Supreme Court Decides the Controversy Applicability of Amendment in Section 11 Restricting Depreciation Allowance

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The Tax Publishers Applicability of Amendment in Section 11 Restricting Depreciation Allowance--Supreme Court Decides the Controversy CA. Manoj Gupta The Finance (No. 2) Act, 2014 amended Section 11 so as to provide that where any income is required to be applied or accumulated or set apart for application, then for such purposes, the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in any previous year. This amendment is effective from the assessment year 2015-16. Prior to the amendment, there was divergence in judicial opinion on the issue. The Delhi High Court in DIT v. Indraprastha Cancer Society ITA No. 240 of 2014 (Del-HC) [2015 Taxpub(DT) 12 (Del-HC)] has held that the amendment in Section 11(6) is prospective in nature. Recently the Supreme Court in CIT v. Rajasthan And Gujarati Charitable Foundation CA No. 7186 of 2014 dated 13-12-2017 [ 2017 TaxPub(DT) 5384 (SC)] upheld the decision of the Delhi High Court. The learned author discusses the entire legal position on the issue. 1. Cost of asset taken as application of income and allowance for depreciation Charitable and religious trusts are entitled to own fixed assets and to use them for their purpose or for earning the income therefrom. Such trusts are also required to file their return of income in view of Section 139(4A), even though their income may be exempt under Section 11 of the Income Tax Act. The question is whether the amount of depreciation on such assets can be deducted in arriving at the income of the trust or not. When the capital asset itself is considered to be application of income, whether further deduction can be considered in respect of depreciation, is a few controversial aspect of such trusts as it may amount to double benefit to trusts or institutions. 2. Judicial opinion as to allowability of depreciation while computing income of trusts or institutions In CIT v. Seth Manilal Ranchhoddas Vishram Bhavan Trust (1992) 198 ITR 598 (Guj), it was held that the income of a charitable trust is liable to be computed in the normal commercial manner and the amount of depreciation is liable to be deducted from the gross income of the trust under Section 11 of Income Tax Act. In this case the trust derived income from immovable property. Also see, Director of Income Tax (Exemptions) v. Franjee Cawasjee Institute (1993) 109 CTR (Bom) 463; CIT v. Society of The Sisters of St. Anne (1984) 146 ITR 28 (Karn); CIT v. Raipur Pallotine Society (1989) 180 ITR 579 (MP); CIT v. Shri Gujrati Samaj (Regd) 2012 Taxpub(DT) 1218 (MP-HC) : (2012) 349 ITR 559 (MP); Dy. CIT & Ors. v. Market Committee, Adamur & Ors. (2008) 13 DTR (Del) 157; CIT v. Market Committee 2011 TaxPub(DT) 331 (P&H-HC) : (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103; GKR Charities v. Dy. DIT (Exemptions)-I 2012 TaxPub(DT) 2261 (Chenn C-Trib). : (2012) 51 SOT 538 (Chenn C-Trib). Director of IT v. Vishwa Jagriti Mission 2012 TaxPub(DT) 1742 (Del-HC) : (2013) 262 CTR (Del) 558; Lissie Medical Institutions v. CIT 2012 TaxPub(DT) 2440 (Ker-HC) : (2012) 348 ITR 344 (Ker); Chiranjiv Charitable Trust v. Addl. Director of IT ITA Nos. 3602 & 3856 (Del) of 2009 & 786 (Del) of 2011 (Del B-Trib). SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Applicability of Amendment in Section 11 Restricting Depreciation Allowance--Supreme Court Decides the Controversy

CA. Manoj Gupta

The Finance (No. 2) Act, 2014 amended Section 11 so as to provide that where any income is required to be applied or accumulated or set apart for application, then for such purposes, the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in any previous year. This amendment is effective from the assessment year 2015-16. Prior to the amendment, there was divergence in judicial opinion on the issue. The Delhi High Court in DIT v. Indraprastha Cancer Society ITA No. 240 of 2014 (Del-HC) [2015 Taxpub(DT) 12 (Del-HC)] has held that the amendment in Section 11(6) is prospective in nature. Recently the Supreme Court in CIT v. Rajasthan And Gujarati Charitable Foundation CA No. 7186 of 2014 dated 13-12-2017 [ 2017 TaxPub(DT) 5384 (SC)] upheld the decision of the Delhi High Court. The learned author discusses the entire legal position on the issue.

1. Cost of asset taken as application of income and allowance for depreciation

Charitable and religious trusts are entitled to own fixed assets and to use them for their purpose or for earning the income therefrom. Such trusts are also required to file their return of income in view of Section 139(4A), even though their income may be exempt under Section 11 of the Income Tax Act. The question is whether the amount of depreciation on such assets can be deducted in arriving at the income of the trust or not. When the capital asset itself is considered to be application of income, whether further deduction can be considered in respect of depreciation, is a few controversial aspect of such trusts as it may amount to double benefit to trusts or institutions.

2. Judicial opinion as to allowability of depreciation while computing income of trusts or institutions

In CIT v. Seth Manilal Ranchhoddas Vishram Bhavan Trust (1992) 198 ITR 598 (Guj), it was held that the income of a charitable trust is liable to be computed in the normal commercial manner and the amount of depreciation is liable to be deducted from the gross income of the trust under Section 11 of Income Tax Act. In this case the trust derived income from immovable property. Also see, Director of Income Tax (Exemptions) v. Franjee Cawasjee Institute (1993) 109 CTR (Bom) 463; CIT v. Society of The Sisters of St. Anne (1984) 146 ITR 28 (Karn); CIT v. Raipur Pallotine Society (1989) 180 ITR 579 (MP); CIT v. Shri Gujrati Samaj (Regd) 2012 Taxpub(DT) 1218 (MP-HC) : (2012) 349 ITR 559 (MP); Dy. CIT & Ors. v. Market Committee, Adamur & Ors. (2008) 13 DTR (Del) 157; CIT v. Market Committee 2011 TaxPub(DT) 331 (P&H-HC) : (2011) 330 ITR 16 (P&H) : (2011) 238 CTR (P&H) 103; GKR Charities v. Dy. DIT (Exemptions)-I 2012 TaxPub(DT) 2261 (Chenn C-Trib). : (2012) 51 SOT 538 (Chenn C-Trib). Director of IT v. Vishwa Jagriti Mission 2012 TaxPub(DT) 1742 (Del-HC) : (2013) 262 CTR (Del) 558; Lissie Medical Institutions v. CIT 2012 TaxPub(DT) 2440 (Ker-HC) : (2012) 348 ITR 344 (Ker); Chiranjiv Charitable Trust v. Addl. Director of IT ITA Nos. 3602 & 3856 (Del) of 2009 & 786 (Del) of 2011 (Del B-Trib).