Depreciation is admissible as a deduction in computing business income but not in working out the deficiency under Section 44a of the Income-tax Act, 1961.

AJIT K. SENGUPTA,J.

( 1 ) IN this reference under Section 256 (2) of the Income-tax Act, 1961, for the assessment year 1967-68, the following question of law has been referred to this court:"whether, on the facts and circumstances of the case, the Tribunal misdirected itself in law in holding that depreciation amounting to Rs. 24,703 (rupees twenty-four thousand seven hundred and three only) even though not admissible as expenditure in working out the deficiency under Section 44a of the Income-tax Act, 1961, should be allowed as a deduction in computing the business income assessed to tax ?"

( 2 ) THE point of reference relates to the deductibility of depreciation for computing the deficiency under Section 44a of the Income-tax Act, 1961. The assessee is a trade association and the assessment year involved is 1967-68 for which the accounting period ended on December 31, 1966. Besides deriving business income which is taxed, the assessee has also income from payments made by the members by way of subscriptions or otherwise. Such receipts fell short of the expenditure incurred solely for the purpose of protection or advancement of the common interest of the members. In working out the deficiency, a sum of Rs. 24,703 representing depreciation was included by the Income-tax Office/ in the original assessment. Subsequently, the Income-tax Officer reopened the assessment under Section 147 (b) in the view that income chargeable to tax has escaped assessment by computing excess deficiency by way of depreciation of Rs. 24,703 and, consequently, reduced the deficiency to that extent in the reassessment made by him.

( 3 ) ON appeal by the assessee, the Appellate Assistant Commissioner upheld both the validity of the reassessment under Section 147 (b) and also the reduction of deficiency under Section 44a of the Income-tax Act, 1961.

( 4 ) ON second appeal by the assessee before the Tribunal, it upheld the validity of the reassessment proceedings under Section 147 (b) relying on the earlier decision of the Tribunal in the assessee's own case. However, on merits, the Tribunal held that though depreciation did not form part of the expenses for the purpose of working out the deficiency under Section 44a, it should be allowed as deduction in computing the business income which has been assessed to tax.

( 5 ) THE question which was posed by the Tribunal was whether depreciation, though not forming part of the expenses for the purpose of working out the deficiency under Section 44a of the Act, should be allowed as a deduction in computing the business income assessed to tax.

( 6 ) OUR attention has been drawn to the decision of this court in CIT v. Indian Jute Mills Association [1982] 134 ITR 68. In that case, the assessee, the Indian Jute Mills Association, registered under the Indian Trade Unions Act, 1926, which derived income from interest on securities, income from jute chronicle and interest, claimed the benefit of deduction of deficiency in accordance with the provisions of Section 44a in respect of depreciation on the furniture, air-conditioner, etc. , which was debited in its accounts. The Income-tax Officer disallowed the claim on the ground that the assessee was a non-trading association and, therefore, was not entitled to claim depreciation since the assets were not used in a business. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer on the ground that depreciation was not an expenditure to be taken into account for computing the deficiency under Section 44a. On further appeal to the Tribunal, the assessee contended that the amount of depreciation which was calculated according to the provisions of the Act and which was not claimed in the computation of income under any other head was an expenditure incurred solely for the purpose of the protection or advancement of the common interests of the members of the assessee-association and that commercial principles must be applied in the de

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