2016 (5) TMI 165 - AT - Income Tax

Disallowance of depreciation to assessee trust - Held that - In view of Section 11(4) & (4A) of the Act, if the property held under trust is a business undertaking, then the income of the business undertaking, which was so held as property held under trust, has to be computed by applying the provisions of Income-tax Act under Chapter IV. While computing income of the business undertaking, all expenditure, including depreciation, has to be allowed and the income of such business undertaking which was held under Trust has to be allowed as exemption under Section 11 on application and accumulation. In this case, as rightly submitted by the Ld. D.R., no business undertaking was held under trust as provided under Section 11(4) & (4A) of the Act. The assessee is claiming depreciation in respect of asset which was used as tool for carrying out charitable object of the institution. When the asset was used as tool for carrying out the object of the charitable institution, such activity cannot be construed as a business or profession of the assessee. Therefore, Section 32 of the Act is not applicable in this case. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of depreciation for a charitable institution.

Detailed Analysis:

1. Disallowance of Depreciation:
The appeal concerns the disallowance of depreciation claimed by a charitable institution registered under Section 12AA of the Income-tax Act, 1961, for the assessment year 2010-11. The assessee claimed depreciation of ?63,14,533 on capital assets, which was disallowed by the Assessing Officer on the grounds that it would amount to double deduction, which is not permissible under the Income-tax Act.

Arguments by the Assessee:
The assessee argued that depreciation is allowable while computing income under the head "business or profession" and that the income of the trust has to be computed on commercial principles as per Section 11 of the Act. The assessee relied on various case laws, including decisions by the Tribunal, which allowed depreciation even though the income of the trust was exempted on its application. The counsel for the assessee clarified that Section 32 of the Act, which provides for allowing depreciation on business assets, does not apply to the assessee as it is not engaged in business but is a charitable institution. The assessee claimed depreciation based on commercial principles, irrespective of the provisions of Section 32.

Arguments by the Department:
The Departmental Representative argued that Section 32 allows depreciation only for assets used for business or profession. Since the assessee is a charitable institution and not engaged in business or profession, it is not eligible for depreciation under Section 32. The DR emphasized that Section 32 falls under Chapter IV of the Act, which deals with the computation of business income, whereas the assessee's claim falls under Chapter III, which deals with income that does not form part of total income. The DR also pointed out that the assessee is claiming depreciation on assets used for charitable purposes, not business purposes, and therefore, Section 32 is not applicable.

Tribunal's Analysis:
The Tribunal considered the rival submissions and relevant material. It noted that depreciation under Section 32 is allowed for assets used for business or profession. The Tribunal opined that depreciation represents the inherent decline in the value of an asset due to wear and tear and is allowed as a notional deduction over the asset's effective lifetime. The Tribunal emphasized that Section 32 specifically provides for depreciation only for assets used for business or profession and does not extend to assets used for charitable purposes.

The Tribunal further noted that the assessee is not claiming depreciation under Section 32 but on commercial principles. However, it observed that the customary practice or commercial principle of computing income cannot override the specific provisions of the Income-tax Act. The Tribunal held that Section 32 will prevail over any customary practice or commercial principle, and therefore, the assessee is not eligible for depreciation on assets not used for business or profession.

Conclusion:
The Tribunal dismissed the appeal, concluding that the assessee, being a charitable institution not engaged in business or profession, is not eligible for depreciation under Section 32 of the Income-tax Act. The Tribunal found no merit in the assessee's claim based on commercial principles or customary practice, as these cannot override the statutory provisions of the Act. The order was pronounced on 22nd April 2016 at Chennai.