Case Law Details
M/s. Kamineni Educational Society vs. Joint DIT (Exemptions)
Issue- The common issue involved in these appeals is about the disallowance of depreciation claimed by assessee in respective assessment years on the reason that the cost of assets had been claimed as application of income by assessee in the preceding years and this would amount to double deduction in view of decision of Hon’ble Supreme Court in the case of Escorts Ltd., vs. UOI 199 ITR 43 (SC).
Held- The judgment of the Supreme Court in Escorts Limited Vs. Union of India (supra) is inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions. We are concerned only with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accounting principles, there is authority for the 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).
Andhra Pradesh High Court in Commissioner of Income-tax. v. Nizam’s Suppl. Religious Endowment Trust (1981) 127 ITR 378 and by the Madras High Court in Commissioner Of Income-Tax vs Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485. The Madhya Pradesh High Court in CIT vs. Raipur Pallottine Society (supra) has held, following the judgment of the Karnataka High, that in computing the income of a charitable institution/trust, depreciation of assets owned by the trust/institution is a necessary deduction on commercial principles. The Gujarat High Court, after referring to the judgments of the Karnataka, Maharashtra and Madhya Pradesh High Courts cited above, also came to the same conclusion and held that the amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes.
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES “A” (SMC) : HYDERABAD
BEFORE: SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
ITA.No. 1099 & 1100/Hyd/2015
Assessment Years 2011-2012 & 2012-2013
M/s. Kamineni Educational Society
vs.
Joint DIT (Exemptions)
For Assessee : Mr. A.V. Raghuram
For Revenue : Mr. M. Sitharam
Date of Hearing: 23.10.2015
Date of Pronouncement: 28.10.2015
ORDER
These two appeals are by assessee against the order of Ld. CIT(A)-9, Hyderabad dated 05.06.2015 issued separately for respective assessment years. The common issue involved in these appeals is about the disallowance of depreciation claimed by assessee in respective assessment years on the reason that the cost of assets had been claimed as application of income by assessee in the preceding years and this would amount to double deduction in view of decision of Hon’ble Supreme Court in the case of Escorts Ltd., vs. UOI 199 ITR 43 (SC).
2. The Ld. CIT(A) following the orders of the ITAT which was given ex-parte in ITA.No. 1585 & 1586/H/2012 for A.Ys. 2008-09 and 2009-10 in assessee’s own case has confirmed the orders of the A.O. disallowing the depreciation claimed of Rs.5,65,79,476 for A.Y. 2011-2012 and Rs.6,55,38,163 for A.Y. 20 12-13.
3. Ld. Counsel submitted that the orders of ITAT relied on by the Ld. CIT(A) were re-called by way of miscellaneous applications and in A.Y. 2010-2011 the Coordinate Bench in assessee’s own case in ITA.No.939/Hyd/2015 has considered the issue and allowed the appeal of the assessee, relying on various High Court’s judgments and Coordinate Bench decision in the case of A.P. Olympic Association, Hyderabad dated 07.02.2014 in ITA.No.1272/Hyd/2013. The Order of the Coordinate Bench is as under:
“7. We have considered the rival submissions and examined the issue. There is no dispute with regard to the fact that the assessee is registered under section 12AA of the I.T. Act. There is also no dispute that assessee has shown all the receipts in income-expenditure account and claimed various expenses in its computation of income, while declaring excess of income over expenditure. It is also not in dispute that income of the assessee trust has to be computed with reference to the provisions of section 11 and 13. Therefore, the principles governing computation of income under the head ‘Business’ may not apply to the computation of income under the above provisions, since the income of a charitable institution has to be computed under ordinary principles of commercial accounting, and depreciation has to be allowed on depreciable assets held by a charitable institution to arrive at the income of 75% (now 85%) which is required to be applied for charitable purpose. In the decision of the Hon’ble Supreme Court in the case of Escorts Ltd. (supra), the Hon’ble Supreme Court was to consider the issue wherein the depreciation was also claimed on an asset which was claimed as a deduction while using for research, as ‘capital expenditure on scientific research’. On those facts, the Hon’ble Supreme Court held that depreciation was inadmissible since the entire cost of the asset used for research was claimed as deduction. However, the same principle may not apply to the computation of income under section 11 of the Trust.
8. The Hon’ble Kerala High Court in the case of Lissie Medical Institutions vs. CIT (2012) 348 ITR 344 (Kerala), taking into consideration of clarification issued by the CBDT ignoring its own Circular 5-P (LXX-6) of 1968 dated 19.06.1968, opined that there could be leakage of revenue and generation of black money, if depreciation was allowed. Thus, the Hon’ble Kerala High Court gave decision in favour of Revenue and directed the assessee to re-draw the accounts.
9. The decision of the Coordinate Bench, which the learned CIT(A) relied on, i.e., in the case of Sri Venkata Sai Educational Society (supra), however, did not decide the issue but restored the matter to the file of the A. 0. to examine; whether assets have been claimed as exemption in earlier years on which depreciation was claimed. However, in a later order by the Coordinate Bench of ITAT, Hyderabad in the case of ADIT (Exemption)-I vs. Royal Educational Society in ITA.No. 1378/Hyd/201 1 dated 28.06.2012 however, allowed the claim of depreciation and dismissed the Revenue’s appeal. The Coordinate Bench relied on the decision of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Manav Mangal Society 328 ITR 421 (P&H) (HC) and CIT vs. Market Committee, Pipli (2011) 330 ITR 16, in arriving at that decision. Thus, there was a difference of opinion on the above issue at that point of time.
10. The Hon’ble Punjab and Haryana High Court in the case of CIT vs. Manav Mangal Society 328 ITR 421 (P&H) (HC) has considered and allowed the claim of depreciation.
