2025 (3) TMI 1417 - AT - Income Tax

Revenue's appeal dismissed as trust gets section 11 exemption, depreciation allowed despite exempt income source

ITAT Delhi dismissed revenue's appeal against trust assessment. AO made additions for surplus from commercial activities and infrastructure development ... Assessment of trust - Additions of surplus raised through commercial activities - Addition on account of credited infrastructure Development fund Addition on account of depreciation HELD THAT:- CIT(A) has examined the issues in the correct prospective and rightly deleted the additions made by the A.O as held AO has made the addition by a very cryptic and non-speaking order without mentioning anything about the issue involved, facts of the matter or any legal and accounting provision under which the same has been added. Appellant has tried to bring to my knowledge the inference drawn from the assessment order, pointing the para that might be relevant for the basis of this addition. A perusal of the para shows that AO has in fact calculated sum in every column, incorrectly. In fact if it is presumed that the table made by AO is correct then appellant has in fact credited more in P&L Account and not less. Secondly even if it is to be held that the accretion to his fund namely Infrastructure fund received can be added to the income of the assessee then also the same shall be free of taxation because of the fact that appellant enjoys the exemption u/s 11A.O has denied the claim of depreciation holding that assessee is enjoying exemption u/s 11 since inception and the assets was created out of exempt Income and thus claiming depreciation on such assets which was acquired from exempted income is amount to double deduction. Claim made for depreciation is for use of the assets while claim of capital outgo as an application is on a different footing, just because capital expenditure was considered as application of income, it could not be said that the assessee would not be entitle to claim of depreciation thereon. A.O has denied the claim of depreciation holding that assessee is enjoying exemption u/s 11 since inception and the assets was created out of exempt Income and thus claiming depreciation on such assets which was acquired from exempted income is amount to double deduction. Claim made for depreciation is for use of the assets while claim of capital outgo as an application is on a different footing, just because capital expenditure was considered as application of income, it could not be said that the assessee would not be entitle to claim of depreciation thereon. The reasoning and findings of the Ld. CIT(A) granting relief is on proper appreciation of law expounded by the judicial dicta. We do not find any reasons to interfere with the findings of the Ld. CIT(A). The appeal of the revenue is liable to be dismissed. Appeal of the revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in the judgment are:Whether the activities of the assessee, a development authority, fall within the ambit of 'trade, commerce or business' under Section 2(15) of the Income Tax Act, thereby disqualifying it from exemptions under Sections 11 and 12.Whether the additions made by the Assessing Officer (AO) regarding the infrastructure development fund and depreciation are justified.Whether the infrastructure development fund credited directly to the balance sheet should be considered taxable income.Whether the claim for depreciation on assets, which were acquired through capital expenditure previously considered as application of income, amounts to double deduction.ISSUE-WISE DETAILED ANALYSIS1. Activities of the Assessee under Section 2(15)Legal Framework and Precedents: Section 2(15) of the Income Tax Act defines 'charitable purpose' and includes advancement of any other object of general public utility. The proviso to this section excludes activities in the nature of trade, commerce, or business if the aggregate receipts exceed a specified threshold.Court's Interpretation and Reasoning: The Tribunal noted that the assessee was established for public purposes such as urban development and infrastructure improvement, which are aligned with charitable objectives. The Tribunal referenced the Supreme Court's decision in Surat Art Silk Cloth Manufacturers Association, emphasizing the importance of the predominant object being charitable.Key Evidence and Findings: The Tribunal found that the assessee's activities, such as housing schemes and urban development projects, were aimed at public welfare and not profit generation.Application of Law to Facts: The Tribunal concluded that the assessee's activities did not constitute trade or commerce, and thus, the proviso to Section 2(15) was not applicable.Treatment of Competing Arguments: The Tribunal considered the revenue's argument that the assessee's activities were commercial but found them unpersuasive in light of the evidence.Conclusions: The assessee's activities were deemed charitable, and the exemptions under Sections 11 and 12 were applicable.2. Additions Related to Infrastructure Development FundLegal Framework and Precedents: The issue revolved around whether the infrastructure funds, credited directly to the balance sheet, should be treated as taxable income.Court's Interpretation and Reasoning: The Tribunal noted that the funds were received under a government order and were to be used as per government directions, indicating that the assessee had no control over them.Key Evidence and Findings: The Tribunal observed that the funds were collected on behalf of the government and utilized for specified purposes, making the assessee a mere custodian.Application of Law to Facts: The Tribunal found that the funds were not income of the assessee and thus not taxable.Treatment of Competing Arguments: The Tribunal rejected the AO's simplistic addition of the funds as income without considering the nature and purpose of the funds.Conclusions: The addition of the infrastructure development fund was deleted.3. Depreciation on AssetsLegal Framework and Precedents: The issue was whether claiming depreciation on assets, whose cost was treated as application of income, amounted to double deduction.Court's Interpretation and Reasoning: The Tribunal referenced several High Court decisions affirming that depreciation is a necessary deduction for computing income on commercial principles.Key Evidence and Findings: The Tribunal noted that the assets were used for charitable purposes, and the claim for depreciation was separate from the capital expenditure.Application of Law to Facts: The Tribunal held that the claim for depreciation did not constitute double deduction and was allowable.Treatment of Competing Arguments: The Tribunal dismissed the AO's argument that the claim was a double deduction, citing judicial precedents.Conclusions: The claim for depreciation was allowed.SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The activities of the assessee are charitable in nature and are for advancement of general public utility. It is therefore clear that KDA fully qualifies the test laid down by the apex court and the jurisdictional high court.'Core Principles Established: The judgment reaffirmed that the predominant object of an entity's activities, rather than incidental profits, determines its charitable status. It also clarified that funds held in a fiduciary capacity and used as directed by the government are not taxable income.Final Determinations on Each Issue: The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO, confirming the assessee's entitlement to exemptions under Sections 11 and 12, the non-taxability of the infrastructure fund, and the allowance of depreciation.