2018 (11) TMI 597 - AT - Income Tax

Charitable activities - Entitled to exemption u/s 11(1) - dominant object - Held that - The Hon ble Apex Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association 2006 (9) TMI 115 - SUPREME COURT had held that if the dominant object is charitable then the incidental object for attainment of the dominant / primary object would also be charitable in nature. It was further held by the Hon ble Apex Court that there is a very clear distinction between the object of a trust to carry on a business activity and the carrying on an activity of profit for achieving its objects. The Hon ble Apex Court in the case of Thanthi Trust 2001 (1) TMI 80 - SUPREME COURT had also held that the assessee is entitled to the assessment u/s 11 of the income derived from an activity incidental to the achievement of the objects of the trust. For these reasons, we hold that the assessee s activities of running the hospital and the nursing school is intricately connected and dependent on each other and it is one inseparable activity and both are entitled to exemption u/s 11(1). Disallowance of depreciation - Held that - We find that the recent judgment of the Hon ble Apex Court in the case of CIT v. Rajasthan And Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT had held in favour of the assessee by holding that the amendment brought about to section 11(6) is not retrospective in effect and is only prospective and applicable for and from 2015- 2016 onwards. Therefore going by the dictum laid down by the Hon ble Apex Court in the case of CIT v. Rajasthan And Gujarati Charitable Foundation (supra), we hold that the assessee is entitled to depreciation on assets though the cost of the same was allowed as application.

Summary

Issues involved:
1. Assessment of income from a nursing school as business activity under section 11 of the IT Act.
2. Denial of depreciation on assets by the Assessing Officer.
3. Requirement of audit of books of account under section 44AB of the IT Act.

Assessment of income from nursing school:
The case involved an appeal against the CIT(A)'s order regarding the assessment of income from a nursing school as a business activity under section 11 of the IT Act. The assessee, a charitable trust, had filed a return of income claiming exemption under section 11. The Assessing Officer treated the income from the hospital and nursing school as business activity, denying exemption under section 11. The CIT(A) upheld the exemption for hospital income but denied it for the nursing school income. However, the tribunal held that the nursing school was an integral part of the hospital, both being part of the trust's charitable objectives. Referring to the trust deed and relevant circulars, the tribunal concluded that the income from the nursing school was not to be assessed as business income but as arising from charitable activities eligible for exemption under section 11(1) of the IT Act. The tribunal emphasized the interconnection between the hospital and nursing school, ultimately allowing the appeal.

Denial of depreciation on assets:
Another issue in the case was the denial of depreciation on assets by the Assessing Officer. The CIT(A) had confirmed this denial, but the tribunal referred to a recent judgment by the Supreme Court in a similar case, ruling in favor of the assessee. The tribunal held that the amendment to section 11(6) was not retrospective but prospective, applicable from 2015-2016 onwards. Therefore, the tribunal allowed the depreciation on assets, even though the cost was allowed as application, based on the Supreme Court's decision.

Requirement of audit under section 44AB:
The Assessing Officer observed that the assessee failed to get its books of account audited under section 44AB of the IT Act, leading to the initiation of penalty proceedings. The CIT(A) upheld this view. However, the tribunal's decision in favor of the assessee on the assessment of income from the nursing school under section 11 also impacted this issue. Since the income was held to be eligible for exemption under section 11(1), the tribunal concluded that the provisions of section 44AB were not applicable in this case. Therefore, the tribunal allowed the appeal, setting aside the requirement for audit under section 44AB.

In conclusion, the Appellate Tribunal ITAT Cochin, comprising Shri Chandra Poojari, AM, and Shri George George K, JM, delivered a detailed judgment allowing the assessee's appeal. The tribunal held that the income from the nursing school was not to be assessed as business income but as arising from charitable activities eligible for exemption under section 11(1) of the IT Act. Additionally, the tribunal allowed depreciation on assets based on a Supreme Court judgment and set aside the requirement for audit under section 44AB, given the nature of the income. The decision provided a comprehensive analysis of each issue raised, ensuring a fair and just outcome for the assessee.