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2022 (12) TMI 397 - AT - Income TaxExemption u/s 11 - assessee is a registered society u/s 12A since past more than 25 years - Charitable activity u/s 2(15) - HELD THAT - As assessee has established that the income generated from this activity is not applied for any individual benefit or transfer to the benefit of any particular person, entity or group of persons but the application is for the benefit of public at large. This amply proves that the AO accepted the claim of the assessee that the assessee is a charitable society. It was in the backdrop of such a finding of the AO that the CIT(A) arrived at the conclusion that the income of the assessee has to be computed in accordance with the provisions of section 11 to 13 which would include accumulations as per section 11(1)(a) and section 11(2). He, then directed the Ld. AO to re-compute the income after giving benefit of section 11 along with all the consequential benefit. We do not find any infirmity in the order of the CIT(A) in giving the above direction to the Ld. AO. Hence these grounds of the Revenue are decided against it. Exemption was never claimed by the assessee in the original ITR and the revised ROI filed by the assessee was defective - In our opinion, this is not a valid reason to deny the benefit of exemption, once the Revenue accepts that the assessee is a charitable society whose activities are not in the nature of business and its income is applied for the benefit of public at large - Admittedly, the claim of exemption was made in the revised return filed within the statutory time limit but was treated as defective only on flimsy ground that once the original return is e-filed, the revised return cannot be filed manually during assessment proceedings. Not claiming exemption in the original return, though otherwise legally admissible on facts cannot be fatal when the assessee did claim exemption in the revised return which was duly considered for the purposes of making assessment. We, therefore do not find any substance in this grievance of the Revenue. Denial of depreciation - assessee s claim of depreciation tantamount to a double deduction since the assessee has already claimed deduction of its capital expenditure being a trust - HELD THAT - CIT(A) has taken notice of subsection( 6) of section 11 inserted by the Finance Act, 2014 w.e.f. 1.4.2015 which has now put restriction on claim of depreciation. The amendment is only prospective applicable to AY 2015-16 and subsequent years and not to case of the assessee in which AY involved is 2012-13. We endorse the findings of the Ld. CIT(A) and hold that the grievance of the Revenue is not sustainable in so far as the present appeal of the Revenue is concerned, the amended law being inapplicable. Accordingly, we decide ground against the Revenue. Taxes paid and deposited which the AO disallowed observing that the taxes are eventually refundable or are not deductable as per provisions of the Act and the same cannot be considered as application of income for the purpose of deduction under section 11 - HELD THAT - Before the Ld. CIT(A), the assessee relying on the decision of CIT vs. Janki Ammal Ayya Nadar Trust 1982 (8) TMI 4 - MADRAS HIGH COURT submitted that tax paid out of current year s income is application for charitable purposes. The submission was acceptable to the Ld. CIT(A) who found support from the decision in DIT(E) vs. National Association of Software and service companies 2012 (5) TMI 204 - DELHI HIGH COURT as well. We do not find any flaw in the direction of the CIT(A) to the Ld AO to allow the impugned amount as application of income by the assessee society. The ground, being bereft of any substance is rejected. Disallowance of expenditure of earmarked fund by the Ld. AO - HELD THAT - The unused funds are shown as liability in the balance sheet and carried forward till they are used. The explanation was not acceptable to the Ld. AO. According to him, the application of earmarked fund cannot be considered as application for the current year whereas they are made out of funds received in the previous year. As per the matching concept, the expenses should have been booked in the previous year and cannot be claimed against the application of income in the current year. CIT(A) did not agree with the view of the Ld. AO. Accordingly to him, matching concept do not apply. From schedule 3 of the Annual Accounts for the period ended 31.03.2012 it is observed that during the year the assessee had received fund out of which the assessee utilised Rs. 6,50,00,000/- only which means that the impugned expenditure was incurred from the fund received during the year itself and not out of accumulated income of earlier years. Since the basis of disallowance itself does not subsist, we agree with the finding of the CIT(A) that the impugned disallowance is not sustainable and reject this ground of the Revenue as well. Appeal of the Revenue is dismissed.
