2015 (6) TMI 4 - AT - Income Tax

Eligibility of exemption u/s 11 - whether the activities of the assessee are charitable in nature? - Held that - CIT(A) has categorically held that the provisions of sec. 2(15) of the Act will be seen that the proviso to section 2(15) of the Act will be applicable only if the entities carrying out any activity or rendering any services in the nature of trading, commerce or business and the most important feature of the business is being profit motive. After analyzing entire activities, receipts and its application, the CIT(A) correctly hold that activities of the assessee society are not carried out with profit motive. As we have respectfully noted earlier the observations of India Trade Promotion Organization vs. DGIT(E) ( 2015 (1) TMI 928 - DELHI HIGH COURT) that the expression charitable purpose as defined in 2(15) of the Act is read in the context of section 10(23C)(iv) of the Act and we would have to give up the strict and literal interpretation sought to be given to the expression charitable purpose by the Revenue and if an Institution established for charitable purpose did not receive an income at all then what would be need for taking any benefit u/s 10(23C)(iv) of the Act. Therefore, if the expression charitable purpose is given meaning that in case an Institution, with an object of advancement of general public utility, derives an income then it would be falling within the exception carved out by the first proviso to sec. 2(15) of the Act then no entity would qualify for the exemption u/s 10(23C)(iv) of the Act and this meaning obviously provide the effect that the provision of sec. 10(23C)(iv) of the Act would be rendered redundant. Thus we are unable to see any ambiguity or perversity in the order of the CIT(A) which granted relief for the assessee by directing the AO to allow exemption u/s 11 of the Act for the assessee. At this point, it is also pertinent to mention that the AO has not brought out any fact to support this allegation that the activities carried out by the assessee society were conducted or derived in the nature of trade, commerce or business or the activity of rendering any service in relation to any trade, commerce or business and the dominant and prime objective of the assessee society was to earn profit i.e. activities of the assessee society was derived for profit motive. - Decided against revenue. Entitlement of depreciation to the assessee society - Held that - On this issue we respectfully take note of the decision of DIT(E) vs. Indraprastha Cancer Society (2014 (11) TMI 733 - DELHI HIGH COURT), wherein it was held that where a charitable institution has purchased a capital asset and treated the amount spend on the said asset as application of income then the said charitable institution is entitled to claim depreciation on said assets utilized for the activities of the institution. As we have already approved the conclusion of the CIT(A) that the assessee society is eligible for exemption u/s 11 of the Act then we are of the considered view that the CIT(A) directed the AO to allow depreciation for the assessee society in both the assessment years. Therefore, this ground and objection of the ld. DR being devoid of merits is dismissed. - Decided against revenue

Issues Involved:

1. Whether the activities of the assessee are charitable in nature.
2. Eligibility for exemption under Section 11 of the Income Tax Act, 1961.
3. Allowance of depreciation on assets.
4. Deduction for provision for leave encashment.
5. Deduction for provision of gratuity.
6. Exemption on earned surplus based on the principle of mutuality.

Issue-wise Detailed Analysis:

1. Charitable Nature of Activities:
The Revenue contended that the assessee was not working according to the aims and objectives of its memorandum and was providing services to non-members, thus engaging in business activities. The assessee argued that its activities were charitable and in line with its objectives, as supported by a previous High Court ruling that the activities were not driven by profit motive and were charitable in nature. The Tribunal upheld this view, noting that the assessee's activities were consistent with its charitable objectives as defined in Section 2(15) of the Act.

2. Eligibility for Exemption under Section 11:
The AO denied exemption under Section 11, arguing that the assessee was engaged in business activities. The CIT(A) and the Tribunal, however, relied on the High Court's decision, which held that the assessee's activities were charitable and not driven by profit motive. The Tribunal concluded that the assessee was eligible for exemption under Section 11 for both assessment years 2008-09 and 2009-10, as its activities were charitable and not in the nature of trade, commerce, or business.

3. Allowance of Depreciation:
The AO had denied depreciation on the grounds that the assessee was not eligible for exemption under Section 11. The Tribunal, following the High Court's decision in DIT(E) vs. Indraprastha Cancer Society, held that a charitable institution is entitled to claim depreciation on assets used for its activities. The CIT(A)'s direction to allow depreciation was upheld.

4. Deduction for Provision for Leave Encashment:
The AO had disallowed the deduction for provision for leave encashment. The CIT(A) directed the AO to allow this deduction, and the Tribunal upheld this direction, finding no merit in the Revenue's objection.

5. Deduction for Provision of Gratuity:
Similarly, the AO had disallowed the deduction for provision of gratuity. The CIT(A) directed the AO to allow this deduction, and the Tribunal upheld this direction, dismissing the Revenue's objections.

6. Exemption on Earned Surplus Based on the Principle of Mutuality:
For A.Y. 2009-10, the AO denied exemption on earned surplus based on the principle of mutuality. The CIT(A) granted this exemption, and the Tribunal upheld this decision, noting that the assessee's activities were charitable and not driven by profit motive.

Conclusion:
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions to grant exemption under Section 11, allow depreciation, and deductions for leave encashment and gratuity, and to recognize the charitable nature of the assessee's activities. The Tribunal emphasized that the assessee's activities were not driven by profit motive and were consistent with its charitable objectives.

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