2003 (7) TMI 52 - HC - Income Tax

Whether Tribunal was right in law in directing the Assessing Officer to allow depreciation on the assets the cost of which has been fully allowed as application of income under section 11 in the past years? Whether Tribunal was justified in law in directing the Assessing Officer to allow depreciation of ₹ 49,453 on assets received on transfer, when the assessee had not incurred the cost of acquiring the assets? - Whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes?

Issues:
1. Depreciation claim on assets fully allowed as application of income under section 11 in past years.
2. Allowance of depreciation on assets received on transfer without cost incurred by the assessee.
3. Carry forward and set off of deficit against surplus in subsequent years for a charitable trust.

Issue 1: Depreciation claim on assets fully allowed as application of income under section 11 in past years.
The court considered whether depreciation could be claimed on assets where the cost had been fully allowed as application of income under section 11 in past years. Referring to the case of CIT v. Munisuvrat Jain, the court held that normal depreciation is a legitimate deduction for computing the real income of a charitable trust, even if the trust is not engaged in business activities. The court emphasized that section 32 of the Income-tax Act, which deals with depreciation for business assets, does not apply to assets of a charitable trust. Therefore, the court ruled in favor of the assessee, allowing the depreciation claim.

Issue 2: Allowance of depreciation on assets received on transfer without cost incurred by the assessee.
The court addressed whether depreciation could be allowed on assets received on transfer without the assessee incurring the cost. Citing the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute, the court held that even if the full capital expenditure was allowed in the year of asset acquisition, depreciation could still be claimed in subsequent years. The court confirmed that the treatment of expenditure as application of income in the year of acquisition did not preclude depreciation claims in later years. Consequently, the court ruled in favor of the assessee, allowing the depreciation on transferred assets.

Issue 3: Carry forward and set off of deficit against surplus in subsequent years for a charitable trust.
The court examined whether the excess expenditure from earlier years could be adjusted against the income of subsequent years for a charitable trust. The Department argued against such adjustment, contending that income of a charitable trust under sections 11 to 13 did not allow for carry forward provisions like those for business income. However, the court disagreed, stating that income derived from trust property must be computed on commercial principles. It held that adjusting earlier expenses against subsequent income amounted to application of income for charitable purposes. Citing the judgment of the Gujarat High Court, the court ruled in favor of the assessee, allowing the carry forward and set off of deficit against surplus in subsequent years for the charitable trust.

In conclusion, the court disposed of the reference, ruling in favor of the assessee on all three issues.

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