G. G. SOHANI, ACTG. C.J. - As directed by this court, the Income Tax Appellate Tribunal, Nagpur Bench, has referred the following question of law to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Income Tax Officer to allow depreciation to the assessee-trust as claimed by it "
The material facts giving rise to this reference, briefly, are as follows : The assessee is a religious and charitable institution and was assessed in the status of an association of persons. For the assessment year 1973-74, the assessee claimed depreciation of Rs. 45,650 on its assets. That was disallowed. Aggrieved by the order passed by the Income Tax Officer, the assessee preferred an appeal. The Appellate Assistant Commissioner upheld the order passed by the Income Tax Officer in this behalf. On further appeal before the Tribunal, the Tribunal held that, on assets held by the assessee trust, the assessee was entitled to depreciation. The Tribunal, accordingly, directed that the Income Tax Officer should allow depreciation as claimed by the assessee. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.
Having heard learned counsel for the petitioner, we have come to the conclusion that the reference must be answered in the affirmative and against the Revenue. It was contended on behalf of the Revenue that depreciation under section 32 of thecould be allowed only when income was computed under the head "Business" falling under section 28 of the. In this connection, we may usefully refer to the following observations of the Karnataka High Court in CIT v. Society of the Sisters of St. Anne : [1984]146ITR28(KAR) :
"The depreciation is nothing but decrease in value of property through wear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. In Spicer and Peglers Book-Keeping and Accounts, 17th edn., pp. 44, 45 and 46, it has been noted as follows :
Depreciation is the exhaustion of the effective life of a fixed asset owing to use or obsolescence. It may be computed as that part of the cost of the asset which will not be recovered when the asset is finally put out of use. The object of providing for depreciation is to spread the expenditure, incurred in acquiring the asset, over its effective lifetime; the amount of the provision, made in respect of an accounting period, is intended to represent the proportion of such expenditure, which has expired during that period.
At the end of its effective life, the asset ceases to earn revenue, i.e., the capital value has expired and the asset will have to be replaced or a substitute found. Provision for depreciation is the setting aside, out of the revenue of an accounting period, of the estimated amount by which the capital invested in the asset has expired during that period. It is the provision made for the loss or expense incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.
If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits; having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Moreover, unless provision is made for depreciation, the balance-sheet will not present a true and fair view of the state of affairs; assets should be shown at a figure which represent that part of their value on acquisition which has not yet expired."
It was not disputed that the mercantile system of accounting was followed by the assessee. In that case, as held in CIT v. Society of the Sisters of St. Anne : [1984]146ITR28(KAR) if depreciation is not allowed as a necessary deduction for computing the income of a charitable institution, then there would be no way to preserve the corpus of the trust for deriving income. We respectfully agree with that decision.
For all these reasons, our answer to the question referred by the Tribunal is in the affirmative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.
