2015 (11) TMI 1295 - AT - Income Tax

Disallowance of depreciation - whether application of income for charitable purpose amounts to double depreciation and therefore depreciation cannot be allowed - Held that - In the case of CIT v. Market Committee, Pipli, (2010 (7) TMI 374 - Punjab and Haryana High Court ) held that a trust claiming depreciation cannot be equated with a claim for double deduction. The Hon ble Punjab & Haryana High Court has also made a reference to the decision of CIT v. Society of Sisters of Anne, (1983 (8) TMI 44 - KARNATAKA High Court), wherein it was held that u/s. 11(1) of the Act, income has to be computed in normal commercial manner and the amount of depreciation debited in the books is deductible while computing such income. - Decided in favour of assessee. Entitlement to carry forward expenditure incurred in excess of its income for setting off against income of the succeeding years - CIT(A) allowed the claim - Held that - The principle that the loss incurred under one head can only be set off against the income from the same head is not of any relevance, if the expenditure incurred was for religious or charitable purposes, and the expenditure adjusted against the income of the trust in a subsequent year, would not amount to an incidence of loss of an earlier year being set off against the profit of a subsequent year. The object of the religious and charitable trust can only be achieved by incurring expenditure and in order to incur that expenditure, the trust should have an income. So long as the expenditure incurred is on religious or charitable purposes, it is the expenditure properly incurred by the trust, and the income from out of which that expenditure is incurred, would not be liable to tax. The expenditure, if incurred in an earlier year is adjusted against the income of a later year, it has to be held that the trust had incurred expenditure on religious and charitable purposes from the income of the subsequent year, even though the actual expenditure was in the earlier years, if in the books of account of the trust such earlier expenditure had been set off against the income of the subsequent year. The expenditure that can be so adjusted can only be expenditure on religious and charitable purposes and no other. See Govindu Naicker Estate VS. ADIT 1998 (10) TMI 4 - MADRAS High Court - Decided in favour of assessee. Accumulation of income - 15% accumulation for application in future has to be calculated on gross receipts or net receipts after deduction of revenue expenditure? - Held that - As per the statutory language of section 11(1)(a) the income which is to be taken for purpose of accumulation is the income derived by the trust from property any expenditure which is in the shape of application of income is not to be taken into account. Having found that trust is entitled to exemption under s. 11(1), we are to go to the stage of income before application thereof. The gross income earned by the assessee is relevant - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation claimed by the assessee.
2. Carry forward of excess expenditure for setting off against income of subsequent years.
3. Calculation of 15% accumulation for application in future on gross receipts or net receipts.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed by the Assessee:
The primary issue revolves around whether depreciation can be claimed on assets whose cost has already been considered as application of income for charitable purposes. The AO disallowed the depreciation claim, arguing that it would amount to a double deduction, referencing the Supreme Court's decision in Escorts Limited & another Vs. Union of India 199 ITR 43. The assessee countered by citing Karnataka High Court decisions in All Saints Church, 148 ITR 786 (Kar) and Society of Sisters of St. Ann, 146 ITR 28 (Kar), which allowed depreciation even when the cost of acquisition was treated as application of income. The Tribunal referenced its earlier decision in DDIT(E) v. Cutchi Memon Union (2013) 60 SOT 260, supporting the assessee's stance that depreciation should be allowed to preserve the corpus of the trust. The Tribunal concluded that the order of the CIT(A) disallowing depreciation should be reversed, and the assessee's ground was allowed.

2. Carry Forward of Excess Expenditure for Setting Off Against Income of Subsequent Years:
The second issue concerns whether a charitable trust can carry forward excess expenditure to set off against future income. The AO denied this claim, stating no provision in the Act allows such carry forward. The Tribunal, however, referenced several High Court decisions, including CIT Vs. Maharana of Mewar Charitable Foundation 164 ITR 439 (Raj) and CIT Vs. Institute of Banking Personnel Selection 264 ITR 110 (Bom), which supported the carry forward of excess expenditure as application of income in subsequent years. The Tribunal allowed the assessee's ground, affirming that excess expenditure incurred in earlier years can be adjusted against the income of subsequent years.

3. Calculation of 15% Accumulation for Application in Future on Gross Receipts or Net Receipts:
The third issue is whether the 15% accumulation for future application should be calculated on gross receipts or net receipts after deducting revenue expenditure. The AO calculated it on net receipts, resulting in nil accumulation for the assessee. The Tribunal, referencing the Special Bench decision in Bai Sonabai Hirji Agiary Trust Vs. ITO 93 ITD 0070 (SB) and the Supreme Court decision in CIT vs. Programme for Community Organization, held that the 15% accumulation should be on gross receipts. Consequently, the Tribunal allowed the assessee's ground, stating that accumulation under Sec.11(1)(a) should be on gross receipts as claimed by the assessee.

Conclusion:
The Tribunal allowed the appeal by the assessee on all grounds. The disallowance of depreciation was reversed, the carry forward of excess expenditure was permitted, and the 15% accumulation was to be calculated on gross receipts. The judgment emphasized preserving the corpus of charitable trusts and aligning with established legal precedents.