Trust denied extra depreciation on school buses - not in transport business

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Case Name

Ebenezer International Foundation vs Assistant Commissioner of Income Tax (High Court of Kerala)

ITA No. 50 of 2018

Date: 2nd November 2021

Key Takeaways

• Simply including transport receipts in business income doesn’t automatically qualify for additional depreciation
• The actual use and purpose of vehicles matters more than how the income is classified
• Charitable trusts providing ancillary services (like school transport) are not automatically in the “business” of those services
• The Supreme Court’s test in Gupta Global Exim case is the governing principle: vehicles must be used “in the business of running them on hire”

Issue

The central legal question was: Is a charitable trust running a school entitled to claim additional depreciation on school buses simply because the transport fees are included in business income?

The court framed two substantial questions of law:

1. Whether the appellant is entitled for additional depreciation as he was hiring buses?
2. Whether the ratio of judgment in ITA No.130 of 2012 applies and the appellant is entitled for additional depreciation?

Facts

Ebenezer International Foundation is a charitable trust registered under Section 12A of the Income Tax Act, running a residential CBSE school in Ettumanoor, Kottayam.

The trust provides school bus services - picking up and dropping students and teachers. They charge fees for this transport service and claimed additional depreciation on these buses, arguing they’re in the transport business.

The tax authorities, including the Income Tax Appellate Tribunal, rejected this claim. The trust then appealed to the High Court under Section 260A of the Income Tax Act.

Arguments

Trust’s Arguments (Appellant):

The trust’s lawyer, Mr. Anil D. Nair, argued that since the transport receipts are treated as business income, the trust should automatically be entitled to additional depreciation. He cited several cases including:

• Commissioner of Income Tax v. Lake Palace Hotels and Motels P. Ltd
• Commissioner of Income Tax v. Rajasthan & Gujarati Foundation
• Commissioner of Income Tax v. Institute of Banking Personnel Selection (IBPS)
• Commissioner of Income Tax v. K R Jayachandran
• The Commissioner of Income Tax v. M/s. Kallungal Trading Company

Revenue’s Arguments (Respondent):

Senior Advocate Mr. P.K.R. Menon argued that additional depreciation depends on the actual nature of activity and purpose of vehicle use, not just income classification. He emphasized that:

• The transport fees are more like reimbursements on a cost-to-cost basis rather than business transactions
• The trust is running a school, not operating a passenger transport business
• The vehicles must be used for the actual business purpose of the assessee

Key Legal Precedents

The most crucial precedent cited was Commissioner of Income Tax v. Gupta Global Exim P. Ltd by the Supreme Court. This case established the key principle:

“Under item (2)(ii) of heading III in Appendix I to the Income-tax Rules, 1962, the higher rate was admissible on motor trucks used in a business of running them on hire. Therefore, the user of the same in the business of the assessee of transportation was the test. Merely because the income from the letting of the trucks on hire was included in the business income the higher rate would not apply.”

The Tribunal also referenced Entry III(3)(ii) of new Appendix 1 which specifies “motor buses, motor lorries and motor taxis used in the business of running them on hire”.

The Tribunal distinguished the Lake Palace Hotels & Motels Pvt. Ltd case, noting that in that case, the assessee was actually in the hotel business and also carried on a separate business of running cars on hire for tourists.

Judgement

The High Court ruled against the trust and in favor of the Revenue. Here’s the court’s reasoning:

The court applied the Supreme Court’s test from Gupta Global Exim P. Ltd, emphasizing that “the user of vehicles in the business of the assessee is the test and that the receipt/income is included in the business income would not i.e., qualify for additional depreciation”.

The court found that the trust’s only argument - that transport receipts are included in business income - was insufficient. The court stated: “In our view the point urged is no more res integra and the test laid down by the Supreme Court in Gupta Global Exim P. Ltd is clear on the point”.

Final Order: The appeal was dismissed with no order as to costs.

FAQs

Q1: Why couldn’t the trust claim additional depreciation even though they charged for transport services?

A: The court held that just because transport income is classified as business income doesn’t automatically qualify for additional depreciation. The key test is whether the assessee is actually “in the business of running vehicles on hire” - which a school providing transport to its students is not.

