PER BENCH: In the appeals filed by these assessees, they are aggrieved that depreciation claimed by them on assets, cost of which were considered as application of income in the earlier years, were not allowed.
2. Ld. Counsel for the assessees submitted that lower authorities had relied on the judgment of Apex Court in the case of Escorts Ltd vs. Union of India, 199 ITR 43 and that of Kerala High Court in the case of Lissie Medical Institutions vs. CIT, 348 ITR 344 for denying the claim of depreciation. Contention of the ld. Authorised Representative was that the assessees being trusts registered u/s.12A(a) of the Income Tax Act, 1961 (in short the Act), had computed their income considering cost of assets acquired as a part of application of their income. As per the ld. Authorised Representative just because cost of the asset was claimed and allowed as application of income would not disentitle the assessees from claiming depreciation on such assets. Further, as per the ld. Authorised Representative the issue stood settled in favour of the assessees by ITA Nos.1039 to 1041/2017. :- 3 -: virtue of judgment of Honble Jurisdictional High Court in the case of Director of Income Tax vs. M/s. Medical Trust of the Seventh Day Adventists in T.C. (Appeal) No.844 of 2010, dated 08.08.2017.
3. Per contra, ld. Departmental Representative strongly supporting the orders of the authorities below submitted that if the claim of the assessees were allowed it would result in double deduction. As per the ld. Departmental Representative sub section (6) of Sec 11 inserted by Finance (No.2) Act, 2014 w.e.f. 01.04.2015 was prospective in nature and therefore assessees could not be allowed such a claim.
4. We have considered the rival contentions and perused the orders of the authorities below. The question whether a charitable/ religious trust registered u/s. 12A(a) of the Act is entitled to claim depreciation on assets, cost of which was already treated as part of application of income, had come up before the Honble Jurisdictional High Court in the case of M/s. Medical Trust of the Seventh Day Adventists (supra). Their lordships after considering the judgment of Honble Apex Court in the case of Escorts Ltd (supra) as well as that of Kerala High Court in the case of Lissie Medical Institutions (supra) held as under at paras 20 to 26 of it judgment. ITA Nos.1039 to 1041/2017. :- 4 -:
20. Depreciation, as defined in Spicer and Pegler's Book-Keeping and Accounts is the measure of the exhaustion of the effective life of a fixed asset owing to use or obsolescence during a given period. It may be regarded as that part of the cost of the asset which will not be recoverable 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, and the amount of provision made in respect of an accounting period is extended to represent the proportion of such expenditure which has expired during that period.
21. The necessity of providing for depreciation emanates from the fact that once an asset ceases to be effective, it will have to be replaced. Providing for depreciation would ensure setting aside out of the revenue of an accounting period, the estimated amount by which the capital investment has expired during that period. This provision, incurred for the use of that asset for the purpose of earned profit should be charged against those profits as and when earned. Spicer, and Pegler, at page 45, states as follows:- 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 an analogous charge 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, since the assets will be shown at an amount which is in excess of the true amount of the unexpired expenditure incurred on their acquisition.
22. The claim of depreciation is thus part of standard accounting practice which is required for fair presentation of a company's financials. The computation of income in the case of an entity to which section 11 is applicable would be in two stages. Firstly, the determination of the profit arrived at, which would be the total receipts net of expenditure and depreciation incurred in earning the receipts, and secondly the stage of application to Charitable/Religious objects. The two stages are distinct and are required to be complied with consecutively in order to determine the correct income and its application.
23. The question before the Supreme Court in the matter of Escorts related to duel claims under section 35 of the Act in relation to the same asset the first, weighted deduction and the second, depreciation. Thus, two benefits were extended in respect of the very same asset. We are faced with an entirely different and distinct position in the present batch of appeals one that involves a claim for exemption in respect of income earned from property held for charitable or religious purposes. We see no double benefit that is extended to the assessee in this regard. ITA Nos.1039 to 1041/2017. :- 5 -:
24. Truth to tell, this Court in the matter of Calavala Cunnan Charities, has decided the question now under consideration in favour of the assessee and we could well have decided this Batch of appeals simply on the strength of the aforesaid decision. We are however persuaded to proceed further with the discussion since a conflicting view has been expressed by the Kerala High Court in the case of Lissie Medical Institutions (supra). Though the attention of the Division Bench of the Kerala High court was drawn to the decision in Rao Bahadur Calavala Cunnan Chetty Charities (supra) and several decisions along similar lines, the court was persuaded to take a contrary view preferring to follow the rationale of the judgment of the Supreme Court in the case of Escorts (supra).
25. As noted by us earlier, the judgment of the Supreme Court in escorts turns on an entirely different position of law and would not impact the issue being discussed in the present case.
