2016 (6) TMI 792 - AT - Income Tax

Depreciation Allowable for Charitable Trusts under Income-tax Act: Tribunal Decision Clarifies Rules

Assistant Commissioner of Income-Tax (Exemption) Versus Vishwachetan Foundation IBMR

Assistant Commissioner of Income-Tax (Exemption) Versus Vishwachetan Foundation IBMR - [2016] 48 ITR (Trib) 481 Issues Involved:1. Adherence to Supreme Court decisions regarding double deductions.2. Applicability of the Kerala High Court decision on double deductions.3. Legislative intent on preventing double deductions.4. Allowability of depreciation for charitable trusts under sections 11, 12, and 13 of the Income-tax Act.5. Applicability of commercial principles for depreciation in charitable trusts.Detailed Analysis:1. Adherence to Supreme Court Decisions Regarding Double Deductions:The Revenue contended that the Commissioner of Income-tax (Appeals) (CIT(A)) erred by not following the Supreme Court's decision in Escorts Ltd. v. Union of India, which held that when a deduction under section 35(2)(iv) is allowed for capital expenditure on scientific research, no depreciation is allowable under section 32 on the same asset. The Supreme Court emphasized that the statute should not permit an assessee to claim two deductions for the same expenditure.2. Applicability of the Kerala High Court Decision on Double Deductions:The Revenue argued that the CIT(A) did not follow the Kerala High Court's decision in Lissie Medical Institutions v. CIT, which held that judicial pronouncements by various High Courts were not applicable to the issue of double deductions. The Kerala High Court's decision emphasized that double deductions should not be allowed.3. Legislative Intent on Preventing Double Deductions:The Revenue highlighted that the legislative intent was to prevent double deductions at any point in time. This was clarified by an amendment effective from the assessment year 2015-16, which explicitly disallowed double deductions.4. Allowability of Depreciation for Charitable Trusts Under Sections 11, 12, and 13 of the Income-tax Act:The CIT(A) held that depreciation is allowable for charitable trusts on normal commercial principles, even when their assessments are covered under sections 11, 12, and 13 of the Income-tax Act. The CIT(A) reasoned that only the application of income during the year is allowable under section 11, and depreciation, being a notional expenditure, is not allowable.5. Applicability of Commercial Principles for Depreciation in Charitable Trusts:The CIT(A) further held that commercial principles are applicable, and depreciation is allowable for charitable trusts. The CIT(A) reasoned that under sections 11, 12, and 13, only the application of income during the year is allowable, and depreciation, being a notional expenditure, is not allowable.Tribunal's Findings:The Tribunal noted that the issue was covered by decisions of various High Courts and the Tribunal, including the jurisdictional High Court's decision in DIT (Exemptions) v. Al-Ameen Charitable Fund Trust. The High Court held that while acquiring the capital assets, what is allowed as exemption is the income out of which such acquisition is made. When depreciation is allowed in subsequent years, it is for the wear and tear of such capital assets. If depreciation is not allowed, there is no way to preserve the corpus of the trust for deriving its income.Relevant High Court Findings:The High Court in CIT v. Society of the Sisters of St. Anne held that the income derived from property held under trust cannot be the total income. Depreciation is considered a necessary outgoing and should be allowed as it represents the decrease in value of property through wear and tear. Similar views were taken by other High Courts, including Gujarat, Punjab and Haryana, Delhi, Madras, Calcutta, and Madhya Pradesh.Distinguishing Escorts Ltd. Case:The Tribunal distinguished the Escorts Ltd. case, noting that it dealt with specific provisions regarding scientific research and not with the general principles applicable to charitable trusts. The High Court's decision in Al-Ameen Charitable Fund Trust clarified that section 11 deals with the application of income, which is different from revenue expenditure or allowances.Prospective Application of Section 11(6):The Tribunal noted that section 11(6), inserted with effect from April 1, 2015, clarified that no depreciation is allowable if the acquisition of the asset has been claimed as an application of income. This amendment was prospective and applied from the assessment year 2015-16 onwards.Conclusion:The Tribunal found no error or illegality in the CIT(A)'s order and dismissed the Revenue's appeal, upholding the allowability of depreciation for charitable trusts on commercial principles. The Tribunal's decision was pronounced on May 20, 2016.