2015 (8) TMI 89 - HC - Income Tax

Interpretation of Section 11(1) clause a of the Income Tax Act, 1961 - whether depreciation allowed on capital assets cannot be treated as application of income under the said clause? - Held that - Kerala High Court in Lissie Medical Institution vs. CIT 2012 (4) TMI 115 - KERALA HIGH COURT following the decision in the case of Escorts Ltd. v. Union of India 1992 (10) TMI 1 - SUPREME Court has stated that the assessee would be entitled to write back depreciation and if done, the Assessing Officer would modify the assessment determining the higher income and allow recomputation of depreciation written back for the purpose of application of income for charitable purposes in future or subsequent years. This may lead to its own difficulties and problems as suddenly the entire depreciation written off would have to be added first and then in one year substantial application of income would be required. This may be impractical and would disturb the working of many a charitable institutions. The legal interpretation which has continued since 1984, if disturbed and implemented, would not appropriately resolved. Consistency and certainty is more appropriate. Decision in the case of Escorts Ltd. (supra) was considered by the Delhi High Court in DIT vs. Vishwa Jagriti Mission 2012 (4) TMI 289 - DELHI HIGH COURT decided on 29th March, 2012 and was distinguished. The equally plausible and consistent interpretation of clause (a) of Section 11(1) of the Act is that income derived from property must be calculated as per the principles of the Act. The said clause is not a computation provision and does not disturb the income earned or available but postulates that the income as computed in accordance with the provisions of the Act to the extent of 86% must be applied. Application of income may include purchase of a capital asset. The said purchase is valid and taken into consideration for the purpose of ensuring compliance, i.e., application of money or funds and is not a factor which determines and decides the quantum of income derived from property held under trust. Computation of income is separate and distinct and has to be made on commercial basis by applying provisions of the Act. - Decided against revenue.

Summary

Issues Involved:
1. Interpretation of Section 11(1)(a) of the Income Tax Act, 1961.
2. Whether depreciation on capital assets can be treated as application of income under Section 11(1)(a).
3. Consistency in the application of depreciation for charitable institutions.

Detailed Analysis:

1. Interpretation of Section 11(1)(a) of the Income Tax Act, 1961:
The primary issue in these appeals is the interpretation of Section 11(1)(a) of the Income Tax Act, 1961. This section stipulates that income derived from property held under trust wholly for charitable or religious purposes is exempt from tax to the extent it is applied for such purposes in India, and any accumulation of such income should not exceed 15% of the income from such property. The Revenue contends that depreciation on capital assets should not be treated as application of income under this clause, arguing that allowing depreciation would result in a double deduction since the purchase of the asset is already treated as application of income.

2. Whether depreciation on capital assets can be treated as application of income under Section 11(1)(a):
The Revenue's argument is supported by the Kerala High Court's decision in Lissie Medical Institution vs. CIT, which states that allowing depreciation on assets already treated as application of income would result in unaccounted income and potential black money. The Central Board of Direct Taxes (CBDT) also supports this view, asserting that depreciation should be added back while computing income for the purpose of application under Section 11. However, the Delhi High Court refers to several decisions from various High Courts, including the Karnataka High Court in Commissioner of Income Tax vs. Society of The Sisters of St. Anne, which held that depreciation is a necessary charge for computing income from charitable institutions. The Court emphasizes that depreciation represents the decrease in value of an asset due to wear and tear, and not allowing it would result in inaccurate financial records.

3. Consistency in the application of depreciation for charitable institutions:
The Court acknowledges that the system of allowing depreciation has been followed consistently by charitable institutions for several years, supported by various High Court decisions. The Court notes that disallowing depreciation suddenly would disrupt the functioning of these institutions. The Court also distinguishes the Supreme Court's decision in Escorts Ltd. vs. Union of India, which dealt with business income and specific provisions under Section 35(1) of the Act, not applicable to charitable institutions. The Delhi High Court concludes that the income derived from property held under trust must be computed as per the principles of the Act, and the application of income, including the purchase of capital assets, should be considered for compliance with Section 11(1)(a).

Conclusion:
The Delhi High Court dismisses the Revenue's appeals, holding that depreciation on capital assets can be treated as application of income under Section 11(1)(a) of the Income Tax Act, 1961. The Court emphasizes the need for consistency and certainty in the application of the law, which has been followed since 1984. The Court also leaves open an additional question raised in ITA No. 336/2013 regarding subscription received from members, due to the small amount involved.