Case Law Details
MITHRA Vs ITO (ITAT Chennai)
The Income Tax Appellate Tribunal (ITAT), Chennai Bench, has delivered an order in the case of MITHRA Vs. ITO (ITAT Chennai) for the Assessment Year (AY) 2016-17. The appeal, filed by the assessee trust, challenged the confirmation by the First Appellate Authority (FAA) of the Assessing Officer’s (AO) action to disallow a deduction for depreciation amounting to Rs. 20,94,730/-, which resulted in a tax demand of Rs. 81,797/-. The Tribunal’s final decision did not conclude the matter but instead restored the central issue to the files of the AO for verification, allowing the appeal for “statistical purposes.”
Background of the Assessee and Assessment
The assessee, MITHRA, is a charitable trust that is registered under Section 12A of the Income Tax Act, 1961 (the Act). For the AY 2016-17, the trust filed its return of income under Section 139(4A), declaring its total income as ‘Nil’. The return reported gross receipts of Rs. 98,76,907/- and claimed revenue expenditure of Rs. 93,52,302/-.
The assessment was selected for scrutiny, and a notice under Section 143(2) was issued. During the ensuing proceedings, the AO noted two key discrepancies. First, the AO observed that the gross income recorded by the assessee in the books was actually higher at Rs. 1,19,71,637/-, with the difference of Rs. 20,94,730/- being the amount claimed as a deduction for depreciation. Second, the AO, citing Section 11(6) of the Act, concluded that the assessee was not entitled to claim depreciation and disallowed the entire amount. Consequently, the assessment was completed under Section 143(3) of the Act, confirming the disallowance.
The Statutory Dispute: Depreciation and Section 11(6)
The core legal controversy centered on the interpretation and application of Section 11(6) of the Act, which was inserted with effect from April 1, 2015.
Section 11(6) is a specific provision applicable to charitable or religious trusts and institutions enjoying tax exemption under Section 11. It stipulates that where the cost of any asset has been allowed as application of income under Section 11 in any previous year, the depreciation on that asset shall not be allowed as a deduction while computing the income of the trust for any subsequent year. This provision aims to prevent a double benefit for trusts: once when the full capital expenditure is claimed as an application of income (a deduction equivalent to 100% of the cost), and again when depreciation (a percentage of the same cost) is claimed in later years.
The Department’s Stance:
The Revenue, represented by the Learned Departmental Representative (DR), supported the orders of the AO and the FAA, maintaining that the disallowance under Section 11(6) was correctly made. The FAA, while confirming the AO’s order, held that the statutory provision clearly barred the claim for depreciation on assets whose cost had been allowed as an application of income.
Secondary Issue: Untimely Claim for Capital Expenditure
In addition to the depreciation issue, the assessee raised a secondary claim before the FAA regarding capital expenditure. The trust submitted that it had incurred capital expenditure of Rs. 40,08,670/- during the relevant year for the acquisition of fixed assets, which was entirely funded from its capital account. The assessee argued that this amount ought to be allowed as an application of income under Section 11.
FAA Ruling on New Claim:
The FAA rejected this secondary contention. The FAA noted that the assessee had failed to claim this capital expenditure as an application of income in the original return of income (ITR 7) filed for the AY 2016-17. Given the absence of the claim in the statutory return, the FAA found it could not be entertained at the appellate stage and dismissed this ground.
ITAT Final Decision and Directions
The ITAT, after considering the submissions of both parties, focused on the central requirement for applying Section 11(6). The Tribunal recognized that the statutory provision’s bar on claiming depreciation is conditional upon the cost of the asset having been previously allowed as an application of income.
Decision on Depreciation Claim:
The Tribunal noted the assessee’s submission that the cost of the assets was never claimed as an application of income. The ITAT ruled that to ensure justice, this crucial factual claim needed verification.
“Since assessee submits that the cost of asset has not been claimed as application of income, this fact needs to be verified by the AO. For the aforesaid purpose, we restore the matter to the files of the AO.”
The ITAT, therefore, directed the AO to re-examine the records and specifically ascertain:
- Whether the cost of acquisition of the assets, on which depreciation was claimed, had been allowed as an application of income in any of the past years.
