1983 (8) TMI 44 - HC - Income Tax

High Court: Depreciation is a Legitimate Expense for Charitable Institutions

Commissioner Of Income-Tax, Karnataka I Versus Society Of The Sisters Of St. Anne

The High Court of Karnataka ruled in favor of a charitable institution, affirming that depreciation should be considered a legitimate expense when ... Charitable Trust Issues involved: Interpretation of the Income Tax Act, 1961 regarding the treatment of depreciation in the accounts of a charitable institution.Summary:The High Court of Karnataka was presented with a question under section 256(1) of the Income Tax Act, 1961, regarding the treatment of depreciation debited to the accounts of a charitable institution in determining the income available for charitable and religious purposes. The case involved a society known as 'The Society of the Sisters of St. Anne, Bangalore,' which operated a school and filed a return of income declaring nil income for the assessment year 1977-78. The dispute arose when the Income Tax Officer disallowed the depreciation claimed by the institution, stating that depreciation should only be allowed when computing income under the head 'Business' as per section 28 of the Act. The Assessing Officer held that depreciation, being a notional expenditure, could not be considered as applied for charitable purposes.Upon appeal, the Appellate Authority Commission (AAC) allowed the depreciation claim, leading to an appeal by the Income Tax Officer to the Tribunal. The Tribunal upheld the AAC's decision, emphasizing that the income available for charitable purposes should be considered in a real sense, and depreciation was essential for determining the income available for distribution for charity. The Revenue Department challenged this decision, arguing that depreciation should not be considered as an expense relevant for calculating the income available for charitable purposes.In analyzing the relevant provisions of section 11 of the Act, the Court highlighted that the income derived from property held under trust should not be included in the total income of the person receiving that income. The Court also discussed the significance of depreciation in accounting practices, noting that depreciation represents the decrease in the value of assets over time and is a necessary outgoing in determining true profits. The Court referred to established accounting principles and previous judicial decisions supporting the inclusion of depreciation in calculating income from trust properties.The Court rejected the Revenue's argument to exclude depreciation from the computation of income for charitable institutions, emphasizing that the mercantile system of accounting, which allows for depreciation, should be considered. Citing relevant case law and circulars, the Court affirmed that depreciation is a legitimate expense that should be accounted for in determining the income available for charitable purposes. Ultimately, the Court ruled in favor of the assessee, affirming the importance of including depreciation in calculating the income available for charitable and religious purposes.In conclusion, the Court answered the question in the affirmative, against the Revenue, and directed each party to bear their own costs.