LISSIE MEDICAL INSTITUTIONS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The appellant is a charitable institution registered under section 12A of the Income-tax Act, 1961 (hereinafter referred to as "the Act" for short), and is running a hospital. In the course of running the hospital, the appellant acquires medical equipment 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 is treated as application of income for charitable purposes under section 11(1)(a) of the Act. When capital expenditure is treated as application of income for charitable purposes, the appellant virtually enjoys a 100 per cent. write off of the cost of assets. However, since medical service is a business activity held in trust, the appellant claimed all the benefits under the Act including depreciation in the computation of net income. In the course of assessment for the year 2005-06, the Assessing Officer noticed that the appellant has claimed depreciation for Rs. 2,16,27,776, out of which Rs. 18,38,645 represents depreciation on assets acquired during the relevant previous year and the balance towards depreciation on assets held as on the first date of the previous year. According to the Assessing Officer, when the assessee claims expenditure for acquisition of assets as application of income of the charitable trust for charitable purposes, then the assessee is not entitled to claim depreciation in the computation of income. In other words, according to the Assessing Officer, 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. Even though the appeal filed against the assessment was allowed by the Commissioner of Income-tax (Appeals), the Tribunal by following the judgment of the Supreme Court in the case of Escorts Ltd. v. Union of India, 1993 199 ITR 43, allowed the Departmental appeal and restored the assessment with the disallowance. After hearing both sides what we notice is that if the assessee treats the 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 is obviously not done by the assessee and so much so, the income which should be available for application for charitable purposes gets reduced by the depreciation amount which is not permissible under section 11(1)(a) of the Act. 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 account of the trust unless it is written back which is not done. We do not think it is permissible for a charitable institution to generate income outside the books in this fashion.

(2.) Learned counsel for the assessee has relied on the following decisions of various High Courts in their favour.

(3.) We do not find in any of these decisions this aspect is considered and discussed by any of the High Courts. Learned senior counsel though referred Circular No. 5P (LLX-6), dated June 19, 1968 (See endnote 1 on page 349), which is with regard to computation of income of charitable trusts, strangely depreciation is not specifically dealt with in the circular. No decision is seen rendered by the Supreme Court on the merits on this issue, even though one of the special leave petitions filed by the Department against one of the above decisions was dismissed by the Supreme Court. No amendment is seen made to the statute requiring the trust claiming depreciation to write back the depreciation as income of the previous year, if payment for acquisition of assets is treated as application of income for charitable purposes.