Harish Chand Ram Kali Charitable Trust vs ACIT

Introduction

The Income Tax Appellate Tribunal (ITAT), Delhi Bench “D”, delivered a significant ruling on May 27, 2020, in the case of Harish Chand Ram Kali vs. The Addl Commissioner of Income Tax (ITA No. 4240/Del/2015) for Assessment Year 2011-12. This case commentary analyzes the Tribunal’s decision, which overturned the lower authorities’ findings on two critical issues: the classification of hostel receipts as business income under Section 11(4A) of the Income Tax Act, 1961, and the allowability of depreciation on assets whose cost was already treated as application of income. The ruling reinforces the principle that ancillary activities supporting charitable purposes remain exempt and clarifies depreciation eligibility for trusts prior to the 2014 amendment.

Facts of the Case

The appellant, Harish Chand Ram Kali, is a charitable trust registered under Section 12AA of the Act, established to impart education in engineering, pharmacy, business administration, and hotel management. It runs HRIT College of Engineering in Ghaziabad. For Assessment Year 2011-12, the trust filed a return declaring Nil income, claiming exemption under Sections 11 and 12.

During scrutiny, the Assessing Officer (AO) questioned why hostel receipts should not be treated as business income, citing the trust’s failure to maintain separate books of account as required under Section 11(4A). The trust argued that hostel facilities are mandatory under AICTE guidelines and are incidental to its educational objectives, not a profit-making activity. The AO, however, held that the hostel activity generated a surplus of ₹85,91,641 (after allowing only ₹2,18,68,399 in expenses against gross receipts of ₹3,04,60,040) and treated it as business income. Additionally, the AO disallowed depreciation of ₹2,74,10,629, reasoning that allowing depreciation on assets whose cost was already treated as application of income would result in double deduction.

The Commissioner of Income Tax (Appeals) [CIT(A)] partly upheld the AO’s order, confirming the hostel receipts as business income but granting an additional expense deduction of ₹25 lakhs. The CIT(A) also upheld the disallowance of depreciation. Aggrieved, the trust appealed to the ITAT.

Reasoning and Legal Analysis

The ITAT admitted an additional ground raised by the assessee regarding depreciation, noting that the issue was legal and required no fresh facts, relying on the Supreme Court’s decision in NTPC Ltd. v. CIT (229 ITR 383). The Tribunal then addressed the two core issues.

1. Hostel Receipts as Business Income under Section 11(4A)

The ITAT held that providing hostel facilities to students is incidental and subservient to the main educational activity, not a business activity. The Tribunal observed that the trust’s primary objective is education, and hostel facilities are a mandatory requirement under AICTE guidelines to enable students from other cities to pursue studies. The surplus generated from hostel operations is utilized for charitable purposes, as per the trust’s objectives.

The Tribunal rejected the AO’s reliance on Municipal Corporation of Delhi v. Children Book Trust and Sole Trustee Lokshikshan Trust v. CIT (101 ITR 234), noting that those cases dealt with different factual contexts. Instead, the ITAT relied on coordinate bench decisions and the Karnataka High Court’s ruling, which held that ancillary activities supporting charitable purposes remain exempt under Section 11. The Tribunal emphasized that the amendment to Section 2(15) in 2015 (removing “not-for-profit” from educational activities) does not apply retrospectively to Assessment Year 2011-12. Therefore, the hostel receipts were not business income under Section 11(4A), and the surplus was exempt as application of income for charitable purposes.

2. Depreciation on Assets Already Treated as Application of Income

On the depreciation issue, the ITAT followed the Supreme Court’s landmark decision in CIT v. Rajasthan & Gujarati Charitable Foundation (2018) 402 ITR 441 (SC). The Supreme Court held that depreciation on assets is allowable on commercial principles under Section 11, even if the cost of those assets was already treated as application of income in the year of purchase. The Court clarified that this does not result in double deduction because depreciation reflects the wear and tear of assets used for charitable purposes. The ITAT applied this precedent, noting that for years prior to the 2014 amendment (which specifically addressed this issue), depreciation is allowable. Thus, the disallowance of ₹2,74,10,629 was reversed.

The Tribunal also noted that the CIT(A) had erred in confirming the AO’s action, as the Supreme Court’s decision in Rajasthan & Gujarati Charitable Foundation directly overruled the earlier Kerala High Court decision in Lissie Medical Institutions v. CIT (2012) 348 ITR 344, which the AO had relied upon.

Conclusion

The ITAT allowed the appeal, setting aside the orders of the lower authorities. The Tribunal held that:
– Hostel receipts are not business income under Section 11(4A) but are incidental to the trust’s educational objectives, thus exempt under Sections 11 and 12.
– Depreciation on assets is allowable even if the cost was treated as application of income, following the Supreme Court’s ruling in Rajasthan & Gujarati Charitable Foundation.

This decision provides clarity for charitable trusts running educational institutions, affirming that ancillary activities like hostel operations remain exempt and that depreciation claims are valid for pre-2015 years. The ruling underscores the importance of interpreting tax provisions in harmony with the charitable purpose of trusts.

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