Allahabad H.C : Cost of capital expenditure has already been allowed as deduction under Section 11 of Act, 1961, against the income of trust in respective years and therefore, allowance of revenue expenditure under Section 11 of the Act, 1961 on assets which had already been claimed and allowed as deduction on account of expenditure, tantamount double deduction

High Court Of Allahabad

CIT (Exemption) vs. Seth Anandram Jaipuria Edu. Society Cantonment

Section : 11, 32

Assessment years : 2006-07 and 2007-08

Sudhir Agarwal And Ravindra Nath Mishra, JJ.

IT Appeal Nos. 94, 102 Of 2015 & 41 Of 2016

March 7, 2017

ORDER

1. All these three appeals filed under Section 260A of Income Tax Act, 1961 (hereinafter referred to as “Act, 1961′) have arisen from two sets of judgments and order of Income Tax Appellate Tribunal (hereinafter referred to as “Tribunal”) raising same questions though relates to different Assessment Years (hereinafter referred to as “A.Y.”), details whereof are as under:

Sl. No.    I.T.A. No.    Appeal number before Tribunal  Date of order    Assessment Years

1           102 of 2015           374/Lkw/2011                       04.07.2014                2006-07

2            94 of 2015            375/Lkw/2011                       04.07.2014                2007-08

3             41 of 2016            2823/Del/2014                     01.09.2015                2008-09

2. Though substantial questions of law raised in all these appeals are same, but since there is difference of amount mentioned in the different appeals, we reproduce respective substantial questions of law involved in all these appeals as under:

Income Tax Appeal No. 102 of 2015:

“(1) Whether Tribunal is justified in law and on facts in deleting addition of Rs. 1,66,49,749/- made by the Assessing Officer on account of dis-allowance of depreciation without appreciating the facts that entire cost of capital expenditure has already been allowed as deduction under Section 11 of Act, 1961, against the income of trust in respective years and therefore, allowance of revenue expenditure under Section 11 of the Act, 1961 on assets which had already been claimed and allowed as deduction on account of expenditure, tantamount double deduction.

(2) Whether the Tribunal is justified in law and on facts in deleting the addition of Rs. 1,66,49,749/- made by the Assessing Officer on account of dis-allowance of depreciation without appreciating the fact that the Assessee Society is claiming expedition under Section 11 of Act, 1961.”

Income Tax Appeal No. 94 of 2015:

“(1) Whether Tribunal is justified in law and on facts in deleting addition of Rs. 1,66,97,767/- made by the Assessing Officer on account of dis-allowance of depreciation without appreciating the facts that entire cost of capital expenditure has already been allowed as deduction under Section 11 of Act, 1961, against the income of trust in respective years and therefore, allowance of revenue expenditure under Section 11 of the Act, 1961 on assets which had already been claimed and allowed as deduction on account of expenditure, tantamount double deduction.

(2) Whether the Tribunal is justified in law and on facts in deleting the addition of Rs. 1,66,97,767/- made by the Assessing Officer on account of dis-allowance of depreciation without appreciating the fact that the Assessee Society is claiming expedition under Section 11 of Act, 1961.”

Income Tax Appeal No. 41 of 2016:

“(1) Whether on the facts and circumstances of case, Tribunal is justified by upholding the order of Commissioner of Income Tax (Appeal) for allowing the depreciation of Rs. 1,63,63,436/- on capital expenditure without appreciating the fact that entire cost of capital expenditure has already been allowed as deduction under Section 11 of Act, 1961 against the income of trust in respective years and, therefore, allowance of revenue expenditure under Section 11 of Act, 1961 on whose assets, which had already been claimed and allowed as deduction on account of capital expenditure, tantamount double deduction.

(2) Whether on the facts and circumstances of case, Tribunal is justified in upholding the order of Commissioner of Income Tax (Appeals) on the issue of deletion of the additional of Rs. 8,18,138/- made by Assessing Officer disallowing the claim of expenditure incurred on account of scholarship paid to one Mr. Adheesh Bhagat as it cannot be said to have been paid for charitable purposes.”

3. Basic facts common for all these appeals, necessary for adjudication of these questions, are stated as under.

4. 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 12A 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.

5. 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.

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

7. Sri Alok Mathur, learned counsel for appellant, has relied on Supreme Court’s judgment in Escorts Ltd. v. Union of India [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 10(2)(vi) and Section 10(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.

8. 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.

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

10. One of the earliest judgment is from Karnataka High Court in CIT v. Society of Sisters of St. Anne [1984] 146 ITR 28/16 Taxman 400. 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 CIT v. Raipur Pallottine Society [1989] 180 ITR 579/[1990] 50 Taxman 233, Gujrat High Court in CIT v. Sheth Manilal Ranchoddas Vishram Bhavan Trust [1992] 198 ITR 598/[1993] 70 Taxman 228, Calcutta High Court in CIT v. Bhoruka Public Welfare Trust [1999] 240 ITR 513/106 Taxman 311 (Cal.), Punjab and Haryana High Court in CIT v. Market Committee, Pipli [2011] 330 ITR 16/[2012] 20 taxmann.com 559, Madras High Court in CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad), Maharashtra High Court in CIT v. Institute of Banking Personel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 (Bom) and CIT v. Jawaharlal Nehru Port Trust [2016] 383 ITR 339 (Bom) .

11. Karnataka High Court has recently followed above authorities in CIT(Exemptions) v. Karnataka Reddy Janasangha [2016] 389 ITR 229/72 taxmann.com 88/241 Taxman 147 and DIT (Exemptions) v. Al-Ameen Charitable Fund Trust [2016] 383 ITR 517/67 taxmann.com 160/238 Taxman 148 (Kar.).

12. 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.”

13. 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.”

14. 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 Al-Ameen Charitable Fund Trust (supra) and following CIT v. Vatika Township (P.) Ltd. [2014] 367 ITR 466/49 taxmann.com 249/227 Taxman 121 (SC) Court has held that the aforesaid amendment is prospective and operative from 01.04.2015.

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

16. 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 v. CIT [2012] 348 ITR 344/24 taxmann.com 9/209 Taxman 19 (Mag.) wherein it has placed reliance on Supreme Court’s judgment in Escorts Ltd. (supra) but we have already discussed that the judgment in Escorts Ltd. (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.

17. The discussion made above leads to inescapbale conclusion that Question-(1) in the aforesaid appeals has to be answered in favour of Assessee and against Revenue.

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.

19. In the result, all the appeals lack merits. Dismissed.

[Citation : 394 ITR 712]

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