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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’: NEW DELHI
Before: SHRI N.K BILLAIYA & SHRI KULDIP SINGH
PER: KULDIP SINGH, JM
The Appellant, M/s Friends Charitable Society (hereinafter referred to as ‘the Assessee’) by filing the present appeal, sought to set aside the
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impugned order dated 26.02.2015 passed by Ld. CIT(A),Muzaffar Nagar,
qua Assessment Year 2010-11, on the grounds that:-
That on the facts and circumstances of the case and in the law the learned commissioner of income-tax (Appeals) has grossly erred in confirming the additions made by Assessing Officer treating Hostel facility provided to college students as business of the appellant society considering the alleged surplus of Rs.2,35,43,997/- as business income in the hand of appellant society. The observation made and basis adopted are erroneous, unjustified, unwarranted, bad in law and are without sufficient material on records.
That the Learned Commissioner of Income-tax ( Appeals) has grossly erred in confirming the additions made by A.O. holding that hostel/ mess facility for students is separate business activity in terms of section 11(4A) merely on irrelevant consideration like surplus should have been reimbursed to students or used to reduce fee or giving contents of some website about fall in demand for rooms at Meerut etc, even after accepting that maintenance of such hostel is mandatory as per the concerned controlling Authority and it was an integral and inalienable part of educational activity. Thus finding is perverse.
That the learned assessing officer has failed to appreciate the fact that maintaining hostel/mess facility to students is an essential & integral part of “education” u/s 2(15) of the Act and not a separate business activity covered under section 11(4A) as also accepted in the past assessments and there is no change in law about the first three limbs of section 2(15) even after 01.04.2009, , hence overall surplus of the society as worked out in Income & Expenditure account of the society and consequently used and invested in the fulfillment of the main objectives of the society resulting into application of income and as such exempt under the provisions of section 11 to 13 of the Act and learned Commissioner of Income- tax (Appeals) has also confirmed the view taken by Assessing officer.
That the Learned Commissioner of Income-tax ( Appeals) has also erred on facts and in law to confirm the disallowance made by
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Assessing officer Rs. 4,04,17,438/- being the deprecation as claimed by debiting the same to the Income & Expenditure Account of the Society for the purposes of working out the surplus in the hands of the society. The assessing officer has failed to bring any material on records to establish that the appellant has availed hundred percent application of the value of capital expenditure in the year of investment thereby inviting disallowance of the depreciation on such capital expenditure quoting double deduction. During the course of assessment proceedings, the Society’s council has submitted details of Gross Income and its Application of income of relevant year and preceeding five years to justify that addition in Fixed Assets could not be utilized as application of income in past years due to excess utilization in past years, hence the same could not be termed as double claim of depreciation. Hence the disallowance of the depreciation is not only unjustified but it is illegal and bad in the eyes of law.”
Briefly stated the facts necessary for adjudication of the
controversy at hand are: the assessee society is running engineering and
professional college in the name of Krishna Engineering College (KEC) for
B.Tech and M.C.A courses, being a society registered under the
registration of society Act and has also been granted registration u/s 12AA
and exemption u/s 80G of the Income Tax Act, 1961 (for short the ‘Act’).
The Assessing Officer on the basis of his enquiry in assessment
proceedings came to the conclusion that running of hostel facilities by the
assessee for its students in which separate fee is charged does not fall
under the definition of charitable purpose u/s 2(15) of the Income Tax
Act, and as such held to be a separate business. Consequently, AO made
addition of Rs. 2,35,43,997/- generated by the assessee as surplus by
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charging fee for hostel accommodation and mess charges as a business
income. The Assessing Officer also disallowed an amount of Rs.
4,04,17,438/- claimed by the assessee as depreciation by debiting the
same to the Income & Expenditure Account of the society for the
purposes of working out the surplus in the hands of the society.
The Assessee carried the matter before the Ld. CIT(A) by way of
filing the appeal, who has dismissed the appeal. Feeling aggrieved, the
assessee has come up before the Tribunal by way of filing the present
appeal.
We have heard the Ld. Authorized Representatives of the parties to
the appeal, gone through the documents relied upon and orders passed
by the revenue authorities below in the light of the facts and
circumstances of the case.
Undisputedly, the assessee society has been granted registration
u/s 12AA of the Act and has also been found entitled for exemption u/s
80G of the Act. It is also not in dispute that the assessee society has
been running the hostel and mess facilities for its students and no
outsider is allowed in the hostel as well as in the mess.
