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Case Number

I.T.A.T No. 172 of 2013 and G.A No. 3199 of 2013

Judges

Girish Chandra Gupta
Tapash Mookherjee, JJ.

Acts

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This appeal challenges a judgment and order dated June 19, 2013 of the learned Tribunal. The Tribunal had directed the Assessing Officer to grant the assessee the benefit of depreciation in respect of investment in fixed assets, relying upon a decision of the Calcutta High Court in Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust. The Revenue (appellant) appealed the Tribunal's order to the court, raising two specific questions of law concerning the allowance of depreciation to a charitable organisation and whether allowing depreciation would amount to a double deduction where cost had already been treated as application of income for charitable purposes.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in allowing depreciation under section 32 of the Income-tax Act, 1961, to the assessee being a charitable organization and whose income does not include income from business and profession without considering the fact that depreciation as a deduction is allowable against income from business and profession?
Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in allowing depreciation on assets without considering the facts that the cost of which has already been treated as application of income for charitable purpose and hence allowing depreciation on such investment would effectively be allowing double deduction from income?

Arguments of the Parties

Appellant's (Revenue) Arguments

The Tribunal was wrong to allow depreciation on the basis of the Bhorukha Public Welfare Trust decision, because that Division Bench itself expressed reservations about the broader legal principle and allowed the claim primarily because the tax effect was small (Rs. 7,000).
Depreciation is allowable as a deduction against income from business and profession under section 32; it is not a general deduction available for computing income of a charitable trust under section 11(1).
Allowing depreciation in the present circumstances would amount to a double deduction because the cost of the asset had already been treated as application of income (i.e., already given 100% deduction under section 11), so permitting depreciation would effectively give the trust a second deduction.
Placed reliance on the decision in Escorts Ltd. v. Union of India (1993) 199 ITR 43 (SC) to support the double deduction argument.

Respondent's (Assessee) Arguments

Cited authorities from various High Courts (Punjab & Haryana, Bombay, and Calcutta) to support the proposition that income of a charitable trust for the purposes of section 11(1) must be computed in a commercial/book-account manner and that normal depreciation can be taken into account in that computation.
Relied on Commissioner Of Income-Tax v. Market Committee, Pipli (P&H) which held that allowing depreciation in computing exempt income does not constitute a double deduction where the depreciation is used to determine the income available to be applied for charitable purposes.
Relied on the Bombay High Court decision in CIT v. Institute of Banking which rejected the argument that depreciation is allowable only under section 32 and held that depreciation may be allowed when computing the real income of a charitable trust under section 11(1)(a) on commercial principles.
Invoked the Division Bench decision in CIT v. Jayashree Charity Trust (Calcutta) and related authorities (including Madras and Andhra decisions and a Board Circular) to support the commercial-computation approach and to justify allowance of depreciation so as to preserve the trust corpus and permit ploughing back of funds for charitable use.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust, [1999] 240 ITR 513 (Cal)	Was relied on by the Tribunal for allowing depreciation to a charitable trust; the Division Bench itself expressed reservations about the general correctness of computing income on commercial lines but allowed claim because the tax effect was small (Rs. 7,000).	The court considered the decision but noted its reservations and limited circumstances; the court did not rely on Bhorukha as the primary precedent and preferred the reasoning in CIT v. Jayashree Charity Trust.
Commissioner Of Income-Tax v. Market Committee, Pipli, [2011] 330 ITR 16 (P&H)	Held that allowing depreciation for computing exempt income of a trust is not a double deduction where depreciation reduces the income for determining funds to be applied for charitable purposes; distinguished Escorts Ltd.	The court drew attention to and treated the Pipli decision as supportive of the view that depreciation does not result in double benefit and should be allowed when computing income for section 11 purposes.
CIT v. Institute of Banking, [2003] 264 ITR 110 (Bom)	Held that depreciation can be considered in computing the real income of a charitable trust under section 11(1)(a) on commercial principles and that section 32 is not the exclusive provision to grant depreciation for trusts' income computation.	The court relied upon the Bombay High Court's reasoning as an authority supporting allowance of depreciation in computing income of a trust under section 11(1).
CIT v. Jayashree Charity Trust, [1986] 159 ITR 280 (Cal)	Held that "income" in section 11(1)(a) should be understood in a commercial/book-account sense and that income from trust properties should be calculated in the commercial manner to determine application/accumulation for charitable purposes.	The court expressly agreed with the view in Jayashree Charity Trust, describing it as logical and in consonance with common sense, and adopted its approach for allowing depreciation in computation of income under section 11.
Escorts Ltd. v. Union of India, [1993] 199 ITR 43 (SC)	Relied upon by the Revenue to argue the proposition of avoiding double deductions.	The court found the Escorts decision distinguishable on the facts (per the reasoning adopted by Pipli) and did not treat it as decisive against allowing depreciation for trusts in the present context.
CIT v. Munisuvarat Jain, [1994] Tax LR 1084 (Bom)	Discussed in the Bombay High Court reasoning: the court there held depreciation allowable for trust income computation and rejected the contention that section 32 alone governs depreciation.	Used (via the Bombay decision) as part of the chain of authorities supporting the proposition that trusts' income should be computed commercially and depreciation allowed.
CIT v. Rao Bahadur Calavala Cunnan Chetty Charities, [1982] 135 ITR 485 (Mad)	Held that income for section 11 must be understood in a commercial sense and that accounts/book-income approach is appropriate for determining amounts available for application to charity.	Quoted in Jayashree and treated as consistent with the commercial-computation approach which the court endorsed.
CIT v. Nizam's Suppl. Religious Endowment Trust (Trustees of HEH), [1981] 127 ITR 378 (AP)	Adopted a similar approach to commercial computation of income for trusts.	Referenced as consistent authority supporting commercial computation of trusts' income; the court cited it alongside Jayashree.
Central Board of Direct Taxes, Circular No. 5-P (LXX-6) dated May 19, 1968	Explained that "income" in section 11(1)(a) should be understood in a commercial sense (book income) for trusts and set out consequences for application/accumulation calculations.	The court noted the Circular's exposition as supportive of the commercial computation approach adopted in Jayashree, which the court followed.

