2017 (3) TMI 896 - HC - Income Tax

Depreciation on assets of trust - One of the earliest judgment is from Karnataka High Court in Commissioner of Income Tax, Karnataka-I Vs. Society of the Sisters of St. Anne 1984 (1983 (8) TMI 44 - KARNATAKA High Court ). Court observed that income derived from property held under trust cannot be total income because Section 11(1) shows that former shall not be included in latter, of the person in receipt of the income. Depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. - Decided in favour of assessee. Payment of scholarship - admissibility as charitable expenditure - Held that - Scholarship was disbursed for pursuing Engineering course from University of California, Los Angeles, USA. The candidate was selected after a process of selection and finding him most deserving candidate, scholarship was disbursed to the said incumbent. This is in the process of charitable object of Assessee - Society for advancement of higher technical education to deserving students. It cannot be doubted that advancement of education is a charitable purpose . The candidate, beneficiary, was directly or indirectly not related to Members of Society nor otherwise has any bearing or connection with the Society Members. Financial status of the said student or other things are immaterial so far as purpose for which scholarship to Adheesh Bhagat is concerned. Hence we are in agreement with the view taken by CIT(A) as also Tribunal that payment of scholarship was admissible as charitable expenditure. Question answered in favour of Assessee.

Issues Involved:
1. Justification of Tribunal in deleting the disallowance of depreciation on capital expenditure under Section 11 of the Income Tax Act, 1961.
2. Justification of Tribunal in deleting the disallowance of scholarship expenditure as non-charitable.

Issue-wise Detailed Analysis:

1. Justification of Tribunal in Deleting the Disallowance of Depreciation on Capital Expenditure:

The primary issue was whether the Tribunal was justified in law and on facts in deleting the addition made by the Assessing Officer (A.O.) on account of disallowance of depreciation. The A.O. had disallowed depreciation on the grounds that the entire cost of capital expenditure had already been allowed as a deduction under Section 11 of the Income Tax Act, 1961, and allowing depreciation would amount to double deduction.

The court examined the provisions of Section 11, which states that certain types of income shall not be included in the total income of the previous year of the person in receipt of the income. The court noted that this is not a case of deduction but rather an exemption. The court referenced multiple High Court judgments that supported the view that depreciation should be allowed even if the cost of the capital asset has been fully allowed as a deduction under Section 11. The court cited decisions from the Karnataka High Court, Madhya Pradesh High Court, Gujarat High Court, Calcutta High Court, Punjab and Haryana High Court, Madras High Court, and Maharashtra High Court, all of which supported the Assessee's position.

The court also discussed the amendment to Section 11 by the Finance Act (No. 2) of 2014, effective from 01.04.2015, which explicitly excluded depreciation or other allowances in respect of assets for which the acquisition cost had been claimed as an application of income. The court concluded that this amendment is prospective and does not apply to the assessment years in question.

The court found itself in agreement with the decisions of various High Courts and concluded that the Tribunal was justified in deleting the disallowance of depreciation. The court respectfully differed from the divergent view expressed by the Kerala High Court in Lissie Medical Institutions Vs. Commissioner of Income Tax, which relied on the Supreme Court's judgment in Escorts Limited and others Vs. Union of India. The court clarified that the judgment in Escorts Limited was in respect of different provisions, while the scheme of Section 11 was different until the amendment in 2015.

2. Justification of Tribunal in Deleting the Disallowance of Scholarship Expenditure:

The second issue was whether the Tribunal was justified in upholding the order of the Commissioner of Income Tax (Appeals) [CIT(A)] in allowing the scholarship expenditure as charitable. The A.O. had disallowed the scholarship payment to one Adheesh Bhagat, arguing that it was not for charitable purposes.

The court noted that the scholarship was disbursed for pursuing an Engineering course from the University of California, Los Angeles, USA, after a selection process that found the candidate to be the most deserving. The court emphasized that the advancement of education is a recognized charitable purpose and that the candidate was not related to the Members of the Society. The financial status of the student was deemed immaterial in this context.

The court agreed with the CIT(A) and the Tribunal that the payment of the scholarship was admissible as charitable expenditure. Therefore, the Tribunal was justified in deleting the disallowance of the scholarship expenditure.

Conclusion:

In conclusion, the court answered both questions in favor of the Assessee and against the Revenue. The appeals were dismissed, and the Tribunal's decisions to delete the disallowance of depreciation and scholarship expenditure were upheld.

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