2021 (11) TMI 223 - AT - Income Tax

Tribunal excludes educational institution income from society's total, supports depreciation claim

The tribunal ruled in favor of the appellant, stating that income from the educational institution, including hostel facilities, should not be considered ... Hostel facility incidental to education - not business under section 11(4A) - allowance of depreciation on assets of registered charitable institution despite application of income - consistency principle - revenue bound by treatment in preceding and succeeding assessment yearsHostel facility incidental to education - not business under section 11(4A) - consistency principle - revenue bound by treatment in preceding and succeeding assessment years - Whether surplus from hostel receipts is business income or part of charitable educational activity and therefore exempt from inclusion in total income. - HELD THAT: - The Tribunal found that the assessee is a society running an engineering college and that hostel facilities were provided to students and staff in implementation of the educational object. Reliance was placed on earlier coordinate decisions, and on the view of the Karnataka High Court in CIT v. Karnataka Lingayat Education Society that providing hostel accommodation and transport to students and staff is incidental and subservient to the principal educational object and cannot be treated as a business. The Tribunal noted absence of any material showing hostels were let out to non-students or that the assessee's primary activity was providing hostels. It also observed that Revenue had treated similar receipts as non-taxable for the assessee in preceding and subsequent years, and that the principle of consistency militated against a contrary view for the year under appeal. Applying these considerations, the Tribunal held that the AO and CIT(A) erred in treating the hostel surplus as business income liable to be included in total income. [Paras 8]Addition of hostel surplus as business income set aside; surplus treated as part of charitable educational activity and not includible in total income.Allowance of depreciation on assets of registered charitable institution despite application of income - Whether depreciation on hostel assets is allowable although capital expenditure had been treated as application of income by the charitable institution. - HELD THAT: - The Tribunal followed the settled law as expounded by the Supreme Court in CIT v. Rajasthani & Gujarati Charitable Foundation Poona and allied High Court authorities which hold that depreciation is allowable even where the cost of capital assets was treated as application of income in the year of acquisition. The Tribunal observed that Revenue had consistently allowed depreciation for the assessee in other assessment years and that the AO's disallowance for the year in question was contrary to the controlling precedent. In view of these authorities and the consistency in Revenue's own treatment, the Tribunal held the disallowance unsustainable. [Paras 9]Disallowance of depreciation deleted and depreciation claim allowed.Final Conclusion: The appeal is allowed: the addition of hostel surplus as business income is set aside and the disallowance of depreciation is deleted; the income from hostel activity is treated as part of the charitable educational activity for AY 2011-12. Issues Involved:1. Inclusion of income from educational institution in the total income of the assessee society.2. Treatment of income from hostel facilities as an independent source of income.3. Historical treatment of income from hostel facilities in previous assessment years.4. Production of books of accounts before the Assessing Officer (AO).5. Opportunity to present books of accounts during remand.6. Maintenance of separate books of accounts for hostel activities.7. Accuracy of income computation from hostel activities.8. Depreciation claim on hostel block.9. Arbitrary determination of hostel income by AO.10. Alleged double deduction of depreciation.11. Allowability of depreciation under Section 32(1)(ii) of the Income Tax Act.Detailed Analysis:1. Inclusion of Income from Educational Institution:The appellant argued that the income derived from the educational institution should not be included in the total income of the society, emphasizing that the sole source of income was from providing education, which necessitated maintaining a hostel. The tribunal agreed, noting that the hostel facility is subservient to the main objective of providing education and should not be treated as an independent business activity.2. Treatment of Hostel Income:The tribunal referenced multiple cases, including Harish Chand Ram Kali Charitable Trust vs. The Addl Commissioner of Income Tax and Krishna Charitable Society vs. Addl. CIT, to support the view that hostel income is incidental to the educational purpose and not a separate business. It was established that providing hostel facilities is intrinsic to the educational activities of the society.3. Historical Treatment of Hostel Income:The appellant highlighted that since its inception in AY 1998-99, and consistently until AY 2009-10, hostel income was not treated as independent income. The tribunal upheld the principle of consistency, referencing the Supreme Court's decision in Commissioner of Income-tax v. Excel Industries Ltd., which emphasized that revenue should not change its stance on an issue if there has been no change in facts or law.4. Production of Books of Accounts:The appellant contended that the books of accounts were duly produced before the AO on specified dates. The tribunal found that the AO's claim of non-production was incorrect, as the books were indeed presented.5. Opportunity During Remand:The appellant argued that the AO did not provide an opportunity to present the books during remand. The tribunal noted this procedural lapse, emphasizing the importance of allowing the assessee to present its case fully.6. Separate Books for Hostel Activities:The appellant maintained separate books for hostel activities as a precaution to comply with Section 11(4A) of the Act. The tribunal found this approach appropriate, noting that the hostel activity was incidental to the educational objectives of the society.7. Accuracy of Income Computation:The appellant disputed the computation of hostel income, arguing that the excess of income over expenditure was minimal and supported by vouchers. The tribunal found the AO's computation of Rs. 93,00,088/- to be arbitrary and unsupported by material evidence.8. Depreciation Claim on Hostel Block:The appellant did not debit depreciation on the hostel block in the income and expenditure account. The tribunal referenced the Supreme Court's decision in CIT vs. Rajasthan & Gujarati Charitable Foundation Poona, which allows for depreciation even if the cost of assets was treated as application of income for charitable purposes.9. Arbitrary Determination of Hostel Income:The tribunal found the AO's determination of hostel income to be arbitrary and unsupported by material evidence, siding with the appellant's computation.10. Alleged Double Deduction of Depreciation:The tribunal rejected the AO's claim of double deduction, referencing the Delhi High Court's decision in DIT vs. Vishwa Jagriti Mission, which allows for depreciation as a legitimate deduction.11. Allowability of Depreciation:The tribunal upheld the appellant's claim for depreciation, citing the Supreme Court's decision in CIT vs. Rajasthan & Gujarati Charitable Foundation Poona, which supports the deduction of depreciation for charitable institutions.Conclusion:The tribunal allowed the appeal, ruling that the income from the educational institution, including hostel facilities, should not be included in the total income of the society. It also upheld the appellant's claim for depreciation, emphasizing the principle of consistency and the incidental nature of hostel activities to the educational purpose. The tribunal's decision was pronounced on November 3, 2021.