2015 (6) TMI 1272 - AT - Income Tax

Denial of exemption u/s 11 - income derive from community hall owned by the assessee - Charitable activity or not? - rental income received from letting out of community hall is in the nature of business income and therefore such activity cannot said to be for charitable purpose as per the proviso to section 2(15) - AO opined that running of Kalyana Mandapam in the name of community hall was not incidental to the main objects of the assessee trust, which are education, medical relief and relief to the poor - HELD THAT - From the facts of the case it is apparent that the assessee trust's multiple activities are to provide relief to the poor, medical relief, providing education and for advancement of any other object of general public utility. Section 2(15) of the Act has undergone drastic change by the Finance Act 2008 with effect from 1/4/2009. If the asset is used for education/medical relief etc., and during the spare time the asset is commercially exploited, in such event, probably it could be said that such activity to be incidental to the objects of education/medical relief etc., of the assessee trust. In the given case before us the Kalyana Mandapam is a distinct and separate asset specially designed to conduct such commercial activity. Looking at the nature of this activity conducted by the assessee trust, it can be considered only as a commercial activity of the assessee trust. Further the case laws relied by the assessee would not be applicable to the case of the assessee, because Section-2(15) of the Act was subsequently amended. In the case Gujarat Industrial Corporation 2010 (12) TMI 672 - ITAT, AHMEDABAD it has held that the word includes occurring at section 11(4) means that there is a reference of property or business of a trust which is a business undertaking in addition to the other properties of the trust. In this given case before us, the community hall or marriage hall whatever may be called is the asset of the separate business of the assessee which falls apart from the other charitable activities conducted by the assessee. Therefore considering the facts and circumstance of the case, we do not find it necessary to interfere with the order of the Revenue. Allowing the benefit of depreciation against the asset the cost of which is already allowed as application of income - The cost of the asset which was already allowed as application of income for the purpose of Section 11(1)(a) of the Act, the benefit of depreciation on the same asset cannot be claimed while computing the exempt income of the trust U/s. 11 of the Act. However, we make it clear that in the case where the benefit of Section-11 is withdrawn, the assessee would be entitled to claim depreciation while computing the income under the head 'income from business' as per Chapter IV-D of the Act. It is ordered accordingly.

Summary

Issues Involved:
1. Whether the rental income received from letting out the community hall is in the nature of business income and thus not entitled to the benefit of Section 11 of the Income Tax Act.
2. Whether the claim of depreciation as a deduction is allowable when the cost of the asset was previously allowed as an application of income under Section 11 of the Income Tax Act.

Detailed Analysis:

1. Rental Income from Community Hall

Assessee's Appeal:

The assessee, a charitable trust registered under Section 12A, contended that the rental income from its community hall should be considered as incidental to its main charitable objectives (education, medical relief, and relief to the poor) and thus eligible for exemption under Section 11 of the Income Tax Act. The assessee argued that the activity of renting out the community hall was to generate revenue to support its charitable purposes and should not be classified as a commercial activity.

Revenue's Stand:

The Revenue argued that the rental income from the community hall should be classified as business income. The Assessing Officer opined that the activity of renting out the community hall was commercial in nature and did not align with the primary charitable objectives of the trust. As the gross receipts from the community hall exceeded the prescribed limit, the Revenue denied the benefit of Section 11.

Tribunal's Findings:

The Tribunal upheld the Revenue's view, noting that the community hall was used exclusively for commercial purposes such as marriages and high-level consumer exhibitions. The Tribunal emphasized that the activity was not incidental to the main charitable objectives and was purely commercial. The Tribunal referred to the amended Section 2(15) of the Act, which states that any activity in the nature of trade, commerce, or business, irrespective of the application of income, would not qualify as a charitable purpose if the aggregate receipts exceed the prescribed limit. The Tribunal concluded that the rental income from the community hall was rightly classified as business income and not eligible for exemption under Section 11.

2. Claim of Depreciation

Revenue's Appeal:

The Revenue contended that allowing the claim of depreciation on assets, the cost of which was already allowed as an application of income under Section 11, would result in double deduction. The Assessing Officer had disallowed the depreciation claim, but the CIT(A) allowed it, leading to the Revenue's appeal.

Tribunal's Findings:

The Tribunal referred to its earlier decision in the case of The Anjuman-E-Himayath-E-Islam, where it was held that depreciation cannot be claimed on assets whose cost was already allowed as an application of income. The Tribunal also cited the Kerala High Court decision in Lissie Medical Institution v. CIT, which held that allowing depreciation in such cases would result in a cash surplus outside the books, violating Section 11(1)(a). The Tribunal upheld the Revenue's appeal, disallowing the claim of depreciation on assets already considered as an application of income. However, the Tribunal clarified that if the benefit of Section 11 is withdrawn, the assessee could claim depreciation under the head 'income from business' as per Chapter IV-D of the Act.

Conclusion:

The Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal. The rental income from the community hall was classified as business income, not eligible for exemption under Section 11. The claim of depreciation on assets whose cost was already allowed as an application of income was disallowed to prevent double deduction. The order was pronounced on 12th June, 2015, at Chennai.