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Commissioner Of Income Tax . v. M/S Tiny Tots Education Society
Factual and Procedural Background
This appeal was filed by the Revenue under Section 260A of the Income Tax Act, 1961, challenging the order dated 2.6.2009 of the Income Tax Appellate Tribunal (ITAT), New Delhi, relating to the assessment year 2006-07. The dispute arose over the Assessing Officer’s disallowance of depreciation claimed by the Assessee, a charitable institution registered under Section 12AA of the Act. The Assessing Officer held that allowing depreciation in addition to deduction under Section 11 amounted to a double benefit, which was disallowed. The Commissioner of Income Tax (Appeals) [CIT(A)] and subsequently the ITAT upheld the Assessee’s claim, allowing depreciation on the basis that it was permissible for computing income and did not constitute double deduction.
Legal Issues Presented
- Whether the ITAT was correct in law in confirming the CIT(A)’s order directing the Assessing Officer to allow depreciation of Rs. 15,21,994/- despite deduction under Section 11 already being allowed on the same asset, thereby avoiding double deduction that allegedly contravenes the Supreme Court’s decision in Escorts Limited and Another v. Union of India and others (199 ITR 43)?
Arguments of the Parties
Revenue's Arguments
- The Revenue contended that allowing depreciation in addition to deduction under Section 11 for the same asset results in double benefit to the Assessee, which is impermissible under the Supreme Court’s ruling in Escorts Ltd. and another v. Union of India and others.
Assessee's Arguments
- The Assessee, as a charitable institution, argued that depreciation is a legitimate deduction for computing income and does not amount to double benefit since the deduction under Section 11 relates to income application, which is a separate concept from income computation.
- The Assessee maintained that income must be computed on commercial principles and the system of accounting followed, subject to statutory provisions.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Escorts Limited and Another v. Union of India and others (199 ITR 43) | Prohibition of double deduction/benefit when income is exempt. | The Court distinguished this precedent, holding it not applicable where depreciation is claimed by a charitable institution for determining the percentage of funds applied for charitable purposes. |
| Commissioner of Income Tax, Karnal v. Market Committee, Pipli (I.T.A No. 535 of 2009) | Clarification on depreciation claims by charitable institutions and application of income. | Referred to in support of the view that depreciation deduction for income computation does not amount to double benefit. |
| CIT v. Seth Manilal Ranchhoddas Vishram Bhawan Trust [1992] 198 ITR 598 (Guj) | Supporting principles on charitable institutions' income computation. | Used to reinforce the distinction between income computation and application. |
| CIT v. Institute of Banking Personal Selection (IBPS) (2003) 131 TAXMAN 386 (Bom) | Supporting principles on income computation and deductions for charitable trusts. | Referred to in the Court’s reasoning. |
| CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad) | Principles related to charitable institutions and income tax. | Referenced in the Court’s analysis. |
| CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar) | Principles applicable to charitable trusts' income and deductions. | Considered in the Court’s discussion. |
| CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (M.P) | Relevant principles on charitable trusts and tax deductions. | Used to support the Court’s conclusion. |
Court's Reasoning and Analysis
The Court carefully examined the submissions and the factual matrix, emphasizing the distinction between computation of income and application of income under the Income Tax Act. It held that the provision relating to compulsory application of income comes into play only after income is determined, and thus has no bearing on whether depreciation is allowable for income computation. The Court reasoned that since the Assessee’s income was fully exempt and assessed at nil income, allowing depreciation for computing income to preserve the corpus of the trust does not amount to double deduction. The Court referred to its recent judgment in Commissioner of Income Tax, Karnal v. Market Committee, Pipli and other precedents to reinforce this position. It found the Supreme Court’s decision in Escorts Ltd. distinguishable because in the present case, depreciation was claimed solely for determining the percentage of funds applied for charitable purposes, not for obtaining double benefit. Consequently, the Court rejected the Revenue’s submission and held that the substantial question of law proposed was not maintainable.
Holding and Implications
The appeal is DISMISSED.
The direct effect of this decision is that the depreciation claimed by the charitable institution is allowed despite an exemption under Section 11, confirming that such allowance does not constitute double deduction. The Court did not set any new precedent beyond affirming the distinction between income computation and application of income in the context of charitable institutions.
---ADARSH KUMAR GOEL, J.
1. This appeal has been preferred by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, “the Act” against order dated 2.6.2009 of the Income Tax Appellate Tribunal, New Delhi in I.T.A No. 3182.Del/2008 for the assessment year 2006-07, proposing to raise following substantial question of law:-
“Whether, on the facts and in the circumstances of the case, the Ld. ITAT was right in law in confirming the order of the Ld. CIT(A) in directing the Assessing Officer in allowing depreciation of Rs. 15,21,994/- even though the deduction u/s 11 was already allowed in respect of the same asset, which amounts to double deduction and is in contravention of Hon'ble Supreme Court's decision in the case of Escorts Limited and Another v. Union of India and others 199 ITR 43.”
2. The Assessee is registered under Section 12 AA of the Act as a charitable institution. In its accounts, the Assessee calculated depreciation for the purpose of showing the amount utilized. The Assessing Officer disallowed the depreciation on the ground that the Assessee being exempt, claim for depreciation will amount to taking of double benefit. However, the CIT(A) accepted the appeal of the Assessee. It was held that deduction for computing income to preserve corpus of the trust was permissible and did not amount to double benefit. This view has been upheld by the Tribunal with the following observations:-“
3. We have given careful thought to the submissions made before us. As already noted, assessee is a charitable institution and its income has been taken to be fully exempt. Assessment has been made at nil income. In our view, the assessee has not claimed any double deduction. The provision relating to compulsory application of income is altogether a different concept and would come into play only after the income is determined. Application of income is not computation of income of the charitable institution. Therefore, the question whether depreciation is to be allowed or not has nothing to do with the application of income. Income is always to be computed on commercial principles and as per system of accounting followed by the assessee, subject always to the statutory provisions.”
3. We have heard learned counsel for the Revenue and perused the record.
4. Learned counsel for the Revenue submits that in view of judgment of the Hon'ble Supreme Court in Escorts Ltd. and another v. Union of India and others [1993] 199 ITR 43, the Assessee could not claim deduction when its income was exempt, as it will amount to getting double benefit.
5. We are unable to accept the submission.
6. The matter was discussed in our recent judgment dated 5.7.2010 in I.T.A No. 535 of 2009 The Commissioner of Income Tax, Karnal. v. Market Committee, Pipli. After referring to judgments in CIT v. Seth Manilal Ranchhoddas Vishram Bhawan Trust [1992] 198 ITR 598 (Guj) and CIT v. Institute of Banking Personal Selection (IBPS) (2003) 131 TAXMAN 386 (Bom), CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad), CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Kar) and CIT v. Raipur Pallottine Society [1989] 180 ITR 579 (M.P), the judgment of the Hon'ble Supreme Court in Escorts Ltd. (supra), was held not to be applicable to the situation where depreciation was claimed by a charitable institution in determining percentage of funds applied for the purposes of charitable objects. It was observed:-
“9. In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. Judgment of the Hon'ble Supreme Court in Escorts Ltd. and another (supra) is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of Section 11. The questions proposed have, thus, to be answered against the revenue and in favour of the assessee.”
7. In view of above, we are unable to hold that the questions proposed by the Revenue are substantial questions of law.
8. Accordingly, the appeal is dismissed.
(ADARSH KUMAR GOEL) JUDGE
July 28, 2010 (AJAY KUMAR MITTAL) JUDGE
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