ITAT CHANDIGARH BENCH

IT Appeal No. 700 (Chd.) of 2011
[ASSESSMENT YEAR 2008-09]

HARI OM MARATHA, JUDICIAL MEMBER
AND N.K. SAINI, ACCOUNTANT MEMBER

Sudhir Sehgal for the Appellant.
Dr. Amarveer Singh for the Respondent.

Hari Om Maratha, Judicial Member - This appeal of the of the assessee-society for A.Y. 2008-09 is filed against the order of ld. CIT(A), Panchkula, dated 28/04/2011.

2. Briefly stated, the facts of the case are that the assessee-society filed its return of income (ROI) for A.Y. 2008-09 on 30/09/2008, declaring total income of Rs. 'NIL'. The assessee has shown gross income of Rs. 6,86,06,524/- in the Income & Expenditure Account. It has claimed depreciation of Rs. 61,68,457/- towards application of income for charitable purposes. By relying on the decision of Hon'ble Apex Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43 has disallowed this claim of depreciation on the premise that it would amount to double deduction, which is not permissible under the Act. The ld. CIT(A) has followed suit and thus, dismissed assessee's first appeal.

2.1 While arguing on ground No. (1) of the appeal, which is in relation to disallowance of depreciation, it was argued that, in fact, this issue now stands covered in favour of the assessee-society by the judgment of Hon'ble Jurisdictional High Court, and Chandigarh Bench of ITAT, a copy of which is enclosed in the paper book.

2.2 Per contra the case of the revenue is that verily double deduction is not permissible under the Act and the assessee-society has already claimed application of income in the earlier years and in the current year. That the assets came into existence by application of income, which is exempt under section 11 of the Act. The assets so obtained are the result of total exemption/deduction, and if depreciation is also allowed on these assets it would definitely amount to double deduction. For that matter, in support, he has relied on the decision of Escorts Ltd. (supra) of the Hon'ble Apex Court and on a decision of Cochin Bench in the case of Dy. DIT (Exemption) v. Adi Sankara Trust [2011] 46 SOT 230/12 taxmann.com 105, inter alia.

2.3 We have cogitated rival submissions on this very vital issue. We have carefully treated through the related provisions of the Act and relevant decisions on this subject. To put the issue, in nutshell, the assessee is a charitable trust (society) which is registered under section 12AA and conditions laid down is section 13 of the Act are also fulfilled. This society has claimed depreciation in respect of capital assets, the total cost of which has already been claimed as an application of income under section 11 (1) of the Act. Obviously, when the capital assets has already been allowed then its Written Down Value (WDV) is 'NIL' and, therefore, there is no amount (value of asset on which depreciation can be claimed, and if allowed it would to a double deduction which is prohibited in law. The contentious issue seems to be very clear in that view of the matter. But, when this issue is deeply analyzed it is found that section 11(1) of the Act excludes certain income from the 'total income' of the previous year. These are mainly as under:-

The Trust for the sake of claiming benefit of section 11 has to fulfil certain conditions. Since, we are not concerned about them in this appeal, as the assessee-society has fulfilled all the requisite conditions, we would concentrate on the issue involved therein. Section 11 falls in Chapter III of the Act which deals with incomes which do not form part of the total income. Chapter IV of the Act deals with the 'computation of the total income". This Chapter deals with different 'heads' under which different types of incomes are to be computed, deductions from incomes, depreciation (section 32), allowance, rebates etc. The decision of Cochin Bench in the case of Adi Sankar Trust (supra) is based on the premise that the capital asset has been purchased out of income of the trust which is totally exempt from tax and, therefore, the WDV of that asset would be 'NIL', and that depreciation on capital asset and deduction qua its cost is one and the same, and the decision of Apex Court in Escorts Ltd. (supra) would apply. In Escorts case the Hon'ble Supreme Court was dealing with a case relating to two deductions both under section 10(2)(vi) and 10(2)(xiv) of the 1922 Act or both under sections 32(1 )(ii) & 35(1)(iv) of the present Act. The assessee, in that case had incurred expenditure of a capital nature on scientific research relating to the business, which resulted into acquisition of an asset. The assessee sought specified percentage of the Written Down Value (WDV) of the asset as depreciation and at the same time claimed deduction, in five consecutive years of the expenditure incurred on the acquisition of the asset. It was held thus:—

"Where a capital asset used for scientific research related to the business of the assessee is also ipso facto an asset used for the purpose of the business, it is impossible to conceive of the Legislature having envisaged a doubt deduction in respect of the same expenditure, one by way of depreciation u/s 32 of the I.T. Act and other by way of allowance u/s 35(1)(iv) of a part of the capital expenditure on scientific research, even though the two heads of deduction do not completely overlap and there is some difference in the rationale of the two deductions...."

