2025 (1) TMI 1577 - AT - Income Tax

Exemption u/s 11 - charitable activity u/s 2(15) - Revenue s endeavour to treat the assessee as covered u/s 2(15) 1st proviso of the Act since carrying out it s activities which are allegedly commercial in nature - HELD THAT - Their lordships in Ahmedabad Urban Development Authority 2022 (10) TMI 948 - SUPREME COURT have indeed clarified the matter that such receipts in case of authorities corporations or bodies established by statute are prima facie to be excluded from a business or commercial receipts. Revenue could further not dispute that apart from raising the issue of section 2(15) 1st proviso AO s assessment discussion dated 30.12.2016 has nowhere quoted any material on record which could lead us to conclusion that the relevant activities herein are in the nature of trade or business as the case may be. We thus find no merit in the Revenue s instant first and foremost substantive ground which stands rejected in very terms. Addition of Infrastructure development Fund - Addition made as it was not routed through Profit Loss Account but it was the accounting policy of the appellant that such fund is used for the external infrastructure development of the area other than specific scheme as per Government order from more than 10 years - HELD THAT - It transpires during the course of hearing that the taxability of the assessee s infrastructure development fund in question is indeed a recurring issue between the parties wherein this tribunal s common order dated 29.09.2016 has already accepted the assessee s stand in preceding A.Ys. 200304 to 2005-06 as the case may be. We make it clear that there is no distinction in law or on facts forthcomings from the Revenue side. Faced with this situation we adopt judicial consistency to uphold the CIT(A) s action under challenge deleting the impugned addition. Deprecation by charitable institutions - Revenue could not dispute herein as well that the statutory amendment in section 11(6) of the Act carries prospective effect only than retrospective one and therefore we find no merit in it s last ground seeking to disallow the assessee s depreciation claim on the fixed assets which stood accepted for the purpose of application of income as well in preceding assessment years. Revenue appeal dismissed.

Summary

The core legal questions considered in this appeal are:

1. Whether the assessee's activities fall within the scope of "commercial activities" under section 2(15) 1st proviso of the Income Tax Act, 1961, thereby disqualifying it from exemption under sections 11 and 12A.

2. Whether the addition of Rs. 19,64,52,045/- to the assessee's income on account of the Infrastructure Development Fund (IDRF), which was not routed through the Income and Expenditure account, was justified.

3. Whether the disallowance of depreciation of Rs. 43,17,034/- claimed by the assessee on fixed assets, despite capital expenditure on those assets being allowed in prior years, was legally sustainable.

Issue 1: Applicability of Section 2(15) 1st Proviso - Commercial Activities

The legal framework centers on the interpretation of section 2(15) 1st proviso of the Income Tax Act, which excludes certain receipts from being treated as income from business or commercial activities for entities claiming exemption under sections 11 and 12A. The Revenue relied on a recent apex court decision affirming that entities engaged in commercial activities cannot claim such exemptions.

The Court examined the facts and noted that the issue was a recurring one between the parties and had been previously adjudicated by the apex court, with the Special Leave Petition dismissed, affirming that receipts of authorities or statutory bodies established by statute are prima facie excluded from business or commercial receipts.

Critically, the Assessing Officer had not placed any material on record to establish that the assessee's activities were commercial or trade in nature. The Court emphasized that the Revenue failed to demonstrate any trade or business element in the activities under scrutiny.

The Court thus rejected the Revenue's contention, holding that the assessee's activities do not fall within the ambit of commercial activities under section 2(15) 1st proviso, preserving the assessee's eligibility for exemption under sections 11 and 12A.

Issue 2: Taxability of Infrastructure Development Fund (IDRF)

The second issue relates to the addition of Rs. 19,64,52,045/- by the Assessing Officer on account of the Infrastructure Development Fund, which was not routed through the Profit & Loss Account but directly capitalized in the Balance Sheet.

