2016 (8) TMI 80 - AT - Income Tax

Entitlement to exemption u/s 11 - activities carried on by the assessee in the form of running of community hall, Suguna Auditorium Hall - treatment of income earned from auditorium as business income instead of treating the same as income exempted u/s.11 of the Act - Held that - We fail to see any connection between the activities relating to running of Suguna Auditorium Hall was carried on and the attainment of the objects of the trust. The mere fact that whole or some part of the income from running of Suguna Auditorium Hall is used for charitable purposes would not render the business itself being considered as incidental to the attainment of the objects. We are in agreement with the Department that the application of income generated by the business is not relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives. Being so, we are inclined to hold that the assessee is not entitled for any exemption u/s. 11 of the I.T. Act. Further, the 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. - Decided against assessee

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Treatment of income earned from the auditorium as business income versus exempt income under Section 11 of the Income Tax Act.
3. Applicability of Section 2(15) and Section 11(4A) of the Income Tax Act.
4. Entitlement to depreciation on assets whose cost was previously considered as application of income under Section 11.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal was delayed by 7 days. The reasons provided by the assessee for the delay were found justifiable, and thus, the delay was condoned, and the appeal was admitted.

2. Treatment of Income Earned from the Auditorium:
The primary issue was whether the income from the auditorium should be treated as business income or exempt under Section 11. The assessee, a charitable trust, claimed that the income from the auditorium, used for charitable purposes, should be exempt under Section 11. The Assessing Officer (AO) disagreed, treating the income as business income under Section 2(15) and Section 11(4A) of the Act, leading to the denial of the exemption. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the auditorium was rented out for commercial activities, which did not align with the trust's charitable objectives. The Tribunal agreed with the CIT(A), emphasizing that the business of running the auditorium was not held under trust and was not incidental to the trust's objectives.

3. Applicability of Section 2(15) and Section 11(4A):
Section 2(15) defines charitable purposes and includes the advancement of any other object of general public utility, provided it does not involve trade, commerce, or business activities. The Tribunal observed that the income from the auditorium was generated from commercial activities, making it subject to tax under Section 2(15). Section 11(4A) states that income from business is exempt only if the business is incidental to the trust's objectives and separate books of account are maintained. The Tribunal found that the running of the auditorium was not incidental to the trust's educational and medical relief objectives, thus not qualifying for exemption under Section 11(4A).

4. Entitlement to Depreciation on Assets:
The assessee claimed depreciation on assets whose cost had already been considered as application of income under Section 11 in previous years. The Tribunal referred to its earlier decision in the case of M/s. Kongunadu Arts & Science College Council, where it was held that depreciation cannot be claimed on such assets, as it would amount to double deduction. The Tribunal reiterated that if the cost of the asset is considered as application of income under Section 11, then the cost becomes NIL, and no depreciation can be allowed. This issue was decided against the assessee.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT(A)'s order that the income from the auditorium is taxable as business income and not exempt under Section 11. Additionally, the claim for depreciation on assets whose cost was previously considered as application of income was denied. The order was pronounced on 29th June 2016, at Chennai.

← Previous Next →