1989 (9) TMI 93 - HC - Income Tax

Charitable Trust Wins Depreciation Claim: Accounting Principles Prevail in Tax Assessment Dispute

Commissioner Of Income-Tax Versus Raipur Pallottine Society

HC determined that depreciation could be allowed for a charitable trust despite Revenue's objections. The court ruled that depreciation is a valid ... Charitable Trust, Depreciation 1. ISSUES PRESENTED and CONSIDEREDThe core legal question referred by the Income-tax Appellate Tribunal to the High Court was whether the Tribunal was correct in law in directing the Income-tax Officer to allow depreciation to the assessee-trust on its assets. Specifically, the issue was whether depreciation under section 32 of the Income-tax Act could be allowed to a religious and charitable institution assessed as an association of persons, particularly when its income was not computed under the head 'Business' as defined under section 28 of the Act.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether depreciation under section 32 of the Income-tax Act is allowable to a religious and charitable institution assessed as an association of persons, despite its income not being computed under the head 'Business'.Relevant Legal Framework and Precedents: The primary statutory provision in question was section 32 of the Income-tax Act, which deals with allowance of depreciation on assets. The Revenue contended that depreciation is permissible only when income is computed under the head 'Business' (section 28). The Court referred to the Karnataka High Court decision in CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28, which elaborated on the concept and purpose of depreciation in accounting and taxation.Court's Interpretation and Reasoning: The Court examined the nature of depreciation as a concept intrinsic to the mercantile system of accounting, which the assessee followed. It cited the Karnataka High Court's explanation that depreciation represents the exhaustion of the effective life of a fixed asset due to use or obsolescence, and that the allowance for depreciation is essential to reflect a true and fair view of income and capital in accounts. The Court emphasized that depreciation is a necessary charge against profits to preserve the capital invested in assets.Key Evidence and Findings: The undisputed fact that the assessee followed the mercantile system of accounting was significant. The assessee claimed depreciation of Rs. 45,650 on its assets for the assessment year 1973-74, which was initially disallowed by the Income-tax Officer and upheld by the Appellate Assistant Commissioner. The Tribunal, however, allowed the depreciation claim, directing the Income-tax Officer to permit it. The Revenue challenged this direction, leading to the present reference.Application of Law to Facts: Applying the principles from the precedent and the accounting rationale, the Court found that denying depreciation to a charitable institution assessed as an association of persons would undermine the preservation of the corpus of the trust. Since the assessee followed mercantile accounting, depreciation was necessary to accurately compute its income and maintain the trust's capital. The Court rejected the Revenue's contention that depreciation could be allowed only under the business income head.Treatment of Competing Arguments: The Revenue's argument was that section 32 depreciation is restricted to business income under section 28. The Court distinguished this by referring to the nature and purpose of depreciation, as expounded in the cited precedent, and by noting that the assessee's income computation method necessitated depreciation to reflect true income. The Court aligned with the Tribunal's view and the precedent that depreciation is allowable to charitable institutions to preserve their capital corpus.Conclusions: The Court concluded that the Tribunal was correct in law in directing the Income-tax Officer to allow depreciation to the assessee-trust. The question referred was answered in the affirmative and against the Revenue. Each party was directed to bear its own costs.3. SIGNIFICANT HOLDINGS'The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc.''Provision for depreciation is the setting aside, out of the revenue of an accounting period, of the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.''If depreciation is not provided for, the books will not contain a true record of revenue or capital... Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs; assets should be shown at a figure which represents that part of their value on acquisition which has not yet expired.''If depreciation is not allowed as a necessary deduction for computing the income of a charitable institution, then there would be no way to preserve the corpus of the trust for deriving income.'The Court established the core principle that depreciation allowance under section 32 is not confined solely to income computed under the business head but is an essential accounting and tax deduction to reflect true income and preserve capital, even for charitable institutions assessed as associations of persons.Accordingly, the final determination was that the Income-tax Appellate Tribunal was correct in directing the Income-tax Officer to allow depreciation to the assessee-trust on its assets, and the Revenue's appeal against this direction was rejected.