2010 (7) TMI 374 - HC - Income Tax

Charitable trust can deduct depreciation when computing percentage applied to charitable objects under Section 11; no double benefit

The HC held that a charitable trust may deduct depreciation when determining the percentage of income applied to charitable objects under section 11; this ... Charitable purpose - Application of Income to charitable objects - Claim to depreciation for determination percentage of funds to be applied for purposes of trust - allowable - Not a case of double benefit - HELD THAT:- In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. The judgment of the hon'ble Supreme Court in Escorts Ltd. case [1992 (10) TMI 1 - SUPREME COURT] is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee. The appeal is dismissed. Issues:1. Whether depreciation is allowable on capital assets when deduction for capital expenditure has already been allowed as application of trust incomeRs.2. Whether allowing double deduction on depreciation when capital expenditure has already been allowed is justifiedRs.Issue 1:The case involved an appeal by the Revenue under section 260A of the Income-tax Act, 1961 against the order of the Income-tax Appellate Tribunal regarding the allowance of depreciation on capital assets. The assessee, a charitable trust under the Punjab Agricultural Marketing Produce Act, had its income exempt under sections 11 to 13. The Revenue argued that allowing depreciation would confer a double benefit, citing the Supreme Court's decision in Escorts Ltd. v. UOI [1993] 199 ITR 43 (SC). The Tribunal had allowed the appeal in favor of the assessee based on previous decisions. The assessee contended that the Tribunal's decision was correct, supported by judgments in various cases. The High Court analyzed the purpose of section 11(1)(a) and emphasized that the computation of income should exclude expenses necessary for earning that income. It concluded that allowing depreciation did not result in a double deduction and ruled in favor of the assessee.Issue 2:The High Court referred to judgments by various High Courts supporting the allowance of depreciation for computing the income of charitable institutions. It highlighted the Karnataka High Court's view that disallowing depreciation would affect the trust's corpus and stated that depreciation should be deducted to determine the income available for charitable purposes. The Court also mentioned the Gujarat High Court's decision, among others, supporting the allowance of depreciation. In response to the Revenue's reliance on the Supreme Court's decision in Escorts Limited's case [1993] 199 ITR 43 (SC), the High Court distinguished the present case by clarifying that the assessee was not claiming double deduction. It noted that the income being exempt, the assessee sought to reduce depreciation from income to determine the funds for trust purposes. The Court held that no double benefit was conferred by allowing depreciation for computing income under section 11. Consequently, the questions were answered against the Revenue and in favor of the assessee, leading to the dismissal of the appeal.This detailed analysis of the judgment highlights the key issues, arguments presented by both parties, relevant legal principles, and the final decision reached by the High Court.