Scholarship paid for pursuing studies abroad is Charitable Expense

18. Now coming to second question relating to scholarship paid to one Adheesh Bhagat, scholarship was disbursed for pursuing Engineering course from University of California, Los Angeles, USA. The candidate was selected after a process of selection and finding him most deserving candidate, scholarship was disbursed to the said incumbent. This is in the process of charitable object of Assessee – Society for advancement of higher technical education to deserving students. It cannot be doubted that advancement of education is a ‘charitable purpose’. The candidate, beneficiary, was directly or indirectly not related to Members of Society nor otherwise has any bearing or connection with the Society Members. Financial status of the said student or other things are immaterial so far as purpose for which scholarship to Adheesh Bhagat is concerned. Hence we are in agreement with the view taken by CIT(A) as also Tribunal that payment of scholarship was admissible as charitable expenditure. Question-(2) is also answered in favour of Assessee.

Claim of depreciation allowable even  when cost of capital assets already been allowed as deduction against income of Trust

1. `Seth Anandram Jaipuria Education Society, 70 Cantonment, Kanpur, which is Assessee-respondent (hereinafter referred to as “Assessee”) in Income Tax Appeal No. 102 of 2015 and Income Tax Appeal No. 94 of 2015 is a Society registered under Societies Registration Act, 1860 (hereinafter referred to as “Act, 1860”). It was granted registration under Section 1 2A of Act, 1961, and running several educational institutions in State of U.P. In A.Ys. 2006-07 and 2007-08, Assessee claimed expenditure as well as depreciation on such capital expenditure. Assessing Officer (hereinafter referred to as “A.O.”) disallowed depreciation observing that once entire cost of capital assets has already been allowed as deduction against income of Trust in respective years, no depreciation on such capital assets can be allowed for the purpose of computing deduction against revenue expenditure. It would amount to double deduction which is not permissible. He also disallowed payment of scholarship to one Adheesh Bhagat on the ground that it was not for charitable purpose and it would be considered as income of Assessee.

2. Commissioner of Income Tax (Appeals) II, Kanpur (hereinafter referred to as “CIT(A)”) allowed appeal preferred by Assessee on both the aforesaid aspects. Revenue’s appeal before Tribunal succeeded so far as issue of Scholarship paid to Mr. Adheesh Bhagat is concerned, but on the question of depreciation of capital assets, it failed.

3. Income Tax Appeal No. 41 of 2016 is in relation to Institution of Assessee, Seth Anandram Jaipuria Education Society, Sector-14, Vasundhara, Ghaziabad. Tribunal hereat has followed judgment of Lucknow Bench.

4. Sri Alok Mathur, learned counsel for appellant, has relied on Supreme Court’s judgment in Escorts Limited and others Vs. Union of India and other 1993 (1) SCC 249 contending that once deduction was already allowed, depreciation cannot be allowed. Here we find that issue raised therein was in the context of deduction under Section 35 and depreciation under Section 32. Disputed year of assessment was 1960-61. Provisions of Income Tax Act, 1922 (hereinafter referred to as “Act, 1922”), on this aspect, were considered. Therein, computation of business income for the purpose of income tax was done in accordance with Section 10 of Act, 1922. In the process of such computation, Act, 1922 provided for two important deductions (among others), in respect of capital assets, employed in the business. The first was deduction under Clause (vi) of Section 10(2) of Act, 1922, an allowance in respect of depreciation of building, machinery, plant or furniture being the property of Assessee and used for the purposes of business, at a prescribed percentage of written down value of such assets. This allowance was calculated, in respect of year of acquisition of the property, at a percentage of its actual cost to the Assessee and in subsequent years at a graduated scale on the basis of the actual cost less the depreciation allowances granted in the preceding years. In strict sense, this was an allowance of capital nature. The second allowance which was not there in Act, 1922 initially but introduced by Income Tax (Amendment) Act, 1946 (hereinafter referred to as “Act, 1946”), was, in respect of expenditure on “scientific research related to the business”. This expression was defined comprehensively in the Statute. Three types of allowances were permitted in respect of this category of expenditure and relevant provision in this regard was Section 10(2)(xiv). A conjoint reading of Section 1 0(2)(vi) and Section 1 0(2)(xiv) suggests, where an Assessee incurs expenditure of a capital nature on scientific research related to business and expenditure results in the acquisition of an asset, Assessee can claim, under Clause (vi), a deduction of specified percentage of written down value of the asset, and under Clause (xiv), he can ask for a deduction, in five consecutive years of expenditure he has incurred on the acquisition of the Asset. The question arose whether both these deductions could have been allowed simultaneously to an Assessee. Court considered pari materia provision of Act, 1961. Under Act, 1961, depreciation is dealt with by Section 32. Section 32(1)(ii) allow depreciation at a percentage of written down value of certain capital assets employed in the business. The topic of “scientific research expenditure” is dealt with by Section 35. Court answered the question observing that both deductions simultaneously cannot be allowed by reading relevant provisions namely Section 10(2)(vi) and Section 10(2)(xiv) of Act, 1922 and Section 32(1)(ii) and 35(2)(iv) of Act, 1961.

