Shree Raghunath Hospital Society Vs DCIT (Exemptions) (ITAT Chandigarh)
Removing Depreciation Does Not Automatically Create Taxable Income: ITAT Deletes ₹30.62 Lakh Addition
Removing Depreciation Does Not Automatically Create Taxable Income
The Chandigarh Tribunal deleted an addition of ₹30.62 lakh in the hands of Shree Raghunath Hospital Society after finding that its application of income for charitable purposes remained above the statutory threshold of 85%, even after excluding depreciation.
The society accepted that depreciation should be removed from its computation of application because the expenditure on the relevant capital assets had already been treated as application of income.
However, that correction did not result in a shortfall in the required charitable application. The Tribunal held that the society remained eligible for full exemption under sections 11 and 12.
The decision turns on the revised computation and the amount actually applied, rather than on the allowability of depreciation itself.
Reopening for Demonetisation Deposits Leads to a Different Dispute
The society’s case was reopened to examine the sources of cash deposits made during the demonetisation period.
The Assessing Officer accepted the society’s explanation concerning those deposits. Nevertheless, during the reassessment proceedings, another issue emerged: the society had claimed ₹35.04 lakh of depreciation as application of income, although the expenditure on additions to capital assets had already been treated as application.
The reassessment was completed under section 147 read with section 144B on 23 March 2025.
The society furnished a revised computation excluding depreciation and explained that, even after this adjustment, approximately 93% of its receipts had been applied towards charitable activities.
Revised Computation Misread as an Offer of Income
The Assessing Officer concluded that the society had offered an amount of ₹30.62 lakh, described in the order as unutilised income and corpus donation, to tax through its revised computation.
Accordingly, that amount was assessed as the society’s income.
The CIT(A), NFAC, by an order dated 3 February 2026, confirmed the Assessing Officer’s action. The appellate authority also directed rectification under section 154, observing that the Assessing Officer had made an addition of ₹30.62 lakh against depreciation of ₹35.04 lakh.
Thus, the authorities proceeded on the consequences they attributed to the revised computation without correctly examining whether the society had still satisfied the minimum application requirement.
The society challenged this treatment before the Tribunal.
The Figures Establish Application Above 85%
The Tribunal examined the society’s paper book and revised computation.
Originally, the society had claimed ₹426.83 lakh as application on revenue account, which included depreciation of ₹35.04 lakh. The society accepted exclusion of that depreciation and placed its revised computation on record.
The revised figures showed aggregate income of ₹434.25 lakh and application for charitable purposes of ₹403.62 lakh.
The Tribunal found that this represented application of more than 92% of the gross receipts. Consequently, the society had applied considerably more than the required 85%, even without counting depreciation.
The decisive point was therefore clear: excluding an item from application did not bring the society’s total application below the prescribed threshold.
CIT(A) Failed to Examine the Correct Question
The Tribunal observed that the CIT(A) had not appreciated the controversy in its proper perspective.
The relevant question was whether, after removing depreciation, the society had applied the required proportion of income towards charitable purposes. The revised computation demonstrated that it had.
Accordingly, the Tribunal held that the society was eligible for full exemption under sections 11 and 12 and deleted the ₹30.62 lakh addition made by the Assessing Officer.
This was a decision granting relief on merits. The matter was not remanded for another examination.
Legal Grounds Left Academic
The society had also raised legal grounds in its appeal. Once the Tribunal granted relief on the application-of-income issue, those grounds were treated as academic.
The order therefore does not decide any separate challenge to the validity or scope of the reassessment.
Likewise, the Assessing Officer’s acceptance of the explanation for demonetisation deposits forms part of the factual background. The Tribunal’s operative reasoning concerns the revised charitable application figures.
The society’s appeal was allowed.
Author’s Comments
This decision illustrates an important computation point: disallowance of an application claim and denial of exemption are separate questions. A correction to the application figure must be followed by a fresh examination of the overall application percentage.
Here, depreciation was excluded, but charitable application still exceeded 92%. The authorities therefore could not treat the correction as automatically creating taxable income.
The ruling also should not be described as allowing depreciation in addition to capital expenditure. The society accepted its exclusion, and the Tribunal granted relief because the remaining application independently satisfied the 85% requirement.
The order briefly refers to accumulation of the 15% balance and subsequent utilisation. However, it does not examine a separate accumulation claim in detail. Its decisive finding is the absence of any shortfall in the required application.
For practitioners, a revised computation should clearly distinguish excluded application, actual charitable expenditure and the resulting application percentage. Those figures can determine whether a proposed adjustment has any tax consequence at all.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHANDIGARH
1. Aforesaid appeal by assessee for Assessment Year (AY) 2017-18 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 03.02.2026 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 147 r.w.s. 144B of the Act on 23.03.2025. Having heard rival submissions, the appeal is disposed-off as under.
2. The assessee’s case was reopened to examine the sources of cash deposit during demonetization period. The Ld. AO accepted this claim of the assessee. However, it was noted that the assessee claimed depreciation of Rs.35.04 Lacs as an application of income despite the fact that entire addition to capital asset was taken as application of income. The assessee furnished revised computation of income and stated that after excluding the amount of depreciation, it has applied 93% of its receipts towards charitable activities. The Ld. AO concluded that in the revised computation of income, the assessee offered the unutilized amount and corpus donation for Rs.30.62 Lacs to tax and therefore, the same was assessed to be the income of the assessee. The Ld. CIT(A) not only confirmed the action of Ld. AO but also directed Ld. AO to make rectification u/s 154 since Ld. AO made addition of Rs.30.62 Lacs as against depreciation amount of Rs.35.04 Lacs. Aggrieved, the assessee is in further appeal before Tribunal.
3. From assessee’s paper-book, it could be seen that originally the assessee claimed application of income on revenue account for Rs.426.83 Lacs which include depreciation of Rs.35.04 Lacs. The depreciation was not considered to be application since entire addition to fixed asset was considered as application of income. The assessee accepted the same and filed revised computation of income which is kept on Page Nos. 13 & 14 of the paper-book. The assessee’s aggregate income is Rs.434.25 Lacs out of which the assessee has made application for charitable purposes to the extent of Rs.403.62 Lacs which is more than 92% of its gross receipts. The income up-to 15% could be accumulated by the assessee for application in subsequent five years. Thus, even if the depreciation is not considered as an application, the assessee has applied more than 85% towards charitable purposes and as such, eligible for full exemption u/s 11 & 12. The Ld. CIT(A) has not appreciated the controversy in the correct perspective. Since the assessee has applied funds more than threshold limit of 85%, it is eligible for full exemption. The impugned addition of Rs.30.62 Lacs as made by Ld. AO stands deleted. I order so. The legal grounds as urged in the appeal have been rendered academic in nature.
4. The appeal stand allowed.
Order pronounced on 05th October, 2026
