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2013 (12) TMI 889 - AT - Income TaxDepreciation on assets Application of funds Held that - Following Karnataka Reddy Janasangha in 2013 (12) TMI 163 - ITAT BANGALORE - The income of the trust is required to be computed under section 11 on commercial principles, without reference to the heads of the income specified under section 14 As per Circular No.5-P (LXX-6) dated 19th June, 1968issued by CBDT - The income of the trust is to be computed on the commercial basis - The normal accounting principles clearly provide for deducting depreciation to arrive at income. The income so arrived after deducting the depreciation is to be applied for charitable purpose. Capital expense is application of the income so determined - There is no double deduction as claimed by the DIT(E) in his order Depreciation is allowed on cost of assets which have been fully allowed as application of income u/s 11 Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the DIT (E) in passing the order under Section 263 of the Income Tax Act. 2. Setting aside the claim of depreciation for application of income by the Trust. Detailed Analysis: 1. Jurisdiction of the DIT (E) in passing the order under Section 263 of the Income Tax Act: The primary issue in this case revolves around the jurisdiction of the Director of Income Tax (Exemptions) [DIT (E)] in passing the order under Section 263 of the Income Tax Act. The DIT (E) scrutinized the assessment records and found that the assessee, a Trust engaged in educational activities, claimed both capital expenditure and depreciation on assets as application of funds towards the objects of the Trust. The DIT (E) viewed this as a case of double deduction, thus setting aside the assessment passed under Section 143(3) and directing the Assessing Officer to disallow the depreciation after giving the assessee an opportunity to be heard. The DIT (E) relied on the judgment of the Hon'ble Supreme Court in the case of Escorts Ltd. & Anr. v/s Union of India (199 ITR 43), which held that when deduction under Section 35(2)(iv) is allowed in respect of capital expenditure on assets for scientific research, no depreciation is allowable under Section 32 on the same assets. The DIT (E) also referenced several other judicial precedents and CBDT clarifications to support the view that allowing both capital expenditure and depreciation amounts to double deduction, which is prejudicial to the interest of the revenue. 2. Setting aside the claim of depreciation for application of income by the Trust: The assessee contested the DIT (E)'s order, arguing that the issue of allowance of depreciation as application of income for the objects of the Trust is a settled position of law. The assessee cited decisions from the Bangalore Bench of the Tribunal in the cases of Karnataka Reddy Janasangha and M/s Cutchi Memon Union, which held that depreciation should be allowed while computing the income of the Trust under Section 11 of the Act. These decisions emphasized that income for the purposes of Section 11 should be computed on commercial principles, which include deducting depreciation to arrive at the income. The Tribunal, after hearing both parties, noted that the income of the Trust should be computed under Section 11 on commercial principles without reference to the heads of income specified under Section 14 of the Act. It should be computed as per the book income, not the total income as defined in Section 2(45) of the Act. The Tribunal referred to various judgments from different High Courts and the CBDT Circular No.5-P (LXX-6) dated 19th June 1968, which confirmed that the income of the Trust should be computed on a commercial basis, including the deduction of depreciation. The Tribunal also distinguished the Supreme Court judgment in Escorts Ltd., stating that the issue in that case pertained to business income and deductions under Sections 32 and 35(1)(iv), whereas in the case of a charitable trust, depreciation is a deduction to arrive at income, and capital expenditure is an application of such income. The Tribunal preferred to follow the judgments of various High Courts over the Cochin Bench Tribunal's decision, holding that the assessee is eligible for claiming depreciation. Conclusion: The Tribunal quashed the order passed under Section 263 by the DIT (E), thereby allowing the appeal filed by the assessee. The Tribunal's decision was based on the established legal position that depreciation should be allowed while computing the income of a charitable trust under Section 11, as it is necessary to preserve the corpus of the Trust and does not amount to double deduction. The order was pronounced in the Open Court on 09th October 2013.
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