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TMI Blog2014 (11) TMI 733X X X X Extracts X X X X X X X X Extracts X X X X ..... which was earlier allowed as deduction as application of income of the trust, would actually amount to double deduction - the cost of asset had been allowed as a “deduction” and thereafter depreciation was being claimed - where any income is required to be applied, accumulated or set apart for application, then for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of an asset, the acquisition of which has been claimed as application of income under this Section in the same or any other previous year - The legal position would undergo a change in terms of Section 11(6), which has been inserted and applicable with effect from 1st April, 2015 and not to the assessment years in question - The newly enacted sub-section relates to application of income – Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... (1981) 127 ITR 378 (AP) and CIT versus Rao Bahadur Calavala Cunnan Chetty Charities, (1982) 135 ITR 485 (Mad.) were referred to in affirmation of the legal ratio. It was, inter alia, held:- "11. .........The only question is whether the income of the assessee should be computed on commercial principles and in doing so whether depreciation on fixed assets utilised for the charitable purposes should be allowed. On this issue, there seems to be a consensus of judicial thinking as is seen from the authorities relied upon by the CIT(Appeals) as well as the Tribunal. In CIT vs. The Society of the Sisters of St. Anme (Supra), an identical question arose before the Karnataka High Court. There the society was running a school in Bangalore and was allowed exemption under Section 11. The question arose as to how the income available for application to charitable and religious purposes should be computed. Jagannatha Setty, J. speaking for the Division Bench of the Court held that income derived from property held under trust cannot be the "total income" as defined in Section 2(45) of the Act and that the word "income" is a wider term than the expression "profits and gains of business or profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided u/s 30 to 43D which includes depreciation u/s 32, assessee is entitled is the case pressed before us by the Senior counsel appearing for the assessee. We have no doubt in our mind that business income of charitable trust also has to be computed in the same manner as provided u/s 29 of the Income Tax Act. However, the issue that requires consideration is when the expenditure incurred for acquisition of depreciable assets itself is treated as application of income for charitable purposes u/s 11(1)(a) of the Act, should not the cost of such assets to be treated as nil for the assessee and in that situation depreciation to be granted turns out to be nil. However, if depreciation provided is claimed on notional cost after the assessee claims 100% of the cost incurred for it as application of income for charitable purposes, the depreciation so claimed has to be written back as income available. In fact, going by the several decisions of the various High Courts, we are sure that based on these decisions all the charitable institutions will be generating unaccounted income equal to the depreciation amount claimed on an year to year basis which is nothing but black money. This aspect i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000/-. The purchase price for acquisition of the capital asset i.e. ₹ 50,000/- is treated as application of income for the purpose of clause „a' to Section 11(1). On the capital asset, the assessee also claims depreciation say @ 20%. Accordingly, the assessee claims that the application of income would include ₹ 10,000/- which is to be allowed as depreciation as to this extent, the asset purchased has depreciated. In other words, ₹ 60,000/- is to be treated as application of money for the purpose of clause „a' to Section 11(1)." Thereafter, reference was made to the following quotation from the judgment of the Karnataka High Court in Society of the Sisters of St. Anne (supra) :- "It is clear from the above provisions 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represent that part of their value on acquisition, which has not yet expired. " In CIT v Indian Jute Mills Association [1982] 134 ITR 68, the Calcutta High Court, while constructing the expression " expenditure incurred " in s. 44A of the Act, observed : "depreciation claimed shall include the expenditure incurred." There are only two recognised methods of accounting : (1) cash basis, and (ii) mercantile basis. Under the cash basis only cash transactions are recorded. It is only cash receipts and cash payments which find entries in the books of account. Mercantile system of accounting was explained by the Supreme Court in Keshav Mills Ltd. v. CIT [1953]23 ITR 230 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onveyed to the Court in this regard is as under:- The Central Board of Direct Taxes is of the considered view that where an assessee has acquired an asset through application of income and has also claimed this amount as expenditure in its income expenditure account, depreciation on such asset would not be allowable to the assessee. Such notional statutory deductions like depreciation, if claimed as deduction while computing the income of "the property held under trust" under the relevant head of income, is required to be added back while computing the income for the purpose of application in the income expenditure account. This would imply that a correct figure of surplus from the trust property is reflected in the Income and Expenditure account of the trust to determine the income for the purpose of application under section 11 of the Income Tax Act. This would reduce the possibility of revenue leakage which may be a cause for generation of black money." 10. We also note that the Kerala High Court, in fact, has noted the clarifications which were earlier issued by the Board in respect of 1968 circular. It is clear from the reasoning given by the Kerala High Court that they have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition that depreciation is a necessary charge in computing the net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under Section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can the assessee again claim deduction on account of depreciation in respect of the same asset. The Supreme Court ruled that, under general principles of taxation, double deduction in regard to the same business outgoing is not intended unless clearly expressed. The present case is not one of this type, as rightly distinguished by the CIT(Appeals)." 12. We would like to reproduce Section 35 (2B)(c). "Section 35(2B)(a) .................................. (b)......................................................... (c) Where a deduction allowed for any previous year under this sub-section in respect of expenditure represented wholly or partly by an asset, no deduction shall be allowed in respect of that asset under [clause (ii) of sub-section (1)] of section 32 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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. 16. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Escorts Ltd. (supra) on the ground that in Escorts (supra), the Supreme Court was concerned with a case where the deduction of the cost of the asset was allowed under Section 35(1) as capital expenditure incurred on scientific research and, therefore, no deduction for depreciation on the very same assets was held allowable under general principles of taxation, as it would amount to double deduction. The judgment of this Court in DIT vs. Vishwa jagrati Mission reinforces the principle that if the cost of the asset has been allowed as deduction by way of application of income then depreciation on the same asset cannot be allowed in the computation of the income of the trust. The distinction has not been kept in view by the Tribunal which seems to have erroneously relied on the judgment of this Court to direct allowance of depreciation even in respect of assets, the cost of which has already been allowed as application of income. We accordingly hold that the Tribunal was not justified in directing the allowance of depreciation in respect of such assets." 10. The aforesaid paragraph refers to the decision in the case of Vishwa Jagriti Mission (supra) but ratio was distinguished ..... X X X X Extracts X X X X X X X X Extracts X X X X
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