TMI Blog2018 (8) TMI 1865X X X X Extracts X X X X X X X X Extracts X X X X ..... r allowance for normal depreciation and deduction thereof from the gross income of the trust. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied, then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment had been made having regard to the benevolent provisions contained in section 11 of the Act and such adjustment will have to be excluded from the income of the trust under section 11(1)(a). See OHIO UNIVERSITY CHRIST COLLEGE [ 2018 (11) TMI 1055 - KARNATAKA HIGH COURT] - I. T. A. No. 551 of 2017 - - - Dated:- 14-8-2018 - Dr. Vineet Kothari And Mrs. S. Sujatha JJ. For the Appellants : Sanmathi E. I. , Advocate For the Respondent : S. Parthasarathi and Smt. Sheetal Borkar JUDGMENT DR. VINEET KOTHARI J. - 1. Both the learned counsel a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee [2018] 408 ITR 231 (Karn).) with regard to allowability and depreciation in the hands of the religious and charitable trust held as under (page 234 of 408 ITR) : Learned counsel at the Bar submitted that so far as the issue regarding claim of depreciation under section 32 of the Act is concerned, the controversy is no longer res integra, having been settled by the hon'ble Supreme Court in the case of CIT v. Rajasthan and Gujarati Charitable Foundation [2018] 402 ITR 441 (SC) ; [2018] 89 taxmann.com 127 (SC), by which the hon'ble Supreme Court has affirmed the view taken by the Bombay High Court in CIT v. Institute of Banking [2003] 264 ITR 110 (Bom) ; [2003] 131 Taxman 386 (Bom). The relevant portion of the said judgment of the Bombay High Court as quoted by the hon'ble Supreme Court and affirmed is quoted below for ready reference (page 445 of 402 ITR) : 'In the said judgment, (Bombay High Court) the contention of the Department predicated on double benefit was turned down in the following manner (page 113 of 264 ITR) : As stated above, the first question which requires consideration by this court is : whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant and machinery and furniture was liable to be computed in a 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 aforestated judgment of the Bombay High Court, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Department. Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of DIT (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR (Bom) 463. In that case, the facts were as follows : The assessee was a trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the trust. The Income-tax Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of income on account of expenditure of earlier years, which has been brought forward and set off in the year under consideration. The Assessing Officer disallowed the same on the ground that there is no express provision in the Act permitting the adjustment of earlier years brought forward expenses as application of income in the current year. According to the Assessing Officer, the application of income for charitable purposes must be during the relevant previous year. Since the income of the trust is exempt from tax, the question of deficit does not arise and also the trust is required to utilize 85 per cent. of the income of the previous year for charitable purposes during the year. In this view of the matter and for the above reasons, the Assessing Officer disallowed the assessee's claim of expenditure of earlier years being brought forward and set off during the year. On appeal, the learned Commissioner of Income-tax (Appeals) allowed the amortization of the expenditure as claimed by the asses see and deleted the disallowance made by the Assessing Officer by placing reliance on the decision of the hon'ble Karnataka High Court in the case of CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxman 400 (Karn), wherein the cognate Bench of this court held that even the depreciation not involving any cash outflow is also in the character of expenditure and therefore such depreciation is nothing but decrease in the value of property through wear and tear, deterioration or obsolescence and the allowance made for that purpose in the books of account were deemed to be the application of funds for the purpose of section 11 of the Act. The relevant portion of the said judgment is also quoted below for ready reference (page 32 of 146 ITR) : 'Mr. Srinivasan, however, urged that there are enough indications in section 11 to exclude the mercantile system of accounting. The learned counsel relied upon section 11(1)(a) and 11(4) in support of his contention. We do not think that there is anything in these subsections to support the contention of Mr. Srinivasan. The Explanation to section 11(1)(a) on the contrary takes note of the income not received in a particular year. It lends support to the contention of the assessee that accounting need not be on cash basis only. Section 11(4) is not intended to explain how the accounts of the business under taking should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied, then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year. The relevant portion of the said judgment of the Bombay High Court is also quoted below for ready reference (headnote of 264 ITR 110 ) : '. . . 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, 1961. Income of a charitable trust derived from building, plant and machinery and furniture is liable to be computed in a 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 Act providing for depreciation, for computation of income derived from business or profession is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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