1992 (2) TMI 51 - HC - Income Tax

Depreciation must be deducted when computing income available under section 11(1)(a); income is commercial after depreciation.

HC held that for computing income available for application under section 11(1)(a) of the Act, depreciation charged in the trust's accounts must be ... Computation of income for a trust - Charitable Purpose - whether depreciation should be allowed while calculating income under section 11(1)(a) - learned counsel appearing for the Revenue is that sections 22 to 27 of the Act are specific provisions providing for computation of income and, therefore, the Tribunal committed an, error in holding that the income of the assessee as contemplated by section 11(1)(a) of the Act was required to be computed not in accordance with those provisions but in accordance with the normal rules of accountancy under which depreciation is always taken into account for finding out the real income. HELD THAT:- Noticing the difference between the word 'income' and the expression 'total income' and the necessity for providing depreciation in order to maintain correct accounts, the High Court held that the amount of depreciation debited to the accounts of the charitable institution has to be deducted to arrive at the income available for application to charitable and religious purposes. In CIT .v Rao Bahadur Calavala Cunnan Chetty Charities [1979 (8) TMI 17 - MADRAS HIGH COURT], the Madras High Court was required to consider whether, for the purpose of computing accumulation in excess of 25 per cent as laid down in section 11(1)(a) of the Act, 'income' has to be computed under the various heads enumerated in the Income-tax Act. It held that the income from the properties held under trust would have to be arrived at in the normal commercial manner without classification under the various heads set out in section 14. It held that the expression ' income has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by application of some artificial provisions either giving or denying deduction. It observed that the computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chapter III. We are in respectful agreement with the view taken by the Karnataka, Madhya Pradesh and Madras High Courts. We, therefore, answer both the questions referred to us in the affirmative and against the Revenue. Issues involved: Interpretation of provisions of Income-tax Act, 1961 regarding computation of income for a trust and whether depreciation should be allowed while calculating income under section 11(1)(a).Summary:The High Court of Gujarat addressed the questions referred by the Tribunal under section 256(1) of the Income-tax Act, 1961. The case involved a trust registered under the Public Trusts Act, deriving income mainly from immovable property. The dispute arose when the Income-tax Officer rejected the claim of depreciation made by the assessee, contending that income from house property should be calculated according to specific provisions of sections 22 to 27 of the Act. The Appellate Assistant Commissioner disagreed, leading to an appeal to the Tribunal, which ultimately dismissed the appeal. The Revenue then sought clarification on two key questions related to the computation of income under section 11(1)(a) of the Act.The main argument put forth by the Revenue was that the Tribunal erred in not following the specific provisions of sections 22 to 27 for computing income, instead of relying on normal accounting rules that allow for depreciation. The Court referenced precedents from other High Courts, such as the Karnataka High Court and the Madhya Pradesh High Court, which emphasized the importance of allowing depreciation to determine the true income available for charitable purposes. Similarly, the Madras High Court highlighted that income should be understood in a general sense, not limited by artificial provisions for tax assessment purposes.In alignment with the interpretations of the Karnataka, Madhya Pradesh, and Madras High Courts, the High Court of Gujarat ruled in favor of allowing depreciation while computing income for charitable institutions under section 11(1)(a) of the Income-tax Act, 1961. Both questions referred by the Tribunal were answered in the affirmative, against the Revenue. No costs were awarded in this judgment.