2019 (4) TMI 708 - HC - Income Tax

Allowability of depreciation - religious and charitable trust - HELD THAT - See RAJASTHAN AND GUJARATI CHARITABLE FOUNDATION POONA 2017 (12) TMI 1067 - SUPREME COURT and M/S AGRICULTURAL PRODUCE MARKET COMMITTEE. 2018 (6) TMI 1393 - KARNATAKA HIGH COURT stating 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 in subsequent year - HELD THAT - 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 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 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) - Decided against revenue

Issues Involved:
1. Applicability of provisions relating to set-off and carry forward of losses for a charitable trust.
2. Entitlement of a charitable trust to carry forward excess application of income.

Detailed Analysis:

Issue 1: Applicability of Provisions Relating to Set-off and Carry Forward of Losses for a Charitable Trust

The court addressed whether the provisions under sections 70 to 79 of the Income-tax Act, which relate to the set-off of loss from one head against income from another head and carry forward and set-off of loss against the income of subsequent years, are applicable to a charitable trust. The appellant's counsel argued that these provisions should apply to the charitable trust, despite the normal computation of income under sections 15 to 59 not being applicable to trusts as per sections 11, 12, and 13.

The court referenced the Supreme Court decision in CIT v. Rajasthan and Gujarati Charitable Foundation, which affirmed the Bombay High Court's view in CIT v. Institute of Banking. The Bombay High Court had held that depreciation is allowable on assets whose cost has been fully allowed as application of income under section 11 in past years. The court rejected the argument that section 32 of the Income-tax Act was the only section granting benefit of deduction on account of depreciation, stating that income of a charitable trust should be computed on commercial principles, allowing normal depreciation as a legitimate deduction.

The court concluded that the issue regarding the claim of depreciation in the hands of the charitable trust is no longer res integra and thus, no substantial question of law arises in the present appeals filed by the Revenue.

Issue 2: Entitlement of a Charitable Trust to Carry Forward Excess Application of Income

The court examined whether a charitable trust is entitled to carry forward excess application of income to subsequent assessment years. The appellant argued that the concept of application is only to show that the income is fully utilized, and excess expenditure should not be carried forward as it would revert the income of the assessee to nil.

The court referred to the judgment in CIT (Exemptions) v. Ohio University Christ College, which held that the Tribunal's findings did not give rise to any substantial question of law. The Tribunal had allowed the amortization of expenditure as claimed by the assessee, relying on the decision in CIT v. Society of the Sisters of St. Anne, which stated that even depreciation not involving any cash outflow is in the character of expenditure. The court emphasized that the income of a charitable trust should be computed on commercial principles, allowing the adjustment of expenses incurred in earlier years against the income of subsequent years.

The court also cited the Bombay High Court's decision in CIT v. Institute of Banking, which supported the view that income derived from trust property should be computed on commercial principles, allowing the adjustment of expenses from earlier years as application of income in subsequent years.

Conclusion:

The court found that both issues were covered by previous decisions and thus, no substantial questions of law arose in the present appeal. Consequently, the appeal filed by the Revenue was dismissed, with no costs awarded. A copy of the order was directed to be sent to the respondent-assessee forthwith.

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