2018 (4) TMI 2011 - AT - Income Tax

Exemption u/s. 11 12 - Depreciation claim - HELD THAT - Supreme Court in the case of CIT-III Pune vs Rajasthan and Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT held that when the charitable body applies its income on acquisition of capital assets depreciation on such assets should be allowed and hence the AR pleaded that the Revenue s contentions are untenable and hence its appeal may be dismissed. Revenue s appeal is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the assessee, a charitable trust registered under section 12AA and approved under section 80G(5)(vi), is entitled to exemption under sections 11 and 12 of the Income Tax Act despite carrying out sales of devotional articles and books at a profit, invoking the proviso to section 2(15).
• Whether the surplus arising from sale of such articles should be treated as income under the head business and taxable accordingly.
• Whether depreciation claimed on capital assets can be allowed as an application of income under section 11 when the entire cost of acquisition of such assets has already been treated as application of income in earlier years.
• Whether allowing depreciation in addition to the cost of acquisition as application of income amounts to double deduction, contrary to judicial precedents.
• The proper interpretation and applicability of judicial precedents, including decisions of the Supreme Court and various High Courts, regarding the treatment of depreciation in charitable trusts claiming exemption under sections 11 and 12.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility for exemption under sections 11 and 12 despite sale of devotional articles at profit invoking proviso to section 2(15)

Relevant legal framework and precedents: Section 2(15) defines "charitable purpose" and includes a proviso that excludes activities involving trade, commerce or business with a profit motive. Sections 11 and 12 provide exemption to income applied for charitable purposes. The proviso to section 2(15) can render sections 11 and 12 inapplicable if the trust carries on business with a profit motive.

Court's interpretation and reasoning: The Assessing Officer (AO) held that the trust was engaged in trade with markup and invoked the proviso to section 2(15), thus treating the surplus from sale of devotional articles as business income and denying exemption under sections 11 and 12. However, the Commissioner of Income Tax (Appeals) [CIT(A)] relied on this Tribunal's earlier decision in the assessee's case for AY 2011-12 and the jurisdictional High Court's ruling in Medical Trust of the Seventh Day Adventists, which held that the assessee's activities were eligible for exemption under sections 11 and 12.

Key evidence and findings: The trust was registered under section 12AA and had approval under section 80G(5)(vi). The CIT(A) found that the trust's activities were charitable in nature and that the sale of devotional articles did not amount to a business carried on with a profit motive as contemplated by the proviso to section 2(15).

Application of law to facts: The CIT(A) applied the precedent decisions to hold that the assessee was entitled to exemption under sections 11 and 12 despite the sale of devotional articles. The Tribunal noted that the Revenue did not challenge this aspect in the present appeal.

Treatment of competing arguments: The Revenue's argument that the proviso to section 2(15) applied was rejected based on binding precedents. The assessee's reliance on prior Tribunal and High Court decisions was accepted.

Conclusion: The trust's income from sale of devotional articles is eligible for exemption under sections 11 and 12, and the proviso to section 2(15) is not attracted.

Issue 2: Allowability of depreciation as application of income when cost of acquisition of assets has already been allowed as application of income under section 11

Relevant legal framework and precedents: Section 11 allows exemption of income applied for charitable purposes. Depreciation is a notional allowance for wear and tear of assets and is not an actual expenditure. The question arises whether depreciation can be claimed as application of income when the entire capital expenditure on acquisition of assets has already been treated as application of income in earlier years.

Relevant judicial precedents cited by the Revenue include:

• The Supreme Court decision in M/s. Nectar Beverages Ltd. vs CIT, which held that depreciation is an allowance and not an expenditure.
• The Kerala High Court decision in Lissie Medical Institutions vs CIT, which held that if the cost of acquisition of assets is treated as application of income, depreciation cannot be claimed on the same assets.
• The Delhi Court decision in DIT vs Charanjiv Charitable Trust, which held that depreciation is not allowable where the cost of acquisition is claimed as application of income.
• The jurisdictional Madras High Court decision in CIT vs Rao Bahadur Cunnan Chetty Charities, which held that the term "income" in sections 11 and 12 should be understood in its normal sense and depreciation, not being an actual expenditure, cannot be allowed.
• The ITAT Cochin decision in DIT vs Adi Sankara Trust, which held that allowing depreciation after claiming the cost of acquisition as application of income amounts to double benefit and is not permissible.
• The Apex Court decision in J.K. Synthetics Ltd., which emphasized that double deduction must be expressly provided for and cannot be inferred.

Court's interpretation and reasoning: The AO disallowed depreciation as it considered that the entire capital expenditure had already been allowed as application of income, and allowing depreciation would amount to double benefit. The CIT(A), however, allowed depreciation relying on this Tribunal's earlier decision for AY 2011-12 and the Supreme Court decision in CIT-III, Pune vs Rajasthan and Gujarati Charitable Foundation (2017 TIOL-463-SC-IT), which held that when a charitable body applies its income on acquisition of capital assets, depreciation on such assets should also be allowed.

Key evidence and findings: The assessee claimed depreciation on assets whose cost had been treated as application of income. The Supreme Court decision cited by the assessee clarified that depreciation is allowable in such circumstances.

Application of law to facts: The Tribunal gave overriding weight to the Supreme Court decision in CIT-III, Pune vs Rajasthan and Gujarati Charitable Foundation, which settled the issue in favour of allowing depreciation even when the cost of acquisition has been treated as application of income.

Treatment of competing arguments: The Revenue's reliance on various High Court and Tribunal decisions holding against depreciation was considered but found to be superseded by the Supreme Court ruling. The Tribunal rejected the Revenue's contention that allowing depreciation would amount to double deduction, emphasizing that the Apex Court held that double deduction must be expressly provided for and cannot be inferred.

Conclusion: Depreciation on capital assets is allowable as application of income under section 11 even when the cost of acquisition has already been treated as application of income, in accordance with the Supreme Court decision.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the following verbatim excerpt:

"Supreme Court in the case of CIT-III, Pune vs Rajasthan and Gujarati Charitable Foundation, Poona reported in 2017 TIOL-463-SC-IT dated 13.12.2017 held that when the charitable body applies its income on acquisition of capital assets, depreciation on such assets should be allowed..."

The core principles established are:

• The proviso to section 2(15) does not render sections 11 and 12 inapplicable merely because a charitable trust sells devotional articles at a profit, provided the activities are not carried out with a profit motive.
• Depreciation is an allowable deduction under section 11 as application of income even when the cost of acquisition of capital assets has been treated as application of income in earlier years.
• Double deduction is not permissible unless expressly provided by law; however, the Supreme Court has clarified that allowing depreciation in such cases does not amount to impermissible double deduction.

Final determinations on each issue are:

• The assessee is entitled to exemption under sections 11 and 12 despite sale of devotional articles, as the proviso to section 2(15) is not attracted.
• The claim for depreciation on capital assets is allowable as application of income under section 11 notwithstanding that the cost of acquisition was treated as application of income in earlier years.
• The Revenue's appeal is dismissed on the sole ground of depreciation.