2016 (1) TMI 1118 - AT - Income Tax

Exemption u/s 11 - disallowance of expenditure as having been incurred in foreign currency and hence, cannot be considered as applied for charitable purposes in India - Held that - In the present case no evidence whatsoever of either of the educational qualification or the nature of services rendered by Ms.Trishtha to the trust has been established by acceptable evidence, though there was only a oral assertion by the Assessee in this regard. The CIT(A) had specifically called upon the Assessee to prove with documentary evidence the manner in which services of Ms.Trishtha were utilized by the Assessee. In the given circumstances, we are of the view that the conclusions drawn by the CIT(A) are correct and calls for no interference. - Decided against assessee. Depreciation claim on asset held by trust - double deduction - Held that - Depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. See Commissioner of Income-tax Versus Market Committee, Pipli 2010 (7) TMI 374 - Punjab and Haryana High Court - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in foreign currency for charitable purposes.
2. Disallowance of expenditure due to payment to relatives under Section 13(3) of the Income Tax Act.
3. Disallowance of depreciation on assets where the cost of acquisition was claimed as capital expenditure.

Detailed Analysis:

1. Disallowance of Expenditure Incurred in Foreign Currency for Charitable Purposes:
The assessee, a charitable trust registered under Section 12A(a) of the Income Tax Act, claimed an expenditure of Rs. 5,04,766/- for the education expenses of Ms. Trishtha, the daughter of a trustee, as application of income for charitable purposes. The Assessing Officer (AO) disallowed this expenditure, stating it was incurred outside India and hence could not be considered as applied for charitable purposes in India under Section 11(1)(a) of the Act. The CIT(A) upheld this disallowance, emphasizing that the trust's objective to grant financial assistance to the poor was not met, and the expenditure was prohibited under Section 13(3) since it benefited a relative of a trustee.

2. Disallowance of Expenditure Due to Payment to Relatives Under Section 13(3):
The CIT(A) further disallowed the expenditure on the grounds that it was a payment to a relative of a trustee, which is prohibited under Section 13(3) of the Act. The assessee argued that Ms. Trishtha was well-qualified and rendered services to the trust, thus the expenditure should be considered as application of income for charitable purposes. However, the Tribunal found no acceptable evidence of Ms. Trishtha's qualifications or the nature of services rendered to the trust, supporting the CIT(A)'s decision.

3. Disallowance of Depreciation on Assets Where the Cost of Acquisition was Claimed as Capital Expenditure:
The AO disallowed the depreciation claim of Rs. 515,36,087/-, arguing that allowing depreciation on assets whose cost was already claimed as capital expenditure would amount to double deduction. The CIT(A) upheld this view. The assessee cited various High Court decisions, including the Karnataka High Court's rulings in All Saints Church and Society of Sisters of St. Ann, which allowed depreciation on such assets, stating it would not amount to double deduction. The Tribunal supported the assessee's stance, referencing the ITAT Bangalore Bench decision in DDIT(E) v. Cutchi Memon Union and the Punjab & Haryana High Court's ruling in CIT v. Market Committee, Pipli, which distinguished the Supreme Court decision in Escorts Ltd. and allowed depreciation on capital assets for charitable trusts.

Conclusion:
The Tribunal upheld the CIT(A)'s disallowance of the Rs. 5,04,766/- expenditure due to lack of evidence and violation of Section 13(3). However, it reversed the CIT(A)'s decision on depreciation, allowing the assessee's claim based on favorable High Court rulings and the principle that depreciation should be allowed to preserve the trust's corpus. The appeal was partly allowed, recognizing the prospective amendment to Section 11(6) effective from AY 2015-16.