ITAT Decision: Govt grants as corpus funds, verify capital expenditure, allow depreciation for AY 2014-15

The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal, affirming that the government grants were to be treated as corpus funds, the expenditure for capital assets should be verified and allowed if incurred from income, and the depreciation on assets was allowable for AY 2014-15.

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Issues Involved:
1. Treatment of Government Grants as Corpus Fund.
2. Disallowance of Expenditure Incurred for Acquisition of Capital Assets.
3. Claim for Depreciation on Assets.

Issue-wise Detailed Analysis:

1. Treatment of Government Grants as Corpus Fund:
The primary issue was whether the government grants amounting to Rs. 6,18,22,000 received by the assessee-trust should be treated as corpus fund or revenue receipts. The Assessing Officer (AO) treated the grants as revenue receipts, arguing that they were not specifically directed to be corpus donations and were meant for certain expenditures, thus falling under the purview of Section 2(24)(iia) of the Income-tax Act, 1961. The AO also contended that the assessee's activities were commercial in nature due to the fees charged for services, invoking the proviso to Section 2(15) and Section 13(8) of the Act, which disallows benefits under Sections 11 and 12.

The assessee argued that the grants were for specific projects and should be treated as corpus funds, citing various judicial precedents, including the Hon'ble Gujarat High Court's decision in CIT vs. Gujarat Safai Kamdar Vikas Nigam, which held that grants for specific purposes should not be treated as income. The CIT(A) accepted the assessee's contention, emphasizing that the grants were for specific projects aligned with the trust's charitable objectives and thus formed part of the corpus fund. The ITAT upheld the CIT(A)'s decision, referencing the Hon'ble Gujarat High Court's ruling and the principle that grants for specific purposes should be treated as corpus funds.

2. Disallowance of Expenditure Incurred for Acquisition of Capital Assets:
The AO disallowed the deduction of Rs. 1,10,04,394 incurred by the assessee for acquiring capital assets, arguing that the assessee was not entitled to deductions under Sections 11 and 12 due to the application of the proviso to Section 2(15). The CIT(A) directed the AO to verify whether the expenditure was incurred from the corpus or the income of the trust, allowing deduction only for the expenditure incurred from the income. The ITAT upheld the CIT(A)'s direction, noting that the decision on the corpus fund issue directly impacted this issue, and the AO's verification was necessary to determine the correct application of income.

3. Claim for Depreciation on Assets:
The assessee claimed depreciation of Rs. 5,58,37,346 on assets whose cost had been allowed as application of income for charitable purposes. The AO disallowed the claim, but the CIT(A) allowed it. The ITAT confirmed the CIT(A)'s decision, citing the Hon'ble Supreme Court's ruling in CIT vs. Rajasthan & Gujarati Charitable Foundation Poona, which held that depreciation is allowable on such assets, and the amendment in Section 11(6) prohibiting this allowance is prospective, effective from AY 2015-16. Since the assessment year in question was AY 2014-15, the ITAT directed the AO to allow the depreciation claim.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal, affirming that the government grants were to be treated as corpus funds, the expenditure for capital assets should be verified and allowed if incurred from income, and the depreciation on assets was allowable for AY 2014-15.

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