Case Law Details

Case Name : CIT vs. Rajasthan And Gujarati Charitable Foundation Poona (Supreme Court)
Appeal Number : Civil Appeal No. 7186 of 2014
Date of Judgement/Order : 13/12/2017
Related Assessment Year :
Courts : Supreme Court of India (951)

Even if entire expenditure incurred for acquisition of a capital asset is treated as application of income, assessee is also entitled to claim depreciation; Amendment in section 11(6) is prospective

Brief Facts of the Case

  • These petitions and appeals filed by the department arises due to the order of various High Courts, granting benefit of depreciation on the assets acquired by the assessee registered as charitable institutions under section 12A of the Income Tax Act (‘Act’).
  • The fact was, once the entire expenditure incurred for acquisition of capital assets treated as application of income for charitable purposes u/s 11(1)(a) of the Act, the grant of depreciation would amount to giving double benefit to the assessee.
  • Taking the above view, the AO has disallowed the depreciation.

Apex Court’s Judgment

  • The Apex Court discern and upheld the judgement of Hon’ble Bombay High Court in the case of CIT V. Institute of Banking Personnel Selection (IBPS) [(2003) 131 Taxman 386 (Bombay)] wherein the High court has laid down the principle which reads as follows:

“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 HC that section 11 of the 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 Act deals with charge ability 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 40C that covers section 32(1) which provides for depreciation in respect of building, plant and machinery.

Here, the Court rejected the argument of revenue that section 32 of the Act was the only section granting benefit of deduction on account deprecation, and held that normal depreciation can be considered as a legitimate deduction in computing the real income u/s 11(1) of the assessee on general principles (i.e. normal commercial manner) of of the Act after providing for allowance for normal depreciation and deduction thereof from gross income of the trust although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets.

  • Further, the Court also went on to mention that the legislature, realizing that there was no specific provision in this behalf in the Act, has made amendment in section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-16. The Delhi High Court has taken the view and rightly so, that the said amendment is prospective in nature.
  • Further, once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well.

Key take away:

The apex court affirm that even if the entire expenditure incurred for acquisition of a capital asset is treated as application of income for charitable purposes u/s 11(1)(a) of the Act, the assessee is also entitled to claim depreciation u/s 32. Revenue’s argument that the grant of depreciation amounts to giving double benefit to the assessee is not acceptable.

Further, section 11(6) of the Act which bars depreciation on expenditure applied for charitable purposes is prospective in nature and applies only from AY 2015-16.

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