2017 (8) TMI 931 - HC - Income Tax

Grant of depreciation to an entity seeking exemption in terms of section 11 - Scope of amendment to restrict the claim - prospective or retrospective - Held that - Depreciation, as defined in Spicer and Pegler s Book-Keeping and Accounts is the measure of the exhaustion of the effective life of a fixed asset owing to use or obsolescence during a given period. It may be regarded as that part of the cost of the asset which will not be recoverable when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure incurred in acquiring the asset over its effective lifetime, and the amount of provision made in respect of an accounting period is extended to represent the proportion of such expenditure which has expired during that period. The necessity of providing for depreciation emanates from the fact that once an asset ceases to be effective, it will have to be replaced. Providing for depreciation would ensure setting aside out of the revenue of an accounting period, the estimated amount by which the capital investment has expired during that period. This provision, incurred for the use of that asset for the purpose of earned profit should be charged against those profits as and when earned. The claim of depreciation is thus part of standard accounting practice which is required for fair presentation of a company s financials. The computation of income in the case of an entity to which section 11 is applicable would be in two stages. Firstly, the determination of the profit arrived at, which would be the total receipts net of expenditure and depreciation incurred in earning the receipts, and secondly the stage of application to Charitable/Religious objects. The two stages are distinct and are required to be complied with consecutively in order to determine the correct income and its application. In the present batch of appeals one that involves a claim for exemption in respect of income earned from property held for charitable or religious purposes. We see no double benefit that is extended to the assessee in this regard. DIT (Exem) Vs Al-Ameen Charitable Fund Trust 2016 (3) TMI 462 - KARNATAKA HIGH COURT - Decided in favour of the assessee. Whether the provisions of Section 11(6) inserted by Finance (No.2) Act, 2014 w.e.f. 1.4.2015, operate prospectively with effect from assessment year 2015-16 or retrospectively with respect to earlier years as well? - Held that - We do not agree with the Revenue. The amendment, inserted specifically with effect from Assessment Year 2015-2016 seeks to disturb a vested right that has accrued to the assesee. The amendment does not purport to be clarificatory, on the other hand the Explanatory Memorandum makes it applicable only w.e.f. A Y 2015-16 and application of the amendment retrospectively would certainly lead to a great deal of hardship to the assessee. We are thus of the view that the provisions of section 11(6) of the Act inserted with effect from 1.4.2015 shall operate prospectively with respect to assessment year 2015-2016 only.

Issues Involved:
1. Double deduction under Section 11 of the Income Tax Act.
2. Grant of depreciation to entities seeking exemption under Section 11.
3. Retrospective application of Section 11(6) of the Income Tax Act.
4. Set-off of excess application of earlier years against the income of the current year.

Detailed Analysis:

Issue 1: Double Deduction under Section 11
- The primary issue in the appeals was whether the Tribunal was correct in allowing double deduction without considering the principles laid down in the Supreme Court judgment in 199 ITR 43 (SC).
- The Revenue argued that granting depreciation in addition to exemption under Section 11 would result in a double benefit, which is not permissible unless specifically conferred by statute. The Supreme Court's decision in Escorts Limited and another Vs. Union of India and others (199 ITR 43) was cited to support this argument, emphasizing that no legislature intended a double deduction for the same business outgoing unless expressly stated.

Issue 2: Grant of Depreciation to Entities Seeking Exemption under Section 11
- The court examined whether entities claiming exemption under Section 11 could also claim depreciation on assets, which had already been treated as application of income.
- The court noted that the claim of depreciation is a standard accounting practice necessary for a fair presentation of financials. Depreciation spreads the cost of an asset over its effective lifetime, ensuring that the books reflect a true record of revenue and capital.
- The court distinguished the present case from the Escorts judgment, noting that the latter dealt with dual claims under Section 35, which involved a weighted deduction and depreciation for the same asset. However, in the present case, the issue was about exemption for income from property held for charitable or religious purposes, and there was no double benefit extended to the assessee.
- The court referred to several High Court decisions supporting the assessee's claim for depreciation, including those from the Bombay, Karnataka, Madhya Pradesh, Gujarat, Punjab and Haryana, and Calcutta High Courts.

Issue 3: Retrospective Application of Section 11(6)
- The court addressed whether the provisions of Section 11(6), inserted by Finance (No.2) Act, 2014 with effect from 1.4.2015, should be applied retrospectively.
- The court referred to Circular 1 of 2015, which clarified that the amendment would apply from the assessment year 2015-16 onwards.
- The court held that the amendment was not clarificatory but intended to correct an existing anomaly, and thus should be applied prospectively to avoid undue hardship to the assessee. The court cited Supreme Court judgments in CIT Vs. Alom Extrusions Ltd and CIT vs Vatika Township to support this view.

Issue 4: Set-off of Excess Application of Earlier Years
- The court examined whether the excess application of funds in earlier years could be set off against the income of the current year.
- The assessee argued that the excess application should be allowed as a set-off, relying on the jurisdictional High Court's decision in Commissioner of Income Tax Vs. Matriseva Trust (242 ITR 20).
- The court remanded the issue to the assessing authority to examine the applicability of the amendment to Section 139(5), which allows for the revision of returns within one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.
- The court directed that if the amendment was found applicable, the rationale of the Matriseva Trust decision should be applied on merits.

Conclusion:
- The court ruled in favor of the assessee on the issue of depreciation, holding that it is a necessary part of standard accounting practice and does not constitute a double benefit.
- The court also held that the amendment to Section 11(6) applies prospectively from the assessment year 2015-16.
- The issue of set-off of excess application of earlier years was remanded to the assessing authority for further examination.
- The court's decision was supported by a plethora of High Court decisions favoring the assessee's position on depreciation and the prospective application of the amendment.

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