2017 (11) TMI 366 - AT - Income Tax

Denial of exemption u/s 11 and 12 - Taxing surplus from Transportation and Games holding that the transportation activity, games activity and picnic are business activities - Educational activity - Held that - The assessee has provided the facilities of the Transportation for the students and staff of the educational activity on chargeable basis which has generated surplus. It is not the case of the revenue that Assessee provides transportation facilities to other outsiders also by charging the fees. Admittedly such facilities is for the purposes of the students etc to whom education is imparted by the society. The claim of the assessing officer that merely because of the admission of the student in the school, he does not become entitle to avail the transport or games facility but has to pay some more fees towards them. We are of the opinion that for the students who are studying in the colleges if they want to avail such facilities then they are charged such fees, which is nothing but providing an additional facility to the students. Therefore it cannot be said that it is not incidental to the education. None of the instances were found by the ld AO or appellate Authorities where the student is not studying in the school and is providing transport or games facility. It is also not the case of the revenue that surplus generated by the assessee in transportation activity is not used for the educational activities. Further the provisions of section 11 (4A) does not apply in case the activity generating profit is incidental to the attainment of the objectives of the trust. In the present case it is not disputed that activities of the games and transportation is for the students of the society and hence both these activities are incidental to the main objects of the trust. Hence the lower authorities erroneously applied the above provisions and taxed the surplus as the separate income of the assessee denying benefit of section 11 and 12 of the act. Transportation activities and Games activity are incidental to the educational activity of the trust. See Queens‟s Educations Case 2015 (3) TMI 619 - SUPREME COURT - Decided in favour of assessee. Disallowance being payment of interest etc to provident fund authorities - Held that - The assessee has paid interest to provident fund authorities for late payment of provident fund. Before us assessee could not establish that how this expenditure is incurred for the object of the trust. In fact, this expenditure is incurred for the violation made by the assessee of the provident fund laws in not depositing the dues of the assessee as well as of the employees in time. In view of this, the above amount cannot be considered as an application of the income and therefore no infirmity is found in the order of the lower authorities. Hence, ground of the appeal of the assessee is dismissed. Disallowance of depreciation - Held that - Depreciation to be allowed on the assets, cost of which is already allowed @100% as application of the income. No double deduction. 2014 (11) TMI 733 - DELHI HIGH COURT

Summary

Issues Involved:
1. Denial of exemption under sections 11 and 12 of the Income Tax Act for surplus from transportation and games activities.
2. Disallowance of depreciation on assets.
3. Penalty under section 271(1)(c) for furnishing inaccurate particulars.
4. Disallowance of expenses related to provident fund interest.
5. Deletion of disallowance on account of sports and transportation activities.

Issue-wise Detailed Analysis:

1. Denial of Exemption Under Sections 11 and 12:
The primary issue was whether the surplus from transportation and games activities should be considered as business income and thus taxable under section 11(4A). The assessee argued that these activities were incidental to its educational purposes and not separate business activities. The Tribunal relied on the Supreme Court's decision in Queen’s Education Society, which clarified that making a surplus does not necessarily mean the institution is for profit. The Tribunal concluded that transportation and games activities were incidental to the educational purposes of the trust and thus eligible for exemption under sections 11 and 12. Consequently, the lower authorities' decision to tax these surpluses as business income was overturned.

2. Disallowance of Depreciation on Assets:
The assessing officer had disallowed depreciation on the grounds that the cost of the assets had already been allowed as an application of income. The Tribunal referred to the Delhi High Court's decision in DDIT vs. Indraprastha Cancer Society, which allowed depreciation even if the cost of the asset was already treated as an application of income. Accordingly, the Tribunal allowed the depreciation claim of the assessee.

3. Penalty Under Section 271(1)(c):
The penalty was imposed for furnishing inaccurate particulars related to transportation and games activities. Since the Tribunal had already decided that these activities were incidental to educational purposes and allowed the exemption under sections 11 and 12, the basis for the penalty no longer existed. The Tribunal directed the assessing officer to cancel the penalties for both assessment years.

4. Disallowance of Provident Fund Interest Expenses:
The assessee contested the disallowance of ?1,503,344/- paid as interest to provident fund authorities for late payment. The Tribunal upheld the disallowance, stating that such expenses were incurred due to a violation of provident fund laws and could not be considered as an application of income for charitable purposes.

5. Deletion of Disallowance on Account of Sports and Transportation Activities:
The revenue appealed against the deletion of disallowances related to sports and transportation activities. The Tribunal reiterated that these activities were incidental to the educational purposes of the trust and that the expenses could not be segregated unless there was evidence that they were incurred for purposes other than the trust's objectives. Consequently, the Tribunal dismissed the revenue's appeal.

Conclusion:
The appeals were partly allowed in favor of the assessee, granting exemption under sections 11 and 12 for transportation and games activities, allowing depreciation on assets, and canceling the penalties under section 271(1)(c). However, the disallowance of provident fund interest expenses was upheld. The revenue's appeal regarding disallowance of expenses for sports and transportation activities was dismissed.