2018 (8) TMI 1865 - HC - Income Tax

Depreciation of assets acquired by assessee trust - whether the capital expenditure is treated as application of income for charitable purposes? - HELD THAT - Allowability and depreciation in the hands of the religious and charitable trust is allowable as relying on RAJASTHAN AND GUJARATI CHARITABLE FOUNDATION POONA 2017 (12) TMI 1067 - SUPREME COURT Carrying forward of the losses for being set off against the income of the charitable trust - HELD THAT - Income of a charitable trust derived from building plant and machinery and furniture is liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases section 32 of the Act providing for depreciation for computation of income derived from business or profession is not applicable. However the income of the trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from the gross income of the trust. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a). See OHIO UNIVERSITY CHRIST COLLEGE 2018 (11) TMI 1055 - KARNATAKA HIGH COURT

Summary

Issues Involved:
1. Eligibility for carry forward of deficit by a charitable or religious trust/institution.
2. Entitlement to claim carry forward and set off of unabsorbed deficit for trusts.
3. Entitlement to claim depreciation on capital assets by a charitable trust.

Issue-wise Detailed Analysis:

1. Eligibility for Carry Forward of Deficit by a Charitable or Religious Trust/Institution:
The court addressed whether the Tribunal was correct in holding that the assessee (a charitable or religious trust) is eligible to carry forward its deficit to subsequent years. The Tribunal's decision was based on the principle that the income of a charitable or religious trust should be computed by applying general commercial principles, without referring to the regular provisions of the Income-tax Act under Chapter-IV. The court referenced the judgment in CIT v. Rajasthan and Gujarati Charitable Foundation, where it was affirmed that depreciation could be considered a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-tax Act. The court held that income derived from trust property should be computed on a commercial basis, allowing for normal depreciation and deduction from the gross income of the trust.

2. Entitlement to Claim Carry Forward and Set Off of Unabsorbed Deficit for Trusts:
The court examined whether the Tribunal was right in law to allow the assessee to claim carry forward and set off of unabsorbed deficit. The Tribunal had allowed the amortization of expenses and the carry forward of unabsorbed deficit, referencing the decision in CIT v. Society of the Sisters of St. Anne. The court held that even depreciation, which does not involve cash outflow, is considered an expenditure and should be allowed as a deduction. The court reiterated that income should be understood in its commercial sense, and expenses incurred in earlier years could be adjusted against income in subsequent years, thus supporting the Tribunal's decision.

3. Entitlement to Claim Depreciation on Capital Assets by a Charitable Trust:
The court considered whether the Tribunal was correct in allowing the assessee to claim depreciation on capital assets, which the Revenue argued amounted to double deduction. The court referenced the Supreme Court's affirmation in CIT v. Rajasthan and Gujarati Charitable Foundation, which upheld the view that depreciation could be considered a legitimate deduction for charitable trusts. The court noted that the income of a charitable trust should be computed on commercial principles, allowing for normal depreciation and deduction from the gross income of the trust. The court held that the issue was no longer res integra and upheld the Tribunal's decision, dismissing the Revenue's contention of double deduction.

Conclusion:
The court concluded that the substantial questions of law suggested by the appellant (Revenue) did not arise for further consideration. The appeal filed by the Revenue was disposed of in terms of the judgments referenced, affirming the Tribunal's decisions on all issues. The court did not award costs.