The term "expenditure incurred" in Section 44A of the Income Tax Act, 1961 includes depreciation debited in accounts, if not deductible under any other provision of the Act and not being capital expenditure.

( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, the following question has been referred to this court:" Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that depreciation debited in the accounts was ' expenditure incurred ' by the assessee within the meaning of Section 44a of the I. T. Act, 1961, and should be deducted in computing the deficiency under the said section for the assessment year 1969-70 ? "

( 2 ) THE assessee is the Indian Jute Mills Association and the relevant assessment year is 1969-70, corresponding previous year being the year ended on 31st December, 1968. The assessee had income from interest on securities, income from jute chronicle and interest. The assessee's total income from these sources was Rs. 98,835. Before the ITO, by a letter dated 6th October, 1961, the assessee claimed the benefit of deduction of deficiency for Rs. 19,934 in accordance with the provisions of Section 44a of the I. T. Act, 1961. Along with the said letter, a computation showing the said deficiency of Rs. 19,934 was filed and this included a sum of Rs. 14,846 representing in respect of furniture, air-conditioner, etc. , which was debited in the accounts. The assessee is registered under the Indian Trade Unions Act, 1926. The ITO disallowed this amount of deficiency for the computation of deficiency as, in his opinion, being a non-trading association, was not entitled to claim depreciation. In support, it was observed that such a depreciation could not be claimed since the assets were not used in the business. He, therefore, restricted the deficiency to Rs. 5,088, being the difference between Rs. 19,934 and Rs. 14,846.

( 3 ) THE assessee, being aggrieved by the aforesaid order of the ITO, went up in appeal before the AAC. The AAC upheld the order of the ITO observing that the depreciation was not an expenditure to be taken into account for computing the deficiency under Section 44a of the Act.

( 4 ) BEING dissatisfied with the order of the AAC, the assessee went up in further appeal before the Tribunal. It was the case of the assessee before the Tribunal that the amount of depreciation, which was calculated according to the provisions of the Act and which was not claimed for computation of income under any other head, was an expenditure incurred solely for the purpose of protection or advancement of the common interests of the assessee-association. In this regard reference was made to the provisions of Section 37 (1) of the Act to contend that the depreciation under Section 32 was treated as any other expenditure enumerated in Section 37 (1) of the Act. It was further submitted that commercial principles must be applied for the determination of the deficiency. On the other hand, on behalf of the revenue, the grounds indicated in the order of the ITO as well as the AAC were canvassed. The Tribunal, after considering the rival contentions, was of the view that the nature of the expenditure allowed under Section 44a of the Act had not been fully spelt out. The Tribunal was also of the view that in the commercial world, viz. , the ascertainment of the true profits of a business, always involved a deduction of depreciation, because it was one of the several items that appeared in the profit and loss account. Under the provisions of the Act, depreciation was found allowable in the determination of the income from business as also that of certain categories falling under the head "other sources". The Tribunal was of the view that there could not be any dispute that the assets on which depreciation had been claimed were used for the purposes for which the association was set up, viz. , the purpose of protection or advancement of the common interests of the members of the association. According to the Tribunal, the provisions of Section 44a should be construed liberally and the Tribunal directed the ITO to allow further deduction of Rs. 14,946 b