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 expenditure being allowed in the year of acquisition. Relying on the CBDT circular of 26 Nov. 1968, the court held that income of a business undertaking held under trust is to be determined as shown in the undertaking's accounts and that income from house property, interest, capital gains or other sources is to be understood commercially. A prior similar application was rejected, and the pleaded question was held misleading.

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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.

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