2016 (3) TMI 462 - HC - Income Tax

Depreciation allowable under Section 11 - whether there is no double claim of capital expenditure? - effect of amendment to Section 11(6) - Held that - The question involved in this case is no more res integra. This question was considered by this Court as far back as in the year 1984, in the case of Society of the Sister s of ST. Anne 1983 (8) TMI 44 - KARNATAKA High Court held that the income derived from property held under trust cannot be the total income because s. 11(1) says that the former shall not be included in the latter, of the person in receipt of the income. The expression total income has been defined under s. 2(45) of the Act to mean the total amount of income referred to in s. 5 computed in the manner laid down in this Act . The word income is defined under s. 2(24) of the Act to include profits and gains, dividends, voluntary payment received by trust, etc. It may be noted that profits and gains are generally used in terms of business or profession as provided u/s. 28. The word income , therefore, is a much wider term than the expression profits and gains of business or profession . Net receipt after deducting all the necessary expenditure of the trust (sic). Depreciation is the exhaustion of the effective life of a fixed asset owing to use or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of Charitable Trust is to be effective from 1.4.2015 and is prospective in nature - Decided in favour of the Assessee

Summary

Issues Involved:
1. Allowability of depreciation under Section 11 of the Income Tax Act for charitable institutions.
2. Applicability of the principle of double deduction.
3. Retrospective or prospective application of Section 11(6) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation under Section 11:
The core issue in these appeals is whether depreciation is allowable under Section 11 of the Income Tax Act for charitable institutions. The assessees, all charitable institutions registered under Section 12AA and 10(23)(c) of the Act, claimed depreciation on capital assets, which was disallowed by the Assessing Officer on the grounds that it would result in double deduction. The CIT(A) and the Tribunal, however, allowed the depreciation, leading to the revenue's appeal.

2. Principle of Double Deduction:
The revenue contended that allowing depreciation would result in a double deduction since the cost of acquiring the capital asset had already been treated as an application of income. The revenue relied on the Supreme Court judgment in Escorts Ltd., which prohibits double deductions. The assessees argued that the depreciation claim is not under Section 32 but under normal commercial principles, and does not amount to double deduction. The court referred to the judgment in Society of Sisters of St. Anne, which held that depreciation is allowable as it represents the wear and tear of the asset and is necessary to preserve the corpus of the trust.

3. Retrospective or Prospective Application of Section 11(6):
Section 11(6) was inserted by the Finance Act No.2/2014, effective from 01.04.2015, which mandates that income should be determined without any deduction for depreciation if the acquisition of the asset has been claimed as an application of income. The revenue argued that this amendment is clarificatory and should apply retrospectively. However, the court, referring to the principles laid down in Vatika Township P. Ltd., held that the amendment is prospective and applies from the assessment year 2015-16 onwards.

Conclusion:
The court concluded that depreciation is allowable under Section 11 of the Income Tax Act for charitable institutions, and such allowance does not amount to double deduction. The court also held that Section 11(6) is prospective in nature and applies from the assessment year 2015-16. Consequently, the appeals by the revenue were dismissed, and the question of law was answered in favor of the assessee.