Depreciation and exemption both not allowable to charitable trust. Statutory provision u/s 32 to prevail over customary practice-commercial principle-ITAT
The allowability of the depreciation claim to a charitable trust/institution in calculating prescribed limit of 85% towards income application u/s 11 of the Income tax Act, 1961 was settled by the amendment made to the section 11 by insertion of sub section (6) by the Finance (No. 2) Act of 2014. Accordingly, applicable from AY 2015-16 in computing application of income u/s 11, no deduction shall be allowed towards depreciation in respect of assets, acquisition of which has already been claimed as application previously.
However for earlier years there has been a controversy on the issue and various High Courts had dealt with this question. Punjab & Haryana High Court,Delhi High Courts have ruled that depreciation would be allowable, whereas the Kerala High Court have taken a contrary view.
Recently in two judgment, ITAT Madras has taken a view that double deduction of depreciation by a charitable trust/institution claiming exemption u/s 11 is not permitted.
Notable is that in its recent order, the Tribunal has also considered/dealt with the numerous contrary judgments of various High Courts (including jurisdictional High Court which held that income from the properties held under trust would have to be arrived at in the normal commercial manner) relied upon by the assessee but rejected all of them holding that the conflict between the commercial principle or customary practice in computing income and the provisions of Section 32 were not brought to the notice of the Courts / Tribunal and therefore, those judgments / decisions were not applicable to the facts of the case.
ABCAUS Case Law Citation:
1051 (2016) (11) ITAT
Important Case considered:
- DIT v. VishwaJagriti Mission (2012) 73 DTR (Del) 195
- CIT v. Market Committee, Pipli (2011) 330 ITR 16 (P&H)
- CIT v. Society of Sisters of St.Anne (1984) 146 ITR 28 (Kar)
- CIT v. Bhoruka Public Welfare Trust (1999) 240 ITR 513 (Cal)
- CIT v. Tiny Tots Education Society (2011) 330 ITR 21 (P&H)
- CIT v. ShethManilalRanchhoddasVishramBhavan Trust (1992) 198 ITR 598 (Guj)
- CIT v. Raipur Pallottine Society (1989) 180 ITR 579 (MP)
- CIT v. Institute of Banking Personnel Selection (2003) 264 ITR 110 (Bom)
- DIT(E) v. FramjeeCawasjee Institute (1993) 109 CTR (Bom) 463
- CIT v. Rao Bahadur CalavalaCunnanChetty Charities (1982) 135 ITR 485 (Mad)
- Devi Karumariamman Educational Trust v. DCIT (Exemptions) (2015) 60 taxmann.com 439 (Madras)
- DDIT v. Lakshmi Saraswathi Educational Trust ITAT Chennai
- Apollo Hospitals Educational Trust v. DCIT ITAT Chennai
- Mamallan Educational Trust ITAT Chennai
- ITO v. Sri Ranganathar Trust ITAT Chennai
- ITO v. KGISL Trust ITAT Chennai
- ITO v. The GRD Trust ITA No.2537/Mds/2014 Chennai ITAT.
Issue for Consideration:
In the instant case, two appeals of the two independent assessees on common issue were heard and disposed of by a common order.
In both the appeals, only sole issue for consideration was whether depreciation can be claimed by the assessee on assets the cost of which was already allowed as application of income under Section 11.
Contentions of the Appellant:
The assessee contended that the claim of depreciation should be allowed on the commercial principle i.e., that computation of income of the Trust is a customary method of accountancy.
Contentions of the Revenue:
The department representative argued that once the cost of asset was allowed as application of income under Section 11, the depreciation on the very same asset would amount to double deduction.
Observations made by the Tribunal:
The ITAT observed that this issue had already been considered by it in a recent case and it was pronounced that when the income allowed as an application of income u/s 11, the assessee cannot claim once again depreciation in respect of the very same asset.
In the said judgment, the Tribunal had observed that Section 32 of the Income Tax Act is applicable only in respect of business of the assessee. Since the assessee was not engaged in any business and claiming itself carrying on the charitable activity, it was found that the assessee was not entitled for depreciation.
The ITAT had opined that the Legislature provided depreciation u/s 32 as an incentive/allowance to the asset which was used for the business or profession. Interpreting the provisions of the Income Tax Act, 1961, the ITAT had opined that
“Section 32(1) of the Act clearly says that the asset owned wholly or partly by the assessee and “used for the purpose of business or profession”. In view of the language employed by the Parliament, the asset used for the purpose of business or profession alone eligible for depreciation.The Income-tax Act does not provide for depreciation in respect of the asset other than the one which is used for business or profession. Therefore, it is for the assessee to establish that the assessee is carrying on any business or profession. In the case before us, the admitted case of the assessee is that the assessee is not carrying on any business or profession. Therefore, whatever be the nature of the asset, which was used as a tool for carrying out the object of the charitable institution, cannot be construed as an asset which is used for the business or profession of the assessee. Therefore, the assessee is not eligible for depreciation under Section 32 of the Income-tax Act.”
The ITAT had also observed that clarified that there is no conflict between the customary way of computation of income and provisions of Section 32. It opined that Section 32 provides for depreciation only in respect of the asset which is used for the purpose of business or profession. The commercial principle of computing income or the customary practice of computing income may also provide for depreciation only in respect of computing business or professional income.
It was further observed that the income of the trust is exempted on application and accumulation as provided under the Income Tax Act and in case of any violation of the conditions of grant of exemption is made, the registration u/s 12AA has to be cancelled u/s 12AA(3) making income of the trust liable for taxation, in such a case, if the income is assessed as income from business or profession, the assessee may be eligible for depreciation but not otherwise.
The ITAT was of the considerate view that the customary way of computing income or the commercial principle of computing income cannot override the specific provision of Income-tax Act.
The Tribunal also dwelled upon the question when there is a conflict between customary practice, commercial principle and provisions of Section 32, which one will prevail? The ITAT answered that the statutory provision, namely, Section 32 of the Income Tax Act will prevail over the customary practice and commercial principle.
The both appeals of the assessee(s) were dismissed holding that double deduction of depreciation was not allowable to the assessee unless exemption is withdrawn income of the trust is assessed as income from business or profession.