2016 (12) TMI 687 - AT - Income Tax

Trust denied depreciation claim for charitable activities under Income Tax Act

M/s. Karpagam Charity Trust Versus The Assistant Commissioner of Income Tax [Exemptions], Coimbatore

M/s. Karpagam Charity Trust Versus The Assistant Commissioner of Income Tax [Exemptions], Coimbatore - TMI Issues Involved:1. Whether the assessee, a trust registered under section 12A of the Income Tax Act, is entitled to claim depreciation on assets as an application of income for charitable purposes.Issue-wise Detailed Analysis:1. Claim of Depreciation as Application of Income:The main issue revolves around whether the depreciation claimed by the assessee on its assets can be considered as an application of income for charitable purposes. The assessee, a trust running various educational institutions, claimed depreciation on assets amounting to Rs. 11,47,32,701/- from the gross receipts in its income computation for the assessment year 2012-13. The Assessing Officer (AO) disallowed this claim, referencing the decision of the Hon'ble High Court in the case of M/s. Lissie Medical Institutions v. CIT 348 ITR 344, which clarified that depreciation cannot be claimed as an application of income if the cost of the asset was already allowed as a deduction.2. Previous Year’s Assessment and Revised Depreciation Claim:The assessee argued that depreciation on assets was allowed in the previous year's assessment, which had reached finality. A revised working on depreciation was submitted, claiming Rs. 1,90,17,900/- for assets acquired during the financial year 2011-12. However, the AO maintained the disallowance, ensuring that at least 85% of the gross receipts were applied for charitable purposes, thus assessing the income at Nil.3. Appeal to CIT(A):Upon appeal, the CIT(A) upheld the AO's decision, reiterating that depreciation is not allowable since the cost of the asset was already deducted as an application of income. This decision was based on various Tribunal decisions supporting this view.4. Tribunal’s Analysis and Decision:The Tribunal reviewed the case, including the decision in PCIT v. Sri Adichunchunagiri Shikshana Trust 2016(7) TMI 1046, which allowed depreciation claims on capital assets even if the cost was previously allowed as an application of income. However, the Tribunal noted that Section 32 of the Income Tax Act specifies that depreciation is allowed only on assets used for business or profession. Since the assessee is a charitable trust and not engaged in business or profession, it is not eligible for depreciation under Section 32.5. Commercial Principle Argument:The assessee argued for depreciation based on commercial principles, suggesting customary accounting practices. The Tribunal clarified that the Income Tax Act's specific provisions, particularly Section 32, override customary practices or commercial principles. Therefore, depreciation can only be allowed for assets used in business or profession, which does not apply to the assessee's charitable activities.6. Precedents and Consistency:The Tribunal cited several cases, including The Music Academy Madras, Chennai, and ITO v. Ranganathan Rajeswari Charitable Trust, where similar views were upheld. The Tribunal emphasized that the statutory provision of Section 32 prevails over commercial principles and customary practices.Conclusion:The Tribunal concluded that the assessee is not eligible to claim depreciation as an application of income for charitable purposes, as it does not fall under the purview of Section 32. The appeal filed by the assessee was dismissed, affirming the decisions of the lower authorities.Order Pronouncement:The order was pronounced on the 5th December 2016 at Chennai, dismissing the appeal filed by the assessee.