2011 (7) TMI 955 - HC - Income Tax

Depreciation - AO also denied the claim of the assessee to carry forward deficit in the application of funds - Held that If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of the trust. A charitable trust is, therefore, entitled to depreciation in respect of the assets owned by it Regarding carry forward - Held that in view of section 11(1)(a) of the Act it cannot be said that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year would not amount to such income being applied for charitable or religious purposes - In the case of CIT v. Maharana of Mewar Charitable Foundation 1986 (7) TMI 56 - RAJASTHAN High Court - Decided in favor of the assessee

Summary

Issues:
1. Disallowance of depreciation on fixed assets for a charitable trust.
2. Denial of claim to carry forward deficit in the application of funds for a charitable trust.

Analysis:
1. The judgment concerns appeals under section 260-A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal disallowing depreciation on fixed assets for a charitable trust. The CIT(A) partly allowed the appeal by permitting depreciation but denied the carry forward of deficit in the application of funds. The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The High Court affirmed the Tribunal's decision, citing the necessity of depreciation to preserve the trust's corpus and relying on legal precedents to support the allowance of depreciation for assets owned by charitable trusts.

2. The second issue pertains to the denial of the claim to carry forward deficit in the application of funds for the charitable trust. The High Court analyzed Section 11(1)(a) of the Act and determined that the income of the trust used to meet charitable purposes, even if from a subsequent year, qualifies as being applied for charitable purposes. Citing the Division Bench judgment of the Rajasthan High Court, the High Court upheld the Tribunal's decision in favor of the assessee. The High Court concluded that the income adjusted to meet expenses for charitable purposes in any year can be considered as applied for charitable purposes in that year, regardless of when the income was earned. As a result, the High Court found no grounds to interfere with the Tribunal's order and dismissed the appeal.

In summary, the High Court upheld the Tribunal's decision, allowing depreciation for assets owned by a charitable trust and permitting the carry forward of deficit in the application of funds for meeting charitable purposes. The judgment emphasizes the importance of preserving the trust's corpus through depreciation and interprets the application of income for charitable purposes under Section 11(1)(a) liberally, in line with legal precedents.