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2011 (12) TMI 322 - AT - Income TaxTrust - Accumulation under 11(2) - Application on FIFO basis - Held That - The amount of Rs. 2,30 crores spent on acquisition of assets has come from the earlier accumulation or out of the accumulation in financial year 2001-02 is not clear. The assessee has to prove with evidence that the amount accumulated under section 11(2) of the Act was used for the purpose for which it was accumulated. Detail not available case remanded back. Depreciation on Fixed Assets - Amount treated as application of income - Held That - In view of Tiny Tots Education Society (2010 - TMI - 202259 - Punjab and Haryana High Court), depreciation allowed.
Issues Involved:
1. Treatment of Rs. 2,30,00,000/- as taxable income under section 11(3) of the Income Tax Act, 1961. 2. Non-allowance of depreciation on fixed assets amounting to Rs. 16,03,236/-. Issue-wise Detailed Analysis: 1. Treatment of Rs. 2,30,00,000/- as Taxable Income under Section 11(3): The assessee, a registered society under section 12-A, filed a return of income for the assessment year 2007-08 disclosing NIL income. The case was selected for scrutiny, and the assessing officer issued a notice under section 142(1) of the Income Tax Act, 1961 (the Act), asking for details of surplus/deficit of past ten years and its utilization. It was noted that the assessee had set apart Rs. 2,29,55,949/- in the financial year 2001-02 relevant to assessment year 2002-03. The assessing officer found that this amount was not utilized within the stipulated five-year period ending on 31st March 2007. The assessee failed to provide supporting details for the claimed utilization of funds. The assessing officer, applying the FIFO method, treated the amount of Rs. 2,30,00,000/- as taxable under section 11(3) of the Act. The CIT (Appeals) upheld the assessing officer's decision, noting that the assessee could not establish by cash flow that the income accumulated in assessment year 2002-03 had been utilized before 31st March, 2007. The CIT (Appeals) emphasized that each assessment year must be considered separately for the purpose of accumulation and the assessee must establish that the funds were spent for the purposes for which they were accumulated. Before the Tribunal, the assessee argued that the FIFO method had no legal sanctity and that the law only required that the accumulated amount be utilized within the next five years. However, the Tribunal noted that the assessee failed to provide specific details or evidence to prove the utilization of the accumulated funds. Consequently, the Tribunal set aside the issue to the file of the assessing officer with directions to examine the accumulation and utilization of income from financial year 1996-97 to 31st March, 2002. The assessee was directed to provide full details, including Form No. 10 and the details of forms or modes of investment of the funds accumulated. 2. Non-allowance of Depreciation on Fixed Assets Amounting to Rs. 16,03,236/-: The assessing officer disallowed the depreciation on fixed assets, noting that the assessee had claimed application of surplus funds for capital expenditure in earlier years, and hence, depreciation was not allowable. The CIT (Appeals) upheld this disallowance, relying on the decision of the Hon'ble Supreme Court in Escorts Ltd. v. Union of India, which held that no depreciation was to be allowed on assets where a deduction under section 35(2)(iv) was already allowed. Before the Tribunal, the assessee cited several decisions, including CIT v. Institute of Banking Personnel Selection, CIT v. Market Committee, Peepli, and CIT v. Tiny Tots Education Society, arguing that depreciation is allowable on assets. The Tribunal observed that under section 11(1)(a), income applied for charitable or religious purposes is exempt from tax. The term 'applied' means 'actually applied,' and notional expenditure like depreciation does not qualify as 'actual application.' The Tribunal noted that allowing depreciation on assets acquired by application of income would amount to double deduction, which is not permissible. However, the Tribunal acknowledged the decision of the Hon'ble Punjab & Haryana High Court in Tiny Tots Education Society, which held that depreciation is allowable for charitable institutions. Respecting this decision, the Tribunal set aside the CIT (Appeals) order and directed the assessing officer to allow depreciation. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes. The issue of treating Rs. 2,30,00,000/- as taxable income was remanded back to the assessing officer for further examination, while the disallowance of depreciation on fixed assets was overturned, directing the assessing officer to allow the depreciation.
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