The assessee contended that the IDRF monies were collected as a trustee or nodal agency on behalf of statutory authorities and the State Government, pursuant to Government Order No. 152/9A-1998 dated 15.01.1998. The funds were to be utilized strictly for external infrastructure development projects under the control of a High-Powered Committee, not at the disposal of the assessee. The assessee argued that such receipts were neither income nor revenue receipts but capital receipts held in trust, and thus not taxable as income.

The Court reviewed the accounting treatment, noting the consistency of the assessee's accounting policies over the years and the absence of any change in the manner of recording these funds. It referred to authoritative precedents, including the Supreme Court decision in CIT v. Sitaldas Tirathnath (1961) 41 ITR 367, which emphasized the importance of the true nature of the receipt in determining its taxability.

Further, the Court observed that the Revenue had not disputed the absence of any specific provision to treat such capital receipts as income artificially. The Court underscored that the mere presentation of the amount as "capitalized" in the Balance Sheet does not convert the nature of the receipt into taxable income.

Given the statutory control over the funds by the High-Powered Committee and the assessee's role as a trustee or nodal agency, the Court held that the amount did not belong to the assessee and was not taxable in its hands. The Court also noted the principle of judicial consistency, referencing earlier Tribunal orders for preceding assessment years where the same issue was decided in favour of the assessee.

The addition was therefore deleted, with the Court affirming that if the receipt was not taxed, the corresponding expenditure on the fund should also not be disallowed, as both were outside the income computation.

Issue 3: Allowance of Depreciation on Fixed Assets

The third issue concerns the disallowance of depreciation claimed by the assessee on fixed assets, amounting to Rs. 43,17,034/-, despite capital expenditure on those assets having been allowed as application of income in earlier years.

The Court analyzed the statutory provisions, particularly section 32 read with section 11 of the Act, and noted the amendment introduced by Finance Act, 2015, inserting sub-section (6) in section 11, which disallows depreciation if capital expenditure is claimed as application of income. However, this amendment is prospective and not applicable to the assessment year 2014-15 under consideration.

The Court relied on binding precedents from the jurisdictional High Court and Tribunal, including Deputy Director of Income-tax (Exemption) v. Bhardwaj Welfare Trust and Income-tax Officer (Exemption) v. S.D. College Society, which allowed depreciation claims by charitable trusts when capital expenditure was also claimed as application of income, holding that disallowance would amount to double deduction and was not warranted.

The Court also referred to the Supreme Court's grant of Special Leave Petition in Charanjiv Charitable Trust v. Director of Income-tax (Exemption), which supported the assessee's entitlement to depreciation in similar circumstances.

Accordingly, the Court held that the Assessing Officer's disallowance of depreciation was unsustainable and deleted the addition, allowing the depreciation claim.

Significant Holdings:

On the first issue, the Court stated: "We thus find no merit in the Revenue's instant first and foremost substantive ground which stands rejected in very terms." This affirms that statutory authorities established by law are not to be treated as engaged in commercial activities merely because of incidental receipts, preserving their exemption status.

Regarding the second issue, the Court observed: "The 'Authority' had been maintaining infrastructure, development and reserve fund IDRF as per the notification dated 15.01.1998... the same could not be treated to be belonging to the 'Authority' or the receipt is taxable nature in its hands... Assessee authority has no control over the IDRF and its receipt during the year cannot be taxed in the hands of assessee." This establishes the principle that funds held in trust under statutory control are not taxable income of the collecting authority.

On the depreciation issue, the Court emphasized: "W.e.f. 1.6.2015 an amendment has been made in section 11 by inserting the provision (6) of the Act... in the present appeal assessment year 2014-15 is involved, so amended provision cannot be made applicable." Further, the Court relied on binding precedents allowing depreciation claims where capital expenditure was also claimed as application of income, thereby rejecting double deduction disallowance.

In conclusion, the Court dismissed the Revenue's appeal in its entirety, upholding the deletion of additions on all grounds and affirming the assessee's entitlement to claim depreciation for the relevant assessment year.