2019 (7) TMI 738 - AT - Income Tax

Reopening of assessment u/s 147 - exemption u/s 11 denied - assessee has not filed the return u/s 139 (4A) reads with section 12A (b) - assessee society was carrying out educational activities which fell within charitable activities u/s 2(15) , it was granted registration u/s 12A - whether, the filing of audit report alongwith the return filed in response to notice u/s 148 will entitle the assessee for benefit of computation of section 11 ? - HELD THAT - We are of the view that, whether it is a case of a regular assessment or it is a case of an assessment consequent to issue of notice u/s 148, not only the procedure of return as given in section 139 has to be applied, but also such the income has to be computed on the basis of such return in accordance with the provision of the Act, which of course will be subject to any specific provision in the Act which itself bars a claim or an exemption. Section 148 provides that all the provision of the Act has to apply on such return furnished in response to notice u/s 148. The Ld. CIT DR has referred to the words so far as may be to canvass the proposition that all the provision will not apply. This contention of the Ld. DR is not correct in view of our reasoning given above. The meaning of these words so far as may be will not mean to exclude provision of section 11 of the Act. Our above view gets further supported from the amendment made by the Finance Act, 2017 whereby a further clause (ba) has been inserted imposing a further condition that such return of income is to be furnished in terms of section 139(4A), within the time allowed under that section. Firstly, this requirement was not there before this amendment; and secondly, this insertion of additional clause clearly shows that such condition was not there in existing clause (b) of section 12A. Had such condition being there in clause (b) itself, then there was no need to insert a further clause (ba) by the Legislature for denying benefit of section 11 12 in case return is not filed in time as per provision of section 139 (4A). We are also not in agreement with the contention of the Ld. DR that this amendment is clarificatory in nature. As rightly pointed out by the Ld. Counsel that this amendment has been made by the Finance Act, 2017 effective from A.Y. 2018-19, meaning thereby that this clause has not been made applicable even for the A.Y. 2017-18, the return of which were still to be filed. Thus, the Legislature has thought fit to make this amendment applicable from next assessment years onwards and not even to the current A.Y. 2017-18. While interpreting the amendment made by the Finance Act No. 2 of 2014 whereby section 11 (6) was inserted so as to exclude such assets while computing depreciation in respect of which deduction has been allowed as an application of income u/s 11. In view of the above, we hold that AO was not justified in denying the benefit of the exemption u/s 11 of the Act and we direct the AO to compute the income in accordance with the provision of section 11. Ground no.6 is accordingly allowed. Computation of income by the AO on the basis of the Balance Sheet and Income Expenditure account submitted to the Syndicate Bank for the purpose of obtaining loan facilities - HELD THAT - The dispute about the financial submitted to the bank and submitted by the assessee with the return of income has been got resolved by the AO by making a reference to the special auditor who after auditing has given its report proposing various additions and disallowances on the financials submitted by the assessee. The AO has also made addition and disallowances on the basis of such report. It is not the case where the AO has rejected the report of the special auditor. On the contrary he has accepted the report of the special auditor. The income and expenditure account submitted by the assessee with the return of income which has been audited by the special auditor should be the basis for computing income as per provision of section 11 and 12. We direct the AO accordingly. Disallowance of electricity expenses in the absence of supporting evidences - CIT-A confirmed part addition after calling for remand report on the additional evidences submitted by the assessee in support of its contention - HELD THAT - assessee has not produced any cogent evidence in respect of balance amount of ₹ 9,653/-and ₹ 1,063/- and hence, the disallowance was confirmed. Since, the assesse has not produced cogent evidence about these expenses of ₹ 10,716/-, we confirm the action of the CIT(A) in disallowing the same. However, this amount instead of making addition as income need to be excluded while considering application of income in terms of section 11t. This ground of appeal is disposed of accordingly. Addition of car insurance expenses - CIT (A) confirmed addition as the assessee has not been able to furnish any proper evidence in support thereof - HELD THAT - In the absence of supporting evidence, the disallowance made by the CIT (A) is upheld. However, we have held in ground no.11 that while considering disallowances in the absence of supporting evidence that the income of the society is to be computed in terms of section 11 of the Act and accordingly such amount need to be excluded while computing total application of income. Following the same reasoning we direct the AO that this amount instead of making addition as income needs to be excluded while considering application of income in terms of section 11. This ground of appeal is disposed of accordingly. Addition