2015 (6) TMI 235 - AT - Income Tax

Depreciation claim - assessee is a charitable trust - according to the AO allowing such a claim would amount to allowing double deduction - Held that - The issue raised by the revenue in the ground of appeal is thus no longer res integra and has been decided in the case of CIT v. Market Committee Pipli, (2010 (7) TMI 374 - Punjab and Haryana High Court) after considering several decisions on that issue and also the decision of of Escorts Ltd. (1992 (10) TMI 1 - SUPREME Court) came to the conclusion that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. The Hon ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon ble Punjab & Haryana High Court has also made a reference to the decision of CIT v. Society of Sisters of Anne, (1983 (8) TMI 44 - KARNATAKA High Court) wherein it was held that u/s. 11(1) of the Act income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. - Decided in favour of assesse. Whether the CIT(Appeals) was justified in holding that assessee a trust is entitled to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? - Held that - Section 11(1)(a) does not contain any words of limitation to the effect that the income should have been applied for charitable or religious purpose only in the year in which the income has arisen. The application for charitable purposes as contemplated in section 11(1)(a) takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. Hence even if the expenses for such purposes have been incurred in the earlier years and the said expenses are adjusted against the income of a subsequent year the income of such subsequent year can be said to be applied for charitable or religious purposes in the year in which such adjustment takes place. The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance if the expenditure incurred was for religious or charitable purposes and the expenditure adjusted against the income of the trust in a subsequent year would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes it is the expenditure properly incurred by the trust and the income from out of which that expenditure is incurred would not be liable to tax. The expenditure if incurred in an earlier year is adjusted against the income of a later year it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year even though the actual expenditure was in the earlier years if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other - Decided against revenue.

Summary

Issues:
1. Allowance of depreciation on assets claimed as capital expenditure towards application of funds by a charitable trust.
2. Entitlement of a trust to carry forward excess expenditure incurred for setting off against income of succeeding years.

Issue 1: Allowance of Depreciation on Assets Claimed as Capital Expenditure:

The appeal pertains to a charitable trust claiming depreciation on assets where the cost of acquisition had been claimed as capital expenditure towards the trust's objectives. The Assessing Officer (AO) disallowed the depreciation, citing the decision in Escorts Limited & another Vs. Union of India, which held that no depreciation is allowable on the same asset for which deduction u/s 35(2)(iv) is allowed for capital expenditure on scientific research. The trust argued that allowing depreciation on such assets would not amount to double allowance based on decisions of the Hon'ble High Court of Karnataka. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the depreciation, relying on precedents like Manipal Hotel & Restaurant Management College Trust and others. The Income Tax Appellate Tribunal (ITAT) held that depreciation is deductible for computing income of charitable institutions to preserve the trust's corpus, citing various judicial decisions. The ITAT dismissed the Revenue's grounds, noting a prospective amendment by the Finance Act, 2014, effective from A.Y. 2015-16, disallowing depreciation in such cases.

Issue 2: Entitlement of Trust to Carry Forward Excess Expenditure:

The second issue involves whether a trust can carry forward excess expenditure incurred for setting off against income of succeeding years. The trust sought to carry forward excess application of income for set-off in subsequent assessment years. The AO denied the claim due to a pending appeal by the department before the High Court. The CIT(A) directed the AO to allow the claim, citing precedents like Manipal Hotel & Restaurant Management College Trust. The ITAT held that the set-off of excess expenditure against income of later years amounts to application of income for charitable purposes, based on various judicial decisions. The ITAT dismissed the Revenue's grounds, emphasizing that the adjustment of expenditure against income of subsequent years is permissible for trusts engaged in charitable activities.

In conclusion, the ITAT upheld the CIT(A)'s decision on both issues, allowing depreciation on assets claimed as capital expenditure by the trust and permitting the carry forward of excess expenditure for set-off against income of succeeding years. The judgment provides a detailed analysis of legal precedents and amendments, ensuring a comprehensive understanding of the issues at hand.