- Whether the cost of acquisition was allowed as an application of income in the relevant assessment year itself.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of the Addl/JCIT(A)-1, Nashik dated 11.06.2025, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2016-17.
2. The solitary issue raised is whether the First Appellate Authority (FAA) is justified in confirming AO’s order wherein he had disallowed depreciation of Rs.20,94,730/- and thereby raising a demand of Rs.81,797/-.
3. Brief facts of the case are as follows:
The assessee is a trust registered u/s.12A of the Act. For the assessment year 2016-17, the return of income was filed u/s.139(4A) of the Act on 30.07.2016 declaring total income at ‘Nil’. The gross receipt as per the return of income filed was Rs.98,76,907/- and assessee had claimed expenditure of Rs.93,52,302/- towards revenue expenditure. The assessment was selected for scrutiny and notice u/s.143(2) of the Act was issued on 19.07.2017. During the course of assessment proceedings, the AO noticed that assessee had claimed depreciation of Rs.20,94,730/- as deduction from the gross income received. Further, the AO noted that the gross income of the assessee was Rs.1,19,71,637/-, however, the assessee admitted only an income of Rs.98,76,907/-. The AO found that remaining amount of Rs.20,94,730/- was claimed as deduction towards depreciation. The AO by referring to section 11, sub-section (6) of the Act held that assessee is not eligible to claim depreciation.
Accordingly, assessment was completed u/s.143(3) of the Act vide order dated 13.11.2018.
4. Aggrieved by the assessment completed, assessee filed appeal before the FAA. Before the FAA, assessee submitted that AO has erred in disallowing depreciation of Rs.20,94,730/-us/.11(6) of the Act. Further, it was submitted by the assessee that the capital expenditure incurred in the current year amounting to Rs.40,08,670/- ought to be allowed as application of income. The FAA however rejected the contentions of the assessee. The FAA held that as per Section 11(6) of the Act, assessee is not entitled to depreciation on assets for which cost has been allowed as application of income in the previous years or in the current year. Further, FAA held as regards application of capital expenditure of Rs.40,08,670/-, assessee has not claimed the same in the return of income i.e, ITR 7 filed by the assessee. Hence, the FAA concluded the assessment order passed u/s.143(3) of the Act is correct and confirmed the same.
5. Aggrieved by the order of the FAA, the assessee has filed the present appeal before the Tribunal. The Ld.AR submitted that the cost of assets were never claimed as application of income u/s.11 of the Act in the relevant assessment year or in the earlier assessment years. It was submitted that the assessee trust had purchased assets out of capital funds. Therefore, depreciation claimed cannot be disallowed u/s.11(6) of the Act. Further, the Ld.AR submitted that in the current assessment year, assessee had incurred capital expenditure of Rs.40,08,670/- for acquisition of fixed assets purchased entirely from capital account. Hence, the same ought to be allowed as application of income.
6. The Ld.DR strongly supported the orders of the AO and the FAA.
7. We have heard rival submissions and perused the material on record. The assessee had not separately claimed depreciation of Rs.20,94,730/- but had reduced the same from the gross receipts. It is the claim of the assessee that depreciation has been claimed on assets, the cost of which has not been allowed as application of income in the relevant assessment year or in the earlier assessment years. Section 11(6) of the Act inserted w.e.f. 01.04.2015 by Finance (No.2) Act, 2014 clearly stipulates depreciation shall not be allowed if the cost of acquisition of asset on which depreciation has been claimed has been allowed as application of income. Since assessee submits that the cost of asset has not been claimed as application of income, this fact needs to be verified by the AO. For the aforesaid purpose, we restore the matter to the files of the AO. The AO is directed to examine whether depreciation has been claimed on assets for which the cost has been allowed as application of income in the past years or in the relevant assessment year. If it has been allowed as application of income in the past years or in the relevant year, depreciation shall not be allowed as per section 11(6) of the Act. The assessee also claims that it had incurred capital expenditure amounting to Rs.40,08,670/- during the assessment year 2016-17, which was omitted to be claimed in the return of income filed as application of income. Since the assessee failed to make the claim of application of income on the capital expenditure incurred in the return of income filed, the said claim cannot be entertained at this stage. With the above said observation, the matter is restored to the files of the AO. It is ordered accordingly.
8. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 23rd September, 2025 at Chennai.
Author Bio
