Case Law Details

Case Name : Sri Rengalatchumi Educational Trust Vs Income-tax Officer (ITAT Chennai)
Appeal Number : IT Appeal No. 89 & 90 (MDS.) OF 2009 AND 681 & 682 (MDS.) OF 2010
Date of Judgement/Order : 25/03/2011
Related Assessment Year : 2004-05 TO 2007-08


Sri Rengalatchumi Educational Trust


Income-tax Officer, OSD (Exemptions) – III

IT APPEAL NOS. 89 & 90 (MDS.) OF 2009 AND 681 & 682 (MDS.) OF 2010

[ASSESSMENT YEARS 2004-05 TO 2007-08]

MARCH 25, 2011


Abraham P. George, Accountant Member

In these appeals filed by the assessee, for the impugned assessment years, a common ground has been taken. The issue raised by the assessee through this common ground is that the CIT (Appeals) as well as the A.O. fell in error in not allowing the claim of depreciation for the respective assessment years, for a reason that cost of acquisition of the capital asset on which the claim of depreciation was made, was earlier allowed to the assessee as a deduction, while computing its income under Section 11 of the Income-tax Act, 1961 (hereinafter called “the Act”).

2. Short facts apropos are that assessee, a Trust holding registration under Section 12A(a) of the Act, had claimed depreciation while computing its income for the respective assessment years. A.O. was of the opinion that when the cost of addition to assets was claimed by the assessee as application of income for the respective assessment years, assessee could not further claim depreciation on the very same assets. Reliance was placed on the decision of Hon’ble Apex Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43. Appeals of the assessee before the CIT (Appeals) were unsuccessful. According to CIT (Appeals), the decision of Delhi Bench of this Tribunal in the case of Mahila Sidh Nirman Yojna v. IAC [1994] 50 ITD 472 (Delhi) as well as the decision of Hon’ble Apex Court in the case of Escorts Ltd. (supra) went against it. He, therefore, upheld the orders of the A.O.

3. Now before us, the learned A.R., strongly assailing the orders of the CIT (Appeals), submitted that the claim made for depreciation was for use of the assets while claim for the capital outgo as an application was on a different footing. According to him, just because capital expenditure was considered as application of income, it could not be said that assessee would not be entitled to claim depreciation thereon.

4. Per contra, the learned D.R. supported the orders of the authorities below. According to him, the claim of the assessee if allowed, would result in double deduction.

5. We have perused the orders and heard the rival contentions. For the purpose of determining the income of a Trust eligible for exemption under Section 11 of the Act, income arising from property held under Trust, constitutes the income of the Trust. It will mean income from property, business, dividends, interest on securities or other interest. In other words, the income for the purpose of Section 11 of the Act is the income as per the accounts of the Trust. It means, income in the commercial sense, without reference to the heads of income specified in Section 14 of the Act, i.e. the book income and not total income as defined in Section 2(45) of the Act. This position is confirmed in CIT v. Trustee of H.E.H. Nizam’s Supplemental Religious Endowment Trust [1981] 127 ITR 378 (A.P.), CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.) and CIT v. Estate of V.L. Ethiraj [1982] 136 ITR 12 (Mad.). This position is also confirmed by the CBDT vide its Circular No.5-P (LXX-6) dated 19th June, 1968. The concept of commercial income necessarily envisages deduction of depreciation on assets of the Trust. Depreciation on assets of a Trust is to be deducted for the purpose of calculating income of a Trust. This is because of the fact that the concept of commercial income necessarily envisages deduction of depreciation on assets of the Trust. Even reasonable depreciation on assets and interest on Sinking Fund or Repairs Reserve are to be deducted as held by the Mumbai Bench of this Tribunal in First ITO v. Trustees of Balkan-Ji-Bari [1979] 2 Taxman 377. Hon’ble Bombay High Court had rejected a reference application of the Revenue in the case of DIT (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463, holding that the answer to the question whether depreciation was allowable to a charitable Trust was self-evident, even if the capital value of the assets on which depreciation was claimed had been allowed as a deduction under Section 11, as an application of income for religious or charitable purposes. Once again in CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110, Hon’ble Bombay High Court held that depreciation should be allowed even on assets, the cost of which had been allowed as exempt under Section 11 in the preceding years. Their Lordship also held that depreciation should be allowed even on assets received on transfer from another charitable Trust on which no cost was borne by the assessee Trust. Other High Courts which have also taken the view that depreciation is deductible are Hon’ble Karnataka High Court in the case of CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28 and Hon’ble Madhya Pradesh High Court in the case of CIT v. Rajpur Pallottine Society [1989] 180 ITR 579. In CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598/[1993] 70 Taxman 228 it was held by Hon’ble Gujarat High Court that depreciation should be allowed while computing such income under Section 11(i)(a) of the Act. Assessing Officer’s stand that ‘provision of computation of income under Section 11′ does not contain any provision which may entitle an assessee to claim weighted deduction for any expenses incurred’ is not acceptable as Section 11 provides that the income of the Trust is to be computed on commercial basis i.e. as per normal accounting principles. Normal Accounting Principles clearly provide for deducting depreciation to arrive at income. Income so arrived at (after deducting depreciation) is to be applied for charitable purpose. Capital expense is application of the income so determined. So there is no double deduction or double claim of the same amount as application. Thus depreciation is to be deducted to arrive at income and it is not application of income. No doubt, Department has relied on the decision of the Supreme Court in the case of Escorts Ltd. (supra). However, in this case the issue before Hon’ble Supreme Court was that whether both depreciation under Section 32 and capital expenditure on scientific research under Section 35(1)(iv) can be claimed as deduction. Reference to this decision cannot be drawn as in the case of Escorts Ltd. (supra) both were deductions under the head ‘business income’ whereas in case of a charitable Trust depreciation is a deduction to arrive at income and capital expenditure is application of such income. The aforesaid decision in the case of Escorts Ltd. (supra) cannot be applied to determine taxable income for a Trust as the provisions to determine taxable income of the Trust are totally different and normal provisions for computing income under five heads cannot be applied. Thus the assessee is eligible for claiming depreciation for all these assessment years. The orders of the authorities below are set aside and the A.O. is directed to allow the claim of depreciation.

6. In the result, all the four appeals filed by the assessee stand allowed.

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