in respect of work-in-progress - HELD THAT - In the absence of any supporting evidence, the disallowance made by the CIT (A) is upheld. However, as held above in ground no.11 while considering disallowances in the absence of supporting evidence that the income of the society is to be computed in terms of section 11 of the Act and accordingly such amount need to be excluded while computing total application of income. Following the same reasoning we direct the AO that this amount instead of making addition as income needs to be excluded while considering application of income in terms of section 11 Addition u/s 40(a)(ia) - society has failed to deduct tax at source - HELD THAT - . Chapter-III of the Income Tax Act is regarding incomes which do not found part of the total income. Section 11 which falls in this Chapter is regarding computation of income from property held for charitable/religious purposes and its mode of computation as per the condition prescribed in these sections itself. As against this section 40(a)(ia), 40A(3) and section 43B falls in Chapter IV-D which are applicable for computing profits and gains of business or profession. Thus, the provisions of these sections are applicable in respect of profit and gains of business or profession. This Chapter IV-D is not applicable in respect of charitable trust or institution whose income is to be computed under Chapter-III. Accordingly, no disallowance or adjustment can be made while determining the income of the society under section 11. Penalty levied by the bank for mortgaging a property without the permission of the prescribed authority by invoking Explanation to section 37 - HELD THAT - As per Explanation -1 to section 37 such expenditure which is incurred for any purpose which is an offense or which is prohibited by law cannot be allowed as deduction while computing income. Even otherwise Explanation 1 to section 37, under which this amount has been disallowed, falls in Chapter IV-D for computation of profits and gains of business or profession. As we have held while adjudicating ground no.14 hereinabove, that the provisions of Chapter IV-D, i.e., section 28 to 44 D are applicable while computing income of business or profession and these provisions are not applicable in respect of the charitable institution whose income is to be computed under section 11 and 12 of the Act falling under Chapter-III. Accordingly, this amount cannot be added by invoking provision of section 37 which falls in Chapter-IV-D not a Chapter-III. Accordingly, we direct the AO to consider this amount as application of income while computing income of the assessee society in terms of section 11. This ground of appeal is accordingly allowed. Addition on account of investment in fixed deposit - HELD THAT - There cannot be any assumption that amount of ₹ 1,43,41,000/- and amount of ₹ 40,88,000/- are undisclosed investment. Accordingly, the addition made on this account is on incorrect appreciation of facts. As regards the observation of the special auditor in respect of the interest on matured FDR, it is seen that the assessee has accounted for the interest of ₹ 6,13,853/-. As regards the interest on the closing balance of FDR of ₹ 40,88,000/- the same having not been received during the year and assessee society following policy of accounting of interest accrued on FDRs on receipt basis no addition on this account otherwise can be made. In view of the above facts and analysis, we direct the AO to delete the addition of ₹ 1,82,92,536/. This ground of appeal is thus allowed. Addition on account of job work - HELD THAT - In the absence of supporting evidence, we also confirm the disallowance made by the CIT (A). However, as we have held in ground no.11 while considering disallowances in the absence of supporting evidence that the income of the society is to be computed in terms of section 11 of the Act and accordingly such amount need to be excluded while computing total application of income. Following the same reasoning we direct the AO that this amount instead of making addition as income needs to be excluded while considering application of income in terms of section 11 of the Act. Disallowance of depreciation - HELD THAT - In the absence of supporting evidence, the disallowance made by the CIT (A) is thus upheld. However, as held above in many grounds while considering disallowances in the absence of supporting evidence that the income of the society is to be computed in terms of section 11 of the Act and accordingly such amount need to be excluded while computing total application of income - we direct the AO that this amount instead of making addition as income needs to be excluded while considering application of income in terms of section 11 Computation of income in accordance with the provision of section 11 and 12 and not in accordance with the provisions of section 28 to 44 D - While adjudicating ground no.6, we have already held that income of the assessee society is to be computed in accordance with the provision of section 11 and 12 . Accordingly, we direct the AO to compute the income in accordance with the provision of section 11 and 12 and not in accordance with provision of section 28 to 44 D. Capital expenditure incurred during the year as application of income towards charitable purposes while computing income of the assessee society - HELD THAT - As per section 11 income of a eligible institution to the extent of which such income is applied to charitable purposes in India is not be included in the total income. The