2013 (9) TMI 84 - AT - Income Tax

Trust granted tax exemption under Section 11 of Income Tax Act, 1961 despite control lapses

The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee by allowing the exemption under Section 11 of the Income Tax Act, 1961. It held ... Exemption u/s 11 - violation of section 11(1) and 11(1)(b) - Commercial activity or charitable activity - Advertisement of facility provided i.e utilization the hostel facilities and auditorium and seminar facilities - double deduction on account of capital expenditure on purchase of fixed assets and then depreciaion - Held that:- It is seen that the AO has been guided by the fact that the assessee is charging fees for hostel facilities and has also in its income shown receipts from canteen facilities over and above receipts from hiring of conference hall/auditorium etc. Apart from that he has also been guided by the fact that the Inspector accompanied by tax advisors was allowed to utilize the canteen facilities without any effort or the part of the serving personnel to ensure that only inmates of the hostel were being served - Merely advertising the fact that facility of hostel, seminar halls, auditorium etc. can be used by organizations interested in having leadership programs for the benefit of youth does not make the activity a commercial activity - It is found explained on behalf of the assessee that sometimes the guardians of the girl participants come to the centre to meet them and canteen staff had been instructed not to stop them from taking snacks and lunch if they so want, keeping in mind the fact that the location of the trust was not close to the commercial areas where the guardians of these girls visiting them could have gone. The mere affording of such a courtesy does not lead to the conclusion that the trust was operating on commercial lines. In the courtesy so afforded if the lady Inspector accompanied by two tax advisors were allowed to have lunch/snacks without requiring them to show any identification in no way detracts from the merits of the case - Therefore, decided against Revenue. Issues Involved:1. Exemption under Section 11 of the Income Tax Act, 1961.2. Allowance of depreciation on fixed assets.Issue-wise Detailed Analysis:1. Exemption under Section 11 of the Income Tax Act, 1961:Background:The Revenue appealed against the order allowing exemptions under Section 11, which was denied by the AO on the grounds that the assessee earned profits from commercial activities, violating Section 11(1) and 11(1)(b) of the Income Tax Act, 1961.Assessment by AO:The AO scrutinized the assessee's income and expenditure, noting that the main sources of income were from hostel/canteen activities and bookings of the Auditorium and Conference Hall. The AO concluded that these activities were of a commercial nature, thus violating the charitable purpose requirement under Section 2(15) of the Income Tax Act. The AO verified the assessee's claim that facilities were restricted to members only through an Inspector's report, which indicated that the facilities were open to everyone, not just members. Consequently, the AO denied the exemption under Section 12A and taxed the assessee at the rate applicable to an AOP, computing taxable income at Rs.1,74,89,655/-.Appeal before CIT(A):The CIT(A) considered the assessee's submissions, which emphasized that the activities were in line with the trust's objectives to promote youth welfare. The CIT(A) noted that the trust's activities, including running a canteen and renting out facilities, were aimed at supporting its charitable objectives. The CIT(A) found that the AO's conclusion that the activities were commercial was incorrect, as the activities were in furtherance of the trust's charitable objectives. The CIT(A) held that the AO was not justified in denying the exemption under Section 11.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, noting that the AO's reliance on the Inspector's report was misplaced. The Tribunal found that the trust maintained strict checks and documentation to ensure that its facilities were used for charitable purposes. The Tribunal agreed with the CIT(A) that occasional lapses in control did not change the charitable nature of the trust's activities. The Tribunal also dismissed the Revenue's reliance on various judgments, finding them distinguishable from the present case.Conclusion:The Tribunal concluded that the activities of the trust were charitable and directed the AO to allow the exemption under Section 11 as claimed by the assessee.2. Allowance of Depreciation on Fixed Assets:Background:The AO disallowed depreciation on assets acquired in earlier years, allowing depreciation only on assets purchased during the relevant financial year. The AO's rationale was that assets acquired in earlier years had already been claimed as application of income.Appeal before CIT(A):The assessee argued that as per Section 11(1)(a), income applied for charitable purposes includes both capital and revenue expenditure, and depreciation should be allowed on assets used during the year. The CIT(A) agreed with the assessee, relying on the judgment of the Delhi Tribunal in ACIT vs. Tiny Tots Educational Society, which was confirmed by the Punjab and Haryana High Court. The CIT(A) also cited the Delhi High Court's decision in DIT vs. Vishwa Jagriti Mission, which held that depreciation is a necessary deduction for computing income of charitable institutions.Tribunal's Decision:The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not provide any contrary decision or distinguish the facts of the case. The Tribunal agreed with the CIT(A) that depreciation should be allowed on assets used during the year, even if they were acquired in earlier years.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow depreciation on fixed assets acquired in earlier years.Final Order:The appeal of the Department was dismissed, and the order was pronounced in the open Court on 23rd August 2013.