2021 (10) TMI 413 - AT - Income Tax

Assessee wins appeal: depreciation disallowed, exemption granted under Income Tax Act.

M/s. Vocational Education Foundation Versus ACIT, Exemptions, Ghaziabad.

The appeals filed by the assessee for multiple assessment years were allowed. The disallowance of depreciation was deleted, and exemption under Sections ... Exemption u/s 11 - Disallowance of depreciation claimed by the assessee stating that there is a double deduction - HELD THAT:- We find that this issue is covered squarely in favour of the assessee by the decision of Rajasthan and Gujarat the charitable foundation [2017 (12) TMI 1067 - SUPREME COURT]. Applicability of the provisions of Section 11 and 12 of the income tax act to the assessee trust - As relying on ADARSH PUBLIC SCHOOL VERSUS JOINT CIT, RANGE-1, NOIDA [2018 (2) TMI 1692 - ITAT DELHI] there is no allegation that the surplus and by the assessee has not been utilized by the assessee for the purpose of charitable activities. Therefore, it remains an uncontroverted fact that the surplus is ploughed back for educational purposes and the assessee exists solely for educational purposes and not for the purposes of the profit. Assessee is entitled to deduction u/s 11 and Section 12 of the income tax act as assessee exists for educational purposes covered as charitable purposes under the provisions of Section 2 (15). Issues Involved:1. Validity of the appeal order passed by CIT (Appeals).2. Jurisdiction and authority of CIT (Appeals) to introduce new sources of income.3. Denial of exemption under Sections 11 and 12 of the Income Tax Act.4. Disallowance of depreciation claimed by the assessee.5. Applicability of Section 11(6) of the Income Tax Act.6. Consideration of gross receipts as income from other sources under Section 56.7. Non-allowance of deductions under Section 57.8. Non-allowance of expenditure incurred by the assessee.9. Treatment of bank interest income.10. Disregard of the appellant's past history in receiving benefits under Sections 11 and 12.11. Correctness of figures of gross income and applicability of Section 164(2).12. Excessive disallowances and additions to returned income.Detailed Analysis:1. Validity of the Appeal Order Passed by CIT (Appeals):The assessee challenged the combined appeal order dated 30.03.2017, arguing it was bad in law, facts, and equity. The CIT (Appeals) issued the order on facts contrary to those of the appellant and on a date different from the alleged final hearing date.2. Jurisdiction and Authority of CIT (Appeals) to Introduce New Sources of Income:The CIT (Appeals) issued a show cause notice under Section 251(2) proposing to increase the income by making new disallowances/incomes not subject to the original assessment order. The assessee argued that the CIT (Appeals) overstepped their jurisdiction by introducing new sources of income, which were not considered by the Assessing Officer.3. Denial of Exemption Under Sections 11 and 12 of the Income Tax Act:The CIT (Appeals) denied the exemption under Sections 11 and 12, asserting that the assessee was not carrying out charitable activities as it charged fees from students. The assessee contended that educational institutions are covered under Section 10(23C) and can claim exemptions under Sections 11 and 12. The judgment referenced the Supreme Court's decision in Queens Educational Society vs. CIT, emphasizing that charging fees does not negate the charitable nature of the institution.4. Disallowance of Depreciation Claimed by the Assessee:The Assessing Officer disallowed the depreciation claimed by the assessee, arguing it resulted in double deduction since the cost of assets was already treated as application of income. The Supreme Court's decision in CIT vs. Rajasthan and Gujarat Charitable Foundation was cited, which held that the amendment to Section 11(6) is prospective from 1 April 2015 and does not apply to prior years.5. Applicability of Section 11(6) of the Income Tax Act:The CIT (Appeals) applied Section 11(6) retrospectively, disallowing the depreciation. The judgment clarified that the amendment is prospective and does not apply to the assessment years in question.6. Consideration of Gross Receipts as Income from Other Sources Under Section 56:The CIT (Appeals) directed the Assessing Officer to assess the entire gross receipts, including corpus donations, as income from other sources under Section 56, without allowing deductions under Section 57. The judgment found this approach incorrect, emphasizing the charitable nature of the assessee's activities.7. Non-Allowance of Deductions Under Section 57:The CIT (Appeals) did not allow any deductions under Section 57, asserting that the expenditure was not the cost of income but its application. The judgment directed that deductions should be allowed as per the Income Tax Act.8. Non-Allowance of Expenditure Incurred by the Assessee:The CIT (Appeals) did not allow the expenditure incurred by the assessee to be set off against any income, arguing no nexus between income and expenditure. The judgment held that such expenditures should be considered legitimate deductions.9. Treatment of Bank Interest Income:The CIT (Appeals) treated the bank interest income as violating Section 13(1)(d), thereby denying the benefit of Sections 11 and 12. The judgment found no such violation by the assessee.10. Disregard of the Appellant's Past History in Receiving Benefits Under Sections 11 and 12:The CIT (Appeals) disregarded the appellant's history of receiving benefits under Sections 11 and 12 since 2000. The judgment emphasized the importance of considering past compliance and benefits.11. Correctness of Figures of Gross Income and Applicability of Section 164(2):The CIT (Appeals) did not take the correct figures of gross income and ignored the applicability of Section 164(2), which provides benefits to all charitable institutions. The judgment directed the correct computation of income and application of Section 164(2).12. Excessive Disallowances and Additions to Returned Income:The assessee argued that the disallowances and additions were highly excessive. The judgment found the disallowances unjustified and directed their deletion.Conclusion:The appeals filed by the assessee for the assessment years 2007-08, 2009-10, 2011-12, and 2012-13 were allowed. The disallowance of depreciation was deleted, and the assessee was granted exemption under Sections 11 and 12. The appeal for assessment year 2013-14 was also allowed, directing the deletion of depreciation disallowance. The judgment emphasized the charitable nature of the assessee's activities and the prospective application of Section 11(6).