2015 (2) TMI 450 - AT - Income Tax

Eligibility for exemption u/s 11 - as per AO assessee is operating a Dharamshala which is general public utility as a commercial activity and so the entire surplus is taxable - source of receipt are from accommodation charges, rent receipt, bed charges and other incidental income - Held that - Assessee society is a charitable society, which is not engaged in any business, trade or commerce so as to disentitle the claim of exemption u/s 11 and 12 of the Act. Surplus alone cannot be a ground to conclude that activities are commercial in nature. In the instant case it is undisputed that the activities are charitable in nature, but solely on the ground of surplus, such activities have been held to be of commercial in nature. We already have found that there was no surplus per-se from the operation of Dharamshala. In any case the incidental surplus cannot be termed as commercial activity. Thus allow the claim of the assessee and direct the AO to allow exemption u/s 11 and 12 of the Act. - Decided in favour of assessee. Treatment of rental income - business income v/s income from house property - Held that - Since already held that the appellant society is eligible for exemption u/s 11 and 12 of the Act, the necessary corollary is that treatment of heads of income become irrelevant. The Hon'ble Supreme Court in CIT Vs. Programme for community organization (2000 (11) TMI 4 - SUPREME Court) while approving the Kerala High Court decision reported in (1996 (10) TMI 41 - KERALA High Court) as to the manner of computation of charitable institution held that income has to be computed on commercial basis and not head-wise on statutory basis. (refer CBDT Circular No.5P, dated 19.06.1998). Depreciation claim by the appellant society on capital assets - Held that - As relying on case of Vishwa Jagriti Mission 2012 (4) TMI 289 - DELHI HIGH COURT claim of depreciation on fixed assets utilized for the charitable purposes has to be allowed while arriving at the income available for application to charitable and religious purposes, since the income of the society should be computed on the basis of commercial principles. Judgment of the Supreme Court in Escorts Limited Vs. Union of India (1992 (10) TMI 1 - SUPREME Court)holding that depreciation under Section 32 of the Act can be denied only in cases where the provisions of Section 35(2)(iv) are applicable held to be inapplicable to the present case. - Decided in favour of asseesse.

Issues Involved:
1. Eligibility for exemption under Section 11 of the Income Tax Act, 1961.
2. Treatment of rental income under the head business income instead of income from house property.
3. Claim of depreciation on capital assets.

Detailed Analysis:

1. Eligibility for Exemption under Section 11 of the Income Tax Act, 1961:

The primary issue was whether the assessee, a society operating a Dharamshala, qualified for exemption under Section 11 of the Income Tax Act, 1961. The Assessing Officer (AO) argued that the society's income was of a commercial nature, thus making it ineligible for exemption under Section 11. The AO noted that the society generated income from accommodation charges, rent receipts, bed charges, and other incidental income, which he considered commercial activities. The AO held that the assessee was covered by the Proviso to Section 2(15) of the Act, and thus, the entire surplus was taxable.

The CIT(A) upheld the AO's view, stating that the surplus generated and the nature of the activities indicated that the society operated like a hotel, which could not be considered as relief to the poor. The CIT(A) concluded that the society's activities were hit by the amended provisions of Section 2(15) effective from the assessment year 2009-10.

However, the assessee contended that it was a non-profit organization established in 1993, providing subsidized accommodation and meals to patients and their attendants visiting Delhi for medical treatment. The society argued that the nominal charges collected were to cover the operational costs and ensure the continuity of its charitable activities. The assessee further submitted that the surplus was incidental and not indicative of commercial activity.

The Tribunal found that the AO had misdirected himself by not considering the factual position that the society did not generate a surplus from the operation of the Dharamshala alone. The Tribunal referred to the Gujarat High Court's decision in DIT Vs. Sabarmati Ashram Gaushala Trust, which clarified that surplus alone cannot determine the commercial nature of activities if they are incidental to the principal charitable activities. The Tribunal concluded that the society was a charitable organization not engaged in business, trade, or commerce, and directed the AO to allow exemption under Sections 11 and 12 of the Act.

2. Treatment of Rental Income under the Head Business Income Instead of Income from House Property:

The second issue was the treatment of rental income received by the society. Since the Tribunal held that the society was eligible for exemption under Sections 11 and 12, the treatment of rental income under different heads became irrelevant. The Tribunal referred to the Supreme Court's decision in CIT Vs. Programme for Community Organization, which stated that income for charitable institutions should be computed on a commercial basis and not head-wise on a statutory basis. Consequently, this ground was rejected.

3. Claim of Depreciation on Capital Assets:

The final issue was the claim of depreciation on capital assets by the society. The CIT(A) allowed the claim following the jurisdictional High Court's judgment in the case of Vishwa Jagriti Mission, which distinguished the Supreme Court's decision in Escorts Limited vs. Union of India. The High Court held that depreciation is a necessary charge in computing net income for charitable institutions, even if the cost of the asset was previously allowed as a deduction. The Tribunal concurred with the CIT(A)'s view and dismissed the revenue's ground on this issue.

Conclusion:

The appeal filed by the assessee was partly allowed, granting exemption under Sections 11 and 12, while the appeal of the revenue was dismissed, upholding the treatment of rental income and the claim of depreciation on capital assets. The judgment emphasized that surplus alone does not determine the commercial nature of activities if they are incidental to the principal charitable purpose.

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