2014 (8) TMI 686 - HC - Income Tax

Allowability of depreciation to charitable organization u/s 32 Income does not include income from business Held that - Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word income should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise - the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust - the business income of the trust as disclosed by the accounts plus its other income computed will be the income of the trust for purposes of section 11(1) - the trust must spend at least 75 per cent, of this income and not accumulate more than 25 per cent., thereof. The excess accumulation, if any, will become taxable under section 11(1). Relying upon CIT v. Jayashree Charity Trust 1984 (12) TMI 30 - CALCUTTA High Court and CIT v. Bhoruka Public Welfare Trust 1999 (7) TMI 50 - CALCUTTA High Court - The object of section 11 of the Income-tax Act, 1961, is to feed the public charity - By permitting computation of income in a commercial manner, the object of feeding the public charity is achieved - The amount deducted by way of depreciation is in that case is ploughed back for user on account of charity - a building used for the purpose of charity diminishes in value over the time like any other building - providing for diminution of value would keep the corpus of the trust intact otherwise the corpus of the trust itself in course of time may get dissipated - as such , there is no reason to refer the matter to any larger Bench Decided against Revenue.

Issues Involved:
1. Justification of allowing depreciation under section 32 of the Income-tax Act, 1961, to a charitable organization without income from business and profession.
2. Justification of allowing depreciation on assets whose cost has already been treated as application of income for charitable purposes, potentially leading to double deduction.

Issue-wise Detailed Analysis:

1. Justification of Allowing Depreciation under Section 32 to a Charitable Organization:
The primary issue was whether the Tribunal was justified in allowing depreciation under section 32 of the Income-tax Act to a charitable organization whose income does not include income from business and profession. The Tribunal had relied on the precedent set by the Calcutta High Court in the case of Bhorukha Public Welfare Trust, which held that depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determining income in terms of section 11(1) of the Act. The Tribunal directed the Assessing Officer to grant the benefit of depreciation, considering it a mistake apparent from the record if not granted.

The Revenue's contention was that depreciation should only be allowable against income from business and profession, as per section 32, and not for charitable organizations. The Revenue relied on the Supreme Court judgment in Escorts Ltd. v. Union of India, which emphasized that allowing depreciation on assets whose cost has already been deducted would amount to double deduction.

2. Justification of Allowing Depreciation on Assets Leading to Double Deduction:
The second issue was whether allowing depreciation on assets, whose cost has already been treated as application of income for charitable purposes, would result in a double deduction. The Revenue argued that the Tribunal's decision effectively allowed a double deduction, as the cost of the assets had already been fully deducted as an application of income under section 11 in past years.

In contrast, the assessee's argument, supported by judgments from the Punjab and Haryana High Court in CIT v. Market Committee, Pipli, and the Bombay High Court in CIT v. Institute of Banking, was that depreciation should be reduced from the income to determine the percentage of funds applied for charitable purposes. These courts held that there was no double deduction, as depreciation was a legitimate deduction in computing the real income of the trust on general principles or under section 11(1)(a) of the Income-tax Act.

The Calcutta High Court, in CIT v. Jayashree Charity Trust, also supported the view that income from properties held under a trust should be calculated in a commercial manner, allowing for depreciation to maintain the corpus of the trust. This view was consistent with the Central Board of Direct Taxes Circular No. 5-P (LXX-6) dated May 19, 1968, which stated that the word "income" in section 11(1)(a) should be understood in a commercial sense, allowing for depreciation.

Conclusion:
The High Court concluded that the views expressed in CIT v. Jayashree Charity Trust were logical and in consonance with common sense. Allowing depreciation ensures that the corpus of the trust remains intact, as the value of the assets diminishes over time. The court found no reason to refer the matter to a larger Bench and answered both questions in favor of the assessee, affirming the Tribunal's decision to allow depreciation. The appeal was thus disposed of, with appreciation recorded for the assistance rendered by the senior advocate.

The High Court's judgment underscores the principle that the income of a charitable trust should be computed in a commercial manner, allowing for depreciation to maintain the trust's assets and further its charitable purposes.

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