2016 (7) TMI 1046 - HC - Income Tax

Entitlement to claim depreciation on capital assets by assessee trust - Held that - Tribunal is right in law in holding that assessee is entitled to claim depreciation on capital assets. See COMMISSIONER OF INCOME-TAX vs. VATIKA TOWNSHIP P.LTD. 2014 (9) TMI 576 - SUPREME COURT

Summary

Issues Involved:
1. Whether depreciation on capital assets can be claimed by a charitable trust when the income is already exempt, potentially leading to a double deduction.
2. Interpretation and applicability of Section 11(6) of the Income Tax Act, 1961, regarding the denial of depreciation deduction.

Detailed Analysis:

1. Claim of Depreciation by Charitable Trusts:
The primary issue revolves around whether a charitable trust can claim depreciation on capital assets when the income is already exempt under Section 11 of the Income Tax Act, 1961. The appellants (Revenue) argued that allowing depreciation would result in a double deduction, as the capital expenditure is already considered an application of income.

The Tribunal relied on its previous decision in the case of ACIT vs. Shri Adichunchunagiri Shikshana Trust, which was upheld by the High Court. The High Court dismissed the Revenue's appeal, reiterating that depreciation is allowable under Section 11 of the Act, and there is no double claim of capital expenditure.

The High Court referenced its earlier judgment in Society of the Sisters of St. Anne, which established that depreciation is a legitimate deduction in computing the real income of a charitable trust. The court clarified that depreciation represents the decrease in value of property through wear, deterioration, or obsolescence, and is a necessary outgoing that should be accounted for.

The court also cited various judgments from other High Courts, including Gujarat, Punjab and Haryana, Delhi, Madras, Calcutta, and Madhya Pradesh, which supported the view that depreciation is allowable for charitable trusts.

2. Applicability of Section 11(6) of the Income Tax Act:
The Revenue contended that Section 11(6) of the Act, inserted by the Finance Act No.2, 2014, should be applied retrospectively. This 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 an application of income in any previous year.

The High Court, however, held that Section 11(6) is prospective in nature and applies from 01.04.2015 onwards. This interpretation was supported by the Notes on Clauses in the Finance Bill, 2014, and circulars issued by the Central Board of Direct Taxes, which clarified that the amendment would apply from the assessment year 2015-16 and subsequent years.

The court also referred to the Supreme Court's judgment in Vatika Township P. Ltd., which laid down general principles concerning retrospectivity, emphasizing that unless clearly stated, amendments should not be applied retrospectively.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming that depreciation is allowable under Section 11 of the Income Tax Act for charitable trusts and that Section 11(6) is prospective, effective from 01.04.2015. The court found no substantial question of law warranting further consideration, thereby upholding the Tribunal's decision in favor of the assessee.