2012 (10) TMI 80 - AT - Income Tax

Depreciation on assets alleged that same was already allowed as application of income with the grant of registration u/s 12AA(1) of I.T. Act, 1961 Held that - Depreciation as debited in the books will be allowable - amount of depreciation debited to accounts of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes in favor of assessee

Summary

Issues Involved:
1. Allowability of depreciation on assets for a charitable institution.
2. Double deduction concerning depreciation and application of income.

Issue-Wise Detailed Analysis:

1. Allowability of Depreciation on Assets for a Charitable Institution:
The primary issue raised by the Revenue was whether the depreciation on assets amounting to Rs. 24,61,686/- for the assessment year 2004-05 and Rs. 20,81,920/- for the assessment year 2005-06 should be allowed, especially when the same was already allowed as an application of income under section 12AA(1) of the I.T. Act, 1961.

The Tribunal examined this issue in light of various judicial precedents. It referred to the decision in CIT v. Society of the Sisters of St. Anne (146 ITR 28), where the Karnataka High Court held that "the amount of depreciation debited to accounts of a charitable institution is to be deducted to arrive at the income available for application to charitable and religious purposes." The High Court emphasized that depreciation is a necessary outgoing and must be allowed to preserve the corpus of the trust.

The Tribunal also considered the Gujarat High Court's decision in CIT v. Ganga Charity Trust Fund (162 ITR 612), which held that all outgoings, including income tax liability, must be deducted to determine the income available for application under section 11(1)(a). Similarly, the Madhya Pradesh High Court in CIT v. Raipur Pollottine Society (180 ITR 579) and the Gujarat High Court in CIT v. Sheth Manilal Ranchoddas Vishram Bhavan Trust (198 ITR 598) supported the view that depreciation should be allowed for computing the income of a charitable institution.

Additionally, the Tribunal cited the Bombay High Court's ruling in CIT v. Institute of Banking (264 ITR 110), which held that normal depreciation should be considered on general principles or under section 11(1)(a) of the I.T. Act, even if the cost of the assets had already been allowed as an application of income.

2. Double Deduction Concerning Depreciation and Application of Income:
The Revenue argued that allowing depreciation when the cost of the asset had already been treated as an application of income would result in double deduction. However, the Tribunal disagreed with this view, citing the Bombay High Court's decision in CIT v. Munisuvrat Jain (1994 Tax LR 1084), which clarified that depreciation could be allowed as a deduction on general principles or under section 11(1)(a) of the I.T. Act. The court held that the income of a charitable trust should be computed in a normal commercial manner, even if the assets were not business assets.

The Tribunal also referred to the CBDT Circular No. 72 dated 06.01.72, which explained that the capital gain arising from the transfer of assets held under trust should be considered as applied for charitable purposes if the net consideration is utilized for acquiring another capital asset. This principle supports the view that depreciation should be allowed to ensure the corpus of the trust is preserved.

In conclusion, the Tribunal held that depreciation is allowable for charitable institutions, even if the cost of the assets had already been treated as an application of income. The appeal of the Revenue was dismissed.