Court's Reasoning and Analysis

The court reviewed the submissions of counsel for both sides and examined the chain of authorities from different High Courts and the Tribunal. The principal analytical steps taken by the court were:

Identification of the core legal dispute: whether depreciation may be deducted in computing a charitable trust's income for the purposes of section 11(1) and whether such deduction results in double benefit when the cost has already been treated as application of income.
Consideration of relevant authorities: the court examined the Division Bench's remarks in Bhorukha (which expressed reservations about commercial computation but allowed the claim on facts), the reasoning in Jayashree Charity Trust, the Bombay High Court decisions (including Institute of Banking and Munisuvarat Jain) and the Punjab & Haryana High Court decision in Market Committee, Pipli.
Assessment of legal principle: the court agreed with the principle in Jayashree that "income" in section 11(1)(a) should be understood in a commercial/book-account sense for the purpose of determining amounts available to be applied for charitable purposes. The court observed that once income is computed in this commercial manner, items such as depreciation—reflecting diminution in value of assets used for charitable purposes—ought to be allowed to preserve the corpus and reflect the real disposable income of the trust.
Rejection of the double-deduction argument on the present analysis: relying on the reasoning in Market Committee, Pipli and the Bombay precedents, the court accepted that allowing depreciation in computing income for the purposes of section 11 does not necessarily amount to a prohibited double deduction where the depreciation merely adjusts the income figure used to determine application/accumulation for charity.
Evaluation of Bhorukha: the court acknowledged the Division Bench's reservations in Bhorukha but treated Jayashree's reasoning as logical and persuasive and did not consider a reference to a larger bench necessary.

The court emphasised the object of section 11: to feed the public charity. It reasoned that computation in commercial terms and allowance of depreciation serves that object by ensuring amounts are available for charitable use and by preventing dissipation of the trust corpus over time.

Holding and Implications

DISPOSED OF — the appeal is dismissed.

The court answered both questions of law in the affirmative and in favour of the assessee, thereby upholding the Tribunal's direction that the Assessing Officer grant the benefit of depreciation in respect of the investment in fixed assets.

Direct effect on the parties: The Tribunal's order directing the Assessing Officer to allow depreciation (and to amend the assessment accordingly) stands; the Revenue's appeal fails.

Broader implications: The opinion accords with and applies the existing line of authorities (in particular the reasoning in CIT v. Jayashree Charity Trust and supporting High Court decisions) that income for the purpose of section 11(1) may be computed on commercial principles allowing for depreciation. The opinion does not purport to refer the matter to a larger bench or to declare a new contrary precedent; it follows established authorities as discussed in the judgment.

We have prepared this summary strictly from the text of the provided opinion; no information not present in that opinion has been added.

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Commissioner Of Income-Tax v. Siliguri Regulated Market Committee

JUDGMENT

1. The appeal is directed against a judgment and order dated June 19, 2013, by which the learned Tribunal held that “The Hon'ble Jurisdictional High Court of Calcutta as in the case of Bkorukha Public Welfare Trust categorically held that the depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determination of income in terms of section 11(1) of the Act. When the learned Commissioner of Income-tax (Appeals) directed the Assessing Officer to amend the assessment in the light of the registration granted to it under section 12A of the Act it is an automatic direction that such deductions of depreciation is available to the assessee must be given. The non-granting of the depreciation is a mistake apparent from record. In the circumstances, respectfully following the decision of the jurisdictional High Court in the case of Bhorukha Public Welfare Trust referred to supra the Assessing Officer is directed to grant the assessee the benefit of depreciation in respect of the investment in the fixed assets”.

