2015 (9) TMI 189 - AT - Income Tax

Disallowance of income generated in the running of Working Women Hostel while computing the taxable income - assessee-society is registered as charitable institution under Section 12A - Held that - It is not in dispute that as per the Memorandum, the predominant object of the assessee-society is education. It is not clear from the orders of the lower authorities whether the assessee was running any educational institution. Even though the assessee is providing funds to the students, it is not clear from the orders of the lower authorities whether such funds are provided by way of or scholarship or any other form of assistance. This Tribunal is of the considered opinion that the activity of the assessee-society has to be examined in the light of the Memorandum of the assessee-society before examining the claim under Section 11 of the Act. It also needs to be examined whether the establishment of Working Women Hostel would fall under the head public utility service under Section 2(15) of the Act. Since these aspects were not examined by the authorities below and the facts are not clear from the orders of the lower authorities with regard to activity of the assessee, this Tribunal is of the considered opinion that the Assessing Officer has to re-examine the issue and he has to bring out the entire facts with regard to object and activity of the assessee-society on record. Accordingly, the orders of the lower authorities are set aside and the entire claim of deduction under Section 11 of the Act is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the issue afresh in the light of the Memorandum of the assessee-society and the activity which is actually carried on by the assessee and thereafter decide the issue in accordance with law after giving reasonable opportunity to the assessee. - Decided in favour of assessee for statsitical purposes. Claim of depreciation on the asset on which the assessee claims deduction under Section 11 as application of income - Held that - Section 32 of the Act, which provides for depreciation on capital asset falls under Chapter IV (D) of the Act. Section 32 of the Act which provides for depreciation is also falling in Chapter IV (D) of the Act. Therefore, for the purpose of computation of total income, depreciation has also to be allowed on the capital asset. In fact, depreciation has to be allowed on the value of the capital asset. This Tribunal is of the considered opinion that Chapter III of the Act deals with an income which does not form part of total income, while Chapter IV deals with situation for computation of total income. Hence, an income which does not form part of total income as the same was exempted under Section 11 as application of income, this Tribunal is of the considered opinion that the assessee cannot claim depreciation under Section 32 of the Act. In other words, Section 11 which falls in Chapter III overrides Section 32 which falls in Chapter IV(D) of the Act. Therefore, this Tribunal is of the considered opinion that the assessee cannot claim depreciation, especially when the cost of asset was allowed as application of income under Section 11 of the Act. - Decided in favour of revenue.

Summary

Issues:
1. Disallowance of income generated from a Working Women Hostel for computing taxable income.
2. Claim of depreciation on assets for which deduction under Section 11 was claimed as application of income.

Issue 1: Disallowance of income from Working Women Hostel:

The appeal focused on the disallowance of income generated from running a Working Women Hostel while computing taxable income. The assessee, a charitable institution, claimed exemption under Section 11 of the Income-tax Act, 1961, stating that the income was applied for the institution's primary object of education. The Revenue argued that the hostel activity was not incidental to education and questioned the application of funds. The Tribunal noted discrepancies in the lower authorities' orders regarding the educational activities and directed the Assessing Officer to re-examine the issue, considering the Memorandum of the assessee-society and the establishment of the hostel under "public utility service" as per Section 2(15) of the Act.

Issue 2: Claim of depreciation on assets:

The second appeal revolved around the claim of depreciation on assets for which deduction under Section 11 had been previously claimed as application of income. The Revenue contended that since the cost of the asset was allowed under Section 11, the depreciation computation failed as the Written Down Value was NIL. The Tribunal analyzed the interplay between Section 11 (Chapter III) and Section 32 (Chapter IV(D)) of the Act. It concluded that when an income is exempted under Section 11 as application of income, depreciation under Section 32 cannot be claimed. Referring to judicial precedents and a division Bench ruling, the Tribunal emphasized that Chapter III deals with income not forming part of the total income, while Chapter IV focuses on total income computation. Consequently, the assessee's claim for depreciation was disallowed, and the Assessing Officer's decision was upheld.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes regarding the disallowance of income from the Working Women Hostel. However, the Revenue's appeal concerning the claim of depreciation on assets was allowed. The orders of the lower authorities were set aside, and the Assessing Officer was directed to re-examine the issues in accordance with the law. The judgment was pronounced on 21st August 2015 at Chennai.