The Ld. AR for the assessee contended that the assessee’s case is
covered by the decisions rendered by the Hon’ble Supreme Court of India
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and also the decision rendered by the Co-ordinate Bench of Tribunal in
the cases cited as CIT vs. Karnataka Lingayat Education Society,
ITA No. 5004/2012, date of order 15.10.2014 (HC of Karnataka)
and Dr. K.N. Institute of Pharmaceuticals Educational & Research
Trust vs. JCIT, ITA No. 4232/Del/2015, date of order 26.04.2017,
(ITAT Delhi). The Ld. AR for the assessee further contended that the
Single Bench of the Tribunal in assessee’s own case for A.Y. 2011-12
decided the identical issue in favour of the assessee.
So far question of making addition of Rs. 2,35,43,997/- on account
of hostel surplus fee received by the assessee by treating the same as
business income u/s 11(4)/11(4A) of the Act is concerned, the Hon’ble
Karnataka High Court while deciding the identical issue in favour of the
assessee held that ‘providing hostel to the students/staff working for the
society is incidental to achieve the object of providing education, namely
the object of the society’
The Co-ordinate Bench of Tribunal in the case of Krishna
Charitable Society vs. Addl. CIT in ITA No. 4639/Del/2015 order
dated 15.09.2017 also decided the issue in favour of the assessee by
following the decision rendered by Hon’ble Karnataka High Court in the
case of Karnataka Lingayat Education Society (supra).
6 ITA No. 3298/Del/2015. M/s Friends Charitable Society.
The Revenue has given effect to the decision rendered by Co-
ordinate Bench of Tribunal in assessee’s own case bearing ITA No.
4640/Del/2015 decided vide order dated 15.2.2017, by passing order
dated 15.3.2018 u/s 254/143(3) of the Act and found the total income of
the assessee society at nil.
So, in view of the matter, we are of the considered view that the
addition made by the AO on account of hostel surplus fee received by
assessee by treating the same as business income in the hands of
assessee u/s 11(4)/11(4A) of the Act and confirmed by Ld. CIT(A) is not
sustainable in the eyes of law, hence ordered to be deleted.
So far as question of making addition of Rs. 4,04,17,438/- by the
AO by disallowing the depreciation claimed by the assessee by debiting
the same to the Income and Expenditure Account of the assessee for the
purposes of working out the surplus in the hands of the society, is
concerned, this issue has already been dealt with by the Co-ordinate
Bench of Tribunal in the case of Krishna Charitable Society (supra) by
following the decision rendered by Hon’ble Supreme Court of India in the
case cited as CIT vs. Rajasthan and Gujarati Charitable Foundation
Poona, Civil Appeal No. 7186/2014, date of order 13.12.2017,
(Supreme Court of India) and decision rendered by Hon’ble High Court
of Delhi in the case cited as DIT (exemption) vs. M/s Indraprastha
7 ITA No. 3298/Del/2015. M/s Friends Charitable Society.
Cancer Society, ITA No. 240/2014, date of Order 18.11.2014,
(High Court of Delhi).
The Hon’ble Supreme Court in the case of Rajasthan and
Gujarati Charitable foundation Poona (supra) upheld the view taken
by the Tribunal and affirmed by Hon’ble Bombay High Court in case of
Commissioner of Income Tax vs. Institute of Banking Personnel
Selection (IBPS)’ [(2003) 131 Taxman 386 (Bombay)] vide which
the contention of the Revenue that disallowing the depreciation on the
ground that once the capital expenditure is treated as application of
income for charitable purposes, the assessee had virtually enjoyed 10%
right off of the cost of assets and therefore grant of depreciation would
amount to giving double benefit to the assessee has not been accepted by
the Tribunal as well as Hon’ble High Court. The Hon’ble Bombay High
Court in the case of Institute of Banking Personnel Selection (supra)
turned down the contention of the Department on double benefit by
returning the following findings as under:-
“3.As stated above, the first question which requires consideration by this Court is: whether depreciation was allowable on the assets, the cost of which has been fully allowed as application of income under section 11 in the past years? In the case of CIT v. Munisuvrat Jain 1994 Tax Law Reporter, 1084 the facts were as follows. The assessee was a Charitable Trust. It was registered as a Public Charitable Trust. It was also registered with the Commissioner of Income Tax, Pune. The assessee derived income from the temple property which was a Trust
