2021 (11) TMI 501 - AT - Income Tax

Revision u/s 263 by CIT - whether depreciation is allowable on fixed assets, whose cost have been allowed as application of income ? - HELD THAT - As in the case of CIT Vs. Rajasthan Gujarat Charitable Foundation, Pune 2017 (12) TMI 1067 - SUPREME COURT held that the depreciation can be treated as application of income even if the expenditure on acquisition of capital asset was treated as application of income. We notice that the Income tax Act has been amended from AY 2015-16 disentitling the assessee to claim depreciation on assets, whose cost has been allowed as application of income. Since the year under consideration is AY 2010-11, the decision rendered by Hon'ble Supreme Court is applicable to the facts of the present case. Since the view taken by Ld. CIT(A) is contrary to the binding decision rendered by Hon'ble Supreme Court, his view on this issue cannot be sustained. Accordingly, we set aside his order on this issue. Whether repayment of loan is application of income or not? - CIT (Exemptions) has taken the view that if the asset acquired out of loan proceeds had been allowed as application of income, then the repayment of loan cannot be considered as application of income again, as the same will result in double deduction. A.O. has not examined this issue during the course of assessment proceedings - there is merit in initiation of revision proceedings on this issue - CIT(A) has directed the AO not to consider repayment of loan as application of income without giving a finding whether the cost of asset acquired out of loan funds were allowed as application of income or not. Hence his direction given on this issue requires modification. We quash the order of Ld. CIT(Exemptions) with regard to issue relating to depreciation. With regard to issue relating to repayment of loan, we modify the direction of the CIT (Exemptions) and direct the A.O. to examine this claim afresh i.e. if the cost of assets acquired out of loan funds have already been allowed as application of income, then the repayment of loan should not be allowed as application. On the contrary, if the cost of assets purchased out of loan was not allowed as application of income, then the repayment of loan should be allowed as application of income. We modify the directions given by Ld. CIT(Exemptions) accordingly.

Summary

Issues:
1. Challenge to revision order u/s. 263 of the Income-tax Act, 1961 for the assessment year 2010-11.
2. Barred appeal by 396 days and request for condonation of delay.
3. Disallowance of depreciation claimed in income and expenditure account.
4. Disallowance of repayment of loan claimed as application of income.
5. Direction by Ld. CIT(Exemptions) to recompute income disallowing depreciation and loan repayment.
6. Settlement of depreciation issue by Hon'ble Supreme Court.
7. Question of whether repayment of loan is application of income.
8. Modification of Ld. CIT(Exemptions) order on depreciation and loan repayment issues.

Analysis:
1. The appeal challenged the revision order under section 263 of the Income-tax Act, 1961 for the assessment year 2010-11. The appeal was initially barred by 396 days, but the delay was condoned due to a reasonable cause presented by the assessee. The delay was attributed to the Chartered Accountant's failure to advise challenging the revision order.

2. The Ld. CIT (Exemptions) found the assessment order erroneous and prejudicial to revenue due to the disallowed depreciation and repayment of loan claimed as application of income. The Ld. CIT (Exemptions) initiated revision proceedings and directed the AO to recompute the income, disallowing these claims. The assessee appealed this decision before the Tribunal.

3. The Tribunal referred to the Hon'ble Supreme Court's decision in CIT Vs. Rajasthan & Gujarat Charitable Foundation, Pune, which clarified that depreciation can be treated as application of income even if the capital asset's cost was treated as application of income. As the Income Tax Act was amended from AY 2015-16, disallowing depreciation on such assets, the Supreme Court's decision applied to the present case for AY 2010-11, leading to the setting aside of Ld. CIT(A)'s order on depreciation.

4. Regarding the repayment of loan issue, the Tribunal noted that the AO did not examine it during the assessment proceedings. The Ld. CIT (Exemptions) had directed not to consider loan repayment as application of income without determining if the asset's cost acquired from the loan funds was allowed as application of income. The Tribunal modified this direction, instructing the AO to re-examine the claim based on whether the asset's cost was previously allowed as application of income.

5. Consequently, the Tribunal quashed the Ld. CIT(Exemptions) order on the depreciation issue and modified the direction on the loan repayment issue. The appeal by the assessee was partly allowed based on these considerations.