2021 (8) TMI 1228 - HC - Income Tax

Claiming Depreciation u/s 32 while claiming exemption u/s 11 - whether while computing income under section 11(1)(a) of the Income Tax Act, 1961, depreciation is not to be allowed? - HELD THAT - The substantial questions of law framed for consideration have been answered in favour of the assessee in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT held that normal depreciation could be considered as legitimate deduction in computing real income of assessee on general principles or under Section 11(1)(a).

Summary

Issues:
1. Whether depreciation is to be allowed while computing income under section 11(1)(a) of the Income Tax Act, 1961?
2. Whether deduction of depreciation under Sec.32 falls under chapter 'Profit and gains from business and profession' of the Income tax Act, 1961 and would not be available to a Charitable Trust where income is otherwise not assessable under the above head?
3. Whether 'income' referred to in section 11(1)(d) of the Act is to be computed not in accordance with the provisions of the Act but in accordance with the normal rules of accountancy under which the depreciation has to be allowed while computing such income under section 11(1)(a) of the Act?

Analysis:
1. The appeal was filed against the order of the Income Tax Appellate Tribunal regarding the assessment year 2010-11. The substantial questions of law included whether depreciation should be allowed under section 11(1)(a) of the Act. The Hon'ble Supreme Court in a similar case held that normal depreciation is a legitimate deduction in computing the real income of the assessee. The Court emphasized that depreciation can be considered under general principles or under section 11(1)(a) of the Act. The Court referred to previous cases and highlighted that depreciation can be claimed even if the capital expenditure was treated as an application of income for charitable purposes.

2. The second issue revolved around whether deduction of depreciation under Sec.32 falls under the chapter 'Profit and gains from business and profession' and if it would be unavailable to a Charitable Trust. The Court referred to a case where the Tribunal confirmed that depreciation on assets can be considered even if the capital expenditure was allowed in the year of acquisition. The Court affirmed the Tribunal's view that depreciation can be claimed in subsequent years for depreciable assets.

3. The third issue was whether the 'income' referred to in section 11(1)(d) of the Act should be computed according to normal rules of accountancy allowing for depreciation. The Court agreed with the principles established in previous judgments and dismissed the appeal in favor of the assessee. The Court highlighted that the legislature made an amendment in Section 11(6) of the Act, which was deemed prospective in nature. The Court affirmed that once depreciation is allowed, the assessee is entitled to carry forward the depreciation.

In conclusion, the Court allowed the appeal filed by the assessee based on the principles established in previous judgments regarding the allowance of depreciation for Charitable Trusts.