Charitable trust income computation allows depreciation and loan repayment as application, despite prior treatment of asset cost

A duly registered charitable trust under section 11 cannot be denied exemption merely because it took an unsecured loan from a managing trustee without prior approval under the Bombay Public Trusts Act, where the borrowing was not contrary to the trust deed or objects and no statutory ground for cancellation existed. Income of a charitable trust is computed on commercial principles, so depreciation remains allowable even if the asset cost was earlier treated as application of income. Repayment of a loan taken to advance charitable objects is also treated as application of income and does not amount to an impermissible double deduction.

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Issues: (i) whether exemption under section 11 could be denied merely because the trust had taken an unsecured loan from the managing trustee without prior approval under the Bombay Public Trusts Act, (ii) whether depreciation on assets, the cost of which had earlier been treated as application of income, was allowable while computing income of a charitable trust, and (iii) whether repayment of a loan taken for charitable objects constituted application of income.

Issue (i): whether exemption under section 11 could be denied merely because the trust had taken an unsecured loan from the managing trustee without prior approval under the Bombay Public Trusts Act.

Analysis: Registration under section 12A having been granted, the trust's exemption could not be withdrawn unless the statutory conditions for cancellation were satisfied. The borrowing of an interest-free loan from the managing trustee was not shown to be barred by the trust deed or by the objects of the trust. A lapse under the Bombay Public Trusts Act did not, by itself, justify denial of exemption under the Income-tax Act. The cited authority dealing with activities beyond the trust deed was found distinguishable.

Conclusion: Exemption under section 11 could not be denied on this ground, and the issue was decided in favour of the assessee.

Issue (ii): whether depreciation on assets, the cost of which had earlier been treated as application of income, was allowable while computing income of a charitable trust.

Analysis: The income of a charitable trust is to be computed on commercial principles for section 11 purposes. Earlier Bombay High Court decisions had already held that depreciation is a normal deduction in computing real income, even where the acquisition cost was allowed as application in an earlier year. The principle against double deduction in the scientific research context was distinguished. The later High Court view relied on by the Revenue did not displace the binding jurisdictional precedent.

Conclusion: Depreciation was allowable and the issue was decided in favour of the assessee.

Issue (iii): whether repayment of a loan taken for charitable objects constituted application of income.

Analysis: CBDT Circular No. 100 recognised repayment of a loan taken to fulfil a trust's objects as application of income. High Court authorities held that repayment of such loan out of the trust's income in a later year is application for charitable purposes. The repayment did not amount to impermissible double deduction.

Conclusion: Repayment of the loan was application of income and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue failed on all substantive grounds, and the assessee's alternative cross-objection did not survive once the Revenue's appeal was rejected.

Ratio Decidendi: For a duly registered charitable trust, exemption under section 11 cannot be denied for a technical violation of another statute unconnected with the trust deed or statutory cancellation grounds, and depreciation as well as loan repayment are allowable as application-based deductions in computing income under section 11.

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