By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Sections 32 and 11 – Assessee entitled to depreciation on capital asset even if cost of acquisition of such asset was earlier allowed as application of income while computing income u/s. 11
Facts:
Assessee trust claimed depreciation while computing its income for the respective assessment years. The Ld. AO held that as the cost of addition to asset was claimed by the assessee as application of income for the respective assessment years, assessee could not further claim depreciation on the very same assets and hence disallowed the claim of depreciation.
Held:
For the purpose of determining the income of trust eligible for exemption u/s. 11, income should be construed strictly in commercial sense (i.e., normal accounting principles), without reference to the heads of income specified in section 14. The income to be considered is the book income and not the total income as defined in section 2(45). The concept of commercial income necessarily envisages deduction of depreciation on the assets of the trust. This position is as confirmed by the CBDT vide its circular No.5-P (LXX-6), dated 19-6-1968. Normal accounting principles clearly provide for deducting depreciation to arrive at income. Income so arrived at (after deducting depreciation) is to be applied for charitable purpose. Capital expense is application of income so determined. Hence, there is no double deduction or double claim of the same amount as application. Thus, depreciation is to be deducted to arrive at income and it is not application of income.
Note:
1. Supreme Court decision in case of Escorts Ltd. vs. Union of India [1993]199 ITR 43 was distinguished
2. Readers may also refer two decisions of Hon’ble Bombay High Court viz.
• DIT (Exemption) vs. Framjee Cawasjee Institute [1993] 109 CTR 463 and
• CIT vs. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110
