2014 (8) TMI 1119 - AT - Income Tax

Exemption under section 11 - violation of section 11(5) - Held that - The act of the assessee in making fixed deposit with Tata Motors Ltd. was an unintended act arising out of bonafide mistake/belief and for this reason assessee cannot be held to be disentitled for exemption under section 11 of the Act. Key Information Memorandum a charitable trust/Wakfs or a society established under the relevant laws and authorized to invest in mutual fund schemes is one of the entity who could apply for the same. Keeping in view these provisions, the said investment by the assessee shall not in violation of section 11(5), therefore, there is no violation on account of that deposit. Depreciation to assessee trust allowed on the basis of the fact that will not tantamount to double deduction.

Summary

Issues Involved:
1. Addition of Rs. 3,00,67,680 to the income of the Trust.
2. Breach of section 11(5) read with section 11(2) and applicability of section 13(1)(d).
3. Rejection of the claim of Rs. 2,26,21,694 on account of depreciation.
4. Non-allowance of excess expenditure amounting to a deficit of Rs. 71,62,825 as the application of income.
5. Investment in Fixed Deposits with Tata Motors Ltd. and Canara Robeco.

Issue-wise Detailed Analysis:

1. Addition of Rs. 3,00,67,680 to the income of the Trust:
The Assessing Officer (AO) added Rs. 3,00,67,680 to the income of the Trust, which was credited directly to the development fund without being accounted for in the Profit & Loss Account. The appellant argued that the entire amount does not pertain to the year under consideration but is an aggregate sum from the assessment years 2007-08, 2008-09, and 2009-10. Upon verification, it was found that Rs. 2,54,52,500 had already been added to the income in previous years. Therefore, the AO was directed to restrict the addition to Rs. 46,15,180 for the year under consideration.

2. Breach of section 11(5) read with section 11(2) and applicability of section 13(1)(d):
The AO denied exemption under section 11 due to investments of Rs. 75,00,000 in funds not permissible under section 11(5)(2)(b). The appellant argued that the investment in Canara Robeco was in mutual funds permissible under rule 17C of the Income Tax Rules, 1962, and the investment in Tata Motors Ltd. was a bona fide error. The Tribunal found that the investment in Tata Motors Ltd. was made under a bona fide mistake and was withdrawn upon realizing the error, thus not disentitling the Trust from exemption under section 11. The investment in Canara Robeco mutual funds was found to be permissible under Rule 17C(i), and thus, there was no violation.

3. Rejection of the claim of Rs. 2,26,21,694 on account of depreciation:
The AO disallowed the depreciation claim on the basis that it would amount to double deduction since the investment in the assets had already been allowed as an application of income. The Tribunal found that this issue is covered in favor of the assessee by the decision of the Hon'ble Bombay High Court in the case of Director of Income Tax (Exemption) vs. GKR Charities (2013) 32 Taxman.com 208 (Bom), which allows depreciation even if the cost of the asset was earlier allowed as an application of income. Therefore, the AO was directed to grant the benefit of depreciation to the assessee.

4. Non-allowance of excess expenditure amounting to a deficit of Rs. 71,62,825 as the application of income:
The appellant submitted that if depreciation is allowed, this ground becomes infructuous. Since the Tribunal allowed the depreciation claim, this ground was considered infructuous and did not require adjudication.

5. Investment in Fixed Deposits with Tata Motors Ltd. and Canara Robeco:
The AO observed that the investments in Fixed Deposits with Tata Motors Ltd. and Canara Robeco were not permissible under section 11(5)(2)(b). The Tribunal found that the investment in Tata Motors Ltd. was made under a bona fide mistake and was promptly withdrawn. The investment in Canara Robeco mutual funds was permissible under Rule 17C(i) as it involved units of mutual funds referred to in clause (23D) of section 10. Therefore, these investments did not lead to the denial of exemption under section 11.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to restrict the addition to Rs. 46,15,180, grant the benefit of depreciation, and accept the investments as compliant with the relevant provisions.