2018 (8) TMI 1968 - HC - Income Tax

Allowability and depreciation in the hands of religious and charitable trust - HELD THAT - Income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in 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. Computation of income from depreciable assets - The assessee was a trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the trust. The 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 - 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 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.

Issues Involved:
1. Allowability of depreciation on assets for which capital expenditure has been fully allowed as application of income under section 11 in past years.
2. Applicability of Supreme Court and High Court decisions on double deduction.
3. Legislative intent on double deduction and its amendment effective from assessment year 2015-16.
4. Applicability of normal commercial principles for depreciation in charitable trusts.
5. Distinction between application of income and deduction of depreciation as expenditure.
6. Carrying forward of losses for set-off against income of charitable trusts.

Issue-Wise Detailed Analysis:

1. Allowability of Depreciation on Assets:
The court addressed whether depreciation is allowable on assets when the cost has been fully allowed as application of income under section 11 in past years. The court referred to the Supreme Court's decision in CIT v. Rajasthan and Gujarati Charitable Foundation, which affirmed the Bombay High Court's view that normal depreciation is a legitimate deduction in computing the real income of the trust on general principles or under section 11(1)(a) of the Income-tax Act. The court held that income of a charitable trust derived from building, plant, and machinery should be computed in a normal commercial manner, and depreciation should be allowed, even if the assets are not business assets.

2. Applicability of Supreme Court and High Court Decisions:
The court considered whether the Tribunal was correct in not following the Supreme Court's decision in Escorts Limited v. Union of India, which held that no depreciation is allowable under section 32 if deduction under section 35(2)(iv) is allowed for capital expenditure on scientific research. The court found that the issue of depreciation for charitable trusts is distinct and has been settled by the Supreme Court in CIT v. Rajasthan and Gujarati Charitable Foundation, which allows depreciation despite the capital expenditure being treated as application of income.

3. Legislative Intent on Double Deduction:
The court examined whether the Tribunal correctly interpreted the legislative intent to disallow double deductions, especially considering the amendment effective from the assessment year 2015-16. The court reiterated that the Supreme Court's ruling in CIT v. Rajasthan and Gujarati Charitable Foundation, which allows depreciation as a deduction, remains applicable to the assessment years prior to the amendment.

4. Applicability of Normal Commercial Principles for Depreciation:
The court discussed whether the Tribunal was correct in holding that depreciation is allowable to charitable trusts on normal commercial principles, despite the assessment of trusts being covered under sections 11, 12, and 13 of the Income-tax Act. The court affirmed that depreciation is a legitimate deduction in computing real income on commercial principles, as established in CIT v. Institute of Banking and CIT v. Munisuvrat Jain.

5. Distinction Between Application of Income and Deduction of Depreciation:
The court addressed whether the Tribunal correctly distinguished between the application of income and the deduction of depreciation as expenditure. The court upheld the view that depreciation is a decrease in the value of property through wear and tear, and its allowance is necessary to compute the real income of the trust, as per commercial principles.

6. Carrying Forward of Losses for Set-off Against Income:
The court considered whether the Tribunal was correct in allowing the carrying forward of losses to be set off against the income of the charitable trust. The court referred to its own decision in CIT (Exemptions) v. Ohio University Christ College, which held that amortization of expenses and carrying forward of losses are permissible under commercial principles and section 11 of the Act.

Conclusion:
The court concluded that the substantial questions of law suggested by the appellant do not arise for further consideration, as the issues have been settled by the Supreme Court and High Court decisions. The appeal filed by the Revenue was disposed of in terms of the aforementioned judgments, with no costs.

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