Tuesday, August 2, 2011

Whether when assessee, a charitable body, has already claimed ded

Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets by application of money, a further claim of depreciation on same assets would amount to double benefits - YES, rules ITAT

THE issue before the Tribunal is - Whether when assessee, a charitable body, has already claimed deduction for acquisition of capital assets as application of money, the further claim of depreciation on the same assets would amount to double benefits. And the verdict goes against the assessee.

Facts of the case

Assessee is a charitable trust registered u/s 12A of the Act. In the return of income filed, it claimed depreciation on the assets, the cost of which were already claimed as application of money u/s 11(1). AO disallowed the depreciation claimed u/s 32 stating that the cost of asset/s having been allowed, its WDV was nil, so that there was no amount available on which depreciation could be claimed. The same would even otherwise amount to a double deduction, prohibited by law.

In appeal before ITAT, the assessee contended that the decision in the case of Escorts Ltd. & Othrs was not applicable as was held in the case of CIT vs. Marketing Committee, Pipli, 330 ITR 16 (P&H) and CIT v. Tiny Tots Education Society (2010-TIOL-550-HC-P&H-IT) which provided that there was no double deduction. Further, the law stood amended w.e.f. 1.4.1989 by co-option of clause (d) to s. 11(1) of the Act, so that there was no requirement in law for applying the said income, i.e., as covered by s. 11(1)(d), for claiming exemption in this respect. In view of the decision of the Lissie Medical Institutions, where the amount was voluntarily received with a direction that the same shall form part of the corpus, the assessee would stand to be allowed depreciation on the capital asset/s acquired out of the said funds. However, in case of no specific directions, it would not be though in both the cases, the amount was applied or utilised in the similar manner. A mere direction by the donor would alter the donee's assessable income, even as the same stood utilized by the donor in the same manner, and which was not comprehensible and, in any case, could not be the intent of law. In reply to the query raised by the Bench, that why could not the assessee take a specific direction from the donor(s) where it proposed to acquire capital asset(s) there-from, the assessee contended that it might not be practical always and secondly, the corpus was not for acquiring capital assets alone, and may well be maintained in the form of liquid assets. The two claims were different - the depreciation was a charge against the profits `an above-the-line item' and the acquisition of capital asset(s) was an application of income, determined thus, `a below-the-line item'.

Revenue relied on the decision of Lissie Medical Institutions and contended that the assessee could not point out any infirmity in the said order, so that there was no ground or occasion for the Tribunal to review or re-visit the said order.

After hearing both the parties, the ITAT held that,

++ the argument that the allowance of depreciation and deduction qua the application of income (on the assets on which the same is claimed), does not amount to or result in a double deduction is not acceptable. If the capital asset/s is a part of the asset base of the charitable trust, used for its purposes, it only forms a part of the capital structure or the apparatus of the entity, and only on the strength of which the claim qua depreciation is maintainable, i.e., as a charge against profits/income thereof. Could the same expenditure be considered as being toward `income' and, at the same time, an application of it, or, to put it in the same graphical manner, could an expenditure be considered as both above and below the line, and simultaneously at that. The two are mutually exclusive. While an expenditure is necessarily incurred for the purposes of income, i.e., as a part of the income generating process, directly or indirectly, the other is an application of the income so generated, and has nothing to do with either income generation or the maintenance of the capital structure or the income generating apparatus;

++ even where the income arises only out of voluntary contributions, recognising the need to maintain corpus, as in the case of any business activity, the law provides therefor, so that the trust/institution is not required to apply the same to claim its exemption from tax u/ss. 11 & 12. That is, the very fact that the said contribution is toward capital or corpus, is by itself sufficient to accord it exclusion, and is, thus, not liable for, or is free from the requirement of, it's application toward the object/s of the trust. Income of a charitable trust, it may be noted, is not per se exempt from tax, but only on its application toward its objects. The same, thus, is only in the nature of a deduction, i.e., required to a allowed for computing income subject to tax under the Act, which also finds support from the insertion of s. 11(1)(d). It is, as such, not a question of a mere direction, but of classifying the receipt of the trust into two distinct categories, i.e., `regular' and `toward capital'. The difference, i.e., depreciation being allowable in one case and not in the other, amount as it does to a double deduction, arises out of the very nature of the source of funding. The same rather than being prejudicial to a charitable trust, is beneficial thereto, inasmuch as the law `recognises' capital receipt as the principal source of funding of a charitable trust/institution not engaged in any business, i.e., voluntary contributions, or its need to maintain capital. In any normal case, While a capital asset acquired for and put to use for business purposes would entitle it to a claim for depreciation, i.e., whatever be the source of funding, and whether the same is acquired from `income' or from 'capital', it is only the `income' which is, where otherwise not exempt, liable to tax. Would that in any manner be considered as prejudicial or leading to a dichotomy with reference to the source of funding, as sought to be made out in respect of a charitable trust?

++ the income that is exempt is only that computed applying the normal principles of commercial accounting, i.e., net of expenses, which would thus stand to be deducted, even where the income of the trust is not from business, determined by applying the provisions of Chapter IV-D (refer s. 11 (4A)), and which expenses would include a charge toward depreciation on capital assets deployed or maintained by the trust as well. The differential treatment qua depreciation is only due to the difference in law attending the two scenarios, which rather seeks to bring the same (law) at par with that qua any other entity acquiring and using a capital asset for its purposes. No infirmity, thus, inflicts the tribunal's order qua the differential treatment of the claim for depreciation, i.e., w.r.t. the application or otherwise of the provision of s. 11(1)(d). The assessee's argument or contention for a uniform treatment (qua depreciation) seeks to eliminate the difference that the law itself specifically provides for, i.e., is contrary to the express provisions of law. The user of an asset for the intended purpose/s, a pre-requisite for a claim of depreciation in its respect, is also necessary to validate the claim (in respect of the capital expenditure) qua the application of income, as no charitable purpose would stand to be served where the capital asset acquired thus, and retained, is not used for the objects of the trust;

++ while the claim for depreciation arises following the accrual basis of accounting for determining `income', the cash method is applied for reckoning its application. Accordingly, the two claims amount to a double deduction is purely factual. The assessee/s has not been able to show, any infirmity in the said findings by the tribunal, which is affirmed;

++ without prejudice to the foregoing, both the assessee-trusts are not undertaking any business activity. As such, the claim of depreciation would be, if at all, exigible only with reference to the normative rate(s) of depreciation, i.e., as determined with reference to the useful lives of the relevant asset(s) under its given state of user. In fact, even if business activity was being undertaken, the claim for depreciation u/s. 32(1) would obtain only in respect of business asset(s). The assessee has, however, claimed depreciation in terms of the rate(s) prescribed under the Act and, as such, is not maintainable at the claimed amount/s;

++ no Legislation would have intended a double deduction in respect of the same business outgoing, and it was impossible to conceive otherwise, i.e., unless clearly so expressed. In other words, the intention of non double deduction is the given status, and is to be presumed, unless there is an express provision to the contrary in a particular case, and which was not so in the case(s) before it. The assessee's contention is, thus, not valid. Thus, the findings given in the case of Lissie Medical Institutions are endorsed.

Revenue's appeal allowed.

1 comment:

  1. An informative post.But I have a query that last year I filed income tax return but I did not get any confirmation or any receipt.How to check if it was successful or not.Thanks.
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