2018 (4) TMI 1483 - HC - Income Tax

Claim of depreciation u/s 32 when exemption has been availed u/s 11 towards applicable of income - claiming depreciation on the same capital assets tantamount to double deduction - Held that - The issue is covered by the decision in the case of Commissioner of Income Tax vs. M/s Mahima Shiksha Samiti 2017 (11) TMI 1421 - RAJASTHAN HIGH COURT - Decided against the revenue.

Summary

Issues Involved:
1. Disallowance of depreciation for charitable or religious institutions.
2. Double deduction of depreciation and application of income.
3. Reliance on previous decisions and conflicting judgments from different courts.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation for Charitable or Religious Institutions:
The appellant challenged the Tribunal's decision, which dismissed the department's appeals and confirmed the CIT(A)'s order, arguing that charitable or religious institutions are governed by Sections 11, 12, 12A, 12AA, and 13 of the Income Tax Act, 1961. These sections form an independent code under Chapter III, whereas the claim for depreciation under Section 32 falls under Chapter IV, which pertains to profits and gains from business or profession. The appellant contended that depreciation should not be allowed as these capital assets are not used for business purposes as required under Section 32(1).

2. Double Deduction of Depreciation and Application of Income:
The appellant argued that allowing depreciation on assets, whose cost has already been treated as an application of income under Section 11(1), results in double deduction, which is not permissible under the law. They cited the case of Lissie Medical Institutions vs. CIT (348 ITR 344), where the Kerala High Court held that depreciation cannot be allowed on such assets. Additionally, they referenced the Supreme Court's decision in Escorts Ltd. vs. Union of India (199 ITR 43), which ruled that capital expenditure on scientific research allowed as a deduction under Section 35(1)(iv) cannot be claimed again as depreciation.

3. Reliance on Previous Decisions and Conflicting Judgments:
The respondents relied on several judgments to support their case. The Supreme Court in CIT-III, Pune vs. Rajasthan and Gujarati Charitable Foundation Poona (Civil Appeal 7186/2014) affirmed that depreciation should be allowed and can be carried forward. This view was supported by most High Courts except the Kerala High Court. The Rajasthan High Court in Commissioner of Income Tax vs. M/s Mahima Shiksha Samiti (708/2008) and Commissioner of Income Tax vs. M/s Compucom Foundation (DBITA No. 209/2017) held that depreciation should be allowed for charitable institutions. The court also referenced the decision in Queen’s Education Society vs. CIT (2015) 372 ITR 699 (SC), which stated that surplus funds ploughed back for educational purposes do not violate Section 10(23C).

Conclusion:
The High Court dismissed the appeals, holding that the issues should be answered in favor of the assessee. The court relied on its previous judgments and the Supreme Court's rulings, affirming that depreciation on capital assets should be allowed for charitable institutions, and such depreciation can be carried forward. The court concluded that no substantial question of law arises, and the appeals were dismissed.