Assets with Prior Capital Expenditure Claims:
The assessee, a charitable trust, claimed depreciation of ?68,43,455 on assets whose cost of acquisition had already been treated as capital expenditure and application of income for charitable purposes. The Assessing Officer (AO) allowed this claim, but the Commissioner of Income Tax (Exemptions) [CIT (E)], Kolkata, found this allowance erroneous and prejudicial to the interest of the revenue. The CIT (E) argued that allowing depreciation on such assets results in a double deduction, citing the Supreme Court's decision in Escorts Limited & another Vs. Union of India 199 ITR 43, which disallowed depreciation on assets used for scientific research when capital expenditure on those assets had already been deducted.

In response, the assessee cited multiple High Court decisions, including CIT Vs. Institute of Banking Personnel Selection (IBPS) and Society of Sisters of St. Ann, which held that depreciation could be claimed even when the cost of acquisition had been treated as capital expenditure. The CIT (E) countered by referring to the Kerala High Court decision in DDIT(E) v. Lissie Medical Institutions, which supported the view that allowing depreciation in such cases amounts to double deduction.

The Tribunal noted that the issue had been settled by various High Courts, including the jurisdictional Calcutta High Court, which consistently held that depreciation is allowable on capital assets for charitable trusts. The Tribunal emphasized that the decision of the Supreme Court in Escorts Ltd. was not directly applicable, as it dealt with different provisions of the Act.

2. Validity of the CIT's Revision Order under Section 263:
The CIT (E) invoked Section 263 of the Income Tax Act, 1961, to revise the AO's order, arguing that it was erroneous and prejudicial to the interest of the revenue. The Tribunal highlighted that for a revision under Section 263, the order must be both erroneous and prejudicial to the revenue. It cited the Supreme Court's ruling in Malabar Industrial Co. 243 ITR 83, which clarified that not every loss of tax revenue qualifies as prejudicial to the interest of the revenue.

The Tribunal observed that the AO's decision to allow depreciation was based on a possible legal view supported by multiple High Court rulings. Therefore, the CIT (E)'s disagreement with the AO's view did not justify a revision under Section 263, especially when the view taken by the AO was in line with the jurisdictional High Court's decision. The Tribunal also noted that the amendment introduced by the Finance (No.2) Act, 2014, which disallowed depreciation on assets whose cost was treated as application of income, was effective from 1.4.2015 and did not apply to the assessment year in question (2012-13).

Conclusion:
The Tribunal quashed the CIT (E)'s order under Section 263, holding that the AO's decision to allow depreciation was neither erroneous nor prejudicial to the interest of the revenue. The appeal by the assessee was allowed, and the stay application was dismissed as infructuous. The Tribunal emphasized the importance of judicial discipline and the binding nature of jurisdictional High Court decisions.