Lissie Medical Institutions v. CIT

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2012 TaxPub(DT) 2440 (Ker-HC) : (2012) 047 (I) ITCL 0082 : (2012) 348 ITR 0344 : (2013) 255 CTR 0324 : (2012) 076 DTR 0377 INCOME TAX ACT, 1961 --Charitable trust--Computation of income Depreciation allowance in respect of asset, expenditure on which was already allowed as application of income--The assessee was a charitable institution registered under section 12A, and was running a hospital. In the course of running the hospital, the assessee acquired medical equipments such as x-ray units, scanning machines etc., which were purchased with the surplus funds available. The entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under section 11(1)(a). In the course of assessment, the AO noticed that the assessee had claimed depreciation for Rs. 2,16,27,776, out of which Rs. 18,38,645 represented depreciation on assets acquired during the relevant previous year and balance towards depreciation on assets held as on the first date of the previous year. According to the AO, when the assessee claims expenditure for acquisition of assets as application of income of the charitable trust for charitable purposes, then the assessee was not entitled to claim depreciation in the computation of income. In other words, according to the AO, when acquisition of assets is treated as application of income for charitable purposes, the value of assets stands fully written off, and over and above, if depreciation is allowed, the same will result in double deduction of capital expenditure leading to violation of the provisions of section 11(1) which requires availability of actual income for charitable purposes. Held: If the assessee treats expenditure on acquisition of assets as application of income for charitable purposes under section 11(1)(a) and if the assessee claims depreciation on the value of such assets, then in order to reflect the true income to be available for application for charitable purposes, the assessee should write back in the accounts the depreciation amount to form part of the income to be accounted for application for charitable purposes. This was obviously not done by the assessee and so much so, the income which should be available for application for charitable purposes got reduced by the depreciation amount, which is not permissible under section 11(1)(a). In fact the net effect is that after writing off full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claims the same amount in the form of depreciation, such notional claim becomes cash surplus available with the assessee, which goes outside the books of accounts of the Trust unless it is written back which is not done. Income Tax Act, 1961 Section 11 IN THE KERALA HIGH COURT C.N. RAMACHANDRAN NAIR & BABU MATHEW P. JOSEPH, JJ. Lissie Medical Institutions v. CIT IT Appeal No. 42 of 2011 A.Y. 2005-06 17 February, 2012 Income Tax Act, 1961, S. 11 Decision :Against the assessee. Appellant by : E.K. Nandakumar, A.K. Jayasankar, K. John Mathai, P. Benny Thomas & P. Gopinath Menon, Respondentby : P.K.R. Menon & Jose Joseph, JUDGMENT SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2440 (Ker-HC) : (2012) 047 (I) ITCL 0082 : (2012) 348 ITR 0344 : (2013) 255 CTR 0324 : (2012) 076 DTR 0377

INCOME TAX ACT, 1961

--Charitable trust--Computation of income Depreciation allowance in respect of asset, expenditure on which was already allowed as application of income--The assessee was a charitable institution registered under section 12A, and was running a hospital. In the course of running the hospital, the assessee acquired medical equipments such as x-ray units, scanning machines etc., which were purchased with the surplus funds available. The entire expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under section 11(1)(a). In the course of assessment, the AO noticed that the assessee had claimed depreciation for Rs. 2,16,27,776, out of which Rs. 18,38,645 represented depreciation on assets acquired during the relevant previous year and balance towards depreciation on assets held as on the first date of the previous year. According to the AO, when the assessee claims expenditure for acquisition of assets as application of income of the charitable trust for charitable purposes, then the assessee was not entitled to claim depreciation in the computation of income. In other words, according to the AO, when acquisition of assets is treated as application of income for charitable purposes, the value of assets stands fully written off, and over and above, if depreciation is allowed, the same will result in double deduction of capital expenditure leading to violation of the provisions of section 11(1) which requires availability of actual income for charitable purposes. Held: If the assessee treats expenditure on acquisition of assets as application of income for charitable purposes under section 11(1)(a) and if the assessee claims depreciation on the value of such assets, then in order to reflect the true income to be available for application for charitable purposes, the assessee should write back in the accounts the depreciation amount to form part of the income to be accounted for application for charitable purposes. This was obviously not done by the assessee and so much so, the income which should be available for application for charitable purposes got reduced by the depreciation amount, which is not permissible under section 11(1)(a). In fact the net effect is that after writing off full value of the capital expenditure on acquisition of assets as application of income for charitable purposes and when the assessee again claims the same amount in the form of depreciation, such notional claim becomes cash surplus available with the assessee, which goes outside the books of accounts of the Trust unless it is written back which is not done.

Income Tax Act, 1961 Section 11

IN THE KERALA HIGH COURT

C.N. RAMACHANDRAN NAIR & BABU MATHEW P. JOSEPH, JJ.

Lissie Medical Institutions v. CIT

IT Appeal No. 42 of 2011

A.Y. 2005-06

17 February, 2012

Income Tax Act, 1961, S. 11

Decision :Against the assessee.

Appellant by : E.K. Nandakumar, A.K. Jayasankar, K. John Mathai, P. Benny Thomas & P. Gopinath Menon,

Respondentby : P.K.R. Menon & Jose Joseph,

JUDGMENT