By TIOL News Service

NEW DELHI, DEC 19, 2017: THE issue is - Whether if a charitable body applies its income on acquisition of capital asseets, allowance of depreciaton on such assets would amount to double benefits. NO is the verdict.

Facts of the case

The assessees, charitable institutions, were registered u/s 12A of the Act. They treated the entire expenditure incurred on acquisition of capital assets as application of income for charitable purposes u/s 11(1)(a). On assessment, the AO disallowed the claims for depreciation u/s 32, on grounds that once the capital expenditure was treated as application of income for charitable purposes, the assessees had enjoyed a 100% write-off of the cost of assets. Thereby, the AO opined that grant of depreciation would amount to giving double benefit to the assessee.

On appeal, the CIT(A) upheld the views of the AO in most of the cases. However, the Tribunal reversed such finding and the same was subsequently upheld by the High Courts.

On appeal, the Apex Court was of the view that,

++ it is seen that the Bombay High Court settled the issue at hand, in its decision in Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS) in the following terms

"...3. As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2½% and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was : whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived form building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust. In view of the aforesatated judgment of the Bombay High Curt, we answer question No. 1 in the affirmative i.e., in favour of the assessee and against the Department...."

++ considering the relevant findings of the Bombay High Court in this case, we are of the opinion that the view taken by the Bombay High Court correctly states the principles of law and there is no need to interfere with the same. It may be mentioned that most of the High Courts have taken such a view with only exception thereto by the High Court of Kerala which has taken a contrary view in Lissie Medical Institutions v. Commissioner of Income Tax. It may also be mentioned at this stage that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the AY 2015-2016. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.

++ it also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

(See 2017-TIOL-463-SC-IT)