2019 (8) TMI 1635 - AT - Income Tax

ITAT Rules Franchise Fees as Business Income; Allows Losses Carry Forward, Addresses Depreciation Concerns.

Dy. Commissioner of Income tax (E), Versus Delhi Public School Society

The ITAT ruled in favor of the assessee, dismissing all grounds of appeal filed by the Revenue. The Tribunal determined that franchisee fees should be ... Exemption u/s 11 - Denial of exemption as receipts are on account of franchisee fee and the same are in the nature of business income within the meaning of provisions of sub-section 4A of section 11 - HELD THAT- In the case of aforesaid precedent of DIT(E) vs. Delhi Public School Society [2018 (4) TMI 714 - DELHI HIGH COURT] [2018] 92 taxmann.com 132 (Delhi), it was held by Hon’ble High Court of Delhi in assessee’s own case that the assessee society was maintaining schools in furtherance of educational purpose and that also qualified as charitable purpose under section 2(15) and, therefore, assessee society fulfilled requirements to qualify for exemption under section 10(23C)(vi). In the case of DIT(E) vs. Delhi Public School Society [2018 (11) TMI 653 - SC ORDER] [2018] 100 taxmann.com 80(SC), a special leave petition of Revenue against the aforesaid order of Hon’ble Delhi High Court was dismissed by Hon’ble Supreme Court. In the case of CIT vs. Rajasthan & Gujarati Charitable Foundation Poona [2017 (12) TMI 1067 - SUPREME COURT], it was held by Hon’ble Supreme Court that in the case of charitable institution registered under section 12A, even though expenditure incurred for acquisition of capital assets was treated as application of income for charitable purposes under section 11(1)(a), yet depreciation would be allowed on assets so purchased. Both sides have agreed that the issues in dispute are covered in favour of the assessee. Issues:1. Interpretation of franchisee fees as business income under Section 11 of the IT Act.2. Allowance of carry forward of losses under sections 70 to 74 of the Income Tax Act.3. Claiming depreciation on fixed assets and potential double deduction.Analysis:(A) Franchisee Fees as Business Income:The appeal by Revenue challenged the Ld. CIT(A)'s order regarding franchisee fees, arguing they constitute business income under Section 11 of the IT Act. The Ld. CIT(A) allowed the claim of carry forward of losses, which the Revenue contended was not in line with sections 70 to 74 of the Income Tax Act. Furthermore, the Revenue argued that allowing depreciation on fixed assets could lead to double deduction.(B) Judicial Precedents:During the ITAT proceedings, the AR of the assessee cited various judicial precedents in favor of the assessee, including orders related to The Delhi Public School Society and other charitable foundations. The AR emphasized that the disputed issues were resolved in favor of the assessee in previous cases. The ITAT noted that similar issues were previously considered by a co-ordinate bench, leading to decisions favoring the assessee.(C) Decision and Precedents:After considering the arguments and judicial precedents, the ITAT found that the issues in dispute were indeed covered in favor of the assessee by the cited judicial precedents. The ITAT dismissed the Revenue's grounds of appeal, deciding in favor of the assessee based on the precedents mentioned in the order.(D) Conclusion:Ultimately, the ITAT pronounced the order in favor of the assessee, dismissing all grounds of appeal filed by the Revenue. The decision was based on the application of relevant judicial precedents and interpretations of the Income Tax Act.This detailed analysis showcases the legal interpretation and application of precedents in resolving the issues raised in the appeal before the ITAT.