2018 (3) TMI 73 - AT - Income Tax

Disallowance of depreciation to assessee trust - Held that - The issue of allowability of depreciation in the case of Charitable Trust has been decided by the Hon ble Gujarat High Court in the case of CIT vs. Sheth Monilal Ranchhuddas Vishram Bhavan Trust 1992 (2) TMI 51 - GUJARAT High Court wherein as observed that the computation under the different categories or heads arises only for the purpose of ascertaining the total income for the purposes of charge. That provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chapter III. Following the aforesaid decision in the instant case the Tribunal was justified in holding that having regard to the scheme of the Act, income referred to in section 11(1)(a) was not to be computed not in accordance with the provisions of the Act but in accordance with the normal rules of the accountancy under which the depreciation has to be allowed while computing such income under section 11(1)(a) - Decided in favour of assessee

Summary

Issues Involved:
1. Allowability of depreciation to a charitable trust.
2. Treatment of carried forward losses for a charitable trust.

Issue 1: Allowability of Depreciation to a Charitable Trust

The primary issue is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in allowing the assessee's appeal and deleting the addition of ?3,52,47,500/- in respect of the disallowance of depreciation. The assessee, a charitable trust engaged in educational activities, claimed depreciation of ?3,52,47,500/- for the Assessment Year (AY) 2009-10. The Assessing Officer (AO) disallowed this claim, arguing that the income from the trust's properties should be calculated according to specific sections of the Income Tax Act, thus rejecting the depreciation claim.

The CIT(A), however, allowed the appeal of the assessee, referencing the Gujarat High Court's decision in "CIT vs. Sheth Monilal Ranchhuddas Vishram Bhavan Trust," which held that the income of a charitable trust should be computed in a normal commercial manner, including depreciation, rather than strictly under the heads set out in section 14 of the Income Tax Act.

Further supporting this, the ITAT cited a co-ordinate bench's decision in the assessee's own case for AY 2011-12, where a similar claim was allowed. The bench referenced the Gujarat High Court's decision in "Director of Income Tax (Exemption) vs. Ahmedabad South Indian Association Charitable Trust," which followed the principle that depreciation should be allowed to compute the real income of a charitable institution.

Additionally, the Supreme Court in "CIT-III, Pune vs. Rajasthan and Gujarat Charitable Foundation Pune" affirmed that depreciation is allowable on assets, even if the cost of these assets has been fully allowed as application of income under section 11 in past years. The Court emphasized that income of a charitable trust should be computed on commercial principles, which includes allowing for depreciation.

Issue 2: Treatment of Carried Forward Losses for a Charitable Trust

The second issue involved the treatment of carried forward losses amounting to ?4,29,74,728/-. The AO issued a show-cause notice to the assessee questioning the legitimacy of these carried forward losses. The assessee contended that the losses were correctly claimed in accordance with the provisions of the Income Tax law and referenced a similar allowance by the ITAT in the previous assessment year (2008-09).

The CIT(A) allowed the appeal, and the ITAT upheld this decision, noting that the issue is covered by the Supreme Court's judgment, which allows for the carry forward of depreciation. The ITAT emphasized that the legislative amendment in Section 11(6) of the Act, which disallows such claims, is applicable prospectively from AY 2015-16 and not retrospectively.

Conclusion:

The ITAT dismissed the department's appeal, affirming the CIT(A)'s decision to allow the depreciation and carry forward losses claimed by the assessee. The judgment relied on multiple precedents from higher courts, including the Gujarat High Court and the Supreme Court, which have consistently held that depreciation should be allowed for charitable trusts to compute real income and that such provisions are not affected by the legislative amendment applicable from AY 2015-16. The ITAT found no reason to interfere with the CIT(A)'s reasoned and detailed order, thus upholding the assessee's claims.