Charitable Institutions: Depreciation is allowable as per general rules as well as per Income-tax Act. Allowed even when purchase of assets was considered as application of income

[CA DEV KUMAR KOTHARI]

References and links:

Section 11, 28, 29, 32 ,145 of Income-tax Act, 1961.

Commissioner of Income Tax -III, Pune Versus Rajasthan And Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT

Commissioner of Income-Tax Versus Institute Of Banking Personnel Selection - 2003 (7) TMI 52 - BOMBAY High Court. Approved by the Supreme Court.

DIRECTOR OF INCOME TAX (EXEMPTION) Versus FRAMJEE CAWASJEE INSTITUTE - 1992 (7) TMI 331 - BOMBAY HIGH COURT Approved by the Supreme Court including other judgments of various High Courts taking similar view.

CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084

Commissioner of Income Tax (Exemption) Versus Raguvanshi Charitable Trust 2017 (12) TMI 135 - DELHI HIGH COURT

LISSIE MEDICAL INSTITUTIONS Versus COMMISSIONER OF INCOME TAX - 2012 (4) TMI 115 - KERALA HIGH COURT (impliedly not approved by the Supreme Court).

Brief discussion in simple way:

Charitable institutions who avail exemption u.s. 11 are required to apply their income to certain minimum extent and only a part can be accumulated or kept apart for application in future for its objects.

Purchase of fixed assets for the purpose of objects of institution is also considered as application of income of charitable institution.

Question arose is whether a fixed asset which has been considered as application of income is still eligible for depreciation allowance while computing income.

The Supreme Court has confirmed views expressed by Bombay High court and various other  High Courts that , yes such assets are eligible for depreciation allowance as per general rule of accounting, as well as as per provisions of Income-tax Act when assets are used in busienss. This has also been confirmed that depreciation not allowed due to inadequate chargeable  income shall also be carried forwarded as per S.32(2) and can be set off in future when there is chargeable income.

The matter was related to  period prior to amendment, by insertion of sub-section (6) in section 11 w.e.f. 01.04.2015. The said amendment has been held to be prospective..

Analysis and summary from judgments of High Courts as noticed, referred in the judgment of the honourable  Supreme Court:

1.The first question considered was 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 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.

• 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 shall 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.

• an argument that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles was advanced by revenue.

• The Court rejected this argument and 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.

• That income of a Charitable Trust derived from 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.

• Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute considered the facts that theassessee a trust derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because, full capital expenditure had been allowed in the year of acquisition of the assets. On further appeal, the Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the earlier judgment. Therefore Question No. 2 was considered covered by the decision of the Bombay High Court consequently, Question No. 2 was answered in the Affirmative i.e., in favour of the assessee and against the Department.

Supreme Court confirmed above views:

The honourable Supreme Court observed as follows:

• It may be mentioned that most of the High Courts have taken the aforesaid 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'.

• After hearing learned counsel for the parties, we are of the opinion that the aforesaid 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 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 Assessment Year 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.

For the aforesaid reasons, we affirm the view taken by the High Courts in these cases and dismiss these matters.

Conclusions:

Depreciation is allowable as per general rules when income is to be computed u.s.11. As per author this can be applied in other situations also.

In case of business income, depreciation on assets used for business is allowable as per S.32.

Depreciation so allowed can be carried forwarded if there is no chargeable income or chargeable income is inadequate.

Amendment in S.11 by insertion of sub-section (6) is prospective and not retrospective.- Commissioner of Income Tax (Exemption) Versus Raguvanshi Charitable Trust 2017 (12) TMI 135 - DELHI HIGH COURT

 approved by the Supreme Court. (Though  citation has not been mentioned but on search author found judgment of Delhi High Court). Readers may refer to other judgments referred to therein also.

Post insertion of sub-section (6) in S.11:

Author hope to write another article to find out scope of amendment and its real impact. And question, whether even after amendment, depreciation is allowable or not, though it may not be considered as application of income. Just wait, and meanwhile readers are requested to send their views and feedback on this and related aspects.