2016 (9) TMI 947 - AT - Income Tax

Depreciation claimed by the assessee charitable trust - assessee engaged in health care activities and registered under section 12AA enjoying the benefit of Section 11 of the Act - Held that - In the case of the assessee which is a charitable trust registered under section 12AA of the Act and enjoying the benefit of section 11 of the Act will not be entitled to claim the benefit of depreciation while computing the income of the trust and further there would be no scope arithmetically to set off excess application of fund during the earlier assessment years in the relevant assessment years. Accordingly we hereby sustain the order of the learned Commissioner of Income Tax (Appeals) on both the issues raised by the assessee for both the assessment years. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of depreciation claimed by the assessee, a charitable trust.
2. Disallowance of carry forward of excess application of income from earlier years for set-off against the income of the relevant assessment year.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed by the Assessee:

The primary issue is whether the assessee, a charitable trust registered under section 12AA of the Income Tax Act and benefiting from section 11, can claim depreciation on assets as an application of income. The Assessing Officer disallowed this claim, reasoning that it would amount to double deduction since the entire cost of the asset had already been claimed as an application of income in the year of purchase. The Commissioner of Income Tax (Appeals) upheld this view, relying on various judicial decisions.

The Tribunal referenced the Kerala High Court's decision in the case of Lissie Medical Institution Vs. CIT, which held that claiming depreciation after writing off the full value of the capital expenditure as application of income results in a notional claim that creates a cash surplus outside the books of the trust. This was deemed impermissible as it violated section 11(1)(a). The Tribunal also cited the Calcutta High Court's decision in DCIT Vs. Girdharilal Shewnarain Tantia Trust, which stated that the "income" under section 11 refers to real income, not assessed income. Consequently, the Tribunal confirmed the disallowance of depreciation, aligning with the decisions of the Kerala and Calcutta High Courts.

2. Disallowance of Carry Forward of Excess Application of Income:

The second issue concerns whether the assessee can carry forward the excess application of income from previous years to set off against the income of the relevant assessment year. The Assessing Officer allowed a partial carry forward, while the Commissioner of Income Tax (Appeals) denied the benefit entirely, stating that the income derived should be real income and that there is no provision under section 11 to carry forward excess expenditure.

The Tribunal analyzed the provisions of section 11, which stipulate that income derived from property held under trust and voluntary contributions (excluding those with specific directions) should be applied for charitable purposes. The Tribunal clarified that application of funds from sources like corpus, loans, sundry creditors, or accumulated funds cannot be treated as application of income under section 11. Excess application of funds over the income received by the trust can only occur if funds are applied from these sources, and such excess application cannot be carried forward.

The Tribunal concluded that the excess application of ?23,96,355/- claimed by the assessee likely came from corpus funds, accumulated funds, loans, or sundry creditors. Therefore, it could not be treated as an application of income for the purpose of section 11. However, if the excess amount was applied from borrowed funds or sundry creditors, it would be allowed as an application in the year of repayment. The Tribunal upheld the disallowance of the carry forward of excess application of income.

Conclusion:

The Tribunal held that the assessee, a charitable trust, is not entitled to claim depreciation as an application of income and cannot carry forward excess application of income from previous years for set-off. The orders of the Commissioner of Income Tax (Appeals) were sustained on both issues, and the appeals of the assessee were dismissed. The decision was pronounced in the open court on 11th August 2016.