Depreciation allowed on non-business assets for charitable trusts under Section 11

The court held that depreciation is allowable on assets for charitable trusts, even if the assets are not business assets, and income should be computed on commercial principles under Section 11. The court also affirmed the set-off of excess expenditure/application against future income, stating it qualifies as application of income for charitable purposes. The appeal by the Revenue was dismissed, with no costs awarded, and the court directed to send a copy of the order to the respondent-assessee.

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Issues Involved:
1. Allowability of depreciation on assets for charitable trusts.
2. Set-off of excess expenditure/application pertaining to current and earlier assessment years against the income of future assessment years.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation on Assets for Charitable Trusts:

The primary issue raised was whether depreciation is allowable on assets whose cost has been fully allowed as application of income under Section 11 in previous years. The court referenced the Supreme Court decision in CIT v. Rajasthan and Gujarati Charitable Foundation, which affirmed the Bombay High Court's ruling in CIT v. Institute of Banking. The Bombay High Court had held that normal depreciation can be considered a legitimate deduction in computing the real income of the assessee on general principles or under Section 11(1)(a) of the Income-tax Act. It was determined that the income of a charitable trust derived from building, plant, machinery, and furniture should be computed in a normal commercial manner, even if the trust is not carrying on any business and the assets are not business assets. Consequently, Section 32 of the Income-tax Act, which provides for depreciation for business or profession, is not applicable. Instead, income must be computed under Section 11 on commercial principles after allowing for normal depreciation. Thus, the court concluded that the issue regarding the claim of depreciation in the hands of the charitable trust is no longer res integra, and no substantial question of law arises in the present appeals filed by the Revenue.

2. Set-off of Excess Expenditure/Application Against Future Income:

The second issue was whether the Tribunal was correct in confirming the Commissioner of Income-tax (Appeals) order allowing the set-off of excess expenditure/application pertaining to current and earlier years against the income of future assessment years. The court referred to its previous judgment in CIT (Exemptions) v. Ohio University Christ College, which held that the Tribunal's findings did not give rise to any substantial question of law. The Tribunal had observed that the assessee had claimed application of income on account of expenditure of earlier years, which was brought forward and set off in the current year. The Assessing Officer had disallowed this on the grounds that there is no express provision in the Act permitting such adjustment. However, the Commissioner of Income-tax (Appeals) allowed the amortization of the expenditure, relying on the decision in CIT v. Society of the Sisters of St. Anne and the Central Board of Direct Taxes Circular No. 5-P (LXX)-6 of 1968. The Tribunal concurred with this decision, noting that income should be understood in its commercial sense, and the commercial principle enunciated by the Karnataka High Court in the Society of the Sisters of St. Anne case applies to trusts as well. Therefore, the court held that the matter is squarely covered by the decision in the Society of the Sisters of St. Anne case, and the adjustment of expenses incurred by the trust in earlier years against the income earned in subsequent years is to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year. Consequently, the substantial question of law suggested by the appellants does not arise for further consideration.

Conclusion:

The appeal by the Revenue was disposed of in terms of the aforesaid judgments, with no costs awarded. The court directed that a copy of the order be sent to the respondent-assessee forthwith.

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