2018 (12) TMI 329 - HC - Income Tax

Computation of income in respect of charitable trust/institution for the purpose of claiming exemption under sections 11, 12 and 13 - applicability of normal computation of income under respective heads as envisaged under sections 15 to 59 - depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets - Held that - 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 gross income of the trust. When the Income-tax Officer stated that full expenditure had been allowed in the year of acquisi tion of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as application of income of the trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. See CIT v. Rajasthan and Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT . Claim for depreciation on new assets put into use during the accounting year relevant to this assessment year, even though the entire cost of these assets have been claimed by the assessee as an application of income for charitable activities - 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 pur poses 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) CIT - See (Exemptions) v. Ohio University Christ College 2018 (11) TMI 1055 - KARNATAKA HIGH COURT

Summary

Issues Involved:
1. Applicability of sections 15 to 59 for computation of income for charitable trusts.
2. Disallowance of accumulation/set apart of income under section 11(1)(a).
3. Allowability of depreciation on assets for charitable trusts.

Detailed Analysis:

Issue 1: Applicability of sections 15 to 59 for computation of income for charitable trusts
The court addressed whether the normal computation of income under sections 15 to 59 applies to charitable trusts for claiming exemptions under sections 11, 12, and 13. The court referenced the Supreme Court's decision in CIT v. Rajasthan and Gujarati Charitable Foundation, which affirmed the Bombay High Court's view in CIT v. Institute of Banking. The judgment clarified that the income of a charitable trust should be computed on commercial principles, allowing for normal depreciation as a legitimate deduction. The court rejected the Revenue's argument that depreciation could only be allowed under section 32, emphasizing that the income of the trust must be computed under section 11 on commercial principles, including allowances for normal depreciation.

Issue 2: Disallowance of accumulation/set apart of income under section 11(1)(a)
The learned counsel for the Revenue did not press this issue, and it was not further discussed in the judgment.

Issue 3: Allowability of depreciation on assets for charitable trusts
The court examined whether depreciation on new assets put into use during the accounting year should be allowed, even if the entire cost of these assets had been claimed as an application of income for charitable activities. The court referenced its decision in CIT (Exemptions) v. Ohio University Christ College, which upheld the Tribunal's findings that depreciation, even without cash outflow, is considered an expenditure and thus an application of funds under section 11. The court reiterated that depreciation is necessary to preserve the corpus of the trust and should be allowed as a deduction to compute the real income of the trust.

Conclusion:
The High Court of Karnataka dismissed the appeal filed by the Revenue, concluding that no substantial questions of law arose for further consideration. The court affirmed that the issues regarding the computation of income for charitable trusts and the allowability of depreciation are settled by previous decisions, specifically referencing the Supreme Court's decision in CIT v. Rajasthan and Gujarati Charitable Foundation and the Karnataka High Court's decision in CIT (Exemptions) v. Ohio University Christ College. The appeal was dismissed with no costs.