2017 (5) TMI 1415 - AT - Income Tax

Charitable trust entitled to claim depreciation on assets despite prior deduction, Tribunal affirms.

The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to delete the disallowance of depreciation, confirming that depreciation could be ... Claim of Depreciation after claiming exemption u/s 11 - whether claim of depreciation by assessee trust would amount to double deduction? - Held that:- We find that the issue is squarely covered by a decision of the co-ordinate bench in the case of ACIT vs. Vishwachetan Foundation IBMR [2016 (6) TMI 792 - ITAT BANGALORE] as relying on DIT (Exemptions) v. Al-Ameen Charitable Fund Trust [2016 (3) TMI 462 - KARNATAKA HIGH COURT] wherein held while acquiring the capital assets what is allowed as exemption is the income out of which such acquisition of asset is made and when the depreciation deduction is allowed in the subsequent years, it is for the losses or the expenses representing the wear and tear of such capital asset incurred, if not allowed then there is no way to preserve the corpus of the trust for deriving its income. - Decided against revenue Issues Involved:1. The deletion of disallowance of depreciation by the Commissioner of Income Tax (Appeals).2. The applicability of depreciation deduction under Section 32 to a charitable trust.Issue-wise Detailed Analysis:1. Deletion of Disallowance of Depreciation:The appeal was filed by the Assessing Officer against the order dated 15th September 2014, passed by the Commissioner of Income Tax (Appeals) [CIT(A)], which involved the deletion of the disallowance of depreciation amounting to Rs. 1,76,50,313/-. The Assessing Officer contended that allowing depreciation on assets, the cost of which had already been allowed as a deduction on account of the application of income, amounted to double deduction. This argument was supported by the decisions of the Hon'ble Supreme Court in Escorts Ltd., 199 ITR 43, the Kerala High Court in Lissie Medical Institutions vs. Commissioner of Income Tax, Kochi, 348 ITR 344, and the Delhi High Court in DIT(E) vs. Charanjiv Charitable Trust, 43 taxmann.com 300 (Delhi).2. Applicability of Depreciation Deduction to Charitable Trust:The core issue was whether a charitable trust, whose income is not assessable under the head 'Profit and Gains from business and profession,' could claim depreciation deduction under Section 32. The Tribunal found that this issue was covered by the decision of a co-ordinate bench in ACIT vs. Vishwachetan Foundation IBMR, 48 ITR (Trib) 481 (Bang), which cited the jurisdictional High Court's ruling in DIT(E) Vs. Al-Ameen Charitable Fund Trust, 238 Taxman 148.The High Court had held that while acquiring capital assets, the exemption allowed pertains to the income used for such acquisition. When depreciation is allowed in subsequent years, it accounts for the wear and tear of the capital asset, which is necessary to preserve the corpus of the trust. This view was consistent with the decisions of other High Courts, including the Gujarat, Punjab and Haryana, Delhi, Madras, Calcutta, and Madhya Pradesh High Courts.The High Court of Bombay in the case of Institute of Banking Personnel Selection (IBPs) held that normal depreciation could be considered a legitimate deduction in computing the real income of a charitable trust, even if the trust was not carrying on any business. The court rejected the argument that Section 32 was the only provision for depreciation deduction, emphasizing that the income of a charitable trust should be computed on commercial principles, allowing for normal depreciation.The judgment of the Supreme Court in Escorts Ltd. was distinguished as it dealt with specific provisions under the 1922 and 1961 Acts, which did not apply to charitable trusts computing income under Chapter III of the Act. The amendment to Section 11(6) effective from 1.4.2015, which denies depreciation deduction for assets whose acquisition cost was claimed as an application of income, was noted to be prospective, not retrospective.The Tribunal, respecting the jurisdictional High Court's judgment, found no error in the CIT(A)'s order and dismissed the appeal, affirming that the deletion of disallowance of depreciation was justified.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of depreciation, confirming that depreciation could be claimed by a charitable trust even if the cost of the asset was previously allowed as a deduction. The appeal by the Assessing Officer was dismissed, maintaining the established legal position that depreciation is necessary to account for the wear and tear of capital assets and preserve the trust's corpus for generating income.