5. The aforesaid judgment may help Revenue only if we may find that Section 11 allows some kind of deduction from income of Assessee of previous years. However, Section 11(1) states that the kind of income mentioned in various sub-clauses of Section 11(1) shall not be included in total income of previous year of person in receipt of income. Expression “total income” has been defined under Section 2(45) of Act, 1961 and the word “income” is defined in Section 2(24) of Act, 1961. Section 11(1), therefore, excludes the kind of income specifically mentioned therein from “total income” of person concerned. It is not a case of deduction. In short, what we understand from Section 11 is that certain income of Assessee is exempted therein and hence Assessee is not claiming any deduction. Thus when depreciation is claimed, the Assessee in effect asks that depreciation should be reduced from income for determining percentage of funds which has to be applied for the purpose of Trust.

6. We find that a large number of High Courts have considered this aspect and taken a view in favour of Assessee.

7. One of the earliest judgment is from Karnataka High Court in Commissioner of Income Tax, Karnataka-I Vs. Society of the Sisters of St. Anne 1984 (1460 ITR 28 (Kar.). Court observed that income derived from property held under trust cannot be total income because Section 11(1) shows that former shall not be included in latter, of the person in receipt of the income. Depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book keeping, accountancy, etc. Same view thereafter has been expressed by different High Courts, namely, Madhya Pradesh High Court in Commissioner of Income-Tax Vs. Raipur Pallottine Society 1989 (180) ITR 579 (MP), Gujrat High Court in Commissioner of Income-Tax, Vs. Seth Manilal Ranchoddas Vishram Bhavan Trust (1992) 198 ITR 598 (Guj), Calcutta High Court in Commissioner of Income-Tax, Vs. Bhoruka Public Welfare Trust 1999 (240) ITR 513 (Cal.), Punjab and Haryana High Court in Commissioner of Income Tax Vs. Market Committee, Pipli 2011 (330) ITR 16, Madras High Court in Commissioner of Income Tax Vs. Rao Bahadur Calavala Cunnan Chetty Charities 1982 (135) ITR 485 (Mad), Maharashtra High Court in Commissioner of Income Tax Vs. Institute of Banking 2003 (264) ITR 110 (Bom), and Commissioner of Income Tax-II Vs. Jawaharlal Nehru Port Trust 2016 (383) ITR 339 (Bom).

8. Karnataka High Court has recently followed above authorities in Commissioner of Income Tax (Exemptions) and others Vs. Karnataka Reddy Janasangha 2016 (389) ITR 229 (Kar.) and Director of Income Tax and others Vs. Al-Ameen Charitable Fund Trust and others 2016 (383) ITR 517 (Kar.).

9. Learned counsel for Revenue pointed out that there is an amendment in Section 11 inserting Sub-section (6) by Finance Act (No. 2) of 2014, with effect from 01.04.2015, which reads as under:

“(6) In this section where any income is required to be applied or 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 any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.”

10. Memorandum explaining the provision made in Finance Bill for the aforesaid amendment shows that in order to exclude deduction, specific declaration was made by insertion of aforesaid sub-section in Section 11. The said Memorandum reads as under:

“The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose.”

11. The aforesaid amendment is effective from 01.04.2015 and therefore will not help Revenue in the circumstances of case in hand. We find that even this aspect has been considered by Karnataka High Court in Director of Income Tax and others Vs. Al-Ameen Charitable Fund Trust and others (supra) and following Commissioner of Income-Tax Vs. Vatika Township P. Ltd. 2014 (367) ITR 466 (SC) Court has held that the aforesaid amendment is prospective and operative from 01.04.2015.

12. We find ourselves in respectful agreement with the decisions of various Courts noticed above.

13. To be fair enough for learned counsel for Revenue, we may notice that there is a divergent view expressed by Kerala High Court in Lissie Medical Institutions Vs. Commissioner of Income Tax 2012 (348) ITR 344 (Ker) wherein it has placed reliance on Supreme Court’s judgment in Escorts Limited and others Vs. Union of India and other (supra) but we have already discussed that the judgment in Escorts Limited and others (supra) was in respect of different provision while scheme of Section 11 is/was different till 01.04.2015. We, therefore, find ourselves unable to agree with the view taken by Kerala High Court and respectfully differ therefrom.