2018 (11) TMI 45 - AT - Income Tax

Claim of depreciation while claiming exemption u/s 11 - Held that - Normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general priciples or under section 11(1) (a) of the Income-tax Act, 1961. Income of a charitable trust derived from building, plant and machinery and furniture is liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect where of depreciation is claimed may not be business assets. In all such cases, section 32 of the Act providing for depreciation, for computation of income derived from business or profession is not applicable. However, the income of the trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from the gross income of the trust. - See COMMISSIONER OF INCOME-TAX VERSUS INSTITUTE OF BANKING PERSONNEL SELECTION 2003 (7) TMI 52 - BOMBAY HIGH COURT - decided against revenue Carry forward of deficit and allowing set off against the income of subsequent years - Held that - Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a). - Decided against revenue

Summary

Issues Involved:
1. Disallowance of depreciation on fixed assets.
2. Carryforward of deficit and setting off against the income of subsequent years.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Fixed Assets:

The primary issue in this appeal is whether the CIT(A) erred in allowing the depreciation on fixed assets, which the AO had disallowed on the grounds of double deduction. The AO argued that since the assessee had already claimed the cost of the assets as a deduction under section 11 of the Income Tax Act, allowing depreciation on the same assets would amount to a double deduction.

The CIT(A) allowed the claim of depreciation by relying on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Services (2003) 264 ITR 110 (Bom.), which held that depreciation should be allowed even on assets whose cost had been allowed as exempt under section 11 in preceding years. The CIT(A) also referenced the assessee’s own case for AY 2008-09, where a similar issue was decided in favor of the assessee.

The Revenue's appeal was dismissed by the Tribunal, which upheld the CIT(A)'s order. The Tribunal noted that the issue was covered by the decision of the Hon’ble Bombay High Court and the Tribunal’s decision in the assessee’s own case for AY 2011-12. The Tribunal emphasized that the income of a charitable trust must be computed on commercial principles, which include allowing for depreciation.

2. Carryforward of Deficit and Setting Off Against the Income of Subsequent Years:

The second issue concerns whether the CIT(A) erred in allowing the carryforward of a deficit and setting it off against the income of subsequent years. The AO had disallowed this claim, arguing that there was no express provision in the Income Tax Act permitting such a carryforward.

The CIT(A) allowed the claim by relying on the assessee’s own case for AY 2008-09, where it was held that the carryforward of deficit should be considered as application against the income earned by the trust in subsequent years. The CIT(A) cited the decision of the Hon’ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Services 264 ITR 110 (Bom.), which supported the view that the deficit of earlier years could be set off against the income of subsequent years.

The Tribunal dismissed the Revenue’s appeal on this issue as well, noting that the matter was covered by the decision of the Hon’ble Bombay High Court and the Tribunal’s decision in the assessee’s own case for AY 2011-12. The Tribunal reiterated that the deficit carried forward from earlier years should be considered as application against the income of subsequent years.

Conclusion:

The Tribunal dismissed the Revenue’s appeal on both issues, upholding the CIT(A)’s decision to allow the depreciation on fixed assets and the carryforward of deficit to be set off against the income of subsequent years. The Tribunal’s decision was based on precedents set by the Hon’ble Bombay High Court and prior Tribunal decisions in the assessee’s own cases. The order was pronounced in the open court on 29-10-2018.