2020 (1) TMI 967 - AT - Income Tax

Exemption u/s 11 - disallowance of amount utilized for acquisition of assets as application of income u/s 11 - disallowance of claim of repayment of loan as application of income u/s 11 - HELD THAT - As submitted that the nexus of loan funds and utilization should be examined to find out exact position. Accordingly, the Ld Counsels submitted that the assessee may be provided with an opportunity to furnish the details of utilization of loans, so that the correct amount of application of income could be quantified in terms of the ratio laid down in the above said decision. D.R also agreed to the plea put forth by the Ld counsels for the assessees. Accordingly, we set aside the orders passed by Ld CIT(A) in respect of above said two issues in all the years and restore them to the file of the AO with the direction to examine these issues afresh in the light of above said decision of the Tribunal by duly considering the information provided by the assessee with regard to utilization of loan funds. The assessee should be provided with adequate opportunity of being heard. Rejection of claim of carry forward of current year s deficit (excess amount of application of income) to subsequent years and also claim of depreciation on assets - HELD THAT - The issue of carry forward of deficit amount is consequential to the earlier two issues. Since the assessing officer has disallowed claim of application of income in respect of assets purchase out of loan funds and also repayment of loans, the income came to be assessed in positive figure. Hence there was no requirement of holding that the deficit shall be carried forward. Since the earlier two issues have been restored to the file of the assessing officer, this issue shall be dependent upon the result of the consequential order that may be passed by the AO. Accordingly, this issue is also restored to his file with the direction to allow carry forward of deficit, if any, computed in any of the years. The AO is also directed to allow claim of depreciation after examining the same upto assessment year 2014-15, since the provisions of sec.11(6) debars claim of depreciation on the assets, which have been allowed as application of income. Manner of computation of income u/s 11and carry forward of excess amount of application - HELD THAT - Both the parties agreed that the issues urged by the revenue are covered against the revenue by the decision rendered by Hon'ble Supreme Court in the case of CIT vs. Rajasthan Gujarati Charitable Foundation 2017 (12) TMI 1067 - SUPREME COURT . Accordingly, we dismiss the grounds urged by the revenue in all the three years.

Issues Involved:
1. Disallowance of amount utilized for acquisition of assets as application of income u/s 11 of the Act.
2. Disallowance of claim of repayment of loan as application of income u/s 11 of the Act.
3. Rejection of claim of carry forward of current year’s deficit to subsequent years and claim of depreciation on assets.
4. Rejection of claim for exemption u/s 10(23C)(vi) of the Act.
5. Manner of computation of income u/s 11 of the Act and carry forward of excess amount of application.

Detailed Analysis:

1. Disallowance of Amount Utilized for Acquisition of Assets as Application of Income u/s 11 of the Act:
The assessee, a charitable trust registered u/s 12AA, claimed the cost of purchase/construction of assets as application of income. The Assessing Officer (AO) rejected this claim to the extent of usage of loan funds, a decision upheld by the CIT(A) based on the precedent set in DCIT vs. M/s Peoples Education Society. The Tribunal reaffirmed that assets acquired with borrowed funds cannot be considered as application of income, emphasizing that allowing this would result in double deduction, which is not the intention of the statute.

2. Disallowance of Claim of Repayment of Loan as Application of Income u/s 11 of the Act:
The assessee claimed repayment of loans as application of income, relying on CIT vs. Janmabhumi Press Trust. However, the AO argued that this would result in double deduction since the original cost of assets purchased with loan funds was already claimed as application of income. The Tribunal, referencing the case of ITO vs. M/s Medical Relief Society of South Kanara, concluded that repayment of loans can only be considered as application of income if the assets purchased with loan funds were not previously claimed as application of income. The matter was remanded to the AO to verify the nexus between loan funds and asset acquisition.

3. Rejection of Claim of Carry Forward of Current Year’s Deficit to Subsequent Years and Claim of Depreciation on Assets:
The issue of carry forward of deficit is consequential to the earlier issues. The AO disallowed the claim due to the positive income assessed after disallowing application of income for assets purchased with loan funds and repayment of loans. The Tribunal restored this issue to the AO for re-examination based on the outcome of the earlier issues. The AO was also directed to allow depreciation claims up to AY 2014-15, governed by CIT vs. Rajasthan & Gujarati Charitable Foundation and CIT vs. Institute of Banking Personnel.

4. Rejection of Claim for Exemption u/s 10(23C)(vi) of the Act:
The assessee did not press this ground during the hearing, leading to its dismissal as not pressed.

5. Manner of Computation of Income u/s 11 of the Act and Carry Forward of Excess Amount of Application:
The revenue contested the computation method and carry forward of excess application. However, both parties acknowledged that the issues are covered against the revenue by the Supreme Court decision in CIT vs. Rajasthan & Gujarati Charitable Foundation. Consequently, the Tribunal dismissed the revenue's grounds.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed. The Tribunal directed the AO to re-examine specific issues and provide the assessee with adequate opportunity to present information regarding the utilization of loan funds. The order was pronounced on January 23, 2020.

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