application of the income towards charitable purposes include application towards acquisition of assets i.e. capital expenditure. As we have already held hereinabove that income of the society is to be computed in accordance with the provision of section 11 and 12, we direct the AO to consider capital expenditure incurred during the year as application of income towards charitable purposes while computing income u/s 11 Addition in respect of the cash deposited in the bank - HELD THAT - CIT (A) has deleted the first two amounts i.e. ₹ 54,00,000/- and ₹ 49,46,000/- as these deposits in the bank account do not pertain to the year under consideration. As regards the balance the CIT (A) noted cash deposits reported by the AO have been duly recorded by the assessee in its books accounts as tuition fees and hence addition made by the AO is double addition. CIT (A) also noted that the Special auditor appointed by the AO has also not made any adverse observation about the cash deposited in the bank. DR could not controvert the above finding of the CIT (A). We are of the view that the CIT (A) has examined the issue. The deposit in the bank account having been made out of the books of accounts the same cannot be considered to be unexplained deposits in the bank account and accordingly we uphold the order of the CIT (A) and dismiss this ground of appeal. Disallowance of depreciation - alleged that building was under construction as on 31.03.2007 - HELD THAT - CIT (A) has taken note of the fact that existence of the building was not in doubt as the valuation officer appointed by the AO itself has confirmed the same and the said report has also been relied upon by the AO subsequently. On this basis the CIT (A) has restricted the disallowance in respect of the addition at year end. We are of the view that the fact building was in existence and was in use is not in dispute and hence the CIT (A) was correct in allowing depreciation on the building. The finding given by the CIT (A) is correct and we see no reason to interfere with the order of the CIT (A) and accordingly, this ground is dismissed. Addition in respect of the cash deposited in the bank - CIT (A) noted that cash deposits added by the AO have been duly recorded by the assessee in its books accounts - HELD THAT - From the assessment order it is evident that the AO has made the addition merely on the ground that cash has been deposited in the bank ignoring the fact that assessee receives tuition fees etc. from the students and mere deposit in the bank account cannot be a ground for making addition. The deposit in the bank account having been made out of the books of accounts the same cannot be considered to be unexplained deposits in the bank account and accordingly we uphold the order of the CIT (A) and dismiss this ground of Revenue s appeal. Addition on the ground of unsupported expenditure - HELD THAT - CIT (A) after examining the remand report noticed that a sum of ₹ 10,12,427/- is the double addition. Accordingly, the CIT(A) deleted this amount. Since, the disallowance has been deleted by the CIT (A) on the reasoning that this amount have been considered twice and after considering the details submitted by the assessee and examined in the remand report we uphold the order of the CIT(A) and this ground is accordingly dismissed. Addition on reasoning that no such expenditure has been claimed in the income and expenditure account and this was a book adjustment having no income element - HELD THAT - addition has been deleted by the CIT (A) after considering the remand report and examination of the explanation and evidences submitted by the assessee. Nothing contrary has been pointed out by the Ld. DR and hence the deletion by the CIT (A) is upheld. As regards the deletion of balance expenditure, from the CIT(A) order we note that the CIT(A) has examined each and every expenditure which was subject matter of disallowance by the AO and has deleted that part of the expenditure in support of which the assessee has been able to submit evidences in the remand proceedings and has confirmed those expenditure in respect of which assessee could not submit evidences. The finding of the CIT (A) has not been controverted before us. In view of these facts we uphold the order of CIT (A) Addition on account of investment in FDR - HELD THAT - AO has simply picked up the figure from the balance sheet with the Syndicate Bank and has on that basis made addition ignoring the fact that the balance sheet submitted by the assessee was subject matter of special audit and assessment has to be completed on the basis of the said balance sheet. We have already held while adjudicating ground no.8 to 11 of the assessee s appeal that the basis for the assessment has to be the balance sheet and income and expenditure account which were subjected to special audit and not the balance sheet and income and expenditure account filed with the Syndicate Bank for collateral security for obtaining the loan. Accordingly, we uphold the order of the CIT (A) and this ground of appeal is dismissed.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Sections 147 and 148.
2. Denial of exemption under Section 11 of the Income Tax Act.
3. Basis for computation of income: reliance on financials submitted to Syndicate Bank vs. those audited by the Special Auditor.
4. Disallowance of various expenses and additions.
5. Application of provisions of Sections 40(a)(ia) and 40A(3).
6. Consideration of capital expenditure as application of income.
7. Depreciation on building and other assets.

