2012 (4) TMI 289 - HC - Income Tax

Depreciation on fixed assets used by charitable trusts allowed when computing income available for application to charitable/religious purposes

DIRECTOR OF INCOME TAX Versus VISHWA JAGRITI MISSION

HC upheld tribunal: depreciation on fixed assets used for charitable purposes is allowable when computing income available for application to ... Denial of registration u/s 12A - Computation of taxable income for the assessee - Allowability of Depreciation on fixed assets utilized for the charitable purpose - Assessee declared gross receipts on account of donations, profit on sale of land and bank interest. Against the gross receipts, the application of funds for charitable purposes was claimed on account of expenditure incurred towards the purposes of the trust Held that:- The judgment of the Supreme Court in Escorts Limited Vs. Union of India [1992 (10) TMI 1 - SUPREME COURT] has been rightly held to be inapplicable to the present case. There are two reasons as to why the judgment cannot be applied to the present case. Firstly, the Supreme Court was not concerned with the case of a charitable trust/institution involving the question as to whether its income should be computed on commercial principles in order to determine the amount of income available for application to charitable purposes. It was a case where the assessee was carrying on business and the statutory computation provisions of Chapter IV-D of the Act were applicable. In the present case, we are not concerned with the applicability of these provisions. We are concerned only with the concept of commercial income as understood from the accounting point of view. Even under normal commercial accounting principles, there is authority for the proposition that depreciation is a necessary charge in computing the net income. Secondly, the Supreme Court was concerned with the case where the assessee had claimed deduction of the cost of the asset under Section 35(1) of the Act, which allowed deduction for capital expenditure incurred on scientific research. The question was whether after claiming deduction in respect of the cost of the asset under Section 35(1), can the assessee again claim deduction on account of depreciation in respect of the same asset. The Supreme Court ruled that, under general principles of taxation, double deduction in regard to the same business outgoing is not intended unless clearly expressed. The present case is not one of this type, as rightly distinguished by the CIT(Appeals). Having regard to the consensus of judicial opinion on the precise question it is held that claim of depreciation on fixed assets utilized for the charitable purposes has to be allowed while arriving at the income available for application to charitable and religious purposes, since the income of the society should be computed on the basis of commercial principles. Order of tribunal upheld – Appeal of Revenue dismissed. Issues:1. Rejection of registration under Section 12AA of the Income Tax Act, 1961.2. Computation of taxable income for the assessee.3. Allowance of depreciation on fixed assets utilized for charitable purposes.Issue 1: Rejection of Registration under Section 12AA:The respondent-assessee, a registered society, applied for registration under Section 12AA of the Income Tax Act, 1961, which was rejected by the Director of Income Tax. The Tribunal set aside the rejection and directed re-examination. However, the registration was again rejected. The rejection impacted the claim for exemption under Section 11 of the Act.Issue 2: Computation of Taxable Income:The Assessing Officer computed the taxable income based on gross receipts and claimed expenses. The assessee declared gross receipts from donations, land sale profit, and bank interest. As the assessee did not specify expenses, the Officer estimated monthly expenses and arrived at the net taxable income. The assessee appealed, claiming the allowed expenses were insufficient and depreciation on fixed assets should be considered.Issue 3: Allowance of Depreciation on Fixed Assets:The CIT(Appeals) accepted the claim for exemption under Section 11 and directed the Assessing Officer accordingly. The claim for depreciation on fixed assets was allowed based on precedents and commercial principles. The Tribunal upheld this decision despite the revenue's appeal, citing consistency with previous orders and legal authorities.The judgment emphasized that income of charitable institutions should be computed on commercial principles, allowing depreciation on fixed assets. Various High Court judgments supported this view, highlighting the necessity of depreciation in computing income available for charitable purposes. The Supreme Court's decision on double deduction in business expenses was distinguished, affirming the allowance of depreciation for charitable trusts. The consensus of judicial opinion led to the dismissal of the revenue's appeal, as no contrary view was presented.