TMI Blog2023 (2) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the amendment by virtue of section 11(6) of the Act was inserted in the Act. Various Hon ble High Courts including decision of Sri Sri Adichunchunagiri Shikshana Trust 2016 (7) TMI 1046 - KARNATAKA HIGH COURT] , Medical Trust of the Seventh Day Adventists [ 2017 (8) TMI 931 - MADRAS HIGH COURT] and Seth Anandram Jaipuria Edu. Society Cantonment [ 2017 (3) TMI 896 - ALLAHABAD HIGH COURT] have held that, Section 11(6) inserted by Finance (No.2) Act, 2014 denying depreciation while computing income of charitable trust, is prospective in nature and operates with effect from 1-4-2015. The assessment for the year under consideration is 2017-18 and therefore, section 11(6) is squarely applicable to the facts of the case and the Revenue is justified in denying the depreciation to the assessee on the assets purchased prior to the previous year relevant to the assessment year under consideration. Appeal of the assessee is dismissed. - ITA.No.561/Hyd/2022 - - - Dated:- 13-2-2023 - Shri Rama Kanta Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member For the Assessee : Sri K. C. Devdas. For the Revenue : Sri Jeevan Lal Lavidiya. ORDER PER LAL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid notices, the assessee has filed details as called for in ITBA portal electronically and the same were verified by the Assessing Officer. Thereafter, Assessing Officer had passed assessment order u/s 143(3) of the Act by disallowing depreciation claimed by the assessee of Rs.7,95,37,319/- on the assets that were purchased prior to 01.04.2015. Thus, completed the assessment. 3. Feeling aggrieved by the order passed by the assessing officer, assessee filed appeal before the Ld. CIT(A), Hyderabad 9 and thereafter, the said appeal was migrated to the NFAC, Delhi, who dismissed the appeal of assessee by holding as under : 6.3.1 Findings of the AO and submission of the appellant have been duly considered. It is an undisputed fact that after the amendment of the Act, depreciation can no longer be claimed as a deduction in case the cost of acquisition of asset was treated as an application of income. This amendment is applicable for the instant assessment year. However, the appellant has pointed out that there would be no effect of this on claim of depreciation of asset that was acquired on account of application of income prior to the date of this amendment. The appellant has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for charitable purpose. 6.3.3 In view of the express provisions of the Act stating that no depreciation is allowable in respect of any asset acquisition of which has been claimed as an application of income in any other previous year, the contention of the appellant can not be accepted. In view of the same, the addition of Rs. 7,95,37,619/- done by the AO on account of depreciation claimed on assets that were earlier used as an application of income is upheld and the grounds of appeal of the appellant are dismissed. 4. In support of the depreciation claimed, the Chairman of the assessee society filed the following written submissions : 1. The issue for consideration is the arriving at income and application of income u/sec.11(1) read with sec.11(6) of the Income Tax Act, 1961 (for short Act ) for the AY 2017-18 considering that sec.11(6) of the Act was introduced by Finance Act No. 2/2014 w.e.f. 01-04-2015 / AY 2015-16 by way of amendment to Act. 2. Sec.11(6) of the Act is held clearly, by the Hon'ble Apex Court in Civil Appeal No. 7186 Of 2014 - CIT -III, PUNE Vs. Rajasthan And Gujarati Charitable Foundation Poona, that the amendment is prosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income, depreciation is not allowable in arriving at income. On the other hand if the cost of the acquisition is not claimed as application of income, the depreciation is allowable in arriving at income. That is, both the limbs are mutually alternative limbs and either limb of the section can be availed by the Assessee but not both. In other words, the assessee has the option to choose the alternative as it may choose. It may not give scope for any other interpretation. 8. If the words 'I ... 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 are interpretated to extend the coverage to assets acquired prior to previous year relevant to AY 2015-16, it amounts to retrospective application of the section and it is not so intended as submitted in the above para. And, as rightly held by the Hon'ble SC in CIT -III, PUNE Vs. Rajasthan And Gujarati Charitable Foundation Poona, cited supra, the provisions are applicable prospective. The words ..asset, acquisition of which has been claimed as an application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et was claimed as application or not since mere claiming does not amount to allowing . 11. Sec.11(6) from AY 2015-16allows depreciation for calculation of income purposes if the cost of the acquired asset is not claimed as application in the same or any other previous year. 12. In other words, From AY 2015-16, the section allows either depreciation on assets acquired during the previous year for calculation of income purposes or as application of the cost of the acquired asset and not both. It may not mean otherwise specifically so because the calculation of income and application and carry forward and set off principles are quite different from business assesses. 13. The position upto AY 2014-15 was that, and it has been approved by the apex court in CIT -III, PUNE Vs. Rajasthan And Gujarati Charitable Foundation Poona, cited supra, while confirming the Bombay High Court decision in CIT Vs. Institution of Banking Personnel Selection (IBPS) (2003) 131 Taxman 386 (Bombay), 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve situations lead to (i) allowance of depreciation only, (ii) allowance of depreciation partly, (iii) allowance of application fully, (iv) allowance of application partly, (v) no depreciation allowance, and (vi) no allowance of application. 13.6 The amounts may have been claimed in the Return of Income and the same is reflected in excess application showing negative balance to be set off against future application. The position may be continuing until 2014-15 year-wise. 13.7 In such a situation the deduction though claimed, if it could not be allowed due to low income, poses the genuine difficulty to assessee if the narrow and pedantic interpretation that sec.11(6) prohibits allowance of depreciation if the cost of the asset was claimed as application in any previous year preceding the previous year relevant to AY 2015-16 irrespective of the fact whether it was allowed or not. 13.8 That is, the words claimed is not equal to allowed . Xxxxxxxxxxx 4.1 Thereafter, the assessee depicted a table explaining its own case for the assessment years 2004-05 to 2014-15. 