Q2: What’s the difference between this case and Lake Palace Hotels case?

A: In Lake Palace Hotels, the company was genuinely in two businesses - hotel business AND a separate car rental business for tourists. Here, the trust is only in the education business, with transport being an ancillary service to students and staff.

Q3: What does “res integra” mean in the judgment?

A: “Res integra” means the legal point is no longer a fresh or open question - it’s already been settled by previous court decisions, specifically the Supreme Court’s ruling in Gupta Global Exim.

Q4: Could the trust have won if they structured their transport service differently?

A: Potentially, if they could prove they were genuinely in the business of running buses for hire (not just providing school transport), but that would require substantial changes to their operations and purpose.

Q5: What’s the practical impact of this decision?

A: Educational institutions and other charitable organizations cannot claim additional depreciation on vehicles used for ancillary services just by treating the income as business income. The actual nature and purpose of the activity matters more than the accounting treatment.

Heard Mr Anil D Nair, learned counsel for the appellant and Mr P K R Menon, learned Senior Advocate, for the respondent.

2. Ebenezer International Foundation, Ettumanoor Kottayam/assessee is the appellant. The Assistant Commissioner of Income Tax, Circle-1, Kottayam/Revenue is the respondent. The assessee being aggrieved by the order in ITA No.545/Coch/2015 dated 17.11.2017 of the Income Tax Appellate Tribunal (for short 'the Tribunal') Cochin Bench has filed the subject appeal under Section 260A of the Income Tax Act, 1961 (for short 'the Act').

2.1 The appeal has been admitted on the following

substantial questions of law:

“i. In the facts and circumstances of the case, ought not the

Tribunal have held that the appellant is entitled for additional

depreciation as he was hiring buses?

ii. In the facts and circumstances of the case, ought not the

Tribunal have held that the ratio of the judgment in ITA.

No.130 of 2012 squarely applies and that the appellant is

entitled for additional depreciation?”

2.2 The circumstances relevant for considering the above

substantial questions are a few. The assessee is a Trust

registered under Section 12A of the Act. The Trust is running a

Residential CBSE School in Ettumannoor. The assessee has

provided transport facility/school buses for attending the

school, by picking up and dropping both the students and the

teachers. The assessee claimed additional depreciation for the

school buses operated by the assessee provided for the above

additional service. The claim for additional depreciation has

been rejected by the authorities including the Tribunal under

the Act. We find it convenient and useful to excerpt the

operative portion of the findings recorded by the Tribunal

which read thus:

“6. We have considered the rival contentions and perused the

orders of the authorities below. Assessee was a trust registered

u/s.12A of the Act and was claiming its income exempt u/s.11

of the Act. Thus assessee was not at in any business at all. It was

doing a charitable activity of education. Entry III(3) (ii) of new

Appendix 1 clearly specifies "motor buses, motor lorries and

motor taxis used in the business of running them on hire".

When assessee itself is not doing any business it cannot say that

bus fees received from students and staff were from a business

incidental to its main business. That apart, in the case of Lake

Palace Hotels & Motels Pvt. Ltd (supra) relied on by the ld.

Authorised Representative, the assessee concerned was in hotel

business and they were also carrying on a business of running

cars on hire for tourists who stayed in their hotel. In our

opinion, this case will not help the assessee since it was not

engaged in any business. What was held by Hon'ble Apex Court

in the case of Gupta Global Exim P. Ltd (supra) is very relevant and

they is reproduced hereunder:

"Under item 2(ii) of heading III, the higher rate of depreciation

is admissible on motor trucks used in a business of running

them on hire. Therefore, the user of the same in the business of

the assessee of transportation is the test.....

In our view, the entire approach of the Commissioner of

Income tax (Appeals) was erroneous when he has stated that

the transportation income of Rs. 12,50,639 by way of running

the subject vehicles on hire is an integral part of, the

appellant's business and its inclusion in the head "Business

income" is not disputed by the Assessing officer. In our view,

mere inclusion of Rs.12,50,639/- in the total business income is

not the determinative factor for deciding whether trucks were

used by the assessee during the relevant year in a business of

running them on hire. In our view, the Commissioner of

Income tax (Appeals) had erred in relying upon the accrual of

income as a determinative factor for coming to the conclusion

that the trucks were used in a business of running them on

hire".

