2016 (1) TMI 1082 - AT - Income Tax

Registration granted U/s 12AA withdrawn - assessee is not entitled exemption U/s 11,12 and 13 - change of accounting policy - Held that - The assessee has been granted registration by the order of the Coordinate Bench wherein the coordinate Bench has held that the assessee s activities are charitable and are not covered U/s 2(15) of the Act. Therefore, the Assessing Officer is directed to give benefit of Section 11 and 12 of the Act to the assessee. The income of the assessee is to be assessed on the real income basis which has been accrued to the assessee during the year under consideration. The appellant had changed method of accounting during the year under consideration but the same has been found more accurate and scientific to determine the assessee s income. Therefore, change of accounting is bonafide and same cannot be rejected on the ground that the assessee had claimed more expenses during the year under consideration. The case law relied by the assessee is squarely applicable. A change in the method of accounting should not be rejected for reasons that it would result in bringing into accounts in one year the losses of several years as held in the case of CIT Vs. Eastern Bengal Jute Trading Co. Ltd. (1978 (1) TMI 72 - CALCUTTA High Court ) Accordingly change of the accounting policy is allowed. The assessee has claimed depreciation on fixed assets which is also allowable as held by the various courts in case of Trust where the assessee first made income for application of acquiring of assets and thereafter claiming depreciation on it. - Decided in favour of assessee

Issues Involved:

1. Application of provisions of Section 145(3) and assessment under Section 144 of the Income Tax Act, 1961.
2. Disallowance of exemptions under Section 11 by holding that the appellant's activities are not charitable as per Section 2(15) of the Income Tax Act, 1961.
3. Disallowance of development expenditure and establishment and administrative expenses.
4. Disallowance of expenses on shooting range.
5. Disallowance of expenditure as contribution to Deendayal Medical Hospital.
6. Disallowance of amortization of expenditure on tree guard/wire fencing.
7. Lack of proper opportunity of being heard.
8. Deletion of disallowance of depreciation by the CIT(A).

Detailed Analysis:

1. Application of Provisions of Section 145(3) and Assessment Under Section 144:
The Assessing Officer (AO) was not satisfied with the correctness or completeness of the accounts of the assessee and invoked Section 145(3), leading to assessment under Section 144. The AO noted that the assessee had not followed the existing accounting principles and had changed its accounting method without proper justification, resulting in disallowance of Rs. 269,69,91,775/- as development expenditure and Rs. 21,13,94,421/- as administrative expenses.

2. Disallowance of Exemptions Under Section 11:
The AO and CIT(A) disallowed exemptions under Section 11, 12, and 13, holding that the assessee's activities were not charitable under the amended Section 2(15). The CIT(A) emphasized that the assessee's registration under Section 12AA was withdrawn due to the nature of its activities, which involved trade, commerce, or business, thus not qualifying as charitable purposes.

3. Disallowance of Development Expenditure and Establishment and Administrative Expenses:
The AO disallowed Rs. 269,69,91,775/- as development expenditure and Rs. 21,13,94,421/- as administrative expenses due to the change in accounting policy. The CIT(A) upheld this disallowance, noting that the assessee's activities did not result in any enduring benefit and that the change in accounting policy was not justified.

4. Disallowance of Expenses on Shooting Range:
The AO disallowed Rs. 1,07,02,423/- incurred on the shooting range, treating it as capital expenditure since it resulted in an enduring benefit. The CIT(A) upheld this disallowance.

5. Disallowance of Expenditure as Contribution to Deendayal Medical Hospital:
The AO disallowed Rs. 5,00,00,000/- contributed to Deendayal Medical Hospital, treating it as a donation and not allowable as an expenditure. The CIT(A) upheld this disallowance.

6. Disallowance of Amortization of Expenditure on Tree Guard/Wire Fencing:
The AO disallowed Rs. 1,74,22,857/- claimed as amortization of expenditure on tree guard/wire fencing, treating it as capital expenditure. The CIT(A) upheld this disallowance.

7. Lack of Proper Opportunity of Being Heard:
The assessee claimed that it was not provided with a proper opportunity of being heard before the order was passed. This issue was not specifically addressed in the judgment.

8. Deletion of Disallowance of Depreciation:
The CIT(A) allowed depreciation of Rs. 1,98,41,604/- on fixed assets, holding that income was assessed as business income. The AO's disallowance of depreciation was not upheld by the CIT(A).

Final Judgment:
The Tribunal directed the AO to give the benefit of Section 11 and 12 to the assessee, recognizing the assessee's activities as charitable and allowing the change in accounting policy. The Tribunal also allowed the depreciation on fixed assets as per the established principles for trusts. Consequently, the assessee's appeal was allowed, and the revenue's appeal was dismissed.

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