2012 (4) TMI 115 - HC - Income Tax

Charitable institution must write back depreciation into income under s.11(1)(a) and may carry forward that amount

LISSIE MEDICAL INSTITUTIONS Versus COMMISSIONER OF INCOME TAX

HC held that where a charitable institution registered u/s 12A treats capital asset acquisition as application of income under s.11(1)(a) but also claims ... Entitlement to claim depreciation in the computation of income - charitable institution registered​​​​​​​ u/s 12A - entire expenditure incurred for acquisition of capital assets is treated as application of income for charitable purposes u/s 11(1)(a) - acquired medical equipements with the surplus funds available - AO held that the assessee claims expenditure for acquisition of assets claiming depreciation in the computation of income though the appellant enjoys a 100% write off of the cost of assets - resulting in double deduction of capital expenditure leading to violation of the provisions of Section 11(1) - assessee contented that the system of allowing depreciation was followed by the assessee for several years - Held that:- If the assessee treats expenditure on acquisition of assets as application of income for charitable purposes under Section 11(1)(a) and claims depreciation then in order to reflect its true income, the assessee should write back in the accounts the depreciation amount to form part of the income -assessee cannot be taken by surprise by disallowing depreciation which was being allowed for several years and to demand tax for one year after making dis-allowance - assessee should be allowed to write back the depreciation for this year and even for previous and then allow the same to be carried forward for application for subsequent years - appeal in favour of Revenue but by granting the relief to the assessee . Issues:1. Whether a charitable institution, treating expenditure on acquisition of assets as application of income for charitable purposes under Section 11(1)(a) of the Income Tax Act, can claim depreciation on such assets.2. Whether the claimed depreciation on assets treated as application of income for charitable purposes leads to a violation of Section 11(1)(a) by generating income outside the books of accounts.3. Whether the Central Board of Direct Taxes' view that depreciation claimed on assets acquired through application of income should be added back as income available for application under Section 11 of the Act is legally sound.Analysis:1. The appellant, a charitable institution running a hospital, treated capital expenditure on acquisition of assets as application of income for charitable purposes under Section 11(1)(a) of the Income Tax Act. The Assessing Officer disallowed depreciation claimed on these assets, arguing that allowing depreciation on assets treated as application of income for charitable purposes would result in double deduction of capital expenditure, violating Section 11(1). The Tribunal, following a Supreme Court judgment, upheld the disallowance.2. The High Court observed that if the appellant claims depreciation on assets treated as application of income for charitable purposes, the depreciation amount should be written back in the accounts to reflect the true income available for charitable purposes. Failure to do so results in generating income outside the books, not permissible for a charitable institution, and reduces the income available for charitable purposes.3. The appellant cited various High Court decisions in their favor, but the High Court noted that none of these decisions addressed the specific issue at hand. The Central Board of Direct Taxes confirmed that depreciation claimed on assets acquired through application of income should be added back to reflect the correct surplus from trust property, preventing revenue leakage and black money generation.4. The High Court emphasized that income from business held in trust by charitable institutions must be computed by granting deductions as provided under the Income Tax Act. While the appellant argued for consistency in allowing depreciation, the court held that allowing depreciation on assets treated as application of income for charitable purposes would violate Section 11(1)(a) unless the depreciation amount is written back.5. Ultimately, the High Court confirmed the Tribunal's order, but recognizing the appellant's consistent practice of claiming depreciation, allowed the appellant to write back the depreciation for the relevant year and previous years. The court directed the assessing officer to modify the assessment accordingly, allowing the recomputed income with the written-back depreciation to be carried forward for subsequent years for charitable purposes.This detailed analysis highlights the key legal issues, arguments presented, and the court's reasoning in the judgment.