2016 (12) TMI 345 - AT - Income Tax

Depreciation not allowed for assets used for charitable purposes under Income Tax Act

Foundation for Ecological Research Advocacy and Learning Versus ITO, Ward 1 (1), Pondicherry

Foundation for Ecological Research Advocacy and Learning Versus ITO, Ward 1 (1), Pondicherry - TMI Issues Involved:1. Applicability of Section 32 of the Income Tax Act to Charitable Trusts for claiming depreciation on assets.2. Whether depreciation on assets can be claimed if the cost of the asset has already been treated as an application of income under Section 11 of the Act.Issue-wise Detailed Analysis:1. Applicability of Section 32 of the Income Tax Act to Charitable Trusts for Claiming Depreciation on Assets:The main grievance of the assessee was that the Commissioner of Income-tax (Appeals) erred in appreciating that depreciation on assets is governed by the provisions of Section 32 of the Income Tax Act, which is applicable to all assessees, including charitable trusts. The assessee argued that by virtue of Explanation 5 to Section 32, depreciation is a mandatory allowance and cannot be denied to the assessee company.The Tribunal referred to the case of The Music Academy Madras, Chennai, wherein it was held that depreciation has to be allowed while computing taxable income on assets owned and used for the purpose of business. Depreciation is an inherent decline in the value of the asset due to wear and tear. The Tribunal emphasized that Section 32 provides depreciation only for assets used for business or profession, and the Income Tax Act does not provide for depreciation on assets used for charitable purposes.2. Whether Depreciation on Assets can be Claimed if the Cost of the Asset has Already been Treated as an Application of Income under Section 11 of the Act:The facts of the case reveal that the assessee trust claimed depreciation under Section 11 of the Act. The Assessing Officer (AO) disallowed the depreciation claimed by the assessee, stating that the purchase of the asset has been treated as an application of income, and hence, allowing depreciation would amount to double deduction. The Commissioner of Income-tax (Appeals) upheld this view, relying on various judgments.The Tribunal noted that the Karnataka High Court in Pr.CIT Vs. Sri Adhichunchungiri Shikshana Trust held that the assessee is entitled to claim depreciation on capital assets, even if the cost of the fixed asset was allowed as an application of income in an earlier year. However, the Tribunal observed that Section 32 of the Act specifically provides for depreciation only on assets used for business or profession. Since the assessee is not carrying on any business or profession, the assets used for charitable purposes cannot be considered for depreciation under Section 32.The Tribunal further clarified that even if the assessee were to claim depreciation on a commercial principle, it would still not be permissible as the Income Tax Act provides specific methods for computing income under different heads, and depreciation is only allowed under Section 32 for business or professional assets. The Tribunal emphasized that the statutory provision of Section 32 prevails over any customary or commercial practice of computing income.The Tribunal also highlighted that if the assessee were engaged in business, it would not be eligible for exemption under Section 11, and the registration under Section 12AA could be canceled. Since the assessee is not carrying on any business or profession, it is not eligible for depreciation under Section 32.Conclusion:The Tribunal concluded that the assessee is not eligible for depreciation on assets used for charitable purposes as per Section 32 of the Income Tax Act. The appeal of the assessee was dismissed, and the order of the Commissioner of Income-tax (Appeals) was upheld.Order Pronounced:The appeal of the assessee was dismissed on 30th November 2016, at Chennai.