2. Aggrieved by the order of the learned Tribunal, the Revenue has come up in appeal. The following questions of law were suggested by the Revenue:

“(i) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in allowing depreciation under section 32 of the Income-tax Act, 1961, to the assessee being a charitable organization and whose income does not include income from business and profession without considering the fact that depreciation as a deduction is allowable against income from business and profession ?

(ii) Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in allowing depreciation on assets without considering the facts that the cost of which has already been treated as application of income for charitable purpose and hence allowing depreciation on such investment would effectively be allowing double deduction from income ?”

3. Mr. Bhowmick, learned advocate appearing for the appellant, submitted that the learned Tribunal was wrong in allowing the deduction on account of depreciation on the basis of the judgment in the case of Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust. reported in [1999] 240 ITR 513 (Cal). He drew our attention to the following two paragraphs from the judgment in the case of Bhoruka Public Welfare Trust (page 518):

“It is true that the view has been taken by various High Courts including this court in the cases referred to above that in the case of a charitable trust income should be computed and arrived at in the commercial manner but nowhere in the Act it prohibits to calculate or compute the income as per the provisions of the Act. Section 11(1) refers to income and not total income defined in section 2(45) but income, itself has been defined in the Act in section 2(24) why the meaning of income given in section 2(24) should not be taken for income referred in section 11(1) of the Act. Therefore the decision referred to also requires reconsideration.

But in the case in hand the assessment year involved is 1983-84, even if we differ from the view taken by this court it will take another five years to conclude. The tax effect is only Rs. 7,000. Therefore, no purpose will be served to differ on this issue with the view taken by this court in Jayashree Charity Trust's case, [1986] 159 ITR 280 (Cal) and we leave the issue open to consider this issue in the appropriate case in future.”

4. He contended that, the Division Bench in that case expressed reservations and the claim for depreciation was allowed only because the amount involved was a meagre sum of Rs. 7,000. He contended that on the basis of the said judgment, the Tribunal was not justified in allowing the deduction on account of depreciation which really amounts to double deduction because the assessee has already got 100 per cent, deduction for the acquisition of the property in question. Allowing deduction on account of depreciation would, therefore, mean a double deduction. He in support of his submission relied on the judgment in the case Escorts Ltd. v. Union of India reported in [1993] 199 ITR 43 (SC). He, therefore, contended that both the questions formulated and quoted above should be answered in favour of the Revenue. We requested Mr. Khaitan, learned senior advocate to assist us in resolving the issue. Mr. Khaitan drew our attention to a judgment of the Punjab and Haryana High Court in the case of Commissioner Of Income-Tax v. Market Committee, Pipli, Pipli reported in [2011] 330 ITR 16 (P&H) wherein the second question formulated above was considered and answered in favour of the assessee. To be precise, the Punjab and Haryana High Court opined as follows (page 20):

“In the present case, the assessee is not claiming double deduction on account of depreciation as has been suggested by learned counsel for the Revenue. The income of the assessee being exempt, the assessee is only claiming that depreciation should be reduced from the income for determining the percentage of funds which have to be applied for the purposes of the trust. There is no double deduction claimed by the assessee as canvassed by the Revenue. The judgment of the Hon'ble Supreme Court in Escorts Ltd. case, [1993] 199 ITR 43 (SC) is distinguishable for the above reasons. It cannot be held that double benefit is given in allowing claim for depreciation for computing income for purposes of section 11. The questions proposed have, thus, to be answered against the Revenue and in favour of the assessee.”

5. Mr. Khaitan also drew our attention to a judgment of the Bombay High Court in the case of CIT v. Institute of Banking reported in [2003] 264 ITR 110 (Bom) wherein an identical view was taken. The question which fell for decision by the Division Bench of the Bombay High Court is as follows (page 112):

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Assessing Officer to allow depreciation on the assets the cost of which has-been fully allowed as application of income under section 11 of the past years ?”

