1981 (2) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Whether depreciation debited in the accounts qualifies as "expenditure incurred" u/s 44A of the I.T. Act, 1961.
2. Whether the Tribunal was correct in allowing the deduction of depreciation in computing the deficiency for the assessment year 1969-70.

Summary:

Issue 1: Depreciation as "Expenditure Incurred" u/s 44A
The primary issue was whether the depreciation debited in the accounts could be considered as "expenditure incurred" within the meaning of s. 44A of the I.T. Act, 1961. The assessee, Indian Jute Mills Association, claimed a deficiency deduction that included depreciation on assets like furniture and air-conditioners. The ITO disallowed this, arguing that as a non-trading association, the assessee was not entitled to claim depreciation since the assets were not used in business. The AAC upheld this view, stating that depreciation was not an expenditure for computing deficiency under s. 44A.

The Tribunal, however, held that in commercial practice, depreciation is considered an expenditure in determining true profits. The Tribunal noted that the assets were used for the association's purposes and construed s. 44A liberally, allowing the depreciation deduction. The High Court agreed with the Tribunal, stating that the term "expenditure incurred" could include depreciation, especially given the beneficial nature of s. 44A intended for trade associations. The Court referenced various judgments, including Indian Molasses Co. (P.) Ltd. v. CIT and CIT v. Nainital Bank Ltd., to support the interpretation that "expenditure" could encompass depreciation.

Issue 2: Tribunal's Decision on Depreciation Deduction
The Tribunal's decision to allow the depreciation deduction was challenged by the revenue, which argued that "expenditure incurred" should mean actual money paid out. The High Court, however, found that the term "expenditure" could be interpreted to include depreciation, especially in the context of trade associations under s. 44A. The Court emphasized that beneficial provisions in fiscal statutes should be liberally construed in favor of the taxpayer. Consequently, the High Court affirmed the Tribunal's decision, allowing the depreciation deduction in computing the deficiency for the assessment year 1969-70.

Conclusion:
The High Court answered the referred question in the affirmative, holding that the Tribunal was correct in treating depreciation as "expenditure incurred" u/s 44A and allowing its deduction in computing the deficiency for the assessment year 1969-70. The parties were directed to bear their own costs.