1992 (7) TMI 331 - HC - Income Tax

Ruling upholds requirement that ITO account for depreciation despite initial full capital expenditure allowance; trust business income follows accounts

HC upheld the Tribunal's direction that the ITO must account for depreciation when computing income from depreciable assets, despite earlier full capital ... Depreciation deduction - application of income - income of a trust in its commercial sense - treatment of capital expenditure for trustsDepreciation deduction - application of income - Whether depreciation may be allowed in computing income from depreciable assets of a trust where the amount spent on acquiring those assets had been treated as application of the trust's income in the year of acquisition - HELD THAT: - The Tribunal correctly held that the ITO's statement that 'full expenditure has been allowed in the year of acquisition' refers to the amount spent on acquiring the assets being treated as an application of the trust's income in that year, and does not preclude allowing depreciation in computing income from those assets in subsequent years. The Court accepted the Tribunal's explanation that treatment of capital expenditure as application of income for the year of acquisition is conceptually distinct from the computation of income from the asset in later years, where commercial accounting principles permit deduction of depreciation. The Court also noted the CBDT circular of 26th November 1968, which directs that, for a business undertaking held under trust, income is to be taken as shown in the accounts and, where trust income arises from sources such as house property, interest, capital gains or other sources, the income should be understood in its commercial sense; this supports allowing depreciation in computing subsequent income. The Court observed that an earlier application in respect of a similar question (Laxmi Charitable Trust) had been rejected by the High Court, and on that basis and for the reasons above, the answer to the reference is plain. [Paras 2, 3, 4]Depreciation is allowable in computing income from the assets in subsequent years despite the capital expenditure having been treated as application of income in the year of acquisition.Final Conclusion: The reference is answered in favour of the assessee: the Tribunal was right to direct the ITO to take depreciation into account when computing the income from depreciable assets, and the rule is discharged. Issues involved: Interpretation of depreciation allowance for a trust under the Income Tax Act.Summary:The High Court of Bombay addressed an application under section 256(2) of the Income Tax Act concerning the treatment of depreciation on depreciable assets for a trust. The main question was whether the Tribunal was correct in allowing depreciation when full capital expenditure had already been accounted for in the year of asset acquisition. The assessee, a trust, included depreciation in its income calculation, but the Income Tax Officer (ITO) disallowed it, stating that full expenditure had been accounted for initially. The Appellate Authority Commission (AAC) upheld the ITO's decision, but the Tribunal overturned it, explaining that the expenditure on asset acquisition had been considered as income application in the acquisition year, not precluding depreciation in subsequent years.The respondents referred to a Circular issued by the Central Board of Direct Taxes (CBDT) clarifying that for a trust holding a business undertaking, income should align with the undertaking's accounts, and income from various sources should be understood commercially. The Court noted a previous case involving Laxmi Charitable Trust where a similar issue was rejected, indicating a clear answer to the current question. The Court also highlighted that the question's wording was misleading, reflecting the ITO's language, which had already been clarified.In conclusion, the Court discharged the rule, affirming the Tribunal's decision to allow depreciation on depreciable assets for the trust, despite full capital expenditure being considered in the acquisition year.