2015 (11) TMI 634 - AT - Income Tax

Entitlement to depreciation - Assessee enjoys registration u/s.12AA and is entitled to claim exemption of its total income u/s.11 - Held that - The order of the CIT(A) in so far as it relates to allowing depreciation on opening WDV has to be confirmed but has to be reversed in so far as it relates to not allowing depreciation on the closing WDV of the block of assets. In other words, the Assessee should be entitled to depreciation as claimed by it - Decided in favour of assessee. Claim of loss/deficit of earlier years against income of the current year - Whether 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 - 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. Whether loan is repaid the Assessee would again claim deduction and hence the Assessee would get double deduction is without any sound basis? - Held that - The claim of the Assessee for set off has to be allowed but with a rider that the Assessee in the year when the loan is repaid should not claim deduction of the sums repaid as loan as application of income. The above direction, to which the learned counsel for the Assessee had no objection, in our view, will sufficiently safeguard the interest of the Revenue. Accordingly, ground raised by the Assessee is allowed and the AO is directed to allow the set off of brought forward deficit as deduction.

Summary

Issues Involved:
1. Disallowance of depreciation.
2. Set off of brought forward deficit.
3. Carry forward of excess expenditure for setting off against income of succeeding years.
4. Direction to allow accumulation u/s.11(2) of the Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Depreciation:
The primary issue was whether the assessee, a charitable institution, could claim depreciation on assets whose cost of acquisition had already been treated as application of income for charitable purposes. The Assessing Officer (AO) disallowed the depreciation, citing the Supreme Court's decision in Escorts Limited, which prohibits double deductions. The assessee countered with Karnataka High Court rulings in All Saints Church and Society of Sisters of St. Ann, which allow depreciation even when the asset's cost is treated as application of income. The CIT(A) partially allowed the claim, permitting depreciation on the opening Written Down Value (WDV) but not on the closing WDV. The Tribunal referenced ITAT Bangalore's decision in DDIT(E) v. Cutchi Memon Union, which supports the assessee's stance, and concluded that depreciation should be allowed on the closing WDV, dismissing the Revenue's appeal and allowing the assessee's appeal.

2. Set Off of Brought Forward Deficit:
The second issue was whether the assessee could carry forward and set off a deficit from previous years against the current year's income. The AO denied this, arguing there was no provision in the Act for such a carry forward. The CIT(A) allowed the set off for AY 2007-08 but not for AY 2008-09, reasoning that the deficit from AY 2008-09 was due to unpaid loans, which could only be set off upon repayment. The Tribunal, referencing several High Court decisions, held that expenses incurred in earlier years could be adjusted against subsequent years' income, treating it as application of income. Thus, the Tribunal dismissed the Revenue's appeal and allowed the assessee's ground, permitting the set off of the brought forward deficit with a condition that the assessee should not claim deduction upon loan repayment.

3. Carry Forward of Excess Expenditure for Setting Off Against Income of Succeeding Years:
The assessee sought to carry forward excess expenditure from AY 2008-09 and AY 2007-08 to set off against AY 2009-10 income. The AO rejected this, but the CIT(A) allowed the set off for AY 2007-08 while denying it for AY 2008-09 due to the nature of the deficit being loan-funded. The Tribunal upheld the CIT(A)'s decision for AY 2007-08 and directed that the set off for AY 2008-09 should be allowed with the condition that loan repayments should not be claimed as application of income in the year of repayment.

4. Direction to Allow Accumulation u/s.11(2) of the Act:
The Revenue challenged the CIT(A)'s direction to allow accumulation u/s.11(2) of the Act. The Tribunal found this ground academic, given the conclusion that the assessee could set off the brought forward deficit. Consequently, there would be no unutilized surplus necessitating adjudication of this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming the allowance of depreciation on closing WDV, permitting the set off of brought forward deficits, and directing the AO to allow the set off of excess expenditure with the stipulated condition regarding loan repayments. The direction to allow accumulation u/s.11(2) was deemed academic and not adjudicated.