In a very recent judgment of Income Tax Appellate Tribunal, Delhi (ITAT) in DCIT(E) v. Smt. Angoori Devi Educational & Cultural Society (Angoori Devi),1 two very important questions in relation to the taxation of trusts were discussed:
- Whether depreciation can be allowed on assets that were acquired out of contributions received, which were exempt from tax since the said expense was allowed as application of income in the past years under Section 11 of the Income Tax Act, 1961 (IT Act);
- Whether excess expenditure incurred by a trust in an earlier assessment year could be allowed to be set off against the income of the subsequent year, and in the event of delay in filing the return, whether such a carry forward can be disallowed under section 80 of the IT Act.
In Angoori Devi, the assessee is a public charitable trust, which is engaged in charitable educational activities. In the income tax return filed on December 28, 2012, the assessee had declared 'Nil' income after claiming application of income as per Section 11 and 12 of the IT Act.
The assessee had shown expenditure incurred on the purchase of fixed assets as application of income, and it had further claimed depreciation on such assets. The Assessing Officer (AO) considered it to be a claim of double benefits by the assessee and hence, disallowed the claim of depreciation of such assets. The assessee had also claimed carry forward of excess expenditure, which the AO disallowed by invoking Section 80 of the IT Act.
Section 80 debars carry forward and set off of losses if the tax return is not filed within the prescribed time limit. For this disallowance, the AO cited the reason that the return was filed after the passing of the "due date" for filing of return. The assessee being aggrieved with the order of the AO preferred an appeal before the CIT(A). The CIT(A) decided both the issues in favour of the assessee. Aggrieved by CIT(A)'s order, the AO appealed to the ITAT.
Discussion before the ITAT
With regard to the first issue, the ITAT relied on the Supreme Court's decision in Commissioner of Income Tax v. Rajasthan and Gujarati Charitable Foundation Poona2 where, in turn, the Supreme Court had heavily relied on the Bombay High Court's judgment in Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)3. In that case, it was held that even if a charitable trust is not carrying on a business, normal depreciation can be considered as a legitimate deduction in computing real income on general principles under section 11(1)(a) of the IT Act. The Court held that the income of a charitable trust derived from building, plant and machinery and furniture was liable to be computed in a normal commercial manner under the applicable sections of the IT Act even though the trust did not carry on business.
The Supreme Court, while deciding Commissioner of Income Tax v. Rajasthan and Gujarati Charitable Foundation Poona,4 concurred with the aforesaid opinion of the Bombay High Court and allowed the claim of depreciation. While doing so, the Supreme Court mentioned that though the majority of the High Courts have concurred with the aforesaid view, the High Court of Kerala in Lissie Medical Institutions v. Commissioner of Income Tax (Lissie Medical Institutions),5 has taken a contrary view.
In Lissie Medical Institutions, the High Court held that: "After allowing cost of acquisition as application of income for charitable purposes and over and above if depreciation is claimed on such assets, so much of the depreciation allowed will generate income outside the books of account and unless the depreciation is simultaneously written back by the assessee as income available for application for charitable purposes in the next year, there will be violation of section 11(1)(a) of the Act." The Supreme Court didn't discuss the reasoning provided by the High Court in Lissie Medical Institutions, but it has specifically held that it concurs with the opinion of the Bombay High Court in IBPS and similar views taken by other High Courts.
In order to do away with this complication of double benefits, Section 11 was amended and sub-section (6) was inserted via the Finance Act No. 2/2014. This sub-section specifically deals with this issue and stipulates that where the use of funds for acquisition of an asset has been accepted as application of income of the charitable trust, no deduction of depreciation or otherwise in respect of such asset would be allowed for determining the income of such charitable organisation. This sub-section came into effect from assessment year (AY) 2015-2016. As pointed out by CIT(A) in Angoori Devi, this amendment was held to be prospective by ITAT, Bangalore in the case of Jyothy Charitable Trust v. DCIT (Exemptions),6 and the Supreme Court in Commissioner of Income Tax v. Rajasthan and Gujarati Charitable Foundation Poona,7 also agreed that the amendment is prospective. Therefore, for the AYs prior to 2015-2016, depreciation can be claimed on the assets, expenditure on which has already been accounted as application of income.
In order to decide the second issue, the ITAT relied on the Apex Court's judgment in the case of Commissioner of Income Tax (exemption) v. Subros Educational Society,8 and held that a trust is allowed to set off the expenditure incurred in previous years against the income of the subsequent year. The ITAT also held that Section 70-74 of IT Act are applied in relation to aggregation of losses and carry forward and set-off of losses. Income of the trust being computed under Section 11-13 of the IT Act will not be hit by these provisions. Therefore, as Section 80 of the IT Act debars carrying forward of losses in the event of failure to file the return before the 'due date', it won't be applicable for carrying forward of excess expenditure by trusts.
Therefore, the ITAT decided both the cases in favour of the assessee and dismissed the appeal filed by the AO.
For the AY prior to 2015-2016, charitable organisations can claim depreciation on the assets, even where the cost of acquisition was allowed as application of income under Section 11 of IT Act in prior years. Post AY 2015-16, due to amendment in law, this benefit would not be available. It is therefore important for such trusts to ensure careful use of their funds and not invest in income-generating assets unless such income also can be used for the charitable objective.
Secondly, charitable organisations are allowed to carry forward excess expenditure in one year to subsequent years towards application of income, even if there is a delay in filing the tax return in the year of incurring the excess of expense over income. Section 80 of the IT Act being a provision applicable for carry forward of losses for commercial organisations would not be applicable to deny this benefit to charitable organisations. This is a significant relief, especially to smaller charitable organisations who struggle to get their accounts finalised before the due date of filing of returns.
1 DCIT(E) v. Smt. Angoori Devi Educational & Cultural Society, TS-464-ITAT-2019 (DEL).
2 Commissioner of Income Tax v. Rajasthan and Guajarati Charitable Foundation Poona, (2018) 300 CTR 1 (SC).
3 Income Tax v. Institute of Banking Personnel Selection, 2003 185 CTR 492 (Bombay).
4 Commissioner of Income Tax v. Rajasthan and Guajarati Charitable Foundation Poona, (2018) 300 CTR 1 (SC).
5 Lissie Medical Institutions v. Commissioner of Income Tax, (2013) 255 CTR 324 (Kerala).
6 Jyothy Charitable Trust v. DCIT (Exemptions), (2015) 60 taxmann.com 165 (Bangalore – Trib.).
7 Commissioner of Income Tax v. Rajasthan and Guajarati Charitable Foundation Poona, (2018) 300 CTR 1 (SC).
8 Commissioner of Income Tax (exemption) v. Subros Educational Society, (2018) 303 CTR 1 (SC).
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