2017 (11) TMI 1650 - AT - Income Tax

Whether the hostel facilities provided to college students is educational activity u/s 2(15) or business activity - whether the depreciation shall be allowed to the assessee - Held that - that providing of hostel facilities and transport facilities to the student and staff member of the educational Institute cannot be considered as business activity but is subservient to the object of educational activities - the hostel and transport facilities is incidental to achieve the object of providing education as per object of the trust - Decided in favor of assessee. Held that - For the similar reasons that hostel activities are incidental to educational activities deduction of depreciation is allowed - Decision in the case of Krishna Charitable Society Vs. Addl CIT 2017 (9) TMI 1030 - ITAT DELHI followed. - Decided in favor of assessee.

Issues Involved:
1. Treatment of hostel facilities provided to college students as business income.
2. Requirement of maintaining separate books of account for hostel facilities under Section 11(4A).
3. Disallowance of depreciation claimed by the assessee.

Issue-wise Detailed Analysis:

1. Treatment of Hostel Facilities Provided to College Students as Business Income:
The primary issue was whether the hostel facilities provided to college students constituted a separate business activity or were part of the educational activities of the assessee society. The Assessing Officer (AO) treated the hostel receipts as business income, asserting that they did not fall under the definition of education as per Section 2(15) of the Income Tax Act, 1961. Consequently, the AO considered the surplus from hostel fees as business income.

The assessee argued that maintaining hostel facilities was an integral part of providing education and not a separate business activity. This argument was supported by the decision of the Hon'ble Karnataka High Court in CIT Vs. Karnataka Lingayat Education Society, which held that providing hostel facilities to students and staff is incidental to the objective of providing education.

The Tribunal agreed with the assessee, noting that the hostel facilities were not provided to anyone other than the students and staff. Thus, it concluded that the hostel and transport facilities were part of the educational activities of the assessee and could not be considered separate business activities. The Tribunal allowed the appeal on this ground, reversing the findings of the lower authorities.

2. Requirement of Maintaining Separate Books of Account for Hostel Facilities under Section 11(4A):
The AO contended that since the hostel fees were treated as business income, the assessee should have maintained separate books of account as mandated by Section 11(4A) of the Act. However, since the Tribunal determined that the hostel facilities were part of the educational activities and not a separate business, the requirement to maintain separate books of account under Section 11(4A) did not apply. Therefore, this ground was also decided in favor of the assessee.

3. Disallowance of Depreciation Claimed by the Assessee:
The AO disallowed the depreciation claimed by the assessee, citing the decision of the Hon'ble Supreme Court in the case of Escorts Ltd. and the Hon'ble Kerala High Court in the case of Lissie Medical Institution. The AO argued that allowing depreciation would result in a double deduction since the capital expenditure had already been considered as application of income.

The assessee countered this by referring to the decision of the Hon'ble Delhi High Court in DIT (Exemption) vs. M/s Indraprastha Cancer Society, which allowed depreciation even if the capital expenditure had been treated as application of income. The Tribunal, following the Delhi High Court's decision, ruled in favor of the assessee and directed the AO to delete the disallowance of depreciation.

Conclusion:
The Tribunal allowed both appeals filed by the assessee for the Assessment Years 2010-11 and 2011-12. It concluded that the hostel facilities were part of the educational activities and not a separate business. Consequently, the requirement to maintain separate books of account under Section 11(4A) was not applicable. Additionally, the Tribunal allowed the depreciation claimed by the assessee, directing the AO to delete the disallowance.

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