Issues Involved:
1. Application of taxes paid and deposited as income. 2. Exemption under sections 11 & 12 and accumulation under section 11(2). 3. Applicability and interaction of sections 11, 12, 12A, 12AA, 13, and 32. 4. Allowability of depreciation on capital assets. 5. Benefit of section 11(1)(a) and section 11(2). 6. Expenditure of earmarked funds. Issue-wise Detailed Analysis: 1. Application of Taxes Paid and Deposited as Income: The Revenue contended that the CIT(A) erred in directing the AO to allow Rs. 38,80,27,604 as the application of income. The CIT(A) referenced the case of CIT vs. Janaki Ammal Ayya Nadar Trust, which held that expenditure on taxes should be considered as application of income for charitable purposes. The CIT(A) also cited the Delhi High Court decision in DIT (E) v National Association of Software and Service Companies, which supported the view that taxes should be deducted before arriving at the commercial income available for application to charitable purposes. Thus, the CIT(A) directed the AO to allow the amount as application of income, and this direction was upheld by the Tribunal. 2. Exemption Under Sections 11 & 12 and Accumulation Under Section 11(2): The Revenue argued that the CIT(A) wrongly allowed exemptions under sections 11 & 12 and accumulation under section 11(2), despite the AO establishing that the exemption was not claimed in the original ITR and the revised ROI was defective. The Tribunal noted that the assessee is a registered society under section 12A for over 25 years. The AO had accepted the assessee's charitable status and its income application for public benefit. The Tribunal found that the revised return, though filed manually, was within the statutory time limit and should be considered. Therefore, the Tribunal upheld the CIT(A)'s direction to re-compute the income with exemptions under section 11. 3. Applicability and Interaction of Sections 11, 12, 12A, 12AA, 13, and 32: The Revenue contended that the CIT(A) ignored the independent provisions of sections 11, 12, 12A, 12AA, and 13, which are a separate code within Chapter III, and that depreciation under section 32 applies to business assets. The CIT(A) observed that charitable trusts are governed by sections 11 to 13, which allow exemptions for capital expenditures. The Tribunal agreed with the CIT(A) that the assessee's income should be computed under these provisions, including accumulation as per sections 11(1)(a) and 11(2). 4. Allowability of Depreciation on Capital Assets: The AO disallowed depreciation, arguing it would result in a double deduction since capital expenditure was already claimed. The CIT(A) allowed depreciation, citing several judicial decisions supporting the view that depreciation does not constitute a double benefit for charitable trusts. The Tribunal noted that the restriction on depreciation claims under section 11(6) applies prospectively from AY 2015-16 and not to AY 2012-13. Thus, the Tribunal upheld the CIT(A)'s decision to allow depreciation. 5. Benefit of Section 11(1)(a) and Section 11(2): The CIT(A) directed the AO to re-compute income, giving the benefit of section 11(1)(a) and section 11(2), which was challenged by the Revenue. The Tribunal found that the AO had accepted the assessee's charitable status and that the income application was for public benefit. Therefore, the Tribunal upheld the CIT(A)'s direction to allow the benefits under sections 11(1)(a) and 11(2). 6. Expenditure of Earmarked Funds: The AO disallowed Rs. 6,50,00,000, arguing that it should have been booked in the previous year as per the matching concept. The CIT(A) disagreed, noting that the matching concept does not apply to charitable organizations. The Tribunal observed that the funds were received and utilized in the same year, not from accumulated income of earlier years. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the disallowance. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The Tribunal found no infirmity in the CIT(A)'s directions regarding the application of taxes paid, exemptions under sections 11 & 12, depreciation on capital assets, and the expenditure of earmarked funds. The Tribunal confirmed that the assessee's income should be computed in accordance with sections 11 to 13, including the benefits of section 11(1)(a) and section 11(2).
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