(2018) 402 ITR 441 (SC)
Regular income of a registered NPO; application of income; depreciation on assets
Yes, on the law as it stood. Claiming the acquisition cost as application and claiming depreciation are not double deduction: the first determines whether income was applied in the year of acquisition, the second is a step in computing income in later years.
Where a charitable trust has treated the cost of a capital asset as an application of income, may it also claim depreciation on that asset in later years?
The assessee trusts had acquired capital assets and, in the year of acquisition, treated the cost as an application of income towards their charitable objects, which is how the statutory scheme requires capital expenditure by trusts to be dealt with. In subsequent years they claimed depreciation on the same assets in computing their income. The Revenue disallowed the depreciation, contending that since the entire cost had already been allowed as application, permitting depreciation as well amounted to a double deduction of the same expenditure.
High Courts across the country had overwhelmingly decided in favour of the trusts. The Revenue's appeals were heard together by the Supreme Court, which affirmed the High Court view and noted the number of decisions taking the same position.
For the assessee
The two claims operate at different levels and serve different purposes. Application of income is a test of whether the trust has spent its income on its objects in the year of acquisition. Depreciation is a step in computing the income of later years, recognising the consumption of the asset. Neither claim duplicates the other.
For the Revenue
The whole cost of the asset has already been allowed once, as application in the year of acquisition. Allowing depreciation on the same cost in later years permits the trust to deduct the same expenditure twice, which no scheme of taxation contemplates.
The Court held that the two claims are conceptually distinct and do not overlap. The computation of income and the application of income are separate exercises in the scheme governing charitable trusts: income is first computed on commercial principles, and the question of whether it has been applied to charitable purposes is then addressed. Depreciation belongs to the first exercise, being a charge recognising the consumption of a capital asset in the course of the trust's activities, while treating the acquisition cost as application belongs to the second, testing whether the trust spent its income on its objects in the year it was acquired. Because the two operate at different stages and answer different questions, allowing both does not result in the same expenditure being deducted twice in the sense that the double deduction doctrine forbids. The Court noted that almost every High Court to consider the question had reached the same conclusion, and it declined to disturb that settled position.
Important to note the sequel: Parliament enacted a provision expressly denying depreciation on an asset whose acquisition cost has been claimed as application, so for years governed by that provision the outcome no longer follows. The IT Act 2025 regime for NPOs lies in Sections 332 to 355, with depreciation generally in Section 33. Read this case for the conceptual distinction between computation and application, which remains sound and matters elsewhere in the scheme, and check the current provision for the depreciation entitlement itself.