2016 (6) TMI 1351 - AT - Income Tax

Exemption u/s 11 - charitable activities u/s 2(15)- income earned from auditorium - treatment of excess receipt over expenditure on the auditorium owned by the assessee - advancement of any other object of general public utility - whether a particular activity is in the nature of business or not ? - activities incidental to main objective - HELD THAT - Supreme Court in the case of Thanthi Trust 2001 (1) TMI 80 - SUPREME COURT held that the trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which falls u/s. 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust namely that of imparting education and the profits of the newspaper business are utilized by the trust for achieving the object of imparting education. In this case there is no such nexus between the activities carried on and the objects of the assessee that can constitute an activity incidental to the attainment of the objects namely to promote cause of charity mission activities welfare employment diffusion of useful knowledge upliftment and education and to create an awareness of self-reliance among the members of the public etc. We are therefore of the opinion that the observations of the Supreme Court must be understood and appreciated in the background of the fact in that case and should not be extended indiscriminately to all cases. Being so we are inclined to hold that the assessee is not entitled for any exemption u/s. 11 of the I.T. Act. Depreciation u/s 32 - HELD THAT - Also assessee is not entitled for depreciation on the opening balance of written down value of the assets in the asst. year under consideration which were purchased in earlier years and the cost of those assets have already considered as application of income in earlier asst. year while granting exemption u/s.11 of the Act. This issue is squarely covered by the decision of the Tribunal in the case of M/s. Kongunadu Arts & Science College Council 2015 (11) TMI 1119 - ITAT CHENNAI - Decided against assessee.

Summary

Issues Involved:
1. Treatment of income earned from the auditorium as business income instead of exempt income under Section 11 of the Income Tax Act.
2. Denial of exemption under Section 11(4A) of the Income Tax Act.
3. Entitlement to depreciation on the opening balance of written down value of assets.

Issue-wise Detailed Analysis:

1. Treatment of Income Earned from Auditorium:
The primary issue in this appeal is the treatment of income earned from the auditorium owned by the assessee, a charitable trust. The assessee claimed that the income from the auditorium should be exempt under Section 11 of the Income Tax Act, as the trust's predominant objective is educational in nature. However, the Assessing Officer (AO) treated the income generated from the auditorium as a separate business of the trust, thereby attracting the proviso to Section 2(15) of the Act. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, observing that the auditorium was rented out for commercial activities, which does not qualify for charitable purposes under Section 2(15) of the Act.

2. Denial of Exemption under Section 11(4A):
The assessee argued that the AO erred in treating the receipts from the auditorium as business income and denied exemption under Section 11(4A) of the Act. The assessee contended that its objects are mainly educational and not for general public utility involving trade, commerce, or business. The assessee also argued that the surplus from the auditorium was used for educational activities, medical relief, and relief to the poor, which should qualify for exemption. However, the Tribunal noted that for the business income to be exempt under Section 11(4A), it must be incidental to the attainment of the trust's objectives and separate books of account must be maintained. The Tribunal found that the running of the auditorium was not incidental to the trust's objectives and was not held under trust at the time of its formation.

3. Entitlement to Depreciation:
The assessee claimed depreciation on the opening balance of the written down value of assets purchased in earlier years, which were already considered as application of income while granting exemption under Section 11. The Tribunal held that since the cost of the asset was already allowed as application of income, the cost becomes NIL, and allowing depreciation would amount to double deduction. The Tribunal referred to its earlier decision in the case of M/s. Kongunadu Arts & Science College Council, where it was held that if the cost of the asset is NIL, there is no question of allowing depreciation. Therefore, the Tribunal concluded that the assessee is not entitled to depreciation.

Conclusion:
The Tribunal dismissed the appeal, upholding the AO's treatment of the income from the auditorium as business income, the denial of exemption under Section 11(4A), and the rejection of the claim for depreciation on the assets. The Tribunal emphasized that the business carried on by the trust must be incidental to the attainment of the trust's objectives and that the application of income generated by the business for charitable purposes does not automatically qualify for exemption.