2016 (7) TMI 812 - AT - Income Tax

Denial of exemption under section 11 - assessee was in receipt of fees for issuance of certificate of origin for the assessment year under consideration and hit by the proviso to section 2(15) - Held that - Where the main object of the Institution was charitable in nature, then the activities carried out towards the achievement of the said, being incidental or ancillary to the main object, even if resulting in profit and even if carried out with non members, were all held to be charitable in nature. Assessee association s primary purpose was advancement of objects of general public utility and it would remain charitable even if an incidental or ancillary activity or purpose, for achieving the main purpose was profitable in nature. Hence, assessee is not hit by newly inserted proviso to section 2(15) of the Act - Decided in favour of assessee Disallowance of depreciation - entire cost of acquisition of assets were treated as application of income for the purpose of claiming exemption under section 11 - Held that - The provision of section 11 of the Act cannot override section 32 of the Act. If the assessee claimed exemption under section 11 under Chapter III of the Act, it cannot claim depreciation under section 32 of the Act. Therefore, the Assessing Officer has to examine whether the assessee has claimed the cost of acquisition of capital assets as application of income or not in any earlier assessment years and if it is claimed so, the assessee cannot claim depreciation as an application of income while claiming exemption under section 11 of the Act in subsequent assessment years. When the cost of asset become NIL, there is no question of allowing any depreciation. The cost of asset was allowed once again as application of income, it would amounts to double deduction, if depreciation is also allowed as application of income, which cannot be permitted. Accordingly, we direct the Assessing Officer to examine this issue and grant depreciation if the assessee has not claimed the cost of acquisition of asset as application of income while claiming exemption under section 11 of the Act in any assessment year - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Denial of exemption under section 11 of the Income Tax Act.
2. Disallowance of depreciation.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11 of the Income Tax Act:

The assessee, a company registered under the Companies Act, 1956, and granted registration under section 12A(a) of the Income Tax Act, 1961, filed its return of income claiming exemption under section 11. The Assessing Officer (AO) denied this exemption, asserting that the income earned by the assessee from fees for issuing certificates of origin, rental income, and interest on fixed deposits was from activities of general public utility rather than charitable, medical, or educational activities. The AO concluded that these activities were covered by the proviso to section 2(15) of the Act, which negates the concept of mutuality as the assessee served non-members as well. Consequently, the AO brought the corpus donation received during the year to tax and allowed depreciation only on capital assets purchased during the relevant assessment year.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the income from fees for issuing certificates of origin hit by the proviso to section 2(15) rendered sections 11 and 12 inoperative, subjecting the surplus to taxation.

On appeal to the Tribunal, the assessee's counsel referenced decisions from the Kolkata and Chennai Benches of the Tribunal, which held that similar receipts were incidental to the main charitable object of the assessee. The Tribunal, after reviewing the materials and previous judicial decisions, concluded that the assessee's activities were incidental to its primary charitable purpose of promoting trade and commerce. The Tribunal emphasized that the dominant purpose of the assessee was charitable, and any incidental profit did not alter this. Consequently, the Tribunal directed the AO to allow the exemption under section 11, setting aside the CIT(A)'s order.

2. Disallowance of Depreciation:

The assessee claimed depreciation as per the mercantile system of accounting. The AO denied this claim, arguing that depreciation is allowed only on capital assets purchased during the relevant assessment year. The CIT(A) upheld this view, reasoning that allowing depreciation on assets whose cost was already treated as an application of income would amount to double deduction.

The Tribunal, referencing the Supreme Court's decision in Nector Beverages Limited v. CIT, clarified that depreciation is an "allowance" and not an "expenditure." It stated that if the cost of acquisition of assets was treated as an application of income in earlier years, depreciation cannot be claimed again in subsequent years. The Tribunal directed the AO to verify whether the cost of acquisition was claimed as an application of income in any earlier assessment years. If it was, the assessee cannot claim depreciation as an application of income. The Tribunal allowed this ground for statistical purposes, instructing the AO to examine the issue accordingly.

Conclusion:

The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal directed the AO to allow exemption under section 11 and to re-examine the claim of depreciation based on the application of income in earlier years. The order was pronounced on 06th July 2016 at Chennai.

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