2016 (9) TMI 959 - AT - Income Tax

Disallowance of depreciation as deduction U/s.35(2)(iv) is allowed in respect of capital expenditure on scientific research - depreciation allowability to charitable trust - double deduction - Held that - CIT(Appeals) has allowed the claim of the assessee by following the various decisions including the decision of Hon ble Bombay High Court in the case of CIT Vs. Institute of Banking Personnel Selections (2003 (7) TMI 52 - BOMBAY High Court ) as well as the decision in the case of CIT Vs. Society of the Sisters of St. Anne 1983 (8) TMI 44 - KARNATAKA High Court held that depreciation is allowable on capital assets on the income of the charitable trust for determining the quantum of funds which have to be applied for the purpose of trusts in terms of section 11 of the Act. We find that this issue is now settled in favour of the assessee by a series of decisions by the High Courts as well as this Tribunal - Decided in favour of assessee. Interest free loans given to the charitable trust - Held that - For attracting the provisions of section 13(1)(c)(ii), the beneficiary of income or property has to be the author trust, any person who has made substantial contribution to the trust in case HUF is the author of the trust, a member of the family or any trustee of the trust or manager, any relative of any such author, founder trustee or manager. Any concern in which any of the persons referred in clause (a) to (d) has a substantial interest. Thus in the case of the assessee, the interest free loan was given to another trust and the common trustee have no substantial interest in any of the trust. Therefore in the absence of any direct or indirect benefit to the trustees or author of assessee trust or to the trustees of the resident trust the provisions of section 13(1)(c) cannot be attracted. Revenue appeal dismissed.

Summary

Issues Involved:
1. Disallowance of depreciation.
2. Interest-free loans given to another charitable trust.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation:
The primary contention revolves around whether depreciation is allowable for a charitable trust when the cost of the asset has already been treated as an application of income. The Assessing Officer disallowed the depreciation claim of ?45,36,382, arguing that it would result in a double deduction, which is not permissible. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, citing precedents such as the Bombay High Court's decision in CIT Vs. Institute of Banking Personnel Selections and the Karnataka High Court's decision in CIT Vs. Society of the Sisters of St. Anne. The Tribunal upheld the CIT(A)'s decision, referencing multiple High Court rulings and Tribunal decisions, including the case of M/s. Moogambigai Charitable and Educational Trust Vs. Addl. DIT (Exemptions). The Tribunal noted that according to these precedents, depreciation should be allowed to compute the income of charitable institutions in a normal commercial manner, and this does not amount to double deduction. The Tribunal also acknowledged the amendment to Section 11(6) of the Act by the Finance Act, 2014, which disallows depreciation on assets whose acquisition cost has been claimed as an application of income, but clarified that this amendment is prospective and applicable only from AY 2015-16.

2. Interest-free Loans Given to Another Charitable Trust:
The Assessing Officer observed that the assessee trust provided an interest-free loan of ?35,38,144 to Vidya Bharati Foundation, where common trustees existed between both trusts. The AO concluded that this loan indirectly benefited the trustees, invoking Section 13(1)(c) of the Income Tax Act, which disallows tax benefits if the income or property of the trust is used for the benefit of specified persons. The CIT(A) overturned this decision, stating that the loan was given to another educational trust with similar objectives, and no trustee derived any direct or indirect benefit from this transaction. The Tribunal agreed with the CIT(A), emphasizing that the loan was to another trust engaged in similar charitable activities and did not benefit any trustee personally. The Tribunal referenced the Delhi High Court's decision in DIT Vs. Acme Education Society, which supports the view that loans to similar charitable institutions do not constitute direct or indirect benefits to trustees.

Conclusion:
The appeal by the revenue was dismissed, affirming the CIT(A)'s decisions on both issues. The Tribunal upheld the allowance of depreciation for the charitable trust and validated the interest-free loan to another charitable trust, as it did not result in any direct or indirect benefit to the trustees. The Tribunal's decision aligns with established legal precedents and clarifies the application of relevant sections of the Income Tax Act.