2019 (5) TMI 283 - AT - Income Tax

Exemption of income u/s 11 - charitable activity u/s 2(15) or not? - running of hostels and providing transportation facilities to the students - whether incidental to the education and receipt therefrom or income from independent business - AO was of opinion that for providing transportation facilities, students are charged on commercial basis - applicability of provisions of Section 11(4A) 11(4) - HELD THAT - In the case at hand, it is undisputed case of the assessee that hostel and transportation facilities are only being provided to the students of the Institute and as such is incidental to achieve the object of providing education in compliance to the aims and objects of the assessee trust. So, in these circumstances, provisions contained u/s 11 (4A) invoked by the AO are not applicable to the facts and circumstances of the case. We are of the considered view that activity of assessee society in providing transport and hostel facilities to the students and staff is incidental to achieve the charitable object of providing education. Addition of repair and maintenance of buses on ad -hoc basis - fuel charges for running the buses are on higher side as the assessee society is owning only two buses - HELD THAT - Since both AO/CIT (A) have disallowed/confirmed the expenses on ad hoc basis only on the ground that the same are on higher side without disputing the incurrence of the expenses it is not permissible under law. Moreover, maintenance charges as well as fuel charges of the buses depends upon the age and condition of the vehicle which has not been examined by the AO. So, we are of the considered view that these expenses are liable to be allowed it is a matter of record that when the assessee society has been claimed exemption u/s 11, no such question has been raised by the AO regarding disallowance of exemption claimed on account of hostel and transportation facilities as is evident from assessment order for AYs 2009-10, 2012-13 and 2013-14 passed u/s 143 (3) . When there is no change in the facts and circumstances of the case, the Revenue is also bound to follow rule of consistency. Disallowance of exemption of receipt from the activities of providing hostel and transport facilities to the students of the institution is not sustainable in the eyes of law being intrinsic part of the educational activities of the assessee society - Decided in favour of assessee Disallowance of depreciation on fixed assets while computing total amount utilized and applied towards charitable purposes - HELD THAT - Following the decisions rendered in Vishwa Jagriti Mission 2012 (4) TMI 289 - DELHI HIGH COURT and Rajasthan and Gujarati Charitable Foundation Poona 2017 (12) TMI 1067 - SUPREME COURT we are of the considered view that while computing income from those assets of which full expenditure has been allowed in the year of acquisition, in the subsequent years depreciation in respect of those assets has also to be taken into account. AO/CIT (A) have erred in making disallowance on account of depreciation on fixed assets claimed during the year under assessment because application of income is not computation of income and the provisions of application of income would come into play only after the income chargeable to tax is determined and the income has to be in the general sense and depreciation is one of the deductions availed under law and there is no reason for disallowing the same. - Decided in favour of the assessee.

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Assessment of income from hostel and transport facilities.
3. Eligibility of hostel and transport facilities for exemption under Section 11.
4. Requirement to maintain separate books of accounts for hostel and transport activities under Section 11(4A).
5. Disallowance of depreciation while computing total amount utilized for charitable purposes.
6. Correctness of income computation from hostel and transport activities.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The first ground raised by the assessee was general in nature and did not require adjudication.

2. Assessment of Income from Hostel and Transport Facilities:
The assessee, a charitable education society registered under Section 12AA of the Income Tax Act, claimed its income as exempt under Section 11. The Assessing Officer (AO) added ?3,71,99,570 to the income, treating the surplus from hostel and transport facilities as independent business income. The CIT(A) upheld this addition. The Tribunal found that the hostel and transport facilities provided by the assessee were incidental to its educational activities and could not be treated as independent business. The Tribunal referenced the case of Delhi Public School Ghaziabad vs. ACIT and the Karnataka High Court's decision in Karnataka Lingayat Education Society, which supported the view that such facilities are intrinsic to educational activities.

3. Eligibility of Hostel and Transport Facilities for Exemption under Section 11:
The Tribunal concluded that the hostel and transport facilities were part and parcel of the main educational objectives of the assessee society. There was no evidence that these facilities were provided to outsiders. The Tribunal emphasized that the surplus from these activities should be considered as part of the educational activities and not as independent business income. Consequently, the disallowance of exemption under Section 11 was not justified.

4. Requirement to Maintain Separate Books of Accounts for Hostel and Transport Activities under Section 11(4A):
The AO and CIT(A) had invoked Section 11(4A), which requires separate books of accounts for business activities. However, the Tribunal found that since the hostel and transport facilities were incidental to the educational activities, the provisions of Section 11(4A) were not applicable. The Tribunal reiterated that these activities were integral to achieving the charitable objective of providing education.

5. Disallowance of Depreciation while Computing Total Amount Utilized for Charitable Purposes:
The AO disallowed ?4,35,23,067 on account of depreciation, arguing that allowing full expenditure as an application of income and simultaneously claiming depreciation would result in double taxation. The Tribunal, referencing the Delhi High Court's decision in Vishwa Jagriti Mission and the Supreme Court's decision in Rajasthan and Gujarati Charitable Foundation Poona, held that depreciation should be allowed even if the full expenditure on assets had been claimed in the year of acquisition. The Tribunal concluded that the disallowance of depreciation was erroneous and allowed the claim.

6. Correctness of Income Computation from Hostel and Transport Activities:
The Tribunal noted that the AO had made ad hoc disallowances for repair and maintenance of buses and fuel charges without disputing the actual incurrence of expenses. The Tribunal found that these expenses were duly recorded in the books of account and should be allowed. The Tribunal also highlighted the principle of consistency, noting that in previous assessment years, similar exemptions were allowed without question. Consequently, the Tribunal deleted the disallowances and ruled in favor of the assessee.

Conclusion:
The Tribunal partly allowed the appeal, ruling in favor of the assessee on most grounds, including the exemption of income from hostel and transport facilities and the allowance of depreciation. The Tribunal emphasized that these facilities were incidental to the educational activities and not independent business activities, thus qualifying for exemption under Section 11.

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