2018 (8) TMI 2139 - HC - Income Tax

Assessment of trust income - claim for depreciation on assets put into use during the accounting year - entire cost of these assets have been claimed by the assessee as an application of income for charitable activities - HELD THAT - This Court in case of Commissioner of Income Tax-III, Pune v. Rajasthan Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT as held 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. Also 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. Application of income of the trust for charitable and religious purposes - Carrying forward of the losses for being set off against the income of the charitable trust for the present Assessment Year - As decided in Ohio University Christ College 2018 (11) TMI 1055 - KARNATAKA HIGH COURT 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 Bombay High Court in Commissioner of Income-tax 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. Eligibility for carry forward of deficit by a charitable or religious trust/institution.
2. Allowability of depreciation on assets for charitable activities resulting in double deduction.
3. Legislative intent regarding depreciation and application of income post-1/4/2015.

Detailed Analysis:

1. Eligibility for Carry Forward of Deficit:

The court addressed whether a charitable or religious trust/institution can carry forward its deficit to subsequent years. The Tribunal's decision allowing the carry forward was upheld. The court referenced the judgment in "Commissioner of Income Tax (Exemptions) and another vs. Ohio University Christ College," which supported the view that expenses incurred in earlier years can be amortized and set off against income in subsequent years. The court cited the case of "CIT vs. Society of the Sisters of St. Anne," affirming that such amortization is permissible under commercial principles and the relevant CBDT Circular No.5-P (LXX)-6 of 1968. The court concluded that the Tribunal's findings do not raise any substantial question of law, thereby endorsing the carry forward of deficits.

2. Allowability of Depreciation on Assets:

The court examined whether depreciation on assets used for charitable purposes, which had already been claimed as an application of income, results in double deduction. The court referenced the Supreme Court decision in "Commissioner of Income Tax-III, Pune v. Rajasthan & Gujarati Charitable Foundation Poona," which affirmed the Bombay High Court's view in "Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)." The judgment clarified that depreciation is a legitimate deduction in computing the real income of a charitable trust, even if the cost of the assets has been fully allowed as an application of income. The court emphasized that income of a charitable trust should be computed on commercial principles, allowing for normal depreciation. Consequently, the court held that the Tribunal was justified in allowing the depreciation claim, dismissing the Department's argument on double deduction.

3. Legislative Intent Regarding Depreciation Post-1/4/2015:

The court considered the legislative amendment effective from 1/4/2015, which intended to disallow both depreciation and application of income simultaneously. Despite this amendment, the court upheld the Tribunal's decision, referencing the Supreme Court's affirmation in the "Rajasthan & Gujarati Charitable Foundation Poona" case. The court reiterated that the principles established by the Bombay High Court, as affirmed by the Supreme Court, remain applicable. The court concluded that no substantial question of law arises on this issue, as the established judicial precedents continue to govern the matter.

Conclusion:

The court dismissed the Revenue's appeal, affirming the Tribunal's decisions on all issues. The judgments cited provided a consistent legal framework supporting the carry forward of deficits and the allowability of depreciation for charitable trusts. The legislative amendment post-1/4/2015 did not alter the court's stance, as existing judicial interpretations were deemed sufficient to resolve the controversy. The appeal was disposed of without costs, and a copy of the order was directed to be sent to the Respondent-Assessee.