2015 (3) TMI 11 - HC - Income Tax

Depreciation on capital assets - whether the Tribunal was justified in allowing depreciation claimed by the assessee on capital assets for which capital expenditure has already been allowed in the year under consideration? - Held that - The assessee is a charitable institution registered under Section 12-A of the Act of 1961 and 100% capital expenditure was availed by it against the asset concerned i.e. a building. Section 32(1) of the Act of 1961 provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. Income of a charitable trust like the present assessee derived from the depreciable heads is also liable to be computed on commercial basis, however, while doing so it is to be kept in mind that ultimately assessee is a charitable institution and its income for tax purposes is required to be determined by taking into consideration provisions of Section 11 of the Act of 1961 after extending normal depreciation and deductions from its gross income. In computing the income of a charitable institution/trust depreciation of assets owned by such institution is a necessary deduction on commercial principles, hence, the amount of depreciation has to be deducted to arrive at the income available. Thus ITAT rightly allowed depreciation claimed by the assessee on capital assets for which capital expenditure was already given in the year under consideration. See Director of Income Tax v. Framjee Cawasjee Institute (1992 (7) TMI 331 - BOMBAY HIGH COURT) and in CIT v. Institute of Banking Personnel (2003 (7) TMI 52 - BOMBAY High Court ). - Decided in favour of assessee.

Summary

Issues:
- Disallowance of depreciation claim for assessment year 2004-05 by the Assessing Officer.
- Appeal by the Revenue regarding the allowance of depreciation claimed by the assessee on capital assets.
- Interpretation of whether depreciation can be claimed on assets for which capital expenditure has already been allowed in the same year.
- Application of income tax laws to charitable institutions regarding depreciation deductions.

Analysis:
The judgment revolves around the disallowance of the assessee's depreciation claim for the assessment year 2004-05 by the Assessing Officer. The Commissioner of Income Tax (Appeals) upheld the disallowance, but the Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur, allowed the appeal by the assessee, directing the Income Tax Department to permit the depreciation claimed. The main issue raised was whether the Tribunal was justified in allowing depreciation on capital assets for which capital expenditure had already been allowed in the same year. The argument against allowing depreciation was based on the premise that full capital expenditure had been permitted in the year of asset acquisition. This argument was supported by a Delhi High Court judgment and a Kerala High Court judgment, both highlighting that allowing depreciation on assets where the cost had been deducted as an application of income would result in double deduction of capital expenditure.

On the contrary, the assessee argued that Section 32 of the Income Tax Act of 1961 does not differentiate between charitable trusts and other entities concerning depreciation application. The assessee contended that normal depreciation should be considered a legitimate deduction to compute the real income, citing a Bombay High Court judgment and another High Court of Bombay case to support the claim that depreciation on depreciable assets should be accounted for in computing the income of a charitable institution, even if the expenditure on acquiring those assets had been treated as application of income in the year of acquisition.

The High Court analyzed the arguments presented and concluded that the assessee, being a charitable institution, was entitled to claim depreciation on capital assets, even if the capital expenditure had been allowed in the year of acquisition. The Court emphasized that depreciation of assets owned by a charitable institution is a necessary deduction on commercial principles to determine the income available for tax purposes. The judgment aligned with previous decisions of the Bombay High Court and upheld that depreciation should be considered in computing the income of a charitable institution. Consequently, the Court dismissed the appeal, affirming the Tribunal's decision to allow the depreciation claimed by the assessee on capital assets.