Charitable trust income computation: exempt dividend is excluded from section 11 application test, and depreciation remains allowable.

For a charitable trust, dividend income exempt under section 10 is not to be included when applying the 85% application test under section 11, because income excluded under section 10 does not re-enter the section 11 computation. Depreciation on trust assets is also allowable on commercial principles even where the acquisition cost of the fixed assets was already treated as application of income, and this does not amount to a double deduction. The later amendment in section 11(6) was stated not to affect the year in question. The Revenue's challenge therefore failed on both issues, and the relief granted by the appellate authority was sustained.

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Issues: (i) Whether dividend income exempt under section 10 was required to be included for computing 85% application of income for exemption under section 11. (ii) Whether depreciation on assets could be allowed as application of income where the entire cost of fixed assets had already been treated as application of income.

Issue (i): Whether dividend income exempt under section 10 was required to be included for computing 85% application of income for exemption under section 11.

Analysis: The applicable scheme distinguishes between income not included in total income under section 10 and income derived from property held under trust under section 11. The exempt dividend income excluded under section 10 does not become part of the computation for the 85% application test under section 11. The jurisdictional High Court view applied in the judgment held that income excluded under section 10 cannot be brought back for section 11 computation.

Conclusion: The issue was decided in favour of the assessee and the exempt dividend income was not required to be included for the 85% application computation.

Issue (ii): Whether depreciation on assets could be allowed as application of income where the entire cost of fixed assets had already been treated as application of income.

Analysis: The governing principle is that the income of a charitable trust is to be computed on commercial principles, and depreciation is a legitimate allowance in such computation. Allowing depreciation does not amount to double deduction merely because the capital cost of the assets was earlier treated as application of income. The later statutory amendment in section 11(6) did not alter the position for the year in question.

Conclusion: The issue was decided in favour of the assessee and depreciation was held allowable as application of income.

Final Conclusion: The Revenue's challenge failed on both substantive issues, and the assessment relief granted by the appellate authority was upheld.

Ratio Decidendi: For a charitable trust, income exempt under section 10 is not to be counted for the 85% application test under section 11, and depreciation on trust assets is allowable on commercial principles despite prior treatment of acquisition cost as application of income.

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