Taxation of trusts
This query is : Resolved
30 May 2012
Suppose a trusts purchased a fixed asset say for Rs. 5,00,000, depreciation would be charged @ 10%.
Now which amount is a application of income
Rs. 5,00,000 (fixed asset cost)
or
Rs. 50,000 (depreciation amount)
Now which amount is a application of income
Rs. 5,00,000 (fixed asset cost)
or
Rs. 50,000 (depreciation amount)
30 May 2012
In case of trust both purchase of FA & depreciation there on is application of income..
30 May 2012
It means application of income is 5,50,000 in the year of purchase of asset.
30 May 2012
yes prabhat ,though it is double deduction.
30 May 2012
whether it is mandatory in the case of trust to charge depreciation?
30 May 2012
Yes Explanation 5 To Sec 32(1)Income Tax Act makes it mandatory for every assessee to claim depreciation.
12 September 2012
Sir again a query has raised on this topic.
How it will be treated and what entry will have to be pass in the books of accounts because either we classify asset under the group head “Fixed Assets” or under “Indirect expenditure”
I have suggested the following entries. Please tell me whether it is correct, if not, please suggest the entries.
1. Fixed Assets Dr. 5,00,000
(classified under head Expenditure and claim exemption u/s 11)
To Bank 5,00,000
2. Fixed Assets Dr. 5,00,000
(classified under head Fixed Assets and claim exemption u/s 11 as depreciation over it useful life)
To Capital Fund 5,00,000
How it will be treated and what entry will have to be pass in the books of accounts because either we classify asset under the group head “Fixed Assets” or under “Indirect expenditure”
I have suggested the following entries. Please tell me whether it is correct, if not, please suggest the entries.
1. Fixed Assets Dr. 5,00,000
(classified under head Expenditure and claim exemption u/s 11)
To Bank 5,00,000
2. Fixed Assets Dr. 5,00,000
(classified under head Fixed Assets and claim exemption u/s 11 as depreciation over it useful life)
To Capital Fund 5,00,000
26 July 2025
This is a common and important area of confusion when it comes to the **tax treatment and accounting entries** for fixed assets in a **charitable or religious trust** registered under **section 12A/12AA** of the Income Tax Act, 1961.
Let’s break this down into:
---
## ✅ 1. **Tax Treatment – What qualifies as Application of Income?**
### ▸ **As per judicial precedents** (notably *CIT v. Institute of Banking Personnel Selection* \[2003] 264 ITR 110 and several others):
> **Both the purchase of a fixed asset and depreciation claimed on it are considered as application of income** for purposes of Section 11.
This leads to a situation where:
* ₹5,00,000 (purchase of asset) is treated as **application of income** in the **year of purchase**.
* Additionally, ₹50,000 (depreciation) is allowed as **application in subsequent years**.
* This **"double deduction"** has been permitted historically by courts.
---
## ✅ 2. **Recent Position – CBDT Circular No. 17/2019 dated 08.08.2019:**
To avoid double deduction, **Finance Act 2014** inserted **Explanation 2 to Section 11(1)** w\.e.f. **01.04.2015** (i.e., AY 2015-16):
> **Depreciation shall not be allowed** as application of income **if the asset was already claimed as application of income in the year of acquisition.**
### ➤ So for **AY 2015-16 onwards**, **you can’t claim both**:
* If **asset cost** was claimed as application in Year 1,
* Then **depreciation** on that asset **is not allowed** in subsequent years.
---
## ✅ 3. **Is charging depreciation in books mandatory?**
Yes, **as per Explanation 5 to Section 32(1)** of the Income Tax Act, **depreciation is mandatory** where the asset is used for the purposes of business/profession (including for trusts).
However:
* This is only **relevant if the trust is taxable under business income**.
* For **Section 11** exempt trusts, the **concept of “application”** is broader and linked to **income applied for charitable/religious purposes**, not necessarily based on business principles.
So **charging depreciation in books** is **accounting-wise appropriate**, but **not mandatory under Income Tax for Section 11 purposes**, especially after the 2014 amendment.
---
## ✅ 4. **Suggested Accounting Entries:**
Your suggestion shows confusion between **capital accounting** and **expenditure accounting**. Here's the correct treatment:
### ▶ In the **Books of Accounts (Accounting Treatment)**:
```plaintext
1. Fixed Asset A/c Dr. ₹5,00,000
To Bank/Cash A/c ₹5,00,000
```
* This is standard — you capitalize the asset.
* It goes under **Balance Sheet → Fixed Assets**.
