2015 (9) TMI 277 - AT - Income Tax

Disallowance of depreciation - purchase of assets were allowed as application of income under Section 11 of assessee - allowing depreciation would amount to double depreciation as held by AO - Held that - As decided in The Anjuman-E-Himayath- E-Islam v. ADIT 2015 (7) TMI 594 - ITAT CHENNAI this issue is elaborately discussed in the case of Lissie Medical Institution Vs. CIT reported in 2012 (4) TMI 115 - KERALA HIGH COURT and held the issue against the assessee wherein held that after writing off the full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claimed the same amount in the form of depreciation, such notional claim became a cash surplus available with the assessee, which was outside the books of account of the trust unless it was written back which was not done by the assessee. It was not permissible for a charitable institution to generate income outside the books in this fashion and there would be violation of section 11(1)(a). It was for the assessee to write back the depreciation and if that was done, the Assessing Officer would modify the assessment determining higher income and allow recomputed income with the depreciation written back by the assessee to be carried forward for subsequent years for application for charitable purposes - Decided against assessee. Excess application - Tthe assessee cannot claim excess application/expenditure as application of income. Carry forward of excess application of fund in the commercial principles cannot be allowed as per the provisions of the Act because it would result in notional application of income in the subsequent year.Needless to mention that the income of the Trust refers to income derived from the property held under the Trust and any voluntary contributions received by the Trust other than contributions made with specific directions that they shall form part of the corpus of the trust - Decided against assessee.

Summary

Issues Involved:
1. Depreciation claim on capital assets by a charitable institution.
2. Adjustment of excess amount spent towards charitable purposes.

Detailed Analysis:

1. Depreciation Claim on Capital Assets:
The primary issue was whether a charitable institution, registered under Section 12AA of the Income-tax Act, 1961, could claim depreciation on capital assets when its income was already exempt under Section 11 of the Act. The appellant argued that the income of the Trust should be computed on commercial principles, allowing depreciation under Section 32 of the Act. The Assessing Officer disallowed this claim, citing that allowing depreciation would result in double depreciation, referencing the Apex Court's judgment in Escorts Ltd. and Another v. Union of India and Others (1993) 199 ITR 43.

Upon review, it was noted that Section 32 applies to assets used for business purposes. Since the appellant was a charitable institution and not engaged in any business activity, Section 32 was deemed inapplicable. This position was supported by a previous Division Bench decision in The Anjuman-E-Himayath-E-Islam v. ADIT, which elaborated on the issue and referenced the Kerala High Court's ruling in Lissie Medical Institution Vs. CIT [2012] 348 ITR 344(Ker.). The Kerala High Court had held that claiming depreciation after writing off the full value of the capital expenditure as application of income resulted in a cash surplus outside the books, violating Section 11(1)(a). Thus, the Tribunal upheld the lower authorities' orders, confirming that depreciation could not be claimed.

2. Adjustment of Excess Amount Spent Towards Charitable Purposes:
The second issue was whether the excess amount spent on charitable purposes in a previous year could be adjusted in the current year. The appellant claimed that the excess expenditure should be allowed as an application of income for the current year. The Tribunal referenced a similar case, The Anjuman-E-Himayath-E-Islam, where it was determined that excess application of income could not be allowed unless the money was generated in the course of charitable activity.

The Tribunal outlined that application of funds by a charitable institution could come from various sources, including voluntary contributions, accumulated funds, loans, and sundry creditors. It was clarified that funds applied from the corpus, accumulated funds, or loans could not be treated as application of income for the purpose of Section 11, as it would amount to double deduction. The Tribunal concluded that excess application of funds over the income received by the Trust could only be allowed in the year when loans or sundry creditors were repaid. Consequently, the claim to carry forward excess application of funds was not entertained, and the lower authority's order was confirmed.

Conclusion:
The appeal was dismissed, with the Tribunal affirming that depreciation could not be claimed by the charitable institution and that excess expenditure from previous years could not be adjusted as application of income in the current year. The judgments referenced provided a comprehensive basis for these conclusions, ensuring adherence to the legal framework and principles governing charitable institutions under the Income-tax Act, 1961.