Thus in our opinion, assessee was never in the business of

running buses on hire and could not claim enhanced

deprecation relying on entry III(3) (ii) of new Appendix 1. We

do not find any reason to interfere with the orders of the lower

authorities.”

Hence the appeal.

3. Mr Anil D Nair places reliance on the judgments

reported in Commissioner of Income Tax v. Lake Palace Hotels and

Motels P. Ltd1; Commissioner of Income Tax v. Rajasthan & Gujarati

Foundation2; Commissioner of Income Tax v. Institute of Banking

Personnel Selection (IBPS)3 ; Commissioner of Income Tax v. K R

Jayachandran4; and unreported judgment in The Commissioner of

Income Tax v. M/s. Kallungal Trading Company5, and contends that

the assessee since is subjected to business income as well, the

assessee is automatically entitled to claim additional

depreciation. The rejection of additional depreciation by the

Tribunal and the authorities is illegal and liable to be set aside.

4. Senior Advocate Mr P K R Menon argues that the

claim of additional depreciation is both a mixed question of fact

and law. The entitlement to additional depreciation by an

assessee is dependent upon the nature of activity carried on by

the assessee and the purpose for which the vehicles are used by

the assessee. The judgments relied on by the appellant are

clearly distinguishable to the fact situation of the case. He

invites our attention to the findings recorded by the Tribunal

on the nature of activity being undertaken by the assessee and

the consideration the assessee receives either from the students

or the teachers in this behalf. According to him, at best, what

is received by the assessee could be treated as reimbursement

to the School by the students and teachers on cost-to-cost basis

but not as consideration in any business transaction. For the

purpose of additional depreciation what is important is the

vehicles must have been used for the business purpose of the

assessee. The assessee since is running the school cannot be

said to be doing business in plying passengers from one place to

another. He places strong reliance on the judgment of the

Supreme Court in Commissioner of Income Tax v. Gupta Global Exim

P. Ltd.6 on:

“Held, setting aside the decision of the High Court and

remanding the matter for fresh decision to the Commissioner

(Appeals), that a neat question of law arose in the matter.

Under item (2)(ii) of heading III in Appendix I to the Income-tax

Rules, 1962, the higher rate was admissible on motor trucks

used in a business of running them on hire. Therefore, the user

of the same in the business of the assessee of transportation

was the test. Merely because the income from the letting of the

trucks on hire was included in the business income the higher

rate would not apply. The matter had to be decided on the

question as to whether the assessee was in the business of

running the trucks for hire.”

(emphasis supplied)

4.1 He placed reliance on the consideration by the Apex

Court by laying much emphasis on the following sentences

' therefore, the user of the same in the business of the assessee of

transportation was the test. Merely because the income from the

letting of the trucks on hire was included in the business income the

higher rate would not apply'. (emphasis supplied) He concludes by

arguing that the assessee is subjected to business income does

not mean that the assessee is automatically entitled to

additional depreciation as well.

5. The only argument canvassed is that the receipts

received by the assessee in this behalf are included in the

business income and, therefore, the assessee is automatically

entitled to additional rate of depreciation. The judgment of the

Supreme Court in Gupta Global Exim P. Ltd is a complete answer

to the said contention canvassed by the assessee. Gupta Global

Exim P. Ltd held that the user of vehicles in the business of the

assessee is the test and that the receipt/income is included in

the business income would not i.e., qualify for additional

depreciation. Except the above, no other point is urged. In our

view the point urged is no more res integra and the test laid

down by the Supreme Court in Gupta Global Exim P. Ltd is clear

on the point. By appreciating the circumstances and also

following the judgment in Gupta Global Exim P. Ltd the questions

are answered in favour of the Revenue and against the assessee.

Hence the appeal stands dismissed. No order as to Costs.

Sd/-

S.V.BHATTI

JUDGE

Sd/-

BASANT BALAJI

JUDGE