“The amount spent on construction of School Building at Panchkula is a capital expenditure but for the purpose of section 11 it is an outgoing expenditure which is application of income of the appellant trust for charitable purpose. The appellant shall also be entitled to claim depreciation on the school building”.
11. This decision was followed in the case of CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 by the Hon’ble Punjab & Haryana High Court.
12. This issue has elaborately been discussed by the Hon’ble Delhi High Court in the case of DIT vs. Vishwa Jagriti Mission in ITA.No. 140/2012 dated 29.03.2012 and took a over view of the existing decisions on the issue while holding as under:
“11. The revenue is in appeal against the aforesaid order of the Tribunal. We are not inclined to admit the appeal and frame any substantial question of law since none arises from the order of the Tribunal. There is no dispute that the assessee has been granted registration under Section 12AA vide order dated 11th September, 2009 and, therefore, it was entitled to exemption of its income under Section 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 profession”. Reference was made to the nature of depreciation and it was pointed out that depreciation was nothing but decrease in the value of property through wear, deterioration or obsolescence. It was observed that depreciation, if not allowed as a necessary deduction for computing the income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income. The circular No.5-P (LXX-6) of 1968, dated July 19,1968 was reproduced in the judgment in which the Board has taken the view that the income of the trust should be understood in its commercial sense. The circular is as under:-
“Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word ‘income’ should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purpose of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax u/s. 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. Of the latter, if the trust is to get the full benefit of the exemption u/s. 11(1).”
12. A similar view was earlier expressed by the Andhra Pradesh High Court in Commissioner of Income-tax. v. Nizam’s Suppl. Religious Endowment Trust (1981) 127 ITR 378 and by the Madras High Court in Commissioner Of Income-Tax vs Rao Bahadur Calavala Cunnan Chetty Charities (1982) 135 ITR 485. The Madhya Pradesh High Court in CIT vs. Raipur Pallottine Society (supra) has held, following the judgment of the Karnataka High court cited above, that in computing the income of a charitable institution/trust, depreciation of assets owned by the trust/institution is a necessary deduction on commercial principles. The Gujarat High Court, after referring to the judgments of the Karnataka, Maharashtra and Madhya Pradesh High Courts cited above, also came to the same conclusion and held that the amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes.
13. The judgment of the Supreme Court in Escorts Limited Vs. Union of India (supra) has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions. We are concerned only with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accounting principles, there is authority for the 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).
14. Having regard to the consensus of judicial opinion on the precise question that has arisen in the present appeal, we are not inclined to admit the appeal and frame any substantial question of law. There does not appear to be any contrary view plausible on the question raised before us and at any rate no judgment taking a contrary view has been brought to our notice. In the circumstances, we decline to admit the present appeal and dismiss the same with no order as to costs”.
13. Similar view was also taken by the Coordinate Bench of the ITAT, Bangalore in the case of ACIT vs. Adichunchanagiri Shikshana Trust (2013) 31 taxmann.com 157 (Bangalore – Trib.) wherein it was held that Charitable or Religious trust registered under section 12A can claim benefit under section 11 in the form of application of funds as well as depreciation under section 32 in respect of property held under the trust. The same opinion was followed by the ITAT, Bangalore Tribunal in the case of DDIT(E), Bangalore vs. Cutchi Memon Union (2013) 38 Taxman.com 276 (Bangalore-Trib.) wherein also similar opinion was expressed.
14. Thus, on this issue, there are decisions of Hon’ble Gujarat High Court, Madhya Pradesh High Court, Kerala High Court, Bombay High Court, Punjab and Haryana High Court and Delhi High Court in favour of the assessee, whereas, there is only a lone judgment of Hon’ble Kerala High Court against the above opinion confirming the Revenue’s contention. In view of the majority opinion of various High Courts, we are of the opinion that amount of depreciation debited to the account of charitable institution has to be allowed in order to arrive at the income available for application to the charitable purpose.
15. Since the Hon’ble Delhi High Court in the case of DIT vs. Vishwa Jagruti Mission (supra) has distinguished various judgments on the issue, we do not intend to discuss the same again. However, we respectfully agree with the principles laid down by the Hon’ble Delhi High Court, which were in favour of the assessee allowing the claim of depreciation.
16. This issue can also be looked into in an other manner. Not only the Board Circular 5-P (LXX-6) of 1968 dated 19.06.1968 but also the Institute of Chartered Accountants of India has given guidelines about the claim of depreciation. Even, as seen from the decision of the Kerala High Court in the case of Lissie Medical Institutions vs. CIT (2012) 348 ITR 344 (Kerala), there the assessee was having activity of running hospital and the issue arose, while claiming depreciation on the assets while computing the income. The hospital was run by the trust. However, in the present case, there is no such business activity. As seen from the computation of income placed on record, assessee has not claimed any application of income towards purchase of assets in this year. A. O. has not brought out anything on record that assets purchased by assessee have been claimed as deduction in earlier years and without examining the issue A. O. cannot disallow the amount, simply because there was a case law establishing the principle that double deduction is not allowable. “
3. As the issue involved in the present case as well as all the material facts relevant thereto are similar to the case of AP Olympic Association (supra), we respectfully follow the decision rendered by the coordinate bench of this Tribunal in the said case, and direct the Assessing Officer to allow the claim of the assessee for depreciation in respect of the assets, the cost of which is claimed by the assessee as application.”
3.1. Respectfully following the Division Bench decision in assessee’s own case, I, direct the A.O. to allow the claim of assessee for depreciation in respect of the assets even though the cost of which was claimed by assessee as application in earlier years.
4. In the result, appeals of the assessee are allowed.
Order pronounced in the open Court on 28.10.2015.
(B. RAMAKOTAIAH) ACCOUNTANT MEMBER
