Karnatak Law Society, Belgaum V. Deputy Commissioner of Income Tax, Cir-2, Belgaum

ITA 94/PAN/2014

• Counselvise Citation: 9424114 RSA 2014
• Duration Of Justice: 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 19-12-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 19-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHA DESAI
• Assessee Lawyers: P DINESH
• Keywords: Depreciation; Charitable institution; Capital expenditure
• Section: 143(3); 32; 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BABNSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 94/PNJ/2014 (ASST. YEAR : 20 1 0 - 1 1 ) THE KARNATAKA LAW SOCIETY, TILAKWADI, BELGAUM. VS. D CIT , CIRCLE - 2 , BELGAUM PAN NO. AAAAT 3599 E (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P. DINESH - AR DEPARTMENT BY : SMT. ASHA DESAI - D.R. DATE OF HEARING : 19 / 12 /2014 . DATE OF PRONOUNCEMENT : 19 / 12 /201 4 . O R D E R PER P.K. BANSAL, A.M THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT (A), BELGAUM DATED 06/01/2014 . 2. THE ASSESSEE HAS TAKEN AS MANY AS FIVE GROUNDS , WHICH ARE AS UNDER: - 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN PASSING THE IMPUGNED ORDER DISREGARDING THE WRITTEN SUBMISSIONS BY THE AUTHORIZED REPRESENTATIVES. 2 2. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS RELIED ON CASE LAWS NOT A PPLICABLE TO THE APPELLANTS CASE. A) IN THE CASE ESCORTS LTD VS UNION OF INDIA & ORS. THE ASSESSEE /APPELLANT IS A BUSINESS ENTITY AND IS CASE WHERE THE ASSESSEE /APPELLANT HAD CLAIMED BOTH CAPITAL EXPENDITURES ON SCIENTIFIC RESEARCH U/S 35( 1 )(IV) AND DEPRECIATION U/S 32 WHICH IS NOT THE CASE WITH PRESEN T APPELLANT AS THE APPELLANT IS EDUCATIONAL TRUST REGISTERED U/S I 2A AND DEPRECIATION IS CLAIMED AS EXPENSES FOR DECREASE IN THE VALUE OF ASSETS THROUGH WEAR OR OBSOLESCENCE. THE OBJECT OF PROVIDING DEPRECIATION IS TO SPREAD THE EXPENDITURES INCURRED IN A CQUIRING THE ASSETS. 3. DEPRECIATION IS NOTHING BUT DECREASE IN THE VALUE OF ASSETS THROUGH WEAR, DETERIORATION OR OBSOLESCENCE AND ALLOWANCE IS MADE FOR THIS PURPOSE IN BOOK KEEPING, ACCOUNTANCY. THE OBJECT OF PROVIDING DEPRECIATION IS TO SPREAD THE EXP ENDITURES INCURRED IN ACQUIRING THE ASSETS, OVER ITS EFFECTIVE LIFETIME. THE AMOUNT OF DEPRECIATION PROVISION MADE IN BOOKS OF ACCOUNTS FOR ACCOUNTING PERIOD IS NOTHING BUT PROPORTION OF SUCH EXPENDITURES WHICH HAS EXPIRED DURING THAT PERIOD. AS SUCH PROVI SIONS OF SECTION 32(1) ARE NOT APPLICABLE TO TRUST. DEPRECIATION IS ACCOUNTED AS EXPENDITURES IN THE BOOKS OF ACCOUNTS AND SAME IS CLAIMED IN COMPUTING THE INCOME OF TRUST IN ORDER TO PRESERVE THE CORPUS OF THE TRUST. AS 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. DEPRECIATION IS THE EXHAUSTION OF THE EFFECTIVE LIFE OF FIXED ASSET OWING TO