M/S Krupanidhi Education Trust , ... vs Assessee

M/s. Krupanidhi Education Trust, Vs. The Director of Income Tax Chikkabelandur, (Exemption), Carmelram Post, Bangalore. Varthur Hobli, Off. Sarjapur Road, Bangalore - 560 034. PAN: AAATK 1211R APPELLANT RESPONDENT

Appellant by : Shri V. Srinivasan, C.A. Revenue by : Shri Farahat Hussain Qureshi, CIT-II(DR)

Date of hearing : 05.02.2015 Date of Pronouncement : 20.02.2015

ORDER

Per N.V. Vasudevan, Judicial Member

This appeal by the assessee is against the order dated 12.3.2014 of

DIT(Exemptions), Bangalore passed u/s. 263 of the Act.

2. The assessee is a trust running various educational institutions.

Assessment u/s. 143(3) of the Act was completed by the AO for the A.Y.

2009-10 by an order dated 30.12.2011. The DIT(E), on perusal of the ITA No.495/Bang/2014 Page 2 of 8

assessment records was of the view that the order of assessment dated

30.12.11 was erroneous and prejudicial to the interests of Revenue. The

DIT(E) noticed that the AO completed the assessment denying the

exemption of capital expenditure claimed u/s.11(1)(a) of the Act as

application of income of the Trust, since the registration u/s.12A of the Act

had been cancelled by the DIT(E). He further noticed from the details of

depreciation claimed, that the depreciation was claimed on the opening

WDV which is inclusive of assets acquired during earlier years, wherein the

expenditure towards acquisition of the said assets has already been

claimed by the assessee as capital expenditure towards application of

funds towards the objects of the trust and allowed as such in earlier years.

According to the DIT(E), doing so amounted to allowing double deduction.

On the facts of the present case, he was of the view that the decision of the

Hon'ble Supreme Court in the case of Escorts Limited & another Vs.

Union of India 199 ITR 43 is squarely applicable, wherein it has been

categorically held that when deduction u/s 35(2)(iv) is allowed in respect of

capital expenditure on scientific research, no depreciation is allowable u/s

32 on the same asset.

3. Accordingly, a show cause notice u/s. 263 of the Act was issued by

the DIT(E). The assessee pointed out that Hon'ble High Court of

Karnataka in the case of All Saints Church, 148 ITR 786 (Kar) and

Society of Sisters of St. Ann, 146 ITR 28 (Kar) has taken the view ITA No.495/Bang/2014 Page 3 of 8

that where capital expenditure on acquisition of depreciable asset is

considered as application of income for charitable purpose, allowing

depreciation on the very same capital asset would not amount to double

allowance. The assessee also pointed out that the decision of Escorts

Ltd. (supra) will not be applicable as it was rendered on a different set of

facts.

4. The DIT(E), however, held that allowance of depreciation when the

cost has already been recovered by way of exemption as application of

income amounts to double deduction and double benefit on the same

asset. In coming to the aforesaid conclusion, the CIT referred to the

decision of Hon'ble Supreme Court in P.K. Badiani v. CIT, (1976) 105

ITR 642 (SC) wherein it was observed that allowance of depreciation is

to replace the value of an asset to the extent it is depreciated during the

period of account relevant to assessment year and as the value to that

extent had been lost, the corresponding allowance of depreciation takes

place. He also referred to the decision in Mysore Minerals Ltd. v. CIT,

(1999) 239 ITR 775 wherein it was observed that the concept of

depreciation suggests that tax benefit on account of depreciation

legitimately belongs to one who has invested in the capital asset in utilising

the capital asset and thereby losing gradually investment cost by wear and

tear and need to replace the same by having lost its value fully over a

period of time. The DIT(E), concluded as follows:-

ITA No.495/Bang/2014 Page 4 of 8

"6.5 Thus, as observed by different courts, depreciation is only diminution in the value of an asset. There is no actual expenditure on account of depreciation but it is the actual amount available for the assessee to invest in the new asset / machinery once the value of the old asset / machinery has fully been reduced to Nil. Therefore, by claiming depreciation, the assessee will have physical cash in his hand which has to be used by him for purchase of a new asset in place of the old. Hence, it cannot be claimed by the assessee as an expenditure during the tenure of the asset as well as application of income of the trust while purchasing the new machinery in place of the existing, which otherwise amounts to double deduction / exemption."

