Case Law Details
DCIT Vs Vidya Vikas Education Trust (ITAT Mumbai)
ITAT Mumbai held that depreciation cannot be disallowed as application of income under section 11(6) of the Income Tax Act when the assessee has not claimed purchase of asset as application of income in any of the previous years.
Facts-
The assessee is a Society involved in running of educational institution, duly registered u/s. 12A with the office of CIT(E). Assessee filed its return u/s. 1394 A (applicable to Charitable Trust/Society) declaring Nil income. Return was filed along with Audit Report in Form No. 10B, Income & Expenditure A/c, Receipt & Payment A/c and Balance-sheet. The case was selected for scrutiny u/s. 143(2) of the Act and a questionnaire was also issued to examine the matter.
AO observed that assessee has claimed depreciation amounting to Rs. 6,42,68,734/-. AO again issued a show-cause to the assessee for disallowing this depreciation by virtue of section 11(6) of the Act inserted w.e.f. A.Y. 2015-16.
The newly inserted section 11(6) of the Act w.e.f. A.Y. 2015-16 restricts allowance of depreciation for the purposes of application of income, as this section assumes that assessee must have taken purchase of asset itself as application of income in the year, the asset was acquired. So, it will tantamount to double claim by the assessee i.e. once on the purchase itself and then depreciation thereon.
AO disallowed depreciation claimed by the assessee. CIT(A) allowed the appeal. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
In the instant case, assessee already following the sprit and intentions of section 11(6) of the Act by not claiming purchase of asset as application of income. Section 11(6) of the Act is applicable only in those cases where assessee has already claimed purchase of asset as application of income in any of the previous years and simultaneously claiming depreciation also as application of income relying on various judicial pronouncements in their favour. We found the interpretation taken by AO as wrong and found the practice being adopted by assessee consistently as correct even after the insertion of section 11(6) of the Act. In view of above, we are not inclined to interfere in the order of Ld. CIT(A) and dismissed the appeal of Revenue and directed the AO to allow depreciation amounting to Rs. 6, 42, 68,734/- as application of income.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals by the Revenue and C.O. by Assessee are directed against the order of National Faceless Appeal Centre – Delhi, [hereinafter referred to as [‘NFAC’] vide common orders dated 26.04.2022 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as [‘the Act’] for the Assessment Years (AY) 2015-16 & 2016-17 respectively. We shall take up ITA No. 1609/Mum/2022 for A.Y. 2015-16 as lead case. The Revenue has raised the common grounds of appeal for both the AYs which are as under:
1. “Whether on facts and circumstances of the cases and in law, the Ld.CIT(A) was justified in allowing the claim of depreciation to the assessee without appreciating the fact that the assessee’s case is squarely covered by the provisions of amended section 11(6) of the Act?
2. Whether on facts and circumstances of the case and in law, the Ld CIT(A) was justified in relying upon the judgement of the Hon’ble Jurisdictional High Court in the case of CIT vs. Institute of Banking Personnel 264 ITR 110 and Director of Income-tax (Exemptions), Mumbai v. Shri Vile Parle Kelavant Mandal [2015] SS com 288, without appreciating the fact that these case laws are not applicable for AY 2016-17 in light of the provisions of amended section 11(6) of the Act?
3. Whether on facts and circumstances of the cases and in law, the Ld CIT(A) was justified in relying upon the judgement of the Ld. CIT(A) in the assessor’s own case for AY 2012-13, without appreciating the fact that facts of that case are not applicable for AY 2016-17 in light of the provisions of amended section 11(6) of the Act?”
2. In C.O. 104/Mum/2022 for AY 2015-16 & C.O. No. 103/Mum/2022 for AY-2016-17, the assessee has raised the similar grounds except variation of amounts in figure, which are as under:
“1. On facts and circumstances of the case and in law, the learned Commissioner (Appeals) ought have appreciated that the Respondent had never claimed the cost of its assets acquired as deduction by way of application of its income in computing its exempt income u/s 11 in either its past years or current year and that therefore, it was fully entitled to the claim of depreciation of Rs. 6,98,80,531/- in the year under appeal.
2. Both learned lower authorities erred in passing their respective orders without granting the Respondent adequate opportunity of being heard.
The orders passed by them are in contravention of the principles of natural justice and hence, bad in law.
3. The Respondent reserves the right to add, alter or delete any of the above grounds with permission of the Hon’ble Tribunal.”
3. Brief facts of the case are that the assessee is a Society involved in running of educational institution, duly registered under section 12A with the office of CIT(E) vide Registration No. INS/TR-37846 dated 05.03.2004. Assessee filed its return under section 1394A (applicable to Charitable Trust/Society) declaring Nil income. Return was filed along with Audit Report in Form No.10B, Income & Expenditure A/c, Receipt & Payment A/c and Balance-sheet. The case was selected for scrutiny under section 143(2) of the Act and a questionnaire was also issued to examine the matter.
4. In response to the questionnaire issued assessee furnished requisite details and produced books of accounts for verification. The books of accounts of assessee were examined along with Income & Expenditure A/c and Balance-sheet. After this examination, Assessee Officer (AO) observed that assessee has claimed depreciation amounting to Rs. 6, 42, 68,734/-. AO again issued a show-cause to the assessee for disallowing this depreciation by virtue of section 11(6) of the Act inserted w.e.f. A.Y. 2015-16.
