2017 (12) TMI 1067 - SC - Income Tax

Depreciation of assets acquired by assessee trust - the capital expenditure is treated as application of income for charitable purposes - Held that - As in Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS) 2003 (7) TMI 52 - BOMBAY High Court correctly states the principles of law and there is no need to interfere with the same. It may be mentioned that most of the High Courts have taken the aforesaid view with only exception thereto by the High Court of Kerala which has taken a contrary view in Lissie Medical Institutions v. Commissioner of Income Tax 2012 (4) TMI 115 - KERALA HIGH COURT . It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature. It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

Summary

Issues:
Income Tax Department challenging depreciation benefit granted to charitable institutions under Section 32 of the Income Tax Act.

Analysis:
The Supreme Court addressed the petitions and appeals filed by the Income Tax Department against various High Court orders granting depreciation benefit to charitable institutions under Section 32 of the Income Tax Act. The assessees, being charitable institutions registered under Section 12A of the Act, had treated the capital expenditure for asset acquisition as income application for charitable purposes. The Assessing Officer disallowed depreciation, arguing it would result in a double benefit for the assessees. While the CIT (Appeals) supported this view, the ITAT and High Courts ruled in favor of the assessees, following the Bombay High Court's precedent in 'Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS).' This judgment emphasized that depreciation is a legitimate deduction for computing real income, even if capital expenditure was treated as income application previously.

The Court referred to the case of 'CIT v. Munisuvrat Jain' where it was held that depreciation can be claimed in addition to the application of income under Section 11(1)(a) of the Act. Similarly, in 'Director of Income-tax (Exemption) v. Framjee Cawasjee Institute,' it was clarified that treating expenditure as income application does not preclude claiming depreciation in subsequent years. The Supreme Court concurred with the Bombay High Court's interpretation, stating that depreciation can be considered for computing income on commercial principles, even for non-business assets of charitable trusts.

The Court noted that most High Courts had adopted the Bombay High Court's view, except for the High Court of Kerala in 'Lissie Medical Institutions v. Commissioner of Income Tax.' The legislature amended Section 11(6) of the Act through Finance Act No. 2/2014, effective from Assessment Year 2015-2016, to address this issue. The Court confirmed that the amendment was prospective and upheld the right of assessees to carry forward depreciation. Consequently, the Supreme Court affirmed the High Courts' decisions, dismissing the Income Tax Department's appeals.