5. The DIT(E) also placed reliance on the decision of Hon'ble High

Court of Kerala in the case of DDIT(E) v. Lissie Medical Institutions,

348 ITR 344 (Ker) wherein it was held that allowing depreciation of a

depreciable asset when the cost of acquisition of depreciable asset was

allowed as application of income for charitable purpose amounts to double

depreciation and therefore depreciation cannot be allowed. The DIT listed

out the details of application of income and claim of depreciation in a chart

in para 11 of his order which reads thus:-

Asst. Income before Cost of capital assets Depreciation Year application during the year claimed claimed on as application of income cost of capital assets (1) (2) (3) (4) 2006-07 12,11,79,731 5,67,99,662 9,21,576 2007-08 12,41,08,027 25,99,22,313 33,87,452 2008-09 14,53,81,247 9,14,39,711 11,79,089 2009-10 17,27,36,619 2,46,47,797 30,60,985 ITA No.495/Bang/2014 Page 5 of 8

6. The DIT(E) finally concluded that order of AO was erroneous and

prejudicial to the interests of Revenue and accordingly set aside the

assessment with a direction to rework the depreciation allowable on the

WDV of assets, after taking into account the cost of assets which has

already been allowed as application of income in the previous years and no

depreciation should be allowed on such assets.

7. Aggrieved by the order of DIT(E), the assessee has preferred the

present appeal before the Tribunal.

8. We have heard the submissions of the ld. DR, who relied on the

order of CIT. The ld. counsel for the assessee relied on the decision of

ITAT Bangalore Bench in the case of DDIT(E) v. Cutchi Memon Union

(2013) 60 SOT 260 Bangalore ITAT, wherein similar issue has been

dealt with by this Tribunal.

9. We have given a very careful consideration to the rival submissions.

Identical issue was considered by this Tribunal in the case of Cutchi

Memon Union (supra). In the aforesaid case, the assessee claimed

depreciation and the AO denied depreciation on the ground that at the time

of acquiring the relevant capital asset, cost of acquisition was considered

as application of income in the year of its acquisition. The AO took the

view that allowing depreciation would amount to allowing double deduction ITA No.495/Bang/2014 Page 6 of 8

and placed reliance on the decision of Hon'ble Supreme Court in Escorts

Ltd. (supra). The CIT(A), however, allowed the claim of assessee. On

further appeal by the Revenue, the Tribunal held as follows:-

20. We have considered the rival submissions. If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon'ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne 146 ITR 28 (Kar). It was held in CIT vs. Tiny Tots Education Society (2011) 330 ITR 21 (P&H) , following CIT vs. Market Committee, Pipli (2011) 330 ITR 16 (P&H) :

(2011) 238 CTR (P&H) 103 that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. The decision of the Hon'ble Supreme Court in the case of Escorts Ltd. 199 ITR 43 (SC) have been referred to and distinguished by the Hon'ble Court in the aforesaid decisions.

21. The issue raised by the revenue in the ground of appeal is thus no longer res integra and has been decided by the Hon'ble Punjab & Haryana High Court in the case of CIT v. Market Committee, Pipli, 330 ITR 16 (P&H). The Hon'ble Punjab & Haryana High Court after considering several decisions on that issue and also the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra), came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon'ble Punjab & Haryana High Court made a reference to the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. (supra) and observed that the Hon'ble Supreme Court was dealing with a case of two deductions under ITA No.495/Bang/2014 Page 7 of 8

different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon'ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon'ble Punjab & Haryana High Court has also made a reference to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Society of Sisters of Anne, 146 ITR 28 (Kar), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. In view of the aforesaid decision on the issue, we are of the view that the order of the CIT(A) on the above issue does not call for any interference.

22. Consequently, ground No.5 raised by the revenue is dismissed."

10. We may also add that the legal position has since been amended

by a prospective amendment by the Finance (No.2) Act, 2014 w.e.f.

1.4.2015 by insertion of sub-section (6) to section 11 of the Act, 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."

11. As already stated, the aforesaid amendment is prospective and will

apply only from A.Y. 2015-16. In view of the above legal position, we are of

the view that jurisdiction u/s. 263 of the Act ought not to have been ITA No.495/Bang/2014 Page 8 of 8

exercised by the DIT(E). We may also add that two views are possible on

the issue and even on this basis, invoking jurisdiction u/s. 263 of the Act is

not permissible. We therefore quash the order u/s. 263 and allow the

appeal of the assessee.

12. In the result, the appeal by the assessee is allowed.

Pronounced in the open court on this 20th day of February, 2015.

Sd/- Sd/-

( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 20th February, 2015.

/D S/

Copy to:

1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar / Senior Private Secretary ITAT, Bangalore.