14. The Assessee on the records of Department : 15. The appellant is a registere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in accordance with the conditions provided in the said section, then such income is deemed to be taxable income of the trust or institution. Section 13 of the Act provides for the circumstances under which exemption under section 11 or 12 in respect of whole or part of income would not be available to a trust or institution. The sections 11, 12, 12A, 12AA and 13 constitute a complete code governing the granting or withdrawal of registration and its cancellation, providing exemption to income, and also the conditions under which a charitable trust or institution needs to function in order to be eligible for exemption. They also provide for withdrawal of exemption either in part or in full if the relevant conditions are not fulfilled. Several issues have arisen in respect of the application of exemption regime in cases of trusts or institutions in respect of which clarity in law is required. The first issue is regarding the interplay of the general provision of exemptions which are contained in section 10 of the Act vis-a-vis. the specific and special exemption regime covered in sections 11 to 13.As indicated above, the primary objective of providing exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose. In view of the above, it is also proposed to amend the Act to provide that under section 11 and section 10(23C), income for the purposes of application 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 these sections in the same or any other previous year. These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g taxes on income and conserving the cash flow to create a broad base / nucleus for rendering charitable activity. This helps the replacement of such assets on self-finance basis without affecting the corpus. 23 The allegation that depreciation is remaining unutilized for charitable purposes is ill-founded since depreciation will not effect any cash outflow by the Trust and thus is naturally reflected in assets only in the cash / bank balances or other assets. Alternatively, it may represent the diminution of value of the asset, which is also expenditure. 24 It is reiterated that application is computed to carry forward or set off the income not applied for the charitable purposes or to ascertain the amount to be incurred in the future years or the back-log application. It does not increase income or receipts. 25. In this context , we though it is appropriate to bring few judicial views on the allowability of certain expenses as application towards charitable purposes. XXXXXXXXXXXXXXXX 26. Thus, from the above it can be seen allowability of claim for depreciation and the application of the same amount in the hands of charitable trusts, in the opinion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Revenue. (b) Capital. In case of Revenue expenditure assessee gets the 100% amount of expenditure as deduction for that year in which year the expenditure is done. But in case of capital expenditure i.e. the expenditure having enduring benefits needs to be capitalized and depreciations is allowed for the years based on the rate of depreciation as per IT rules. But in order to promote the charitable organizations Act has provided extra relief to these charitable organizations by allowing them to claim 100% of capital expenditure also for the year in which that expenditure has been done. But this relief was misused by some of the charitable organization claiming both the capital expenditure and depreciation for the same assets. This act of them has created 2 major consequences for not applying the major part of the gross receipt for the year and also subsequent year for the charitable purpose. This can be understood by an example as follows. Let us suppose that one charitable organization ABC has gone of the object to provide the medical services gets the gross receipt of Rs.100 for a year from the property held by the trust. From that receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarify more it is also reiterated that the introduction of this section is very well prospective in nature and not retrospective. Because the Act denies the depreciation after 01.04.2015, and not for the earlier year on which assessee has not only claimed the capital expenditure but also depreciation up to 01.04.2015. In the light of above mentioned facts it is prayed that the depreciation should not be allowed to assessee on the assets on which it has not only claimed capital expenditure for whole of the cost of assets but also the depreciation up to 31.03.2015. Allowing such kind of expenditure will not only defeat the very purpose of Tax relief' to Charity or Charitable Organization but also will open the avenue for the Trust to divert the fund and not apply for the object of Trust or for charitable purpose. 7. We have heard the rival contentions of the parties and perused the material available on record. Section 11(6) of the Act provides as under : Section 11(6) inserted with effect from 1.4.2015 by Finance Act No.2/2014, reads as under: (6) In this section where any income is required to be applied or accumulated or set apart for application, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining the provisions in Finance (No.2) Bill, 2014 reads thus: The second issue which has arisen is that the existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalized to ensure that double benefit is not claimed and such notional amount does not excluded from the condition of application of income for charitable purpose . 9. From the perusal of the Section 11(6) of the Act read with the notes on Clause reproduced hereinabove, it is abundantly clear that the assessee is not entitled to the depreciation from the assets while computing its income. The contention of the Ld.AR reproduced hereinabove, wherein it was mentioned that the assets were acquired during the period prior to the previous year relevant to the year under consideration forming the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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