2003 (7) TMI 52 - HC - Income Tax

Charitable trust cannot claim depreciation on assets already fully deducted as income application under section 11

Commissioner of Income-Tax Versus Institute Of Banking Personnel Selection

The Bombay HC addressed three issues regarding charitable trust taxation. The court ruled that depreciation cannot be allowed on assets whose cost was ... Charitable trust - depreciation on buildings - whether depreciation was allowable on the assets, the cost of which has been fully allowed as application. of income under section 11 in the past years? - HELD THAT:- As in the present case, was advanced on behalf of the Revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income-tax Act and not under general principles. The court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-tax Act. The court rejected the argument on behalf of the Revenue that section 32 of the Income-tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income-tax 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 gross income of the trust. Whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in the subsequent year for charitable purposes? - HELD THAT:- In the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. We do not find any merit in this argument of the Department. 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 has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the trust under section 11(1)(a) of the Act. Our view is also supported by the judgment of the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujak Jain Mandai [1993 (11) TMI 17 - GUJARAT HIGH COURT]. Accordingly, we answer question No. 3 in the affirmative, i.e., in favour of the assessee and against the Department. Accordingly, reference is disposed of with no order as to costs. The Court considered three core legal questions arising from the assessment of a charitable trust under the Income-tax Act, 1961, specifically relating to the allowance of depreciation on assets whose cost had been fully allowed as application of income, depreciation on assets received by transfer without acquisition cost, and the permissibility of carrying forward deficits from earlier years to set off against surpluses in subsequent years under section 11.First, the Court examined whether depreciation could be allowed on assets of a charitable trust when the cost of those assets had already been fully allowed as application of income under section 11 in previous years. The relevant legal framework involved section 11, which governs the computation of income for charitable trusts and the application of income for charitable purposes, and section 32, which deals with depreciation but primarily in the context of business income under section 28. The Court referred to the precedent established in a prior Bombay High Court decision, where it was held that although section 32 provides for depreciation in the case of business income, the income of a charitable trust must be computed on commercial principles. This includes allowing for normal depreciation even if the trust does not carry on business and the assets are not business assets. The Court rejected the Revenue's argument that depreciation could only be allowed under section 32 and not under general principles or section 11(1)(a). It emphasized that depreciation is a legitimate deduction to compute the real income of the trust, ensuring that income from trust property is assessed fairly. Applying this principle to the facts, the Court concluded that the Tribunal was correct in directing the Assessing Officer to allow depreciation on assets despite their cost having been fully allowed as application of income in earlier years.Second, the Court addressed whether depreciation could be allowed on assets received by the trust on transfer when the trust had not incurred any acquisition cost for those assets. This issue was closely linked to the first and hinged on whether the allowance of depreciation would amount to double deduction, given that the full capital expenditure had been allowed in the year of acquisition by the transferor trust. The Court relied on a precedent where it was held that treating the capital expenditure as application of income in the year of acquisition by the transferor trust does not preclude the transferee trust from claiming depreciation in subsequent years. The Tribunal's view that the full expenditure allowed earlier related to the application of income and not to the depreciation claim was upheld. Consequently, the Court affirmed that depreciation was allowable on transferred assets even though the assessee had not incurred the original cost.The third issue concerned the permissibility of carrying forward a deficit from earlier years and setting it off against surpluses in subsequent years by a charitable trust whose income is exempt under section 11. The Revenue contended that such carry forward and set-off provisions applied only to income assessable under the head 'Profits and gains of business' and not to income exempt under sections 11 to 13. The Court rejected this contention, reasoning that income derived from trust property must be computed on commercial principles, which include the ability to adjust prior years' excess expenditure against future surpluses. The Court noted that such adjustment constitutes application of income for charitable purposes in the year of adjustment and should be excluded from taxable income under section 11(1)(a). The Court's view was supported by a Gujarat High Court decision which held similarly. Therefore, the Tribunal was justified in allowing the carry forward and set off of deficits by the trust.In conclusion, the Court held:'Section 11 of the Income-tax Act makes a provision in respect of computation of income of the trust from property held for charitable or religious purposes and it also provides for application and accumulation of income... income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner although the trust may not be carrying on any business... 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.'The Court's core principles established include:Depreciation is allowable on assets of a charitable trust even if the cost of those assets has been fully allowed as application of income under section 11 in prior years.Depreciation can be claimed on assets received by transfer from another charitable trust despite the assessee not incurring the original acquisition cost, as the prior allowance was application of income by the transferor, not depreciation deduction by the transferee.Deficits or excess expenditure incurred in earlier years by a charitable trust can be carried forward and set off against surpluses in subsequent years, treated as application of income for charitable purposes under section 11(1)(a), notwithstanding the absence of explicit statutory provisions akin to business loss carry forward.Accordingly, all three questions referred to the Court were answered affirmatively in favor of the assessee and against the Revenue, confirming the Tribunal's decisions allowing depreciation claims and the carry forward of deficits.