It was further held that:
"There is a fundamental, though unwritten, axiom that no Legislature could have at all intended a double deduction in regard to the same business outgoing; and if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the stature should not be read so as to permit an assessee two deductions"

The assessee is not claiming double deduction on account of depreciation. The income of the assessee is exempt, the assessee is 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 society. That is why the decision in Escorts would not apply to this case.

2.4 The Hon'ble Jurisdictional High Court has succinctly described the whole issue in the case of CIT v. Market Committee Pipli [2011] 330 ITR 16/[2012] 20 taxmann.com 559 (Punj. & Har.) and after distinguishing the Escorts Ltd. (supra) judgment on facts, has held that depreciation is allowable on capital assets from the income of the charitable trust for determining the quantum of funds which have to be applied for the purposes of the trust in terms of section 11 of the Act. Thus, it does not amount to double benefit. In this regard the following decisions are also relevant:—

2.5 It becomes apparent that we are not dealing with the taxability of income. We are considering the issue of application of 85% of the gross receipts of the year in terms of Explanation (2) appended to section 11(10(a) & (b) of the Act. While considering the income of the Trust the 'income' is not considered under any of the five heads prescribed in section 14 of the Act. Therefore, the provisions of section 145 cannot apply as it applies to sections 28 and 56 and not to sub-sections (11) and (12) of the Act. Under sections 11 and 12 capital expenditure is the result of application of income, which is not allowable while dealing with business income where only business expenses are allowable. Sections 11, 12 and 13 of the Act are a complete code in itself, where no statutory deduction. In sections 2(45) and 14 the term 'total income' is used unlike 'income' used in sections 11 & 12. Thus, there is a schematic and conceptual difference & distinction between Chapter III & Chapter IV of the Act. The assessee-trust is eligible to claim exemption of section 11 in case it fulfils conditions laid in sub-section (12) and (13), and if it is also registered u/s 12A(a) of the Act. This assessee-trust has fulfilled all the requisite conditions.

2.6 Accordingly, we reverse the finding of ld. CIT(A) and allowed ground No. (1) of assessee's appeal.

3. During assessment proceedings it was noticed that in the computation of income, the assessee has not shown gross receipts at Rs. 7,18,47,989/- because amount of Rs. 1,05,28,607/- and Rs. 12,65,115/- on account of interest account on FDRs and TDS, respectively, have been deducted; and net receipts has been shown as Rs. 6,00,54,267/-. For doing so, it was noted down that "amount not realized during the previous year and the interest accrued on FDRs and TDS receivable would be added when received". The assessee has been following mercantile basis, therefore, the A.O. has assessed gross receipts / income of the Trust at Rs. 7,18,47,989/- as against Rs. 6,00,54,267/-, shown in the assessable income filed by the assessee. The ld. CIT(A) has also followed suit.

3.1 Before us, both parties have reiterated and have taken their original stand. It was argued by the ld. AR that the assessee has been regularly following the system of declaring interest when actually realized during the year as income. That yearly accrued interest on FDRs is calculated and is credited in the P&L account but while filing the return of income an adjustment of actual interest realized during the year is made and total taxable income is computed accordingly. It was stated that the assessee has been regularly following this very system of accounting of these receipts. In proof of the above statements, assessable incomes for A.Y. 2006-07 to A.Y. 2008-09 were filed. It was stated that in A.Y. 2006-07 the AO has accepted similar method while making assessment u/s 143(3) of the Act. It was argued that in A.Y. 2008-09, which is under consideration, the A.O. even without giving any notice has made adjustments of interest accrued and TDS. He has stated that during the year interest accrued of earlier years and realized during this year has been treated as taxable income, which has resulted into a double addition. In this regard, ld. AR has relied on numerous decisions.

3.2 Per contra ld. CIT(DR) has relied on the orders of the authorities below.

3.3 After going through the entire record produced for our perusal including the copies of the statements filed for A.Y. 2006-07, et al, we have found that the assessee has been following the method as is discussed above, continuously. In A.Y. 2006-07, the A.O. has accepted this method even while framing assessment order u/s 143(3) of the Act. The revenue has not denied the claim of the assessee that it has been following a particular method of accounting for the interest on FDRs and TDS. Therefore, we are in agreement with ld. A.R. that consistently has to be maintained. In this regard the following decision are relevant :-

3.4 Accordingly, we allow both the grounds, with a direction that these receipts are to be considered in the same manner as these have been considered by the A.O. in the A.Y. 2006-07 while passing his order u/s 143(3) of the Act.