2012 (9) TMI 954 - AT - Income Tax

Franchisee fees not taxable as business income under Income Tax Act | Depreciation allowance upheld

Asstt. Director of Income Tax (E), Versus The Delhi Public School Society,

Asstt. Director of Income Tax (E), Versus The Delhi Public School Society, - TMI Issues Involved:1. Deletion of addition of Rs. 6,39,42,882/- made by the Assessing Officer in respect of franchisee fees received by the DPS Society.2. Allowance of depreciation amounting to Rs. 12,55,50,824/- on certain fixed assets, claimed as application of income in earlier years.Issue-wise Detailed Analysis:Issue 1: Deletion of Addition of Rs. 6,39,42,882/- as Franchisee FeesThe Revenue challenged the deletion of Rs. 6,39,42,882/- by the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that the franchisee fees received by the DPS Society from satellite schools should be taxed as business income under Section 11(4A) of the Income Tax Act, 1961. The Assessing Officer (AO) had initially taxed this amount, stating that the society did not maintain separate books of accounts as required under Section 11(4A).The Tribunal noted that the assessee society, registered under Section 12AA, had been granted exemptions under Sections 10 and 11 for previous years. The Tribunal referred to several precedents, including ITAT decisions in the assessee's own case for various assessment years (AY 2001-02, AY 1998-99 to 2000-01, AY 2002-03, AY 2004-05, and AY 2005-06), which consistently held that the franchisee fees were not liable to tax as business income. The Tribunal emphasized the principle of consistency, noting that there was no substantial cause for the AO to deviate from the earlier decisions.The Tribunal upheld the CIT(A)'s order, which followed the ITAT's earlier decisions, confirming that the franchisee fees were not liable to tax. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's ground.Issue 2: Allowance of Depreciation of Rs. 12,55,50,824/-The Revenue also contested the CIT(A)'s decision to allow depreciation on fixed assets amounting to Rs. 12,55,50,824/-, arguing that it resulted in a double deduction since the full cost of the assets had already been claimed as application of income in earlier years.The Tribunal referred to the judgment of the Hon'ble Delhi High Court in the case of DIT vs Vishwa Jagriti Mission, which held that depreciation should be allowed even if the cost of the asset had been treated as application of income in earlier years. The Tribunal also considered the judgment of the Hon'ble Punjab & Haryana High Court in the case of Tiny Tots Education Society, which distinguished the Supreme Court's decision in Escorts Ltd. vs Union of India, stating that the latter was not applicable to charitable institutions.The Tribunal observed that the AO ignored the fact that the assessee's claim of depreciation had been allowed in earlier years without any disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee was not claiming double deduction but merely computing income on commercial principles to determine the funds available for charitable purposes. The Tribunal dismissed the Revenue's ground, finding no infirmity in the CIT(A)'s order.Conclusion:The Tribunal dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s order that the franchisee fees were not liable to tax and that depreciation on fixed assets should be allowed. The Tribunal emphasized the principle of consistency and the proper interpretation of relevant legal provisions and precedents.