2017 (12) TMI 802 - AT - Income Tax

Appeal allowed: Exemption granted under Income Tax Act for educational institution's depreciation claim

Pallavi Educational Society Versus Asst. Director of Income-tax (E) – III, Hyderabad

Pallavi Educational Society Versus Asst. Director of Income-tax (E) – III, Hyderabad - TMI Issues Involved:1. Denial of exemption under Section 11 of the Income Tax Act.2. Disallowance of depreciation on fixed assets.Issue-wise Detailed Analysis:1. Denial of Exemption Under Section 11 of the Income Tax Act:The assessee, an educational institution, claimed exemption under Section 11 of the Income Tax Act for the assessment year 2009-10. The Assessing Officer (AO) denied this exemption on the grounds that the assessee had advanced Rs. 32,07,995 to M/s Shalivahana Associates, a firm where one of the trustees held a substantial interest, thus violating Section 13(1)(c) of the Act. The AO noted that no interest was paid to the assessee for the loan, nor was any security attached to the balance payable, thereby contravening Section 13(3).On appeal, the CIT(A) upheld the AO's decision, emphasizing that the transactions between the assessee and Shalivahana Associates constituted a loan, as per Section 13(2)(a), and thus rendered the assessee ineligible for exemption under Section 11.Before the Tribunal, the assessee argued that the transactions were part of a running account and not a loan, highlighting that interest-free advances were received from Shalivahana Associates throughout the year. The AR contended that the transactions did not result in any net benefit to Shalivahana Associates, and thus there was no violation of Section 13(1)(c). The Tribunal, after considering the ledger accounts and the nature of transactions, concluded that the funds remitted to Shalivahana Associates were not lent with a commercial intention. The Tribunal observed that the transactions were reciprocal and primarily benefited the assessee. Consequently, the Tribunal found it unreasonable to deny the exemption under Section 11 and directed the AO to allow the exemption.2. Disallowance of Depreciation on Fixed Assets:The AO disallowed the assessee's claim for depreciation amounting to Rs. 10,11,041 on the grounds that the cost of the assets had already been claimed as an application of income, thus amounting to double deduction, referencing the decision in Escorts Ltd. Vs. UOI.The CIT(A) upheld the AO's decision, relying on a previous ITAT decision in ACIT Vs. Sri Venkat Sai Educational Society.The Tribunal, however, differentiated the present case from Escorts Ltd., noting that the assessee was a charitable institution and not engaged in business. The Tribunal cited several legal precedents, including CIT Vs. Market Committee, Pipli and CIT Vs. Institute of Banking, which established that depreciation should be allowed to determine the actual income over expenditure for charitable institutions. The Tribunal emphasized that the computation of income for a charitable trust should follow commercial principles, allowing for depreciation to reflect the true income available for application to charitable purposes. Consequently, the Tribunal deleted the disallowance of depreciation and allowed the ground raised by the assessee.Conclusion:The Tribunal allowed the appeal of the assessee, granting exemption under Section 11 and permitting the claim for depreciation on fixed assets. The judgment emphasized the need to interpret the provisions of the Income Tax Act in a manner that aligns with the commercial principles and the legislative intent to support charitable institutions.