Facts

Certain petitions and appeals were filed by the Income Tax  Department against   the orders passed by various High Courts granting benefit of depreciation on the assets acquired by the assessees. All the assessees were charitable institutions registered under Section 12A of the Income Tax Act (hereinafter referred to as ‘Act’).  In the previous year to the year with which the Court was concerned and    in which year the depreciation was claimed, the entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under Section 11(1)(a) of the Act. The view taken by the Assessing Officer in disallowing the depreciation which was claimed under Section 32 of    the Act was that once the capital expenditure is treated as application of income  for charitable purposes, the assessees had virtually enjoyed a 100 per cent write   off of the cost of assets and, therefore, the grant of depreciation would amount to giving double benefit to the assessee. In most of these cases, the CIT (Appeals)    had affirmed the view, but the ITAT reversed the same and the High Courts have accepted the decision of the ITAT  thereby dismissing the appeals of the Income  Tax Department. From the judgments of the High Courts, it was discerned that the High Courts have primarily followed the judgment of the Bombay High Court in ‘Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)’ [(2003) 131 Taxman 386 (Bom)(HC)] which was in favour of the Assessee.

The Court was of the opinion that the view taken by the Bombay High Court correctly stated the principles of law and there is no need to interfere with the same. It was mentioned that most of the High Courts had taken the aforesaid  view with only exception by the High Court of Kerala which has taken a contrary view in ‘Lissie Medical Institutions v. Commissioner of Income Tax’. It was further observed by the Court that the legislature, realising that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective  from the Assessment Year 2015-2016. The Court affirming the view observed that the Delhi High Court had rightly held that the said amendment is prospective     in nature. It was specifically stated that once assessee is allowed depreciation,      he shall be entitled to carry forward the depreciation as well. The Court thus confirmed the view of the High Courts and dismissed departmental appeals.

However, an application was filed by the Income-tax Department wherein it was stated that one CA No. 5171 of 2016 was tagged with other appeals and the batch matters were decided by Supreme Court via above judgement on 13-12-2017. However, one questions was left out with regards to excess expenditure being set  off in subsequent year.

Issue

The issue of depreciation was already decided by the Court vide its judgement   date 13-12-2017. The only issue raised in the miscellaneous application was whether any excess expenditure incurred by  the trust/charitable institution in earlier assessment year could be allowed to be set off against income of subsequent years by invoking Section 11 of the Income-tax Act, 1961.

View

Though the Supreme Court accepted that there was mistake and the issue was not address in the earlier decision. However, after hearing on the issue, the Court did not find any merit and hence dismissed the miscellaneous application.

Held

Affirming Delhi High Court’s view, in  Subros Educational  Society (IT No.  382 of 2015 dt. 23rd September 2015), that any excess expenditure incurred by the trust/charitable institution in earlier assessment year could be allowed to  be  set off against income of subsequent years, the Supreme Court dismissed the Miscellaneous Application of the Revenue. (MA No. 941/2018 (CA No. 5171/2016 dt. 16-4-2018)

Editorial: The ratio of judgment was followed by the Tribunals in the following;

(a)            ITO v. Shri Sushilaben Ramniklal Jhaveri Charitable Trust [IT Appeal No. 4131 (Mum.) of 2017, order dt. 28-9-2018];

• Love in Action Society ITO [IT Appeal No.459 (Coch) of 2018, order  dt. 4-2-2019];

(c)             Dy. CIT v. J.R.D. Tata  Trust  [IT Appeal No. 7122 (Mum.) of  2017,  dt. 13-2-2019];

• KSD Charitable Trust Asstt. CIT [IT Appeal No. 3033 (Delhi) of 2015, dt. 13-12-2015].

In CIT v. Rajasthan & Gujarati Charitable Foundation Poona [2018] 89 taxmann.com 127/253 Taxman 165/402 ITR 441 (SC), the Supreme Court held  that even though expenditure incurred for acquisition of capital assets was treated

as application of income for charitable purposes under section 11(1)(a), yet depreciation would be allowed on assets so purchased. The Supreme Court also observed as follows, “It also follows that once assessee is allowed depreciation, he shall be entitled to carry forward the depreciation as well”

Thus, the above observation suggests that it is possible for the charitable institution to carry forward deficit to subsequent years. The decision of the Supreme Court was also followed in J.R.D. Tata Trust (supra) and Medical Trust  of Seventh DayAdventists v. Dy. DIT [IT Appeal No. 1708 (Chny) of 2015, dated 4-9-2018].

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– Mahatma Gandhi