2015 (8) TMI 89 - HC - Income Tax

Court allows depreciation on capital assets for charitable institutions under Income Tax Act, emphasizing consistency.

The Delhi High Court dismissed the Revenue's appeals, ruling that depreciation on capital assets can be considered as the application of income under ... Application of income under Section 11(1)(a) - computation of income of trusts on commercial/mercantile principles - allowability of depreciation where asset acquired by application of income - prohibition on accumulation beyond fifteen per cent - purposive interpretation versus textual interpretation of Section 11(1)(a)Application of income under Section 11(1)(a) - allowability of depreciation where asset acquired by application of income - computation of income of trusts on commercial/mercantile principles - Whether depreciation can be treated as application of income under clause (a) of Section 11(1) where a charitable trust acquires a capital asset by applying income - HELD THAT: - The Court held that clause (a) of Section 11(1) postulates that income derived from property held under trust must be applied for charitable purposes and imposes an embargo on accumulation beyond fifteen per cent, but that the clause is not itself a computation provision. Income derived from trust property must be computed in accordance with the Income-tax Act on commercial/mercantile principles, which ordinarily recognise depreciation as a permissible charge in computing net income. The Court distinguished Escorts Ltd. v. Union of India on the ground that that decision arose in a different statutory context and dealt with explicit non-duplication language in Chapter IV-D; Section 11(1)(a) does not contain comparable wording. The Court noted earlier judicial authorities favouring allowance of depreciation when trusts follow mercantile accounting and observed that longstanding consistent practice and the implications of abruptly denying depreciation militate against a contrary approach. The Court considered the CBDT clarifications and divergent High Court decisions but concluded that the preferable and consistent interpretation is that purchase of a capital asset by application of income may be treated as application for compliance with the 85% mandate, while computation of income (and consequences of depreciation) is to be determined separately under the Act. Applying this principle, the appeals raising the point failed and were dismissed. [Paras 11, 16, 18]Depreciation is allowable in computing the income of a trust under commercial/mercantile principles and clause (a) of Section 11(1) is not a computation provision that by itself disallows depreciation; accordingly, the appeals are dismissed.Final Conclusion: The appeals are dismissed: income of a charitable trust must be computed on commercial/mercantile principles (including depreciation where appropriate) and Section 11(1)(a) requires application of the income so computed but is not a provision that, by its text, forbids allowance of depreciation. Issues Involved:1. Interpretation of Section 11(1)(a) of the Income Tax Act, 1961.2. Whether depreciation on capital assets can be treated as application of income under Section 11(1)(a).3. Consistency in the application of depreciation for charitable institutions.Detailed Analysis:1. Interpretation of Section 11(1)(a) of the Income Tax Act, 1961:The primary issue in these appeals is the interpretation of Section 11(1)(a) of the Income Tax Act, 1961. This section stipulates that income derived from property held under trust wholly for charitable or religious purposes is exempt from tax to the extent it is applied for such purposes in India, and any accumulation of such income should not exceed 15% of the income from such property. The Revenue contends that depreciation on capital assets should not be treated as application of income under this clause, arguing that allowing depreciation would result in a double deduction since the purchase of the asset is already treated as application of income.2. Whether depreciation on capital assets can be treated as application of income under Section 11(1)(a):The Revenue's argument is supported by the Kerala High Court's decision in Lissie Medical Institution vs. CIT, which states that allowing depreciation on assets already treated as application of income would result in unaccounted income and potential black money. The Central Board of Direct Taxes (CBDT) also supports this view, asserting that depreciation should be added back while computing income for the purpose of application under Section 11. However, the Delhi High Court refers to several decisions from various High Courts, including the Karnataka High Court in Commissioner of Income Tax vs. Society of The Sisters of St. Anne, which held that depreciation is a necessary charge for computing income from charitable institutions. The Court emphasizes that depreciation represents the decrease in value of an asset due to wear and tear, and not allowing it would result in inaccurate financial records.3. Consistency in the application of depreciation for charitable institutions:The Court acknowledges that the system of allowing depreciation has been followed consistently by charitable institutions for several years, supported by various High Court decisions. The Court notes that disallowing depreciation suddenly would disrupt the functioning of these institutions. The Court also distinguishes the Supreme Court's decision in Escorts Ltd. vs. Union of India, which dealt with business income and specific provisions under Section 35(1) of the Act, not applicable to charitable institutions. The Delhi High Court concludes that the income derived from property held under trust must be computed as per the principles of the Act, and the application of income, including the purchase of capital assets, should be considered for compliance with Section 11(1)(a).Conclusion:The Delhi High Court dismisses the Revenue's appeals, holding that depreciation on capital assets can be treated as application of income under Section 11(1)(a) of the Income Tax Act, 1961. The Court emphasizes the need for consistency and certainty in the application of the law, which has been followed since 1984. The Court also leaves open an additional question raised in ITA No. 336/2013 regarding subscription received from members, due to the small amount involved.