Issues involved: Whether the Tribunal was right in directing the Income-tax Officer to allow depreciation to the assessee-trust as claimed by it.
Summary: The High Court of Madhya Pradesh was tasked with determining whether the Income-tax Appellate Tribunal was correct in directing the Income-tax Officer to allow depreciation to the assessee-trust. The assessee, a religious and charitable institution, had claimed depreciation on its assets for the assessment year 1973-74, which was initially disallowed. The Tribunal later ruled in favor of the assessee, prompting the Revenue to seek reference to the High Court.
Upon hearing arguments, the court concluded that depreciation should indeed be allowed to the assessee-trust. The Revenue had argued that depreciation could only be allowed when income was computed under the head "Business" as per section 32 of the Income Tax Act. However, the court cited a previous judgment highlighting the concept of depreciation as a necessary accounting practice to spread the expenditure incurred in acquiring assets over their effective lifetime.
Given that the assessee followed the mercantile system of accounting, the court agreed that depreciation should be allowed as a deduction for computing the income of a charitable institution to preserve the trust's corpus for deriving income. Therefore, the court answered the question referred by the Tribunal in the affirmative and against the assessee, emphasizing the importance of allowing depreciation for charitable institutions.
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