USE OR OBSOLESCENCE. INCOME OF THE TRUST IS REQUIRED TO BE COMPUTED UN DER SECTION 11 ON CO M MERCIAL PRINCIPLES AFTER PROVIDING FOR ALLOWANCE FOR DEPRECIATION AND DEDUCTION THEREOF FROM GROSS INCOME OF THE TRUST IT IS THEREFORE TRUST IS ENTITLED TO CLAIM DEPRECIATION IN RESPECT OF THE ASSETS OWNED BY IT. RELIANCE IS LAID ON T HE RATIO LAID DOWN IN THE CASE OF DJRECTOR OF INCOME TAX (EXEMPTION) V/S G K CHARITABLE (20L3)2L4TAXMARI 555 (BOM) CIT V/S GUJURATI SAMAJ (2012)349 ITR 559 CIT V/S SOCIETY OF SISTERS ST ANNE (1984) KAR CIT V/S INSTITUTE OF BANKING(2003) ITR 110 (BOM) 3 4 . IN LIGHT OF THE ABOVE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AS WELL AS THE ASSESSING AUTHORITY HAVE ERRED IN DISALLOWING DEPRECIATION OF RS 4,11,50,509. 5 . WITHOUT PREJUDICE TO ABOVE, THE EXCESS EXPENDITURES INCURRED IN EARLIER YEARS IS NOT S ET OFF FROM INCOME OF SUBSEQUENT YEAR. THE SAME IS TO BE SET OFF FROM CURRENT YEAR SURPLUS. WE PLACE RELIANCE ON THE FOLLOWING CASES IN SUPPORT OF OUR CLAIM : CIT V/S GUJUBATI SAMAJ (RGED) (2012) ITR 559 M P INDORE 6 . THE APPELLANT RESERVES THE RIGHT TO ADD, AMEND OR DELETE THE GROUNDS OF APPEAL. 3. GROUND NO.5 WAS NOT PRESSED, HENCE, IT IS DISMISSED AS NOT PRESSED . GROUNDS NO. 1 TO 4 RELATE TO ONLY ONE ISSUE AS CONTENDED BY THE LEARNED AR I.E. THE CLAIM OF DEPRECIATION BY THE ASSESSEE , BUT DISALLOWED BY THE ASSESSING OFFICER . 4 . F ACTS RELATING TO THESE ISSUES , IN BRIEF, ARE THAT THE ASSESSEE IS AN EDUCATIONAL TRUST , FILED ITS RETURN DECLARING NIL INCOME AND CLAIMED APPLICATION U/S. 11 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE 'ACT', FOR SHORT) . THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S. 143(3) OF THE ACT VIDE HIS ORDER DATED 19/12/2012 BY DISALLOWING THE DEPRECIATION CLAIMED BY THE ASSESSEE AMOUNTING TO RS. 4,11,50,509/ - . 4 5. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CONSIDERED THE SAME. IN OUR OPINION, THE ISSUE IS COVERED BY THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INSTITUTE OF BANKING PERSONNEL SELECTION , IN WHICH JUSTICE S.H. KAPADIA WHEN THE FOLLOWING QUESTION WAS REFERRED TO THE HONBLE HIGH COURT HELD AS UNDER: - WHETHER , ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT TO LAW IN DIRECTING THE AO TO ALLOW DEPRECIATION ON THE ASSETS THE COST OF WHICH HAS BEEN FULLY ALLOWED AS APPLICATION OF INCOME UNDER S. 11 IN THE PAST YEARS? 