2015 (7) TMI 859 - AT - Income Tax

Depreciation claim on on scientific research - whether deduction u/s 35(2)(iv) is allowed in respect of capital expenditure on scientific research, no depreciation is allowable u/s 32 on the same asset? - Held that - If depreciation is not allowed as a necessary deduction for computing income of charitable institutions, then there is no way to preserve the corpus of the trust for deriving the income as it is nothing but a decrease in the value of property through wear, deterioration, or obsolescence. Since income for the purposes of section 11(1) has to be computed in normal commercial manner, the amount of depreciation debited in the books is deductible while computing such income. It was so held by the Hon ble Karnataka High Court in the case of CIT Vs. Society of Sisters of St. Anne (1983 (8) TMI 44 - KARNATAKA High Court). It was held in CIT vs. Tiny Tots Education Society (2010 (7) TMI 377 - Punjab and Haryana High Court) following CIT vs. Market Committee, Pipli (2010 (7) TMI 374 - Punjab and Haryana High Court ) that depreciation can be claimed by a charitable institution in determining percentage of funds applied for the purpose of charitable objects. Claim for depreciation will not amount to double benefit. - Decided against revenue. Entitlement to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years? - CIT(A) allowed claim - Held that - 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. The High Court relied on the decision in the case of CIT Vs. Society of Sisters of ST. Anne( supra). - Decided against revenue.

Summary

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

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

The appeal involved a charitable trust claiming depreciation on assets where the cost had been claimed as capital expenditure towards the trust's objects. The Assessing Officer (AO) disallowed the claim citing a potential double deduction issue based on a Supreme Court decision. The trust argued that previous High Court decisions supported allowing depreciation on such assets. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the depreciation claim, referencing similar decisions. The Tribunal, in a previous case, emphasized that depreciation is essential for computing income of charitable institutions to maintain the trust's corpus. The Tribunal distinguished the Supreme Court decision and supported allowing depreciation on capital assets for charitable trusts. The legal position was later amended prospectively by the Finance Act, 2014, reinforcing the allowance of depreciation on such assets.

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

The second issue revolved around whether a trust could carry forward excess expenditure to set off against income in subsequent years. The Assessing Officer denied this claim, asserting no provision allowed such carry forward. However, the CIT(A) directed the AO to allow the claim, citing precedents. The Tribunal examined the law, highlighting that adjusting excess expenditure against income of later years constitutes application of income for charitable purposes. Various High Court decisions supported this view, emphasizing the benevolent nature of provisions for charitable trusts. The Tribunal dismissed the Revenue's appeal, affirming the trust's entitlement to carry forward and set off excess expenditure against future income.

In conclusion, the judgment addressed the issues of allowing depreciation on assets claimed as capital expenditure by a charitable trust and the entitlement of a trust to carry forward excess expenditure for setting off against future income. The Tribunal's detailed analysis upheld the trust's claims in both instances, emphasizing the legal principles and precedents supporting such allowances.