2018 (9) TMI 1891 - HC - Income Tax

Exemption u/s 11 - allowing of depreciation to a trust and accumulation of income under section 11(2) - HELD THAT - Issues stand settled by the decision of the hon'ble Supreme Court reported in CIT v. Rajasthan and Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT and Principal CIT (Exemptions) v. Manipal Academy of Higher Education 2018 (8) TMI 1865 - KARNATAKA HIGH COURT Income of a charitable trust derived from building, plant and machinery and furniture was 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 Income-tax 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 gross income of the trust Carry forward of income or loss of charitable trust - HELD THAT - Allowing any expenditure of the earlier year which has been brought forward and set off in the year under consideration, is a justified finding of fact based on the correct interpretation of law and the judgment relied upon by it rendered by the cognate Bench. Therefore, the same does not call for interference. A similar view was also taken by the Division Bench of the Bombay High Court in CIT v. Institute of Banking 2003 (7) TMI 52 - BOMBAY HIGH COURT wherein held that the 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.

Summary

Issues Involved:
1. Allowance of depreciation to a trust under Section 11 of the Income-tax Act.
2. Accumulation of income under Section 11(2) of the Income-tax Act.

Detailed Analysis:

1. Allowance of Depreciation to a Trust:
The primary issue was whether depreciation is allowable to a trust registered under Section 12A of the Income-tax Act, 1961, even if the entire expenditure for acquiring capital assets was treated as application of income for charitable purposes in the previous year. The Assessing Officer disallowed the depreciation claim on the grounds that it would amount to double deduction since the trust had already claimed 100% exemption of capital expenditure as application of income.

The appellate authority and the Income-tax Appellate Tribunal (ITAT) allowed the claim of depreciation, leading to the Revenue's appeal. The High Court referred to the Supreme Court's decision in CIT v. Rajasthan and Gujarati Charitable Foundation [2018] 402 ITR 441 (SC), which upheld that depreciation on assets acquired by charitable institutions is allowable. The Supreme Court had affirmed that the entire expenditure incurred for acquiring capital assets treated as application of income for charitable purposes does not preclude the allowance of depreciation. The Court emphasized that income of a charitable trust should be computed on commercial principles, which includes providing for normal depreciation.

2. Accumulation of Income under Section 11(2):
For the assessment year 2009-10, the Assessing Officer disallowed the trust's claim for accumulation of income under Section 11(2) of the Act, arguing that the trust failed to indicate specific purposes for which income was accumulated in the original Form No. 10. The Assessing Officer contended that the revised Form No. 10 filed subsequently did not satisfy legal requirements.

The appellate authority and the ITAT allowed the trust's claim for accumulation of income. The High Court referred to its own decision in I.T.A. No. 551 of 2017 (Principal CIT (Exemptions) v. Manipal Academy of Higher Education [2019] 415 ITR 361 (Karn)), which held that even depreciation not involving cash outflow is in the character of expenditure and should be considered as application of income. The Court reiterated that the income of a charitable trust should be computed on commercial principles, and adjustments of expenses incurred in earlier years against income earned in subsequent years should be regarded as application of income for charitable purposes.

Conclusion:
The High Court concluded that both issues—allowance of depreciation and accumulation of income—were settled by the Supreme Court and its own previous decisions. It held that no substantial question of law arose for further consideration. The appeals filed by the Revenue were dismissed, affirming the decisions of the appellate authority and the ITAT, which allowed the benefit of depreciation and accumulation of income to the respondent trust.