Depreciation in case of trust

The trust has acquired fixed assets out of bank borrowals. Repayment of bank loan installments has been claimed as application of income by the trust in the earlier years. For the assessment year 2009-10 the assessing officer wants to disallow depreciation in the scrutiny proceedings since the assset has already been deducted as application of income in the earlier years. The escorts case has been distinguished by the Punjab and Haryana High Court in the marketing comittee Pipli case wherein it is held that depreciation is allowable even in respect of assets claimed as application of income. Such being the case, can the AO disallow depreciation because the asset has been acquired out of borrowed funds and repayment of loans has been shown as application of income?

Replies (4)

No. Assessing Officer cannot do so merely on the ground that the asset as been acquired out of borrowed funds. The judgment (supra) is very clear on this aspect and there is no scope for AO as desired.

Depreciation on any assets is based on the declining value of assets as per the set norms and has no concern whether the same were acquired by its own earnings or through borrowed funds. This aspect should have been ignored by the AO that even the borrowed funds have to be repaid out of the income of the Trust.

Defenately  AO could do this.

As only interest will be eligible as application of income but not installment.

One side you are taking capital receipt and other side you charge as capital exp..........?(Installment)

if cost of acquisition was originally allowed as application of trust income then depreciation on the same asset can not be allowed

this amounts to double deduction, which is not the intension of the statute.

If the charitable trust has purchased the asset, then the cost of the asset shall be an application of income. However the depreciation on the cost of the asset cannot be treated as an application of income. Since this amounts to UNJUST ENRICHMENT. This was the view of the Hon'ble Supreme court in Escorts Ltd.  judgment. However if the trust receives the asset as a gift, then in that case depreciation can be claimed as in the case of Inst of Banking personnel selection.

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