Law:

Section:

Section 11(1) of the income-tax act, 1961-Charitable or religious trust-Exemption of income from property held under trust-Whether amount of depreciation debited by assessee, a charitable institution, to expenditure account was deductible in arriving at assessee's income available for application for charitable and religious purposes-Held, on facts, yes Facts The assessee, a charitable institution, ran a school. For the assessment year 1977-78, the assessee debited a certain amount as depreciation in respect of the school building to the expenditure account and claimed it to be deductible under section 11(1) in the computation of its income. The ITO disallowed the claim stating that depreciation was required to be allowed only when the income was computed under the head 'business' falling under section 28. He also observed that what was contemplated under section 11(1) was actual application of the institution's income towards charitable objects and not an expenditure which had not been actually incurred to meet the expenses, and that depreciation, being notional expenditure, could not be said to have been incurred or applied for charitable purposes. On appeal, the AAC and the Tribunal allowed the assessee's claim. Held The revenue had assumed that expenditure should necessarily involve actual delivery of or parting with the money. However, it need not necessarily be so. Expenditure should be understood as necessary outgoings. Depreciation is nothing but decrease in the value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. Further, there are only two recognised methods of accounting, cash basis and mercantile basis, and it is undisputed that if the mercantile system is followed, depreciation allowance in respect of the trust property would be allowed. Also notwithstanding the revenue's contention to the contrary, there is nothing in section 11 which debars a charitable institution from maintaining accounts on mercantile basis. That apart, if depreciation is not allowed as a necessary deduction for computing the income of the charitable institutions, then there is no way…

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