3. AS STATED ABOVE, THE FIRST QUESTION WHICH REQUIRES CONSIDERATION BY THIS COURT IS WHETHER DEPRECIATION WAS ALLOWABLE ON THE ASSETS, THE COST OF WHICH HAS BEEN FULLY ALLOWED AS APPLICATION OF INCOME UNDER S. 11 IN THE PAST YEARS? IN THE CASE OF CIT VS. MUNIS U VRAT JAM (1994) TAX LR 1084 (BORN) THE FACTS WERE AS FOLLOWS. THE AS S ESSEE WAS A CHARITABLE TRUST. IT WAS REGISTERED AS A PUBLIC CHARITABLE TR UST. IT WAS ALSO REGISTERED WITH THE CIT, PUNE. THE ASSESSEE DERIVED INCOME FROM THE TEMPLE PROPERTY WHICH WAS A TRUST PROPERTY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR ASST. YRS. 1977 - 78, 1978 - 79 AND 1979 - 80, THE ASSESSEE CLAIMED DEPRECIATION ON T HE VALUE OF THE BUILDING @2 - 1/2 PER CENT AND THEY ALSO CLAIMED DEPRECIATION ON FURNITURE @ 5 PER CENT. THE QUESTION WHICH AROSE BEFORE THE COURT FOR DETERMINATION WAS WHETHER DEPRECIATION COULD BE DENIED TO THE ASSESSEE, AS EXPENDITURE ON ACQUISITION OF TH E ASSETS HAD BEEN TREATED AS APPLICATION OF INCOME IN THE YEAR OF ACQUISITION? IT WAS HELD BY THE BOMBAY HIGH COURT THAT S. 11 OF THE IT ACT MAKES PROVISION IN RESPECT OF COMPUTATION OF INCOME OF THE TRUST FROM THE PROPERTY HELD FOR CHARITABLE OR RELIGIOUS PURPOSES AND IT ALSO PROVIDES FOR APPLICATION AND ACCUMULATION OF INCOME. ON THE OTHER HAND, S. 28 OF THE IT ACT DEALS WITH CHARGEABILITY OF INCOME FROM PROFITS AND GAINS OF BUSINESS AND S. 29 PROVIDES THAT INCOME FROM PROFITS AND GAINS OF BUSINESS SHAL L BE COMPUTED IN ACCORDANCE WITH S. 30 TO S. 43C. THAT, S. 32(1) OF THE ACT PROVIDES FOR DEPRECIATION IN RESPECT OF BUILDING, PLANT AND MACHINERY OWNED BY THE ASSESSEE AND USED FOR THE BUSINESS PURPOSES. IT FURTHER PROVIDES FOR DEDUCTION SUBJECT TO S. 34. I N THAT MATTER ALSO, A SIMILAR ARGUMENT, AS IN THE PRESENT CASE, WAS ADVANCED ON BEHALF OF THE 5 REVENUE, NAMELY, THAT DEPRECIATION CAN BE ALLOWED AS DEDUCTION ONLY UNDER S. 32 OF THE IT ACT AND NOT UNDER GENERAL PRINCIPLES. THE COURT REJECTED THIS ARGUMENT. I T WAS HELD THAT NORMAL DEPRECIATION CAN BE CONSIDERED AS A LEGITIMATE DEDUCTION IN COMPUTING THE REAL INCOME OF THE ASSESSEE ON GENERAL PRINCIPLES OR UNDER S. 1 1(1)( A) OF THE IT ACT. THE COURT REJECTED THE ARGUMENT ON BEHALF OF THE REVENUE THAT S. 32 OF TH E IT ACT WAS THE ONLY SECTION GRANTING BENEFIT OF DEDUCTION ON ACCOUNT OF DEPRECIATION. IT WAS HELD THAT INCOME OF A CHARITABLE TRUST DERIVED FROM BUILDING, PLANT AND MACHINERY AND FURNITURE WAS LIABLE TO BE COMPUTED IN NORMAL COMMERCIAL MANNER ALTH OUGH TH E TRUST MAY NOT BE CARRYING ON ANY BUSINESS AND THE ASSETS IN RESPECT WHEREOF DEPRECIATION IS CLAIMED MAY NOT BE BUSINESS ASSETS. IN ALL SUCH CASES, S. 32 OF THE IT ACT PROVIDING FOR DEPRECIATION FOR COMPUTATION OF INCOME DERIVED FROM BUSINESS OR PROFESSIO N IS NOT APPLICABLE. HOWEVER, THE INCOME OF THE TRUST IS REQUIRED TO BE COMPUTED UNDER S. 1 1 ON COMMERCIAL PRINCIPLES AFTER PROVIDING FOR ALLOWANCE FOR NORMAL DEPRECIATION AND DEDUCTION THEREOF FROM GROSS INCOME OF THE TRUST. IN VIEW OF THE A FORETASTED JUD GMENT OF THE BOMBAY HIGH COURT, WE ANSWER QUESTION NO. 1 IN THE AFFIRMATIVE I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT. 6. