2019 (10) TMI 1082 - HC - Income Tax

Depreciation on the assets of assessee trust - HELD THAT - The substantial question of law, which has been framed in these appeals, has been answered against the Revenue by the Hon'ble Supreme Court in CIT vs. Rajasthan and Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT in which held that the assessee Trust is entitled to depreciation on the assets acquired by the expenditure incurred for acquisition of the assets by way of application of income for charitable purposes under Section 11(1)(a) - Decided in favour of assessee.

Summary

Issues:
1. Interpretation of Section 11(1)(a) of the Income Tax Act, 1961 regarding depreciation on assets acquired by expenditure for charitable purposes.
2. Whether depreciation can be claimed on assets when the cost of acquisition has been treated as application of income under Section 11 of the Act.

Issue 1: Interpretation of Section 11(1)(a) of the Income Tax Act, 1961 regarding depreciation on assets acquired by expenditure for charitable purposes:

The judgment in question discusses the controversy surrounding the entitlement of a Trust to depreciation on assets acquired through expenditure for charitable purposes under Section 11(1)(a) of the Income Tax Act, 1961. The Hon'ble Supreme Court held that once the capital expenditure is treated as application of income for charitable purposes, the Trust is entitled to claim depreciation on the assets. This decision was based on the principle that normal depreciation is a legitimate deduction in computing the real income of the assessee under general principles or under Section 11(1)(a) of the Act. The Court emphasized that the provision for depreciation in Section 32 of the Act is not the only section granting the benefit of deduction on account of depreciation, and depreciation can be considered for assets owned by the assessee and used for business purposes, even if the Trust is not engaged in business activities.

Issue 2: Whether depreciation can be claimed on assets when the cost of acquisition has been treated as application of income under Section 11 of the Act:

The judgment further delves into whether depreciation can be claimed on assets when the cost of acquisition has been treated as application of income under Section 11 of the Act. The Court referred to a case where the Tribunal held that even if the capital expenditure was treated as application of income in the year of acquisition, depreciation on those assets can still be claimed in subsequent years. This view was confirmed by the Bombay High Court, emphasizing that treating the expenditure as application of income does not preclude the allowance of depreciation in computing income from those assets in subsequent years. The Court upheld this interpretation, stating that the principles of law articulated by the Bombay High Court correctly address the issue, and there is no need for interference.

Overall, the judgment clarifies the interpretation of Section 11(1)(a) of the Income Tax Act, 1961 regarding the allowance of depreciation on assets acquired through expenditure for charitable purposes, emphasizing that depreciation can be claimed even if the expenditure for acquisition has been treated as application of income. The decision aligns with previous rulings and establishes that normal depreciation is a legitimate deduction in computing the income of a Trust, even if the assets are not used for business purposes.