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property. During the course of assessment proceedings for assessment years 1977-78, 1978-79 and 1979-80, the assessee claimed depreciation on the value of the building @2 and half % and they also claimed depreciation on furniture @ 5%. The question which arose before the Court for determination was: whether depreciation could be denied to the assessee, as expenditure on acquisition of the assets had been treated as application of income in the year of acquisition? It was held by the Bombay High Court that section 11 of the Income Tax Act makes provision in respect of computation of income of the Trust from the property held for charitable or religious purposes and it also provides for application and accumulation of income. On the other hand, section 28 of the Income Tax Act deals with chargeability of income from profits and gains of business and section 29 provides that income from profits and gains of business ahll be computed in accordance with section 30 to section 43C. That, section 32(1) of the Act provides for depreciation in respect of building, plant and machinery owned by the assessee and used for business purposes. It further provides for deduction subject to section 34. In that matter also, a similar argument, as in the present case, was advanced on behalf of the revenue, namely, that depreciation can be allowed as deduction only under section 32 of the Income Tax Act and not under general principles. The Court rejected this argument. It was held that normal depreciation can be considered as a legitimate deduction in computing the real income of the assessee on general principles or under section 11 (1) (a) of the Income Tax Act The Court rejected the argument on behalf of the revenue that section 32 of the Income Tax Act was the only section granting benefit of deduction on account of depreciation. It was held that income of a Charitable Trust derived from building, plant and machinery and furniture was liable to be computed in normal commercial manner although the Trust may not be carrying on any business and the assets in respect whereof depreciation is claimed may not be business assets. In all such cases, section 32 of the Income Tax Act providing for depreciation for computation of income derived from business or profession is not applicable. However, the income of the Trust is required to be computed under section 11 on commercial principles after providing for allowance for normal depreciation and deduction thereof from gross income of the Trust.In view of the aforesatated judgment of the Bombay High Curt, we answer question No. 1 in the
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affirmative i.e., in favour of the assessee and against the Department. 4.Question No. 2 herein is identical to the question which was raised before the Bombay High Court in the case of Director of Income-tax (Exemption) v. Framjee Cawasjee Institute [1993] 109 CTR 463. In that case, the facts were as follows: The assessee was the Trust. It derived its income from depreciable assets. The assessee took into account depreciation on those assets in computing the income of the Trust. The ITO held that depreciation could not be taken into account because; full capital expenditure had been allowed in the year of acquisition of the assets. The assessee went in appeal before the Assistant Appellate Commissioner. The Appeal was rejected. The Tribunal, however, took the view that when the ITO stated that full expenditure had been allowed in the year of acquisition of the assets, what he really meant was that the amount spent on acquiring those assets had been treated as 'application of income' of the Trust in the year in which the income was spent in acquiring those assets. This did not mean that in computing income from those assets in subsequent years, depreciation in respect of those assets cannot be taken into account. This view of the Tribunal has been confirmed by the Bombay High Court in the above judgment. Hence, Question No. 2 is covered by the decision of the Bombay High Court in the above Judgment. Consequently, Question No. 2 is answered in the Affirmative i.e., in favour of the assessee and against the Department."
Hon’ble Delhi High Court in the case cited as M/s Indraprastha
Cancer Society (supra) examined the issue at length and has also
examined Finance Act (No. 2) Act of 2014, sub section (6) to Section 11
inserted with effect from 1.4.2015 by returning the following findings as
under:-
“11. By Finance (No.2) Act of 2014, sub-section (6) to Section 11 stands inserted with effect from 1st April, 2015 to the effect that where any income is required to be applied, accumulated or set apart for application, then for
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such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of an asset, the acquisition of which has been claimed as application of income under this section in the same or any other previous year. The legal position, therefore, would undergo a change in terms of Section 11(6), which has been inserted and applicable with effect from 1st April, 2015 and not to be assessment years in question. The newly enacted sub-section relates to application of income.”
Hon’ble Delhi High Court has also allowed the depreciation claimed
by the assessee by debiting the same to the income and expenditure
account of the society for the purpose of working the surplus in the hands
of the society. So, following the decision rendered by Hon’ble Supreme
Court of India and Hon’ble High Court as discussed in the preceding
paras, we are of the considered view that Ld. AO/CIT have erred in
making/affirming additions on account of depreciation claimed by the
assessee, hence ordered to be deleted. In view of what has been
discussed above, present appeal filed by the assessee is allowed.
Order pronounced in the open court on 19/7/2018
Sd/- Sd/- (N.K. BILLAIYA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 19.07.2018 Pooja/-
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