5. The relevant provisions of newly inserted section 11(6) of the Act are reproduced herein-below for ready reference:
“(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.”
This newly inserted section 11(6) of the Act w.e.f. A.Y. 2015-16 restricts allowance of depreciation for the purposes of application of income, as this section assumes that assessee must have taken purchase of asset itself as application of income in the year, the asset was acquired. So, it will tantamount to double claim by the assessee i.e. once on the purchase itself and then depreciation thereon.
6. In view of above, AO disallowed depreciation of Rs. 6, 42, 68,734/- claimed by the assessee as application. Being aggrieved with the order of AO, assessee preferred an appeal before the office of Ld. CIT(A)-1, Mumbai. The Ld. CIT(A) relying on the decision of CIT Vs. Institute of Banking Personnel (264 ITR 110), Director of Income Tax (E) Vs. Framejee Cawasjee Institute (1993) 109 CTR 463 (Bom.), Director of Income Tax (E) Vs. Shri Vile Parle Kelavani Mandal [2015] 55 taxmann.com 288 and assessee’s own order for the A.Y. 2012-13 by the then CIT(A)-1, Mumbai vide order CIT(A)-I/IT/E-II(110)/2015-16, dated 17.11.2016 allowed the appeal of the assessee and accepted the claim of assessee subject to due verification of the facts submitted by the assessee before Ld. CIT(A).
7. Being aggrieved with this order of Ld. CIT (A), the Revenue preferred this appeal and assessee filed Cross Objection. We have gone through the order of AO, order of Ld. CIT (A) and considered the submissions of the assessee filed along with Paper Book.
9. We found copies of Income & Expenditure A/c along with a chart of application of income for Financial Year (FY) 2007-08 to 2013-14. We observed that none of these years assessee claimed purchase of assets against application of income. Rather, he carried the asset to the Balance-sheet and depreciation thereon is the only part he claimed as application of income consistently. We have gone through the order of Ld. CIT (A) for A.Y. 2012-13 in favour of assessee on similar set of facts.
10. In our observation, the entire relevant facts can be summarized as under:
i. The Appellant has incurred expenses towards purchase of fixed assets which has been capitalised during the year. The said amount is shown under the head “Fixed Assets and depreciation on the same has been claimed as an expense in the Income & Expenditure Account;
ii. The amount spent on purchase of fixed assets has not been shown as application of income of the trust, which is evident from the Income & Expenditure Account and also the Computation of Total Income;
iii. Further, it may be noted that the Appellant has availed secured bank loan for the purchase of new fixed assets, which is evident from the Balance Sheet and therefore the income of the Trust cannot be said to have been applied for purchase of capital asset;
iv. Further, all the expenses incurred on purchase of fixed assets in current year and earlier years is always capitalised as “Fixed Assets” and never treated as application of income;
v. Depreciation has been claimed on the wear & tear of the assets as per the provisions of the Act which is only valid in law.
11. It is established on record that assessee never claimed purchase of asset as application of income. Assessee only claimed depreciation on assets as application of income. In view of this, we observed that assessee never claimed double deduction. The insertion of section 11(6) of the Act w.e.f. A.Y. 2015-16 is done to curve the practice where assessee claimed deprecation of income on purchase of assets as well as depreciation thereon. The introduction of section 11(6) was intended to overrule certain judicial pronouncements in favour of assessee wherein it was held that assessee is entitled to claim application of income on purchase of assets and deprecation also on the ground of commerciality.
12. In the instant case, assessee already following the sprit and intentions of section 11(6) of the Act by not claiming purchase of asset as application of income. Section 11(6) of the Act is applicable only in those cases where assessee has already claimed purchase of asset as application of income in any of the previous years and simultaneously claiming depreciation also as application of income relying on various judicial pronouncements in their favour. We found the interpretation taken by AO as wrong and found the practice being adopted by assessee consistently as correct even after the insertion of section 11(6) of the Act. In view of above, we are not inclined to interfere in the order of Ld. CIT(A) and dismissed the appeal of Revenue and directed the AO to allow depreciation amounting to Rs. 6, 42, 68,734/- as application of income.
13. In above terms, Ground No. 1, 2 & 3 raised by the Revenue are dismissed.
14. Assessee also in its C.O. No. 104/Mum/2022 (A.Y. 2015-16) raised issue pertaining to disallowance of depreciation amounting to Rs. 6, 42, 68,734/-. As this matter has already been decided (supra) in the appeal of Revenue in favour of assessee, hence, no further adjudication on C.O. is required.
15. In the result, appeal filed by the Revenue is dismissed and C.O. filed by assessee is allowed.
ITA No. 1608/Mum/2022 (A.Y. 2016-17)
C.O. No. 103/Mum/2022 (A.Y. 2016-17)
16. As the facts and law applicable in this appeal and C.O. is similar to what we have decided in ITA No.1609/Mum/2022 (A.Y. 2015-16) and C.O. No. 104/Mum/2022 (A.Y. 2015-16), no further discussion and adjudication is required as the findings are applicable mutatis mutandis to this appeal and C.O. also.
17. In the result, appeal filed by the Revenue is dismissed and C.O. filed by assessee is allowed.
Order pronounced in the open court on 20th day of October, 2022.
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