Charitable status and depreciation principles: incidental commercial receipts do not defeat exemption, and depreciation remains deductible prospectively.

A statutory transport corporation claiming charitable status under the advancement of an object of general public utility retained exemption under section 11 because incidental receipts from advertisements, space letting and allied activities did not displace its dominant public utility purpose or show a trade, commerce or business motive. Depreciation on assets whose cost had already been treated as application of income was also allowable in computing charitable income, since depreciation is a normal deduction and does not create a prohibited double deduction. The later restriction in section 11(6) was prospective and applied only from assessment year 2015-16 onwards.

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Issues: (i) Whether the proviso to section 2(15) of the Income-tax Act, 1961 applied to the assessee so as to deny exemption under section 11 of the Income-tax Act, 1961; (ii) Whether depreciation on assets, the cost of which had already been treated as application of income, was allowable in computing income of the charitable institution.

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

Analysis: The assessee was a statutory transport / corporation established to provide efficient and economical public transport, and its object fell within advancement of an object of general public utility. The mere receipt of revenue from advertisements, letting of space, or allied activities did not by itself establish that the dominant object was trade, commerce, or business. The controlling test was whether the institution was driven primarily by a profit motive or by a charitable purpose. On the facts found, the revenue-generating activities were incidental and the dominant and prime objective remained public utility.

Conclusion: The proviso to section 2(15) did not apply, and the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961.

Issue (ii): Whether depreciation on assets, the cost of which had already been treated as application of income, was allowable in computing income of the charitable institution.

Analysis: Depreciation is a necessary deduction while computing income of a charitable institution in the normal commercial sense. Allowance of depreciation does not amount to impermissible double deduction merely because the capital outlay was earlier treated as application of income. The later insertion of section 11(6) of the Income-tax Act, 1961 was prospective and applied only from assessment year 2015-16 onwards.

Conclusion: Depreciation was allowable, and the revenue's objection was rejected.

Final Conclusion: The assessee succeeded on the core exemption issue and on depreciation, while the separately filed appeal by the revenue failed and the unpressed appeal stood dismissed, resulting in a partial allowance of the assessee's appeals.

Ratio Decidendi: For section 2(15), the decisive inquiry is the dominant object of the institution, and incidental receipts from commercial-type activities do not defeat charitable status where profit motive is absent; depreciation remains deductible in the computation of charitable income until the prospective bar introduced by section 11(6).

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