2016 (11) TMI 1416 - AT - Income Tax

Deduction under section 11 - charitable nature of assessee - Held that - Assessing Officer has not seen the fact that the assessee has stopped transaction during the assessment year 2012-13 as it got some better deal from Reliance which was tried in previous years also but did not work out. It also shows the intention of the assessee. If the assessee wants to take any undue benefit under the heading of trust then transactions must have been continued in the assessment year 2012-13. On page no.91 and 92 of the paper book, the FPP at the same rate was sold to other blood banks also but this fact was not considered by the Assessing Officer as life of FPP is one year because it is a perishable item and after one year it is of no use. Considering the charitable nature of assessee, Celestial Biologicals Limited has provided unsecured loan to the tune of ₹ 3.43 crores since financial year 2003-04. If we consider the notional interest rate of 12.5% p.a., the interest would have been more than ₹ 2.50 crores till 31.03.2009. However, no interest has been charged by Celestial Biologicals Limited and its promoters are only trying to help the assessee financially. If the promoters were to take any undue advantage, they would have preferred to draw interest from assessee and ask for complete loan repayment. The Assessing Officer has not considered the fact that the Celestial Biologicals Limited has given interest free unsecured loan of ₹ 3.36 crores and closing balance of ₹ 2.26 crores as on 31.03.2009. - Decided in favour of assessee.

Summary

Issues Involved:

1. Denial of exemption under Sections 11 & 12 of the Act.
2. Disallowance of depreciation claimed.
3. Disallowance of net application of income by purchase of fixed assets.
4. Disallowance of business loss carry forward.
5. Alternative claims regarding partial exemption and computation of income.
6. Alleged breach of law and principles of natural justice by lower authorities.
7. Charging of interest under Section 234B/C/D.
8. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Denial of Exemption under Sections 11 & 12:
The CIT(A) upheld the AO's decision that the appellant trust provided undue benefit to a concern under Section 13(3)(c), thus denying the exemption of ?18,63,860/- claimed under Sections 11 & 12. The AO noted that the appellant supplied Fresh Frozen Plasma (FFP) to Celestial Biologicals Limited at a significantly lower rate compared to the rate charged to patients, questioning the charitable nature of the transactions. The AO concluded that the transactions were intended to benefit Celestial Biologicals Limited, a related party, and thus violated Section 13(1)(c)(ii), leading to the denial of exemption.

2. Disallowance of Depreciation:
The AO disallowed the depreciation of ?43,99,739/- claimed by the appellant, arguing that allowing depreciation on assets whose capital expenditure had already been treated as application of funds would result in double deduction. The appellant failed to provide detailed working of depreciation as per the Income Tax Act, leading to its disallowance.

3. Disallowance of Net Application of Income by Purchase of Fixed Assets:
The AO disallowed the claim of ?13,09,804/- for net application of income by purchase of fixed assets, treating the capital expenditure as non-allowable since the exemption under Section 11 was denied. The AO assessed the total income at ?75,73,403/-.

4. Disallowance of Business Loss Carry Forward:
The AO disallowed the carry forward of business loss amounting to ?8,23,58,027/-, stating that the deficit from earlier years was computed under Section 11 and did not represent business losses as per the Income Tax Act. The AO required the appellant to prepare the profit and loss account and balance sheet as per normal commercial parlance.

5. Alternative Claims:
The appellant contended that even if the transactions violated Section 13, the entire exemption under Section 11 should not be denied. Instead, the denial should be limited to the transactions in violation. Additionally, the appellant argued that if the exempt income is treated as taxable business income, appropriate directions should be issued for computing the income on commercial principles and allowing set-off of carried forward deficit.

6. Alleged Breach of Law and Principles of Natural Justice:
The appellant claimed that the lower authorities failed to properly appreciate the facts and ignored various submissions, explanations, and information provided, resulting in a breach of law and principles of natural justice.

7. Charging of Interest under Section 234B/C/D:
The CIT(A) confirmed the AO's action of charging interest under Sections 234B, 234C, and 234D of the Act.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The CIT(A) also upheld the AO's initiation of penalty proceedings under Section 271(1)(c) of the Act.

Conclusion:
The ITAT found that the authorities below failed to understand the costing and processing cycle of the appellant’s operations. The FFP was a by-product, and its sale added to revenue and profit. The ITAT noted that the appellant followed applicable accounting standards and that the AO's disallowance of depreciation and denial of deduction under Section 11 were incorrect. The ITAT observed that the transactions with Celestial Biologicals Limited were market-driven and not intended to benefit the related party unduly. The ITAT allowed the appeal, concluding that the appellant's charitable nature and financial dealings were transparent and justified.