Introduction

The Supreme Court (SC), has recently put to rest a much debated issue regarding the claim for depreciation by charitable / religious institutions (Institutions) on assets.

Under Section 11 of the Income Tax Act, 1961 (Act), income of an Institution derived from property held under trust wholly for charitable or religious purposes, is not included in the total income of the Institution, to the extent that such income is applied for charitable or religious purposes, or is accumulated or set aside for such purposes, subject to certain conditions.

The Tax Authorities have, on certain occasions disallowed claims for depreciation on the assets of such Institutions, on the basis that once the capital expenditure to acquire assets is treated as the application of income for charitable purposes, the Institutions had virtually enjoyed a 100% write-off of the cost of assets. Therefore, the grant of depreciation would amount to giving double benefit to such Institutions.

Holding in favour of the Institutions, the SC disagreed with the above view, and upheld the decision of the Bombay High Court (Bombay HC) in the case of Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS), ([2003] 264 ITR 110 (Bombay)) wherein it was held that the income of an Institution was to be computed on commercial principles, after providing for allowance for normal depreciation.

Facts

Rajasthan and Gujarati Charitable Foundation Poona (Taxpayer) is a charitable institution registered under Section 12A of the Act. In accordance with Section 11(1)(a) of the Act, the entire expenditure incurred by the Taxpayer for the acquisition of capital assets was treated as, ‘application of income for charitable purposes’. The claim for depreciation on these assets, was allowed by the jurisdictional High Court against which the Tax Authorities were in appeal before the SC.

Decision of the SC

The SC noted that several High Courts across the country had decided the issue in favour of Institutions by relying on the decision of Institute of Banking Personnel Selection (IBPS) (supra). The Bombay HC in that case had based its decision on Commissioner of Income Tax v. Munisuvrat Jain, (1994 Tax Law Reporter, 1084) another decision of the Bombay HC, wherein the taxpayer was a registered public charitable trust that derived income from a temple property that belonged to the trust. The taxpayer claimed depreciation on such property and furniture, and the question before the Bombay HC was whether depreciation could be denied to the taxpayer, since the expenditure on acquisition of assets had been treated as application of income in the year of acquisition of the assets. The Bombay HC, in its judgment highlighted that, while Section 11 of the Act provides for computation of income of Institutions from the property held for charitable or religious purposes, and for the application and accumulation of income, Section 28 of the Act deals with chargeability of income from profits and gains of business. The Bombay HC also noted that Section 29 provides for calculation of such income in accordance with Sections 30 to 43C of the Act.

Thereafter, the Bombay HC laid down that even though Section 32 of the Act (which provides for depreciation for computation of income derived from business or profession) is not applicable to an Institution since it does not carry on business, the income of an Institution derived from building, plant and machinery, and furniture was liable to be computed in a normal commercial manner under Section 11 of the Act, based on commercial principles, and after providing for allowance for normal depreciation, and deduction of the depreciation from gross income of the Institution. Accordingly, it was held that, normal depreciation could be considered as a legitimate deduction in computing the real income of the taxpayer on general principles, or under Section 11(1)(a) of the Act.

The SC held that the view taken by the Bombay HC correctly states the principles of law and found no reason to interfere with the decision.

The SC also took note of and confirmed the prospective nature of Section 11(6) of the Act (introduced with effect from Assessment Year 2015-16) which clarifies that income of an Institution would be calculated without provision for any depreciation or deduction in relation to an asset that has been acquired by the Institution.

Comment

The deduction of depreciation from various sources of income by an Institution, effectively reduces the amount of income that an Institution is mandatorily required to spend towards its objectives. This gives Institutions the ability to build their corpus. Therefore, this decision of the SC is a welcome one, as it settles the position regarding claims for depreciation by Institutions, and shall prevent avoidable litigation.