Charitable exemption and depreciation remain available where dominant charitable purpose is intact and receipts are only incidental.

The proviso to section 2(15) does not deny charitable status where an institution's dominant object remains charitable and its activities are not shown to be carried on as trade, commerce or business; incidental sponsorships or receipts do not by themselves destroy exemption under sections 11 and 12. Depreciation is also allowable on charitable assets even where the acquisition cost has already been treated as application of income, because that treatment does not bar subsequent depreciation and does not create an impermissible double deduction. The stated position preserves both charitable exemption and depreciation for genuine charitable institutions.

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Issues: (i) Whether the proviso to section 2(15) of the Income-tax Act, 1961 applied so as to deny charitable status and exemption under sections 11 and 12 of the Income-tax Act, 1961. (ii) Whether depreciation was allowable on capital assets, even though the cost of acquisition had been treated as application of income for charitable purposes.

Issue (i): Whether the proviso to section 2(15) of the Income-tax Act, 1961 applied so as to deny charitable status and exemption under sections 11 and 12 of the Income-tax Act, 1961.

Analysis: The dispute turned on whether the assessee's activities were in the nature of trade, commerce or business, or whether its dominant object remained charitable. The reasoning followed the earlier view that the proviso targets entities whose real purpose is commercial, and not genuine charitable institutions whose activities may incidentally involve sponsorships or receipts. The nature of the assessee's activities, its objects, and the absence of material showing that it was carrying on affairs solely on commercial lines led to the conclusion that the charitable character was not lost.

Conclusion: The proviso to section 2(15) did not apply, and exemption under sections 11 and 12 was available. This issue was decided in favour of the assessee.

Issue (ii): Whether depreciation was allowable on capital assets, even though the cost of acquisition had been treated as application of income for charitable purposes.

Analysis: The claim for depreciation was held to be governed by the settled position that allowance of capital expenditure as application of income does not bar depreciation on the same asset in subsequent computation. The binding precedent relied upon affirmed that depreciation is a legitimate deduction for charitable institutions and does not amount to impermissible double deduction.

Conclusion: Depreciation was allowable. This issue was decided in favour of the assessee.

Final Conclusion: The Revenue's challenge failed in full, and the assessee retained the benefit of charitable exemption as well as depreciation on eligible assets.

Ratio Decidendi: A genuine charitable institution does not lose exemption merely because it receives sponsorships or incidental receipts, and depreciation remains allowable on charitable assets even where their acquisition cost has been treated as application of income.

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