Madhya Pradesh H.C : depreciation to trust on capital asset which was considered for computation “application of money ” is allowed

High Court Of Madhya Pradesh

CIT Vs. Devi Sakuntala Tharal Charitable Foundation

Section : 32, 12A

Krishn Kumar Lahoti And B.D. Rathi, Jj.

It Appeal Nos. 14 Of 2011 And 4 To 6 Of 2012

April 2, 2013


Krishn Kumar Lahoti, J. – These appeals are preferred by the Revenue, in which the Revenue has framed identical substantial question of law, for admission of the appeals and hearing on the aforesaid question by this court.

2. As all these appeals involve the same question and have been taken into consideration to be decided by this common order, we are referring the facts from I. T. A. No. 14 of 2011.

3. In the memo of appeal, the Revenue has shown the following substantial question of law on which the prayer of the Revenue is for admission of the appeal and for its hearing on the merits.

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding the deletion of the addition of Rs. 31,08,381 being the disallowance of depreciation on fixed assets even when the entire expenditure incurred towards purchase of fixed assets has already been claimed in entirety either in the current year or in earlier years and if depreciation is allowed on such assets it would amount to double deduction ?”

4. In other cases also, except the amount of addition, the substantia] question of law as has been framed in the memo of appeal are identical.

5. The facts of the case, in all these appeals, are that the respondents are societies registered with the Registrar of Societies Madhya Pradesh and are running an educational institution. All these societies have been registered as charitable societies under section 12A of the Income-tax Act and claiming depreciation on the assets of which, cost had already been claimed as application of income. The contention of the Revenue is that on the aforesaid assets, the assessees were not entitled to claim depreciation by way of deduction and this amounts to double deduction in the matter.

6. The Commissioner of Income-tax (Appeals) in the order held that the issue was covered by the various judgments of the High Courts in favour of the assessee and also by the Income-tax Appellate Tribunal, Indore Madhya Pradesh. The issue was also considered by the High Court of Madhya Pradesh in Govindram Saksaria Charity Trust v. ITO [1987] 168 ITR 387 and the High Court of Delhi in the case of Nokia Corpn. v. DIT (International Taxation) [2007] 292 ITR 22/162 Taxman 369 wherein it has been held that the deduction was rightly claimed, and wrongly disallowed by the Assessing Officer which was allowed by the Commissioner of Income-tax (Appeals).

7. The Department preferred an appeal before the Income-tax Appellate Tribunal, Indore, and the Tribunal considered the issue and dismissed the appeal in the light of the aforesaid judgments of various High Courts, This order is under challenge in these appeals.

8. To appreciate the contention of the appellant, it would be appropriate if the judgment of the High Coun of Madhya Pradesh in the case of CIT v. Raipur Pallottine Society [1989] 180 ITR 579/[1990] 50 Taxman 233 is taken into consideration the Division Bench considering the similar issue has held as under (page 580 of 180 ITR) :

“The material facts giving rise to this reference, briefly, are as follows. The assessee is a religious and charitable institution and was assessed in the status of an association of persons. For the assessment year 1973-74, the assessee claimed depreciation of Rs. 45,650 on its assets. That was disallowed. Aggrieved by the order passed by the Income-tax Officer, the assessee preferred an appeal. The Appellate Assistant Commissioner upheld the order passed by the Income-tax Officer in this behalf. On further appeal before the Tribunal, the Tribunal held that, on assets held by the assessee trust, the assessee was entitled to depreciation. The Tribunal, accordingly, directed that the Income-tax Officer should allow depreciation as claimed by the assessee. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.

Having heard learned counsel for the petitioner, we have come to the conclusion that the reference must be answered in the affirmative and against the Revenue. It was contended on behalf of the Revenue that depreciation under section 32 of the Act could be allowed only when income was computed under the head ‘Business’ falling under section 28 of the Act. In this connection, we may usefully refer to the following observations of the Karnataka High Court in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar.) (at page 31) :

The 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. In Spicer and Pegler’s Bookkeeping and Accounts, 17th edn., pages 44, 45 and 46, it has been noted as follows :

Depreciation is the exhaustion of the effective life of a fixed asset owing to ‘use’ or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime ; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period.

At the end of its effective life, the asset ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, of the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.

If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits ; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable harge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs ; assets should be shown at a figure which represents that part of their value on acquisition which has not yet expired.

It was not disputed that the mercantile system of accounting was followed by the assessee. In that case, as held in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar.), if depreciation is not allowed as a necessary deduction for computing the income of a charitable institution, then there would be no way to preserve the corpus of the trust for deriving income. We respectfully agree with that decision.

For all these reasons, our answer to the question referred by the Tribunal is in the affirmative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.”

9. The similar view was taken by the Delhi High Court in DIT v. Vishwa Jagrrit Mission [I.T.A. No. 140 of 2012] and the Division Bench of the Delhi High Court considering the similar controversy has held as under (page 450) :

“The judgment of the Supreme Court in Escorts Ltd. v. 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 account 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, unless 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 Commissioner of Income-tax (Appeals).”

10. The matter was also considered by the Bombay High Court in the case of CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 wherein the Division Bench headed by the hon’ble justice S. H. Kapadia, as he then was, considering the question held thus (page 114) :

“Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of DIT (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR (Bom) 463. In that case, the facts were as follows : The assessee was the trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the trust. The Income-tax Officer held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Appellate Assistant Commissioner. The appeal was rejected. The Tribunal, however, took the view that where the Income-tax Officer stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as ‘application of income’ of the trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, question No. 2 is covered by the decision of the Bombay High Court in the above judgment. Consequently, question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Department.”

11. As the question has been considered by the various High Courts in which it has been held that in computation of income-tax in subsequent years, the depreciation in respect of those assets cannot be taken into account and the depreciation was allowed by the High Court. As the controversy in the present case is identical and in the light of the judgment of Division Bench of this court in Raipur Pallottine Society (supra) and in the light of the Bombay High Court decision in Institute of Banking Personnel Selection (IBPS) (supra), we find that the substantial question of law as framed by the appellant in the memo of appeal does not arise and the issue is covered by the aforesaid decisions.

12. This appeal does not involve any substantial questions of law for our consideration and accordingly dismissed with no order as to costs.

[Citation : 358 ITR 452]

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