6. The aforesaid question was answered in favour of the assessee holding as follows (page 113):

“As stated above the first question which requires consideration by this court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years ? In the case of CIT v. Munisuvarat Jain, [1994] Tax LR 1084 (Bom), the facts were as follows: The assessee was a charitable trust. It was registered as a public charitable trust. It was also registered with the Commissioner of Income-tax, Pune. The assessee derived income from temple property which was a trust property. During the course of assessment proceedings for the assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building at 2½ per cent, and they also claimed depreciation on furniture at 5 per cent. The question which arose before the court for determination was: 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 High Court that section 11 of the Income-tax Act makes a provision in respect of computation of income of the trust from property held for charitable or religious purposes and it also provides for application, and accumulation of income. On the other hand, section 28 of the Income-tax Act deals with chargeability 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 32 to section 43C. That section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also a similar argument, as in the present case was advanced on behalf of the Revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income-tax Act and not under general principles. The court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11(1)(a) of the Income-tax Act. The court rejected the argument on behalf of the Revenue that section 32 of the Income-tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner although the trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income-tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the trust. In view of the aforesaid judgment of the Bombay High Court, we answer question No. 1 in the affirmative, i.e, in favour of the assessee and against the Department.”

7. Mr. Khaitan, also drew our attention to a Division Bench judgment of this court in the case of CIT v. Jayashree Charity Trust reported in [1986] 159 ITR 280 (Cal), wherein the following view was taken (page 285):

“The Madras High Court, in the case of CIT v. Rao Bahadur Cala-vala Cunnan Chetty Charities, [1982] 135 ITR 485 (Mad) held that taking into account the purposes for which the conditions of section 11(1)(a) were imposed, it would be clear that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. It was held that the income from properties held under trust would have to be calculated in the commercial manner. It was observed that section 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent, of the income. The application as well as the accumulation has necessarily to be of the income as accounted for in the accounts and not as computed under the Income-tax Act, subject, of course, to what is provided in sub-section (4) of section 11.

We are in respectful agreement with the view expressed by the Madras High Court. This judgment is also in consonance with the view taken by the Andhra Pradesh High Court in the case of CIT v. Nizam's Suppl. Religious Endowment Trust (Trustees of HEH), [1981] 127 ITR 378 (AP).

It also appears that the view we have taken has also been adopted by the Central Board of District Taxes in Board's Circular No. 5-P (LXX-6) dated May 19, 1968. It was stated in that circular, inter alia (see [1969] Indian Tax Laws, Appx. II, p. Ixxxv):

2. Section 11(1) provides that subject to the provisions of sections 60 to 63 the following income shall not be included in the total income of the previous year… The reference in sub-section (1)(a) is invariably to “income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) of the Act as “the total amount of income… computed in the manner laid down in this Act”. It would, accordingly, be incorrect to assign to the word “income”, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income”, vide section 2(45)…

4. Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e, book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent., of the latter, if the trust is to get the full benefit of the exemption under section 11(1).

5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for purposes of section 11(1). Further, the trust must spend at least 75 per cent., of this income and not accumulate more than 25 per cent., thereof. The excess accumulation, if any, will become taxable under section 11(1).’

This circular makes it clear that the word “income” in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.”

8. Mr. Khaitan submitted that this court has already expressed the opinion that the income from properties held under a trust would have to be calculated in the commercial manner. He submitted that once the aforesaid process of computation is permitted, the claim for depreciation has to be allowed.

9. Mr. Bhowmick, learned advocate replied by stating, that in the case of Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust., a Division Bench of this court has expressed some reservations with regard to the aforesaid view as regards computation of income in a commercial manner, and, therefore, the matter should be referred to a larger Bench.

10. We have considered the submissions and perused the judgments of the Punjab and Haryana High Court and the Bombay High Court as also the judgment of this court in the case of CIT v. Jayaskree Charity Trust and in the case of Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust.. We are of the opinion that the views expressed in the case of CIT v. Jayaskree Charity Trust are logical and in consonance with common sense. The object of section 11 of the Income-tax Act, 1961, is to feed the public charity. By permitting computation of income in a commercial manner, the object of feeding the public charity is achieved. The amount deducted by way of depreciation is in that case is ploughed back for user on account of charity. It cannot be disputed that a building used for the purpose of charity diminishes in value over the time like any other building. Therefore, providing for such diminution of value would keep the corpus of the trust intact otherwise the corpus of the trust itself in course of time may get dissipated. We are, as such, in agreement with the views expressed in the case of CIT v. Jayashree Charity Trust. There is, as such, no reason why the matter should be referred to any larger Bench, as submitted by Mr. Bhowmick. In the result, the appeal fails. Both the questions are answered in the affirmative and in favour of the assessee. The appeal is thus disposed of.

11. We record our deep sense of appreciation for the assistance rendered by Mr. J.P Khaitan, learned senior advocate in resolving the questions of law raised in this matter.

Commissioner Of Income-Tax v. Siliguri Regulated Market Committee

Structured Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Revenue) Arguments

Respondent's (Assessee) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Siliguri Regulated Market Committee

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