Charitable trust wins appeal for set-off of expenses & depreciation, revenue's challenge dismissed

The Tribunal upheld the CIT(A)'s order allowing the set-off of unabsorbed expenses and depreciation claim in favor of a charitable trust. The revenue's appeal challenging the set-off of expenses and depreciation was dismissed. The Tribunal relied on judicial precedents and High Court rulings supporting the allowance of such set-offs and depreciation for charitable trusts. The cross objections by the assessee were found to be in support of the CIT(A)'s order and were dismissed. The decision was pronounced on July 27, 2016.

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Issues Involved:
1. Set-off of excess expenditure/application/deficit/loss.
2. Depreciation on assets.

Detailed Analysis:

Set-off of Excess Expenditure/Application/Deficit/Loss
The primary issue raised by the revenue pertains to the set-off of unabsorbed expenses of earlier years against the income of the current year. The revenue contended that the CIT(A) erred in directing the assessing officer to allow the set-off of Rs. 1,15,42,645/- of unabsorbed expenses from earlier years and the current deficit of Rs. 1,18,24,928/-. The revenue argued that under the scheme of taxation of charitable or religious trusts/institutions as codified in sections 11, 12, and 13 of the Income Tax Act, there is no provision for computing loss from property held under trust/institution on account of excess application of income/funds.

The assessee, a charitable trust registered under section 12A of the Income Tax Act, claimed the carry forward of the current year deficit and brought forward unabsorbed expenses of earlier years. The CIT(A) allowed the claim by relying on various judicial precedents. The Tribunal noted that the CIT(A) relied on several decisions including:
- ACIT v. Medical Relief Society of South Kanara
- ACIT v. Dr. TMA Pai Foundation
- ACIT v. Academy of General Education

The Tribunal further noted that the issue is covered by the decision of the Hon’ble Bombay High Court in CIT v. Institute of Banking, 264 ITR 110 (Bom), which held that excess expenditure in earlier years can be adjusted against the income of subsequent years and such adjustment would be considered as application of income for charitable purposes in the subsequent year. The Tribunal also referred to its own decision in M/s. Amara Prema Charitable Society v. DDIT(E) and Baldwin Methodist Educational Society, reiterating that the set-off of excess expenditure incurred in earlier years against the income of a subsequent year amounts to application of income for charitable purposes.

Therefore, the Tribunal upheld the CIT(A)'s order allowing the set-off of unabsorbed expenses and current deficit, dismissing the revenue's appeal on this ground.

Depreciation on Assets
The second issue raised by the revenue was regarding the disallowance of depreciation. The revenue argued that the CIT(A) erred in allowing depreciation on assets whose cost of acquisition was already claimed and allowed as application of income under section 11(1) in the respective years of acquisition.

The CIT(A) allowed the claim of depreciation by following various decisions, including the Hon’ble Kerala High Court in Lissie Medical Institutions v. CIT. The Tribunal noted that this issue is covered by the decision of the Hon’ble jurisdictional High Court in CIT v. Society of the Sisters of St. Anne, 146 ITR 028 (Kar), which held that depreciation on assets used for charitable purposes should be deducted to arrive at the income available for charitable or religious purposes.

The Tribunal also referred to its own decision in ACIT v. Sri Adichunchanagiri Shikshana Trust, 141 ITD 575, which followed the jurisdictional High Court's ruling and allowed the claim of depreciation. Therefore, the Tribunal upheld the CIT(A)'s order allowing the depreciation claim, dismissing the revenue's appeal on this ground as well.

Cross Objections by the Assessee
The assessee filed cross objections supporting the CIT(A)'s order and argued for the allowance of excess application to be absorbed in subsequent years. The Tribunal found that the grounds raised in the cross objections were in support of the CIT(A)'s order and no fresh issues were raised. Consequently, the cross objections were dismissed as infructuous.

Conclusion
The appeal by the revenue and the cross objections by the assessee were both dismissed. The Tribunal upheld the CIT(A)'s order allowing the set-off of unabsorbed expenses and the claim of depreciation, following established judicial precedents and the jurisdictional High Court's rulings. The judgment was pronounced in the open court on July 27, 2016.

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