2015 (6) TMI 754 - AT - Income Tax

Revision u/s 263 - Registration u/s.12A cancelled - when deduction u/s 35(2)(iv) is allowed in respect of capital expenditure on scientific research, no depreciation is allowable u/s 32 on the same asset as held by DIT(E) - Held that - The issue raised in the ground of appeal is no longer res integra as has been decided in the case of CIT v. Market Committee, Pipli,(2010 (7) TMI 374 - Punjab and Haryana High Court) considering several decisions on that issue and also case of Escorts Ltd. (1992 (10) TMI 1 - SUPREME Court) came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. A trust claiming depreciation cannot be equated with a claim for double deduction. The Hon ble Punjab & Haryana High Court has also made a reference to the decision of CIT v. Society of Sisters of Anne, (1983 (8) TMI 44 - KARNATAKA High Court), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. Thus jurisdiction u/s. 263 of the Act ought not to have been exercised by the DIT(E). - Decided in favour of assessee.

Summary

Issues:
1. Whether disallowance of depreciation on assets claimed as application of income amounts to double deduction.
2. Whether the order of the DIT(E) under section 263 of the Act was erroneous.

Analysis:
1. The appeal was against the order of the DIT(E) under section 263 of the Act, where the DIT(E) found the AO's assessment to be erroneous and prejudicial to the Revenue's interests. The AO had denied the exemption of capital expenditure claimed under section 11(1)(a) as application of income due to the cancellation of registration under section 12A. Additionally, the DIT(E) noted that claiming depreciation on assets whose cost had already been considered as application of income amounted to double deduction. The DIT(E) relied on various legal precedents to support this view, emphasizing that depreciation is meant to replace the value of an asset gradually lost over time.

2. The DIT(E) issued a show cause notice under section 263, and the assessee cited previous court decisions to argue against the disallowance of depreciation. Despite the assessee's contentions, the DIT(E) maintained that allowing depreciation on assets already accounted for as application of income would result in double benefit. The DIT(E) referenced the decision of the Hon'ble High Court of Kerala in a similar case to support the disallowance of depreciation. The DIT(E) concluded that the AO's order was erroneous and directed a reevaluation of the depreciation allowable on the assets' WDV, excluding previously allowed costs.

3. The assessee appealed to the Tribunal, where arguments were presented by both parties. The Tribunal considered a similar issue in a previous case and ruled in favor of allowing depreciation, stating that it is a necessary deduction for computing income of charitable institutions. The Tribunal referenced relevant court decisions to support its stance that depreciation can be claimed without resulting in double benefit. The Tribunal highlighted the legal amendment introduced by the Finance Act, 2014, which clarified the treatment of assets claimed as application of income. The Tribunal held that the DIT(E) should not have exercised jurisdiction under section 263 and allowed the appeal of the assessee, quashing the DIT(E)'s order.

In conclusion, the Tribunal's decision favored the assessee, emphasizing the legality of claiming depreciation on assets previously considered as application of income and highlighting the prospective amendment introduced to clarify the treatment of such assets.