2021 (10) TMI 793 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - HELD THAT - As decided in own case 2021 (10) TMI 728 - ITAT BANGALORE assessee is a charitable society and is not primarily driven by profit motive, therefore, the proviso to section 2(15) of the I.T.Act does not have application to the assessee. Thus we hold that the assessee is not hit by proviso to section 2(15) of the I.T.Act. Accordingly, the A.O. is directed to grant benefit of exemption u/s 11 of the I.T.Act for the relevant assessment year. Disallowance of depreciation - cost of assets as claimed as application of income - double deduction - HELD THAT - Identical issue was decided in favour of the assessee by the order of the Tribunal in the case of Bangalore Metropolitan Transport Corporation 2019 (8) TMI 1125 - ITAT BANGALORE - In the instant case, the concerned assessment year being 2009-2010, the amendment to section 11(6) of the I.T.Act by the Finance (No.2) Act, 2014 will not have application. Accordingly, we direct the A.O. to grant depreciation on the assets irrespective of the fact that the cost of assets is claimed as application of income. It is ordered accordingly.

Summary

Issues Involved:
1. Applicability of proviso to section 2(15) of the I.T. Act.
2. Disallowance of depreciation on assets where the cost has already been allowed as application of income.

Issue-wise Detailed Analysis:

1. Applicability of Proviso to Section 2(15) of the I.T. Act:

The primary issue was whether the CIT(A) was justified in holding that the assessee is impacted by the proviso to section 2(15) of the I.T. Act, thereby making the excess income over expenditure taxable. The Tribunal referenced its own previous decisions in the assessee's case for assessment years 2010-2011 to 2014-2015, where it was held that the proviso to section 2(15) did not apply to the assessee-society. The Tribunal noted that the assessee is a charitable society formed under the RTC Act, 1950, with the purpose of providing an efficient transport system, which is inherently charitable. The revenue authorities had previously concluded that the assessee was not for charitable purposes based on its revenue sources. However, the Tribunal emphasized that the dominant objective of the assessee was not profit-making but providing public utility services. It cited the Hon'ble Delhi High Court's principles in the case of India Trade Promotion Organization vs. DGIT(Exemption), which clarified that the dominant motive of an institution must be considered to determine the applicability of the proviso to section 2(15). The Tribunal concluded that the assessee's activities were not driven by profit motive but by the objective of public utility, thus, the proviso to section 2(15) was not applicable, and the assessee was entitled to exemption under section 11 of the I.T. Act.

2. Disallowance of Depreciation:

The second issue was whether the CIT(A) was justified in confirming the addition made by the Assessing Officer regarding the disallowance of depreciation on assets, given that the cost of these assets had already been allowed as application of income. The Tribunal referenced its decision in the case of Bangalore Metropolitan Transport Corporation, which followed the judgment of the Hon'ble Supreme Court in CIT v. Rajasthan & Gujarati Charitable Foundation Poona. It was established that depreciation should be allowed as a deduction even if the cost of acquisition of the depreciable asset had been treated as an application of income in the year of acquisition. The Tribunal pointed out that the amendment to section 11(6) by the Finance (No.2) Act, 2014, which disallows depreciation if the cost has been claimed as an application of income, is applicable prospectively from assessment year 2015-2016. Since the concerned assessment year in this case was 2009-2010, the amendment did not apply. Therefore, the Tribunal directed the Assessing Officer to grant depreciation on the assets irrespective of the cost being claimed as application of income.

Conclusion:

The Tribunal ruled in favor of the assessee on both issues. It held that the proviso to section 2(15) of the I.T. Act did not apply to the assessee, allowing it to claim exemption under section 11. Additionally, the Tribunal directed that depreciation should be allowed on the assets, even if their cost had been treated as an application of income. Consequently, the appeal filed by the assessee was partly allowed.