Tribunal rules in favor of assessee, overturning additions by Assessing Officer.

The Tribunal allowed the appeal, ruling in favor of the assessee by deleting both additions made by the Assessing Officer. The first addition of Rs. 2,35,43,997 as business income from hostel facility surplus was deemed unsustainable, as providing hostel facilities to students and staff was considered incidental to the objective of providing education. The second addition of Rs. 4,04,17,438 disallowed as depreciation claimed by the assessee was overturned based on judicial precedents emphasizing that depreciation should be allowed even if the asset cost had been treated as application of income.

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Issues Involved:
1. Addition of Rs. 2,35,43,997/- treating hostel facility surplus as business income.
2. Addition of Rs. 4,04,17,438/- by disallowing depreciation claimed by the assessee.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,35,43,997/- Treating Hostel Facility Surplus as Business Income:

The primary issue was whether the surplus generated from the hostel facility provided to students should be treated as business income under Section 11(4)/11(4A) of the Income Tax Act. The Assessing Officer (AO) concluded that running hostel facilities, where separate fees were charged, did not fall under the definition of charitable purpose under Section 2(15) of the Act and hence treated the surplus as business income. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this view.

However, the Tribunal noted that the assessee society was registered under Section 12AA and entitled to exemption under Section 80G of the Act. It was undisputed that the hostel and mess facilities were exclusively for students and staff, with no outsiders allowed. The Tribunal referred to precedents such as the Karnataka High Court's decision in the case of Karnataka Lingayat Education Society and the Tribunal's own decision in the case of Krishna Charitable Society, which held that providing hostel facilities to students and staff was incidental to achieving the objective of providing education and thus should not be treated as separate business income.

The Tribunal concluded that the addition made by the AO on account of hostel surplus fee was not sustainable in law and ordered its deletion.

2. Addition of Rs. 4,04,17,438/- by Disallowing Depreciation Claimed by the Assessee:

The second issue involved the disallowance of Rs. 4,04,17,438/- claimed as depreciation by the assessee. The AO disallowed this on the grounds that allowing depreciation would result in double deduction since the capital expenditure had already been treated as application of income for charitable purposes.

The Tribunal referred to several judicial precedents, including the Supreme Court's decision in CIT vs. Rajasthan and Gujarati Charitable Foundation Poona and the Delhi High Court's decision in DIT (exemption) vs. M/s Indraprastha Cancer Society. These decisions upheld that depreciation should be allowed even if the cost of the asset had been fully allowed as application of income in the year of acquisition. The rationale was that income of a charitable trust should be computed in a normal commercial manner, which includes accounting for depreciation.

The Tribunal noted that the legal position would change with the insertion of sub-section (6) to Section 11 by the Finance (No.2) Act of 2014, applicable from 1st April 2015, which disallowed depreciation on assets whose acquisition cost had been claimed as application of income. However, this was not applicable to the assessment years in question.

Following these precedents, the Tribunal concluded that the AO and CIT(A) erred in disallowing the depreciation claimed by the assessee and ordered its deletion.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting both the additions made by the AO. The order was pronounced in the open court on 19/7/2018.

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