2015 (9) TMI 272 - AT - Income Tax

Depreciation claim denied - as at the time of acquiring the relevant capital asset, cost of acquisition was considered as application of income in the year of its acquisition thus allowing depreciation would amount to allowing double deduction - assessee is a charitable trust with objects to provide education - CIT(A) allowed claim - 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) wherein after considering several decisions on that issue and also the decision of the Hon ble Supreme Court in the case 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 Supreme Court in the case of Escorts Ltd. (supra) observed that as dealing with a case of two deductions under different provisions of the Act, one u/s. 32 for depreciation and the other on account of expenditure of a capital nature incurred on scientific research u/s. 35(1)(iv) of the Act. The Hon ble Court thereafter held that a trust claiming depreciation cannot be equated with a claim for double deduction. Also see CIT v. Society of Sisters of Anne (1983 (8) TMI 44 - KARNATAKA High Court)- Decided against revenue. Entitlement to trust 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 - 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. See CIT Vs. Society of Sisters of St. Anne ((1983 (8) TMI 44 - KARNATAKA High Court). - Decided against revenue.

Summary

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

Issue 1: Allowance of Depreciation on Assets claimed as Capital Expenditure:
The appeal involved 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 potential double deduction, referencing a Supreme Court decision. The trust argued that previous High Court decisions supported allowing depreciation on such assets. The AO maintained the disallowance, referring to a High Court decision and distinguishing the trust's cited cases. The Commissioner of Income Tax (Appeals) allowed the depreciation claim, citing previous decisions in favor of the trust. The Tribunal, considering a similar case, held that depreciation is essential for computing income of charitable institutions, preserving the trust's corpus. The Tribunal referred to various court decisions supporting depreciation claims by charitable institutions. The legal position was subsequently amended prospectively, affirming the allowance of depreciation for charitable trusts.

Issue 2: Carry Forward of Excess Expenditure by a Trust:
The second issue pertained to a trust seeking to carry forward excess expenditure from one year to set off against income of subsequent years. The AO denied the claim, stating no provision allowed such carry forward. The trust appealed, and the CIT(A) directed the AO to allow the claim, following a previous ITAT Bangalore decision. The Tribunal analyzed the legal position, highlighting that the application for charitable purposes can occur in subsequent years, allowing the set-off of excess expenditure against income of later years. Various court decisions were referenced supporting the adjustment of excess expenditure against income of subsequent years for charitable trusts. The Tribunal dismissed the Revenue's grounds, affirming the trust's entitlement to carry forward and set off excess expenditure against income of succeeding years.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the allowance of depreciation on assets claimed as capital expenditure by a charitable trust and affirming the trust's entitlement to carry forward and set off excess expenditure against income of subsequent years. The judgment provided a thorough analysis of legal precedents and amendments supporting the decisions rendered.