2020 (5) TMI 655 - AT - Income Tax

Exemption u/s 11 - hostel receipt to be treated as business income of the trust in absence of not maintaining separate books of accounts as per section 11 (4A) - assessee has not maintained separate books of account of hostel activity as assessee is running a hostel and every year surplus is generated - HELD THAT - In this case , it is not denied that student who pays the hostel fees do not get education in classrooms - Assessee is running educational institutes , income from which has been accepted by ld AO himself as falling u/s 2 (15 ) of the act. We direct the learned assessing officer to not to treat the excess as taxable income on account of hostel receipts under section 11 (4A) of The Income Tax Act. As hostel fee income is subservient to the main object of the education and therefore the learned assessing officer is directed to treat the same as not a business income but income derived from the charitable activities of education . - Decided in favour of assessee. Depreciation to assessee trust - additional ground - double deduction - HELD THAT - The assessment year in appeal before us is assessment year 2011 12, which is prior to assessment year 2015 16 where from the amendment has been made denying the double deduction. Therefore, for this year the assessee is entitled to the depreciation allowance. Accordingly, additional ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Addition of ?60,91,641/- against returned income.
2. Classification of hostel running activity as a business activity.
3. Application of Section 11(4A) regarding hostel activities.
4. Allowance of expenses against hostel receipts.
5. Disallowance of depreciation claim of ?2,74,10,629/-.

Issue-Wise Detailed Analysis:

1. Addition of ?60,91,641/- against Returned Income:
The appellant, a charitable trust, contested the addition of ?60,91,641/- to its returned income by the CIT (Appeals). The trust argued that the hostel running activity was not a business activity but a mandatory requirement for running an educational institute as per AICTE guidelines. The trust maintained that the surplus generated from the hostel was utilized for charitable purposes.

2. Classification of Hostel Running Activity as a Business Activity:
The CIT (Appeals) upheld the AO's decision to classify the hostel running activity as a business activity, invoking Section 11(4A) of the Act. The AO argued that the trust did not maintain separate books of accounts for the hostel activity and generated a surplus, which indicated a business motive. The AO relied on precedents, including the Supreme Court's decision in Municipal Corporation of Delhi vs. Children Book Trust, to assert that educational activities generating profit could not be considered charitable.

3. Application of Section 11(4A) Regarding Hostel Activities:
The trust contended that running a hostel was integral to its educational objective and should not be treated as a separate business activity. The trust cited that the hostel facility was necessary for students coming from other cities and states, and the surplus was used for charitable purposes. The tribunal referred to previous decisions, including those of the ITAT Delhi in Seth Anandram Jaipuria Education Society and Krishna Charitable Society, which held that hostel facilities provided to students were subservient to the educational activities and not a separate business.

4. Allowance of Expenses Against Hostel Receipts:
The AO disallowed a significant portion of the expenses claimed by the trust against hostel receipts, allowing only ?2,18,68,399/- out of ?3,79,24,668/-. The AO computed a net profit of ?85,91,641/- from hostel activities, treating it as business income. The tribunal, however, directed the AO to treat the hostel fee income as subservient to the main educational objective and not as business income, thereby allowing the expenses incurred on hostel activities.

5. Disallowance of Depreciation Claim of ?2,74,10,629/-:
The AO disallowed the depreciation claim of ?2,74,10,629/- on the grounds that the assets were created out of exempt income and allowing depreciation would result in double deduction. The tribunal admitted the additional ground raised by the assessee regarding the depreciation claim, citing the Supreme Court's decision in CIT vs. Rajasthan and Gujarati Charitable Foundation. The tribunal held that for the assessment year 2011-12, the assessee was entitled to depreciation as the amendment denying double deduction was applicable from the assessment year 2015-16 onwards.

Conclusion:
The tribunal allowed the appeal of the assessee partly. It directed the AO to treat the hostel fee income as part of the charitable activities and not as business income, thereby allowing the expenses incurred on hostel activities. The tribunal also allowed the depreciation claim for the assessment year 2011-12, following the Supreme Court's decision. The appeal was decided on the merits as no representative appeared for the assessee during the hearing.