2014 (2) TMI 988 - AT - Income Tax

Claim of depreciation u/s 32(1) of the Act Computation of income u/s 11(1)(a) of the Act - Whether the computation of income u/s 11(1)(a) of the Act, without classification under various heads as set out in section 14 of the Act amount to double deduction Held that - The decision in DIT vs. Vishwa Jagriti Mission 2012 (4) TMI 289 - DELHI HIGH COURT followed - claim of depreciation on fixed assets utilized for the charitable purposes has to be allowed while arriving at the income available for application to charitable and religious purposes, since the income of the society should be computed on the basis of commercial principles - there is no business activity - As seen from the computation of income placed on record, assessee has not claimed any application of income towards purchase of assets in this year - A.O. has not brought out anything on record that assets purchased by assessee have been claimed as deduction in earlier years and without examining the issue A.O. cannot disallow the amount, simply because there was a case law establishing the principle that double deduction is not allowable the order of the AO and CIT(A) set aside and the claim of the depreciation is allowed Decided in favour of Assessee.

Issues Involved:
1. Claim of depreciation disallowed by the Assessing Officer (A.O.) and treated as income.
2. Re-assessment proceedings and their validity.
3. Allowability of depreciation under section 11(1)(a) of the Income Tax Act, 1961.

Detailed Analysis:

1. Claim of Depreciation Disallowed by the A.O. and Treated as Income:

The primary issue in this appeal is the disallowance of a depreciation claim amounting to Rs. 7,29,036/- by the A.O. The A.O. reasoned that since the assessee's assets had already been allowed as an application of income, claiming depreciation would amount to a double deduction. The assessee, a society registered under section 12AA of the Act, contended that this was not a double claim and relied on earlier ITAT decisions in its favor for the assessment years 2003-04 and 2007-08. However, the CIT(A) dismissed the appeal, referencing the ITAT's decision in ACIT vs. Sri Venkata Sai Educational Society, which held that depreciation under section 32(1) is not allowable if the entire cost of the asset has been allowed as an application of income under section 11(1).

The Tribunal examined the issue and noted that the income of a charitable institution should be computed under ordinary principles of commercial accounting, and depreciation should be allowed on depreciable assets held by a charitable institution to arrive at the income required to be applied for charitable purposes. The Tribunal distinguished the case from the Supreme Court decision in Escorts Ltd. vs. Union of India, which dealt with the inadmissibility of depreciation when the entire cost of the asset was claimed as a deduction for scientific research.

The Tribunal also considered various High Court decisions, including CIT vs. Manav Mangal Society and CIT vs. Tiny Tots Education Society, which supported the claim of depreciation for charitable institutions. The Tribunal concluded that the amount of depreciation debited to the account of a charitable institution has to be allowed to determine the income available for application to charitable purposes.

2. Re-assessment Proceedings and Their Validity:

Grounds No. 2 and 3, which pertained to the re-assessment proceedings, were not argued by the assessee and were thus treated as not pressed and dismissed.

3. Allowability of Depreciation under Section 11(1)(a) of the Income Tax Act, 1961:

The Tribunal reviewed various judicial precedents and found a consensus that depreciation should be allowed for charitable institutions even if the cost of the asset has been treated as an application of income. The Tribunal noted that the Hon'ble Delhi High Court in DIT vs. Vishwa Jagriti Mission had analyzed the issue comprehensively and held that depreciation is allowable while computing the income of a charitable institution.

The Tribunal also highlighted that the A.O. failed to examine whether the assets on which depreciation was claimed had been exempted in earlier years. The Tribunal criticized the A.O. for not following the provisions of the Act properly and for unnecessarily raising demands that could harass charitable institutions.

The Tribunal emphasized that the CIT(A) erred in not following the binding order of the ITAT in the assessee's own case for earlier years. Since the Revenue had accepted the ITAT's order in those years, the CIT(A) should have adhered to the ITAT's decisions.

Conclusion:

The Tribunal reversed the orders of the A.O. and CIT(A), allowing the claim of depreciation to the assessee. The appeal of the assessee was thus considered allowed. The order was pronounced in the open court on 07.02.2014.

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