2017 (9) TMI 1030 - AT - Income Tax

Exemption u/s 11 - transport and hostel facilities surplus considered as business income of the assessee society - proof of charitable activities - Held that - As observed that the statutory obligation of maintenance of the hostel, which involved supply, and sale of food was an integral part of the objects of the Institute nor could the running of the hostel be treated as the principal activity of the Institute. The Institute could not be held to be doing business. Further meals being supplied in a hostel to the scholars, visitors, guest faculty etc. can not be exigible to sales tax where main activity is academics as held in Scholars home Senior Secondary School 2014 (6) TMI 793 - UTTARANCHAL HIGH COURT We are also not averse to considering the latest legal developments too where in the recently introduced new legislation of Goods and service tax it is provided that no GST would be chargeable on the hostel fees etc recovered from the Students, faculties and other staff for lodging and boarding as they are engaged in education activities. Therefore we reverse the finding of the lower authorities and held that transport and hostel facilities surplus cannot be considered as business income of the assessee society which is mainly engaged in business activities and these activities are subservient to the main object of education of the trust. In the result 1 3 of the appeal of the assessee are allowed. Disallowance of depreciation on the assets which have already been claimed and allowed to the assessee as application of funds - Held that - Allowance of depreciation on assets on assessee trust allowed. No double deduction. See DDIT versus Indraprastha Cancer Society 2014 (11) TMI 733 - DELHI HIGH COURT - Decided in favour of assessee.

Issues Involved:
1. Treatment of hostel and mess facility as business income.
2. Disallowance of depreciation on assets already claimed as application of income.

Issue-wise Detailed Analysis:

1. Treatment of Hostel and Mess Facility as Business Income:

The primary issue was whether the surplus generated from providing hostel and mess facilities to students should be treated as business income. The assessing officer considered these activities as separate business activities under section 11(4A) of the Income Tax Act, 1961, and thus taxable. The assessee argued that these facilities were integral to their educational activities and not separate business activities.

The Tribunal referred to several judicial precedents, including the decision of the Karnataka High Court in CIT vs. Karnataka Lingayat Education Society, which held that providing hostel facilities to students and staff is incidental to the educational objectives of the society and not a separate business activity. The Tribunal also cited the Allahabad High Court's decision in IIT vs. State of UP, which stated that running a hostel is an integral part of the educational institution's objectives and not a business activity.

The Tribunal concluded that providing hostel and transport facilities to students and staff members is subservient to the main educational objectives of the society and cannot be considered a business activity. Therefore, the surplus from these activities should not be treated as business income. The Tribunal reversed the findings of the lower authorities and allowed the appeal on this ground.

2. Disallowance of Depreciation on Assets Already Claimed as Application of Income:

The second issue was the disallowance of depreciation on assets for which the cost had already been claimed as an application of income. The assessing officer disallowed the depreciation, citing that it would amount to a double deduction since the entire capital expenditure had been allowed in the year of investment.

The Tribunal referred to the Delhi High Court's decision in DIT vs. Indraprastha Cancer Society, which held that depreciation should be allowed as per commercial accountancy principles when computing income for charitable institutions. The Tribunal distinguished the Supreme Court's decision in Escorts Ltd. vs. Union of India, noting that it was not applicable to charitable institutions and that the principles of commercial accounting should apply.

The Tribunal also referred to several other High Court decisions, including those from the Bombay, Karnataka, and Madras High Courts, which supported the allowance of depreciation on assets used for charitable purposes. The Tribunal concluded that disallowing depreciation would not preserve the corpus of the trust and would lead to an incorrect computation of income.

The Tribunal reversed the findings of the lower authorities and directed the assessing officer to delete the disallowance of depreciation. The appeal on this ground was allowed.

Conclusion:

The Tribunal allowed the appeal on both grounds, holding that the surplus from hostel and transport facilities should not be treated as business income and that depreciation on assets should be allowed, even if the cost of the assets had been claimed as an application of income. The Tribunal's decision was in line with several judicial precedents that supported the assessee's contentions.

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