26. We are supported in our view by a plethora of decisions of various High Courts the Bombay High Court in the case of CIT v. Munisuvrat Jain (1994 Tax Law Reporter 1084) and DIT (Exem) Vs. Framjee Cawasjee Institute (109 CTR 463); Karnataka High Court in CIT Vs. Society of the Sisters of St.Anne (146 ITR 28); Madhyapradesh High Court in CIT Vs. Raipur Pallottine Society (180 ITR 579); Gujarath High Court in CIT Vs. Sheth Manilal rachhnoddas Vishram Bhavan Trust 198 ITR 598; Punjab and Haryana High court in CIT Vs. Market Committee Pipli (330 ITR 16) and CIT Vs. Tiny Tots Education Society (330 ITR 21); Madhyapradesh High Court in CIT Vs. Devi Sakuntala Tharal Charitable Foundation (358 ITR 452) and the Calcutta High Court in CIT Vs. Silluguri Regulated Market Committee (366 ITR 51). In addition, the Delhi High Court in DIT Vs. Vishwa Jagriti Mission 262 CTR 558 and the Karnnataka High Court in DIT (Exem) Vs Al-Ameen Charitable Fund Trust (2016) 67 taxmann.com 160 have accepted the claim of the assessee distinguishing both the judgment of the Supreme Court in Escorts as well as that of the Kerala High Court. The question of law raised before the Honble Jurisdictional High Court was as under:- (a) Whether on the facts and circumstances of the case, the Tribunal was right in allowing double deduction without considering the principles laid down in 199 ITR 43(SC)? ITA Nos.1039 to 1041/2017. :- 6 -: Their lordships had also considered the effect of sub section (6) to Sec.
11 inserted by Finance (No.2) Act, 2014 w.e.f. 01.04.2015. Relevant paras 33 to 36 of the judgment are reproduced hereunder:-
33. Adverting to question No.1, the Tribunal has, in denying the benefit of depreciation to the assessee, applied the provisions of sub section 6 of section 11 reading as follows; (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. .... 34.The short point that arises for decision is whether the provisions of Section 11(6) inserted by Finance (No.2) Act, 2014 w.e.f. 1.4.2015, operate prospectively with effect from assessment year 2015-16 or retrospectively with respect to earlier years as well. In this regard, M/s.Pushya Sitaraman, learned senior counsel and other learned counsels appearing for the assesses refer to the provisions of Circular 1 of 2015 dated 21.1.2015 (371 ITR (St) 0022) containing explanatory notes to the provisions of Finance (No.2) Act, 2014. The relevant portion of the circular reads as follows; 7.3 Several issues had arisen in respect of the application of exemption regime to trusts or institutions in respect of which clarity in law was required. 7.4 The first issue was regarding the interplay of the general provision of exemptions which are contained in section 10 of the Income-tax Act vis-`-vis the specific and special exemption regime provided in sections 11 to 13 of the said Act. As indicated above, the primary objective of providing exemption in case of charitable institution is that income derived from the property held under trust should be applied and utilized for the object or purpose for which the institution or trust has been established. In many cases it had been noted that trusts or institutions which are registered and have been availing benefits of the exemption regime to not apply their income, which is derived from property held under trust, for charitable purposes. In such circumstances, when the income becomes taxable, a claim of exemption under general provisions of section 10 in respect of such income is preferred and tax on such income is avoided. This ITA Nos.1039 to 1041/2017. :- 7 -: defeats the very objective and purpose of placing the conditions of application of income, etc., in respect of income derived from property held under trust in the first place. 7.4.1 Sections 11, 12 and 13of the income-tax Act are special provisions governing institutions which are being given benefit of tax exemption. It is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigation. ..... 7.6 Applicability. - These amendments take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-2016 and subsequent assessment years.
35. Para 7.6 of the Circular states that the amendment would apply to assessment year 2015-16 and subsequent assessment years. Reliance was placed on the judgment of the Supreme Court in CIT Vs. Alom Extrusions Ltd (2009) and CIT vs Vatika Township (367 ITR 466) for the proposition that an amendment that increases the liability of an assessee is liable to be applied only prospectively. Mr. Narayanaswamy would object stating that the amendment had been inserted to a correct an existing anomaly and thus was clearly clarificatory, and consequently retrospective in operation.
36. We do not agree with the Revenue. The amendment, inserted specifically with effect from Assessment Year 2015-2016 seeks to disturb a vested right that has accrued to the assesee. The amendment does not purport to be clarificatory, on the other hand the Explanatory Memorandum makes it applicable only w.e.f. A Y 2015-16 and application of the amendment retrospectively would certainly lead to a great deal of hardship to the assessee. We are thus of the view that the provisions of section 11(6) of the Act inserted with effect from 1.4.2015 shall operate prospectively with respect to assessment year 2015-2016 only. Thus as it stands today, the issue is squarely covered in favour of the assessees. Assessees were entitled to claim depreciation on assets purchased, cost of which was already considered as part of application ITA Nos.1039 to 1041/2017. :- 8 -: of their income in earlier years. Ld Assessing Officer is directed to allow such claim.
5. In the result, the appeals of the assessees stand allowed. Order pronounced on Thursday, the 5th day of October, 2017, at Chennai. Sd/- Sd/- (GEORGE MATHAN) /JUDICIAL MEMBER ( . $) (ABRAHAM P. GEORGE) '/ACCOUNTANT MEMBER /Chennai ./Dated: 5th October, 2017. " $01 21/Copy to:
1. !/Appellant 3. 3 ()/CIT(A) 5. 1 $8/DR
2. $%!/Respondent 4. 3/CIT 6. /GF
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