General public utility exemption survives incidental surplus; depreciation on charitable assets remains allowable before the prospective amendment.

A charitable institution with a dominant object of general public utility did not lose section 11 exemption merely because incidental surplus arose, as the proviso to section 2(15) applies only where trade, commerce or business is the dominant activity. Depreciation on assets already treated as application of income remained allowable in computing charitable income for years before the prospective introduction of section 11(6), and the lease-rental addition was rejected because the receipts were consistently accounted for under an established proportionate method with no material showing tax avoidance. The result was deletion of the depreciation disallowance and lease-rental addition.

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Issues: (i) whether the proviso to section 2(15) of the Income-tax Act, 1961 applied so as to deny exemption under section 11, and (ii) whether depreciation on assets already treated as application of income was allowable, and whether the lease-rental addition was sustainable.

Issue (i): whether the proviso to section 2(15) of the Income-tax Act, 1961 applied so as to deny exemption under section 11

Analysis: The assessee was constituted under a special statute for industrial development and infrastructure facilitation, with activities controlled by the State and undertaken on a no profit basis. The dominant object was found to be advancement of an object of general public utility. Applying the principle that the proviso to section 2(15) excludes only activities carrying the dominant element of trade, commerce, or business, the Court followed the earlier year's decision and held that the assessee's main activities were not commercial in character merely because some surplus arose incidentally.

Conclusion: The proviso to section 2(15) did not apply, and the assessee was entitled in principle to exemption under section 11, subject to verification of the application-of-income requirements.

Issue (ii): whether depreciation on assets already treated as application of income was allowable, and whether the lease-rental addition was sustainable

Analysis: Depreciation in the case of a charitable institution was treated as part of the normal commercial computation of income and not as a prohibited double deduction. The Court followed binding precedent that depreciation is allowable for determining the income of a charitable trust, noting that the statutory bar in section 11(6) operated prospectively from assessment year 2015-16 and therefore did not govern the year in question. On the lease-rental issue, the receipts were found to relate to lease transactions accounted for consistently on a proportionate basis, and the long-standing accounting method could not be disturbed in the absence of material showing tax avoidance.

Conclusion: The depreciation disallowance and the lease-rental addition were deleted.

Final Conclusion: The assessee succeeded on the central exemption and addition issues, while the revenue's challenge to depreciation failed, resulting in partial relief to the assessee and dismissal of the revenue appeal.

Ratio Decidendi: For a charitable institution whose dominant object is advancement of general public utility and whose activities are not driven primarily by profit, incidental surplus does not attract the proviso to section 2(15); depreciation remains allowable in computing charitable income for years prior to the prospective amendment in section 11(6).

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