2018 (8) TMI 1894 - HC - Income Tax

Allowability and depreciation in the hands of religious and charitable trust - HELD THAT - Income-tax Officer held that depreciation could not be taken into account because full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The appeal was rejected. The Tribunal however took the view that when the Income-tax Officer stated that full expenditure had been allowed in the year of acquisition of the assets what he really meant was that the amount spent on acquiring those assets had been treated as application of income of the trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years depreciation in respect of those assets cannot be taken into account. Carrying forward of the losses for being set off against the income of the charitable trust for the present assessment year the controversy is covered by the judgment in CIT (Exemptions) v. Ohio University Christ College 2018 (11) TMI 1055 - KARNATAKA HIGH COURT Income derived from the trust property has also got to be com puted on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for char itable 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 pur poses 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)

Summary

Issues Involved:
1. Entitlement of the assessee to carry forward excess/surplus funds for set-off as application of income against the income of subsequent years.
2. Allowability of depreciation in the hands of religious and charitable trusts.

Issue-wise Detailed Analysis:

1. Entitlement to Carry Forward Excess/Surplus Funds:
The primary issue is whether the assessee, a charitable trust, is entitled to carry forward excess or surplus funds to set off against the income of subsequent years. The Revenue questioned the Tribunal's decision, which allowed such carry forward based on earlier cases, even though there is no specific provision for such set-off in sections 11, 12, and 14 of the Income-tax Act, and sections 70 to 79 are not applicable to trusts.

The court referenced the judgment in CIT (Exemptions) v. Ohio University Christ College [2018] 408 ITR 352 (Karn), which upheld the Tribunal's findings. The Tribunal had allowed the amortization of earlier years' expenses brought forward and set off in the current year, relying on the decision in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 (Karn) and CBDT Circular No. 5-P(LXX)-6 of 1968. The court affirmed that the income of a trust should be computed on commercial principles, allowing the set-off of previous years' expenses against current income.

2. Allowability of Depreciation:
The second issue concerns the allowability of depreciation on assets whose cost has been fully allowed as application of income in past years. The court cited the Supreme Court's decision in CIT v. Rajasthan and Gujarati Charitable Foundation [2018] 402 ITR 441 (SC), which affirmed the Bombay High Court's view in CIT v. Institute of Banking [2003] 264 ITR 110 (Bom). The court held that normal depreciation is a legitimate deduction in computing the real income of the assessee, even if the assets are not business assets. Depreciation should be allowed as it represents a decrease in the value of property through wear and tear, and it is necessary to preserve the corpus of the trust.

The court reiterated that the income of a charitable trust should be computed under section 11 on commercial principles after providing for normal depreciation. The court also referenced the decision in CIT v. Society of the Sisters of St. Anne, which supported the allowance of depreciation as a deduction for charitable trusts.

Conclusion:
The court concluded that both issues raised by the Revenue do not give rise to any substantial question of law. The principles established in earlier judgments, which allow the carry-forward of surplus funds and the deduction of depreciation, were affirmed. The appeal filed by the Revenue was disposed of in terms of these judgments, with no costs awarded. A copy of the order was directed to be sent to the respondent-assessee forthwith.