Normal depreciation is legitimate deduction while computing income of ‘Trust’ u/s 11(1)(a) of Income Tax Act: Madras HC

Read Judgment: M/s MAZDOOR WELFARE TRUST vs. THE DEPUTY COMMISSIONER OF INCOME TAX, COIMBATORE

Pankaj Bajpai

Chennai, July 29, 2021: While allowing the appeal of the assessee, the Madras High Court has ruled that normal depreciation can be considered as legitimate deduction in computing real income of a ‘trust’ on general principles or u/s 11(1)(a) of Income Tax Act. 

A Division Bench of Justice M Duraiswamy and Justice R Hemalatha observed that provisions of section 32 of the Act providing for depreciation for computation of income derived from business or profession is not applicable in case of charitable trusts. 

The assessee in the present case is a ‘Trust’ registered u/s 12A of the Income Tax Act for running an Engineering College in the name of Anjalaiammal Mahalingam Engineering College at Tiruvarur District. Consequent to filing of its returns declaring Nil income after claiming exemption u/s 11, the scrutiny assessment was carried out resulting in rejection of the claim of depreciation. 

Such rejection was made on the ground that the capital expenditure incurred for acquiring the asset was already allowed as application of fund for the purpose of section 11 and therefore, further allowance of depreciation on the same would amount to double deduction, as per the opinion of the I-T Department. 

Challenging the dispute over the allowability of depreciation, the assessee approached the High Court. 

However, in the course of proceedings before the High Court, the counsel for the Revenue Department fairly submitted that the substantial questions of law were already decided in favour of the assessee in the Judgment of Anjuman – E – Himayat – E – Islam, Chennai vs. The Assistant Director of Income Tax, Chennai, wherein this same Bench has held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or u/s 11(1)(a) of the Income Tax Act. 

Therefore, rejecting the argument on behalf of the Revenue Department that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation, the High Court opined that the same would not be applicable in case of charitable trusts. 

The Division Bench noted that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in 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 u/s 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust,” found the High Court.

Therefore, having regard to the submissions made by the counsel on either side, the High Court answered the questions of law against the Revenue Department, and held the assessee eligible for normal depreciation.