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIRECTOR OF INCOME - TAX (EXEMPTION), MUMBAI VS. G.K.R. CHARITIES [ 264 ITR 110 (BOM.) ] & IN THE CASE OF DIT(E) VS. FRAMJEE CAWASJEE INSTITUTE [109 CTR (BOM.) 463] . NOT ONLY IN THE AFORESAID CASES, BUT ALSO IN VARIOUS JUDGMENTS OF OTHER HIGH COURTS HAS ALSO TAKEN SAME VIEW IN THE FOLLOWING CASES: - 1. CIT V . MARKET COMMITTEE, PIPLI 330 ITR 16 (P & H) 2. DIT V. VISHWA JAGRITI MISSION 262 CTR (DEL) 558 3. CIT V. SHRI PLOT SWETAMBER MURTI PUJAK JAIN MANDAL 211 ITR 293 (GUJ.) 4. CIT V. DEVI SAKUNTALA THARAL CHARITABLE FOUNDATION 358 ITR 452 (MP) 6 5. CIT V. SHRI GUJRATI SAMAJ 349 ITR 559 (MP) 6. CIT V. MAHARANA OF MEWAR CHARITABLE FOUNDATION (1987) 164 ITR 439 (RAJ.) 7. CIT V. SOCIETY OF THE SISTERS OF ST. ANNE 146 ITR 28 (KAR.) 7. LEARNED DR BEFORE US EVEN THOUGH RELIED ON THE DECISION OF KERALA HIGH COURT (2012) 6 TAXCORP (DT) 51579 IN THE CASE OF LISSIE MEDICAL INSTITUTIONS VS. CIT , W E NOTED AND HAVE LOOKED INTO THIS CASE LAW AND W E FIND THAT IN THIS CASE, HONBLE KERALA HIGH COURT HAD TAKEN A CONTRARY VIEW AS HAS BEEN TAKEN BY THE OTHER HIGH COURTS . THE HONBLE HIGH COURT TOOK A VIEW THAT WHEN THE EXPENDITURE INCURRED FOR ACQUISITION OF DEPRECIABLE ASSETS ITSELF IS TREATED AS A P PLIC A TION OF INCOME FOR CHARITABLE PURPOSES U/S. 11(1)(A) OF THE A CT, SHOULD NOT THE COST OF SUCH ASSETS TO BE TREATED AS NIL FOR THE ASSESSEE AND IN THAT SITUATION DEP RECIATION TO BE GRANTED TURNS OUT TO BE NIL . THE VIEW TAKEN BY THE HONBLE KERALA HIGH COURT MAY BE ONE OF THE VIEW, BUT WE ARE OF THE OPINION THAT SEC. 11(1)(A) OF THE ACT TURNS OF NIL APPLICATION OF INCOME. THE INCOME HAS TO BE COMPUTED U/S. 29 OF THE ACT BY GRANTING ALL THE DEDUCTIONS PROVIDED U/S. 30 TO 43D OF THE ACT WHICH INCLUDES DEPRECIATION U/S. 32 OF THE ACT. THE AMOUNT , WHICH HAS BEEN ALLOWED AS AN APPLICATION U/S. 11(1)(A) OF THE ACT , CANNOT BE REDUCED FOR DETERMINING THE COST ELIGIBLE FOR DEPRECIATION. SINCE, THE JURISDICTIONAL HIGH COURT S DECISION IN THE CASE OF CIT V . SOCIETY OF 7 SISTERS OF ST. ANNE [146 ITR 28(KAR. )] IS IN FAVOUR OF THE ASSESSEE, WE THEREFORE , RESPECTFULLY FOL LO W I NG THE SAID DECISION, SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIATION TO THE ASSESSEE U/S. 32 OF THE ACT WHILE COMPUTING THE INCOME ELIGIBLE FOR APPLICATION U/S. 11(1)(A) OF THE ACT. THUS, GROUNDS NO. 1 TO 4 ARE ALLOWED. 8. IN THE RESULT, APPEAL FILED BY ASSESSEE IS PARTLY ALLOWED. ( ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DECEMBER , 201 4 ). SD/ - SD/ - (D.T. GARASIA) (P.K. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 19 TH DECEMBER , 201 4 . VR/ - COPY TO: 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE LD. CIT 4 . THE CIT(A) 5 . THE D.R 6 . GUARD FILE. BY ORDER ASSISTANT REGISTRAR I.T.A.T., PANAJI