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The Supreme Court in the case of CIT (E) v. Subros Educational Society (2018) 303 CTR 1/166 DTR 257 (SC) held that  as per S. 11 of Income Tax Act : Property held for charitable purposes – Application of income – Any excess expenditure incurred by the trust/ charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years.

Facts

In response to the rulings that were handed down by several High Courts, which granted the assessees the advantage of depreciation on the assets that they had bought, the Income Revenue Department submitted several petitions and appeals. These were submitted to reverse the rulings that had been handed down.

All of the taxable entities in question were charitable organizations that had registrations following Section 12A of the Income Tax Act (which will be referred to simply as the “Act” from this point forward). The entirety of the expenditure incurred for the acquisition of capital assets was treated as an application of income for charitable purposes in the year before the year with which the Court was concerned and in which year the depreciation was claimed, as stated in Section 11(1)(a) of the Act.

This was the case because this was the year in which the depreciation was claimed. This took place in the same calendar year that the depreciation claim was submitted. The view that was taken by the Assessing Officer to disallow the depreciation that was claimed under Section 32 of the Act was that once the capital expenditure is treated as an application of income for charitable purposes, the assessees have practically enjoyed a 100 percent write-off of the cost of assets and, as a result, the grant of depreciation would amount to giving double benefit to the assessee. This was the reasoning behind the decision to disallow the depreciation that was claimed under Section 32 of the Act to avoid having to honor the depreciation that had been asserted following Section 32 of the Act, this opinion was adopted. In the majority of these cases, the CIT (Appeals) had upheld the view, but the ITAT had overturned it, and the High Courts adopted the judgment of the ITAT, which resulted in the appeals of the Income Tax Department being dismissed.

Based on the decisions made by the High Courts, it was possible to deduce that the High Courts have, for the most part, adhered to the decision made by the Bombay High Court in the case “Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)” [(2003) 131 Taxman 386 (Bom)(HC], which found in favor of the Assessee. This came about as a result of the Bombay High Court concluding that the assessee was eligible for relief.

The Court was of the view that the principles of law were adequately established by the stance reached by the Bombay High Court, and there is no need to interfere with the same. As a result, the Court did not change its previous decision. It was said that the majority of the High Courts had adopted the viewpoint that was indicated above, with the High Court of Kerala being the lone exception to this rule. An alternative point of view was expressed by the High Court of Kerala in the case that was given the name “Lissie Medical Institutions v. Commissioner of Income Tax.”

In addition, the court observed that the legislature, upon realizing that the Income Tax Act did not contain a specific provision in this regard, has amended Section 11(6) of the Act via Finance Act No. 2/2014, which became effective from the Assessment Year 2015-2016 onwards. This was a further observation made by the court. The prior observation that there was no express provision in this respect in the Income Tax Act led to the formulation of this modification, which was made as a reaction to the aforementioned observation by the Court.

The court agreed with the argument and commented that the Delhi High Court had rightly established that the alteration in question is prospective in its applicability. The court also expressed its agreement with the position. It was made plain that if the assessee is allowed depreciation, he would also be granted the right to carry forward the depreciation. This privilege will be provided if the assessee is granted depreciation. Hence, the Supreme Court affirmed the conclusion that was presented by the High Courts, and departmental appeals were not accepted.

Nevertheless, an application was presented by the Income-tax Department, in which it was said that one CA No. 5171 of 2016 was tagged with other appeals and that the Supreme Court handled the batch cases via the aforementioned ruling on 13-12-2017. The application was submitted on 13 December 2017. On the 13th of December 2017, this application was sent in. But there was one question that was not addressed, and that was about the possibility of deducting further expenses in the next fiscal year.

Issue

The decision that the court reached on the subject of depreciation was handed down on December 13, 2017, and it has already been made available to the general public. In the miscellaneous application, the only question that was asked was whether or not any excess expenditures that were incurred by the trust or charitable institution in earlier assessment years could be allowed to be set off against the income of subsequent years by invoking Section 11 of the Income-tax Act, 1961. This was the only question that was asked in the miscellaneous application. This was the sole question that was asked by the interviewer.

View

Even though the Supreme Court acknowledged that a mistake had been made and that the matter had not been addressed in the previous judgment, the Court concluded the hearing on the matter that there was no valid argument, and as a result, they rejected the miscellaneous application. Even though the Supreme Court acknowledged that a mistake had been made and that the matter had not been addressed in the previous judgment,

Held

The Miscellaneous Application of the Revenue has been denied by the Supreme Court, and the position stated by the Delhi High Court in the matter of Subros Educational Organization has been upheld (IT No. 382 of 2015 dt. 23rd September 2015). In that particular case, the High Court of Delhi ruled that any excess expenditures incurred by the trust or charitable institution in an earlier assessment year could be allowed to be set off against the income of subsequent years. This ruling was made because the court had previously decided that such an allowance was permissible.

Judgement Reviewed by Jay Kumar Gupta