```plaintext
2. Depreciation A/c Dr. ₹50,000
To Fixed Asset A/c ₹50,000
```
* Depreciation is charged annually.
* This goes into the **Income & Expenditure Account**.
---
## ✅ 5. **Tax Treatment in Income Tax Return:**
* For **years prior to AY 2015–16** → You could claim **both cost and depreciation**.
* For **AY 2015–16 and onwards** → If you claimed **₹5,00,000 as application**, **you can’t claim depreciation again**.
So the **application of income** for tax purposes is:
* **₹5,00,000** in **year of purchase**, or
* **Annual depreciation**, **if asset cost was not claimed earlier**.
---
## ✅ Summary
| Item | Accounting Books | Income Tax Application of Income |
| ------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------ |
| Purchase of Asset | Capitalized in Balance Sheet | Claimed as application in year of purchase |
| Depreciation | Charged annually | **Disallowed** post AY 2015–16 if asset cost already claimed |
| Total Application Allowed | Either cost or depreciation, **not both** post 2014 amendment | |
---
Let me know if you want a sample disclosure in **ITR-7** or treatment in **audit reports (Form 10B)**.
Let’s break this down into:
---
## ✅ 1. **Tax Treatment – What qualifies as Application of Income?**
### ▸ **As per judicial precedents** (notably *CIT v. Institute of Banking Personnel Selection* \[2003] 264 ITR 110 and several others):
> **Both the purchase of a fixed asset and depreciation claimed on it are considered as application of income** for purposes of Section 11.
This leads to a situation where:
* ₹5,00,000 (purchase of asset) is treated as **application of income** in the **year of purchase**.
* Additionally, ₹50,000 (depreciation) is allowed as **application in subsequent years**.
* This **"double deduction"** has been permitted historically by courts.
---
## ✅ 2. **Recent Position – CBDT Circular No. 17/2019 dated 08.08.2019:**
To avoid double deduction, **Finance Act 2014** inserted **Explanation 2 to Section 11(1)** w\.e.f. **01.04.2015** (i.e., AY 2015-16):
> **Depreciation shall not be allowed** as application of income **if the asset was already claimed as application of income in the year of acquisition.**
### ➤ So for **AY 2015-16 onwards**, **you can’t claim both**:
* If **asset cost** was claimed as application in Year 1,
* Then **depreciation** on that asset **is not allowed** in subsequent years.
---
## ✅ 3. **Is charging depreciation in books mandatory?**
Yes, **as per Explanation 5 to Section 32(1)** of the Income Tax Act, **depreciation is mandatory** where the asset is used for the purposes of business/profession (including for trusts).
However:
* This is only **relevant if the trust is taxable under business income**.
* For **Section 11** exempt trusts, the **concept of “application”** is broader and linked to **income applied for charitable/religious purposes**, not necessarily based on business principles.
So **charging depreciation in books** is **accounting-wise appropriate**, but **not mandatory under Income Tax for Section 11 purposes**, especially after the 2014 amendment.
---
## ✅ 4. **Suggested Accounting Entries:**
Your suggestion shows confusion between **capital accounting** and **expenditure accounting**. Here's the correct treatment:
### ▶ In the **Books of Accounts (Accounting Treatment)**:
```plaintext
1. Fixed Asset A/c Dr. ₹5,00,000
To Bank/Cash A/c ₹5,00,000
```
* This is standard — you capitalize the asset.
* It goes under **Balance Sheet → Fixed Assets**.
```plaintext
2. Depreciation A/c Dr. ₹50,000
To Fixed Asset A/c ₹50,000
```
* Depreciation is charged annually.
* This goes into the **Income & Expenditure Account**.
---
## ✅ 5. **Tax Treatment in Income Tax Return:**
* For **years prior to AY 2015–16** → You could claim **both cost and depreciation**.
* For **AY 2015–16 and onwards** → If you claimed **₹5,00,000 as application**, **you can’t claim depreciation again**.
So the **application of income** for tax purposes is:
* **₹5,00,000** in **year of purchase**, or
* **Annual depreciation**, **if asset cost was not claimed earlier**.
---
## ✅ Summary
| Item | Accounting Books | Income Tax Application of Income |
| ------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------ |
| Purchase of Asset | Capitalized in Balance Sheet | Claimed as application in year of purchase |
| Depreciation | Charged annually | **Disallowed** post AY 2015–16 if asset cost already claimed |
| Total Application Allowed | Either cost or depreciation, **not both** post 2014 amendment | |
---
Let me know if you want a sample disclosure in **ITR-7** or treatment in **audit reports (Form 10B)**.
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