2018 (6) TMI 1862 - AT - Income Tax

Depreciation claim over and above the claim of section 11 and 12 - HELD THAT - This issue is now settled in favour of the assessee by Hon ble Supreme Court s judgment in the case of Rajasthan and Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act. The Court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. As held that income of a Charitable Trust derived form building plant and machinery and furniture was liable to be computed in normal commercial manner although the 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 section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Curt we answer question No. 1 in the affirmative i.e. in favour of the assessee and against the Department. It also follows that once assessee is allowed depreciation he shall be entitled to carry forward the depreciation as well. The assessee is over and above the claim under section 11 and 12 entitled to the depreciation as well. CIT(A) had declined the same on the ground that since the assessee is allowed exemption under section 11 there is no question of grant of depreciation. The view so taken by the learned CIT(A) in the light of binding judicial precedents does not merit our approval. We therefore direct the Assessing Officer to grant the depreciation as well. Exemption u/s 11 - disallowing accumulation claimed by assessee u/s 11(2) - HELD THAT - As learned CIT(A) rightly notes we find that as regards the issue of claim having been made for the first time before the Assessing Officer other than by way of a revised return what is important to bear in mind is the fact that the claim was admitted by the Tribunal and the matter was remitted to the file of the Assessing Officer for consideration on merits in the light of the registration under section 12A. CIT(A) was quite justified in rejecting the stand of the assessee. As regards the requirement of filing the audit report on form 10B alongwith the return of income find that as reported in 179 ITR 61 (Stat) Hon ble Supreme Court has dismissed the SLP against Hon ble jurisdictional High Court s declining to call a reference against this Tribunal s direction registration of the assessee trust under section 11 of the Income Tax Act 1961 when the auditor s report in form 10B as required by Section 12A(b) of the Income Tax Act 1961 was not filed alongwith the return but was filed later on . No decision to the contrary was brought to our notice. As regards the investments in Kutch Railway and Petronet we have noted that these investments in the PSUs were made pursuant to the directions of the Government of India and as such disability under section 13(1)(d) will not be attracted. This aspect has been discussed in great detail in the findings of the CIT(A) which have been reproduced above and no infirmities therein have been pointed out to us. Similarly as far as the books of accounts are concerned in the light of specific certificate issued by the CAG this objection also ceases to have legally sustainable basis. As for the accumulation aspect there are no independent discussions in the impugned order and that is covered in denial of exemption itself. In the light of these discussions as also bearing in mind entirety of the case we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. Allowability of provision @ 20% of salary payable for productivity linked reward - The quantification of productivity linked reward was not in doubt in the relevant previous year. The quantification was at 20%. The amount representing 15.5% is only adhock payment made during the relevant previous year. The actual payment cannot restrict the deductibility of a liability which is very well foreseen and quantified as a present liability. The amount claimed as deduction by the assessee represents present liability and the mere fact that it was paid at a later date as authorised by the Ministry of Shipping Road Transport and Highways does not restrict the deductibility. We are therefore of the considered view that the CIT(A) ought to have allowed the entire amount of PLR liability . Dis allowing to set-off carried forward loss - The loss to be set off is to be modified so as to include the deduction declined by the said rectification order. To this extent action of the CIT(A) is indeed erroneous and cannot be sustained. We therefore accept the plea of the assessee on this point. AO is directed to allow the entire loss and not to restrict the same in the light of the rectification order which has been quashed anyway.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

• Whether the assessee is entitled to claim depreciation over and above the exemptions granted under Section 11 and 12 of the Income Tax Act.
• Whether the assessee's claim for exemption under Section 11 was valid despite not being claimed in the original return of income and subsequent procedural issues.
• Whether the assessee's investments met the criteria under Section 13(1)(d)(iii) to qualify for exemption under Section 11.
• Whether the assessee's accounting treatment of prior period income and expenses was permissible.
• Whether the assessee's claim for carried forward losses and set-off was justified.
• Whether the CIT(A) erred in allowing or disallowing various claims and adjustments made by the Assessing Officer.

ISSUE-WISE DETAILED ANALYSIS

Depreciation Claim Over and Above Section 11 and 12 Exemptions

• Legal Framework and Precedents: The issue of depreciation claim alongside Section 11 and 12 exemptions was settled by the Supreme Court in CIT Vs Rajasthan and Gujarati Charitable Foundation, which allowed such claims.
• Court's Interpretation and Reasoning: The Court noted that the Supreme Court had clarified that depreciation can be claimed even when capital expenditure is treated as application of income for charitable purposes.
• Conclusion: The Court directed the Assessing Officer to grant the depreciation claim, aligning with the Supreme Court's judgment.

Exemption under Section 11

• Legal Framework and Precedents: The applicability of Section 11 exemptions despite procedural lapses was considered in light of the Supreme Court's decision in Goetze India Ltd Vs CIT, which restricts new claims without revised returns but not at the appellate stage.
• Court's Interpretation and Reasoning: The CIT(A) and Tribunal found that procedural lapses like filing the audit report late did not invalidate the exemption claim, especially since the Tribunal had remitted the matter for reconsideration.
• Conclusion: The CIT(A)'s decision to uphold the exemption under Section 11 was affirmed.

Investments under Section 13(1)(d)(iii)

• Legal Framework and Precedents: Section 13(1)(d)(iii) requires investments in specified modes for exemption under Section 11.
• Court's Interpretation and Reasoning: The CIT(A) found that the investments in Kutch Railways and Petronet were in public sector undertakings, thus complying with Section 13(1)(d)(iii).
• Conclusion: The CIT(A)'s decision to uphold the exemption was affirmed, as the investments were in compliance with the required provisions.

Prior Period Income and Expenses

• Legal Framework and Precedents: The treatment of prior period income and expenses in accounting was considered, with reference to the Supreme Court's guidance on rectification under Section 154.
• Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that rectification under Section 154 was inappropriate for disallowing prior period expenses, as the issue was debatable.
• Conclusion: The rectification order was quashed, and the CIT(A)'s decision to allow prior period expenses was upheld.

Carried Forward Losses and Set-Off

• Legal Framework and Precedents: The set-off of carried forward losses was considered in light of the rectification order's quashing.
• Court's Interpretation and Reasoning: The Tribunal directed the Assessing Officer to allow the set-off of losses, as the rectification order was invalidated.
• Conclusion: The appeal of the assessee regarding carried forward losses was allowed.

SIGNIFICANT HOLDINGS

• The Tribunal affirmed the principle that depreciation can be claimed alongside Section 11 exemptions, following the Supreme Court's precedent.
• The Tribunal upheld the CIT(A)'s decisions on procedural lapses not invalidating exemption claims, investments complying with Section 13(1)(d)(iii), and the treatment of prior period items.
• The Tribunal quashed the rectification order under Section 154, emphasizing that debatable issues cannot be rectified under this provision.
• The Tribunal directed the allowance of carried forward losses, reinforcing the principle that procedural errors should not negate substantive claims.