Purchase of Capital Assets allowed as Application of Income u/s 11(1) as well as Depreciation allowed u/s 32

[CA Surender Gupta]

Interpretation of Section 11(1) clause ‘a’ of the Income Tax Act, 1961 - whether depreciation allowed on capital assets cannot be treated as application of income under the said clause? - Held that:- Kerala High Court in Lissie Medical Institution vs. CIT [2012 (4) TMI 115 - KERALA HIGH COURT] following the decision in the case of Escorts Ltd. v. Union of India [1992 (10) TMI 1 - SUPREME Court] has stated that the assessee would be entitled to write back depreciation and if done, the Assessing Officer would modify the assessment determining the higher income and allow recomputation of depreciation written back for the purpose of application of income for charitable purposes in future or subsequent years. This may lead to its own difficulties and problems as suddenly the entire depreciation written off would have to be added first and then in one year substantial application of income would be required. This may be impractical and would disturb the working of many a charitable institutions. The legal interpretation which has continued since 1984, if disturbed and implemented, would not appropriately resolved. Consistency and certainty is more appropriate.

Decision in the case of Escorts Ltd. (supra) was considered by the Delhi High Court in DIT vs. Vishwa Jagriti Mission [2012 (4) TMI 289 - DELHI HIGH COURT] decided on 29th March, 2012 and was distinguished.

The equally plausible and consistent interpretation of clause (a) of Section 11(1) of the Act is that income derived from property must be calculated as per the principles of the Act. The said clause is not a computation provision and does not disturb the income earned or available but postulates that the income as computed in accordance with the provisions of the Act to the extent of 86% must be applied. Application of income may include purchase of a capital asset. The said purchase is valid and taken into consideration for the purpose of ensuring compliance, i.e., application of money or funds and is not a factor which determines and decides the quantum of income derived from property held under trust. Computation of income is separate and distinct and has to be made on commercial basis by applying provisions of the Act. - Decided against revenue.

Position w.e.f. Assessment Year 2015-16

However, on or after 1.4.2015, the double deduction as above will not be allowed since section 11 has been amended vide Finance Act (No 2), 2014 which is read as under:

"(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."

See:-

DIRECTOR OF INCOME TAX (EXEMPTION) Versus INDIAN TRADE PROMOTION ORGANISATION, COUNCIL OF SCIENTIFIC and INDUSTRIAL RESEARCH, R.L. KHERA CHARITABLE TRUST, M/s INTERNATIONAL GOUDIYA VEDANTA TRUST, TCI FOUNDATION 10 RAM BAGH AZAD MARKET ROHTAK ROAD NEW DELHI - 2015 (8) TMI 89 - DELHI HIGH COURT

Director of Income Tax (Exemption) Versus M/s. Indraprastha Cancer Society, M/s. Sanskriti Educational Society, M/s. Abul Kalam Azad Islamic Awakening - 2014 (11) TMI 733 - DELHI HIGH COURT

Mool Chand Khairati Ram Trust Versus Director of Income Tax (Exemptions) - 2015 (7) TMI 922 - DELHI HIGH COURT