2018 (5) TMI 2094 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - assessee in addition to educational activities, also provide hostel and transport facilities to the students in its college - transportation and hostel running itself is not an educational activity and can at the most be said to be incidental to the object of the trust - HELD THAT - As relying in assessee's own case 2017 (9) TMI 1030 - ITAT DELHI and further stands supported by the decision of Rajasthan and Gujrati Charitable Foundation, Poona 2017 (12) TMI 1067 - SUPREME COURT . Accordingly, the additions made by the ld. Authorities below deserve to be deleted and the appeal of the assessee to be allowed.

Summary

Issues Involved
1. Classification of hostel facilities as business activity.
2. Applicability of Section 11(4A) concerning separate business activity.
3. Treatment of hostel/mess facilities as integral to educational activities under Section 2(15).
4. Disallowance of depreciation claimed by the assessee.

Detailed Analysis

Issue 1: Classification of Hostel Facilities as Business Activity
The primary contention was whether the hostel facilities provided by the assessee society, which runs an engineering college, should be classified as a business activity. The Assessing Officer (AO) treated the surplus generated from hostel activities as business income, asserting that such activities are incidental to the business. The AO's stance was that the hostel and transportation services are separable from educational activities, necessitating separate books of accounts. The Tribunal, referencing the Karnataka High Court's decision in CIT vs. Karnataka Lingayat Education Society, concluded that providing hostel facilities to students/staff is incidental to the educational objectives of the society. It was held that these activities cannot be considered business activities but are subservient to the educational objectives of the trust.

Issue 2: Applicability of Section 11(4A)
The AO argued that the hostel/mess facilities should be considered a separate business activity under Section 11(4A) of the IT Act. This was based on the premise that the surplus should either be reimbursed to students or used to reduce fees. The Tribunal, however, found this reasoning flawed. It emphasized that maintaining hostel facilities is a statutory obligation and an integral part of the educational activities. The Tribunal relied on the Allahabad High Court's decision in IIT vs. State of UP, which held that running a hostel is an integral part of the educational institution's objectives and not a separate business activity.

Issue 3: Treatment of Hostel/Mess Facilities as Integral to Educational Activities
The assessee contended that maintaining hostel/mess facilities is an essential part of "education" under Section 2(15) of the IT Act and not a separate business activity. This argument was upheld by the Tribunal, which noted that the educational activity and hostel facilities are inseparable. The Tribunal referenced various judicial pronouncements, including the Hon’ble Supreme Court's decision in CIT vs. Rajasthan and Gujarati Charitable Foundation, Poona, to support its conclusion that such facilities are integral to the educational objectives and cannot be treated as business income.

Issue 4: Disallowance of Depreciation
The AO disallowed the depreciation claimed by the assessee on the grounds that the capital expenditure had already been allowed as an application of income in the year of investment, and allowing depreciation would amount to double deduction. The Tribunal reversed this finding, relying on the Delhi High Court's decision in DDIT vs. Indraprastha Cancer Society, which held that depreciation should be allowed even if the capital expenditure has been treated as an application of income. The Tribunal emphasized that disallowing depreciation would not present a true and fair view of the financial state of the trust. This view was further supported by the Supreme Court's decision in CIT vs. Rajasthan and Gujarati Charitable Foundation, Poona.

Conclusion
The Tribunal allowed the appeal, concluding that the hostel and transportation facilities provided by the assessee are integral to its educational activities and cannot be classified as separate business activities. The Tribunal also held that the depreciation claimed by the assessee should be allowed, as disallowing it would lead to an inaccurate representation of the financial state of the trust. The appeal was thus decided in favor of the assessee, with all additions made by the authorities below being deleted.