Detailed Analysis:

1. Validity of Reassessment Proceedings under Sections 147 and 148:
The appeals challenged the reassessment proceedings initiated by the Assessing Officer (AO) under Sections 147 and 148, arguing that the reasons recorded for the notice were contrary to facts and not in compliance with statutory conditions. The tribunal dismissed these grounds as not pressed, indicating no substantial arguments were made on these points.

2. Denial of Exemption under Section 11 of the Income Tax Act:
The AO denied the benefit of exemption under Section 11, arguing that the assessee did not file returns under Section 139(4A). The tribunal held that the AO and CIT(A) erred in law by not computing income under Section 11. It was emphasized that the requirement to file returns within the due date was introduced only by the Finance Act, 2017, applicable from AY 2018-19. The tribunal directed the AO to compute the income in accordance with Section 11, granting the exemption.

3. Basis for Computation of Income:
The AO relied on financials submitted to Syndicate Bank for loan purposes, which differed from those audited by the Special Auditor. The tribunal held that the income and expenditure account audited by the Special Auditor should be the basis for computing income under Section 11. It was noted that the AO cannot pick and choose figures from different financials and must rely on the Special Auditor's report.

4. Disallowance of Various Expenses and Additions:
Several grounds involved disallowance of expenses due to lack of supporting evidence. The tribunal upheld these disallowances but directed that such amounts should be excluded while considering the application of income under Section 11. Specific disallowances included:
- Electricity expenses: Disallowed due to lack of evidence but to be excluded from income computation.
- Car insurance expenses: Similarly treated.
- Work-in-progress: Disallowed but excluded from income computation.
- Penalty payments: Disallowed under Explanation 1 to Section 37 but directed to be considered as application of income under Section 11.
- Unsupported expenditures: Disallowed but directed to be excluded from income computation.

5. Application of Provisions of Sections 40(a)(ia) and 40A(3):
The tribunal held that provisions of Sections 40(a)(ia) and 40A(3), which apply to business income, are not applicable to charitable institutions whose income is computed under Section 11. Disallowances under these sections were deleted.

6. Consideration of Capital Expenditure as Application of Income:
The tribunal directed the AO to consider capital expenditures incurred during the year as application of income towards charitable purposes while computing income under Section 11, aligning with the provisions that allow such application.

7. Depreciation on Building and Other Assets:
The AO disallowed depreciation on the grounds that the building was under construction. The tribunal, however, directed that depreciation should be allowed on buildings and assets in use, based on the Special Auditor's report and the valuation officer's confirmation of the building's existence. Any disallowed depreciation was to be excluded from income computation under Section 11.

Conclusion:
The tribunal's consolidated order emphasized the correct application of Section 11 for computing the income of charitable institutions, ensuring that procedural lapses like delayed filing of returns did not unjustly deny exemptions. It also clarified the inapplicability of business income provisions to charitable institutions and ensured that capital expenditures and depreciation were appropriately considered in the income computation. The appeals were partly allowed for statistical purposes, and the Revenue's appeals were dismissed.