2018 (5) TMI 235 - AT - Income Tax

Entitled to a claim of depreciation allowance on the assets of its unit managing shrines (holy places) - Held that - Without doubt, the same is admissible. The same would not be u/s. 32(1), as rightly pointed out by the ld. CIT(A), in-as-much as the assets do not represent or constitute a business undertaking. However, an annualized capital charge, based on a reasonable estimate of the life of the relevant assets, would definitely stand to be allowed, even as explained by the Board per its Circular No. 5-P (LXX-6) dated 19.06.1968. This, in fact, represents trite law and is also the premise for a claim of depreciation. The non-booking of depreciation in accounts, though essential inasmuch as it cannot be unaccounted, would not in our view be fatal. The first appellate authority ought to have issued specific directions in this regard as the assessee s accounts, which are subject to audit, ought to bear the said charge. The same would also eschew a double claim in its respect, which is a distinct possibility where the asset value/s is not correspondingly reduced (by the amount of depreciation). Further, the assessee is equally entitled to claim capital expenditure, including on acquisition of capital assets, as a part of application of income. We state this in-as-much as exemption under section 11 is only on the basis of application of income, and not otherwise, and on which aspect we observe no finding by the AO. The matter, accordingly, shall travel to the file of the AO to compute the assessee s income (for both the units) in accordance with law. The AO, whose powers in the matter of assessment are plenary, shall, after hearing the assessee, issue directions with regard to booking of depreciation deemed proper under the circumstances, which the assessee is entitled to claim, and which may extend to properties of both the units. We may clarify that the depreciation is to be consistently provided in accounts based on objective data. Penalty u/s. 271(1)(c) - excess of Gurdwara receipt over the related expenditure - Held that - We have not only held of the assessee as being entitled for the claim of depreciation - which though would have to suitably quantified and also booked, but also for set off of capital expenditure as application of income, both in terms of settled law, which shall reduce the taxable income. In fact, even excluding section 11, the claim would stand, as it is only income thereafter that could be subject to application for charitable or religious purposes. In fact, merits apart, the assessment itself stands set aside. No case for the levy of penalty is under the circumstances made out. We decide accordingly.

Summary

Issues:
1. Quantum Proceedings - Claim of depreciation allowance and benefit of sections 11 and 12.
2. Legal Issue - Entitlement to claim depreciation and benefit of sections 11 and 12.
3. Penalty Proceedings - Penalty under section 271(1)(c) on the addition of Gurdwara receipt.

Quantum Proceedings Analysis:
The appellant, a society managing a school and shrines, appealed against the denial of benefits under sections 11 and 12 due to lack of registration under section 12AA at the relevant time. The appellant argued for depreciation allowance on assets, citing Circular No. 5-P (LXX-6) of 1968. The Tribunal held that depreciation is admissible even if assets do not constitute a business undertaking. The appellant's accounts should reflect depreciation to avoid double claims. The Tribunal also allowed capital expenditure as part of income application, emphasizing the importance of reducing asset values by depreciation amount.

Regarding the legal issue, the Tribunal accepted the appellant's claim for benefits under sections 11 and 12, even if registration was granted after assessment, citing previous decisions and the scheme of the Act. The Tribunal emphasized that appellate proceedings are distinct from assessment proceedings and granted the benefit of sections 11 and 12 to the appellant. However, the Tribunal noted that the appellant cannot claim benefits under both section 11 and section 10(23C(iiiad)) for different units, directing the Assessing Officer to compute income accordingly.

Penalty Proceedings Analysis:
The penalty under section 271(1)(c) was imposed on the excess Gurdwara receipt over related expenditure. The Tribunal, after allowing the claim for depreciation and capital expenditure, found no basis for the penalty considering the reduction in taxable income. The Tribunal concluded that no case for penalty existed and allowed the appellant's appeal for statistical purposes while dismissing the Revenue's appeal.

In summary, the Tribunal ruled in favor of the appellant in the quantum proceedings by allowing depreciation and capital expenditure claims, and granting benefits under sections 11 and 12. The penalty under section 271(1)(c) was deemed unwarranted due to the reduction in taxable income. The orders were pronounced on April 20, 2018.