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2023 (1) TMI 219 - AT - Income TaxAccumulation of Income as specified under section 11(1 )(a) of the Act on gross receipts of the Trust - CIT(A) has not given specific instruction to AO to compute the accumulation of income in accordance with provision of Section 11(1)(a) of the Act on gross receipts of the trust - HELD THAT - We are of the view that in the case of trust there is no concept of net income but of gross receipts and application of funds. In our opinion, for the purpose of calculation of accumulation of income to the extent of 15% u/s 11(1)(a) the gross receipts are to be taken as basis and not the net income after deducting expenses which has been done by both the authorities below. The case of the assessee finds support from the decision of Bai Sonabai Hirji Agiary Trust 2004 (9) TMI 300 - ITAT BOMBAY-E wherein the Co-ordinate Bench has taken a view for the purpose of accumulation of income, which is deemed to be derived for the purpose of charitable activities subject to the fulfillment of other condition in that section, is to be taken on the gross receipt of the trust before deducting any sum towards application of income. In other words, the application of income has to be taken into account from the said gross receipts for the purpose of accumulation u/s 11(1)(a) of the Act. The case of the assessee is squarely covered by the decision of Kanehialall Lohia Trust 2020 (1) TMI 501 - ITAT KOLKATA . Accordingly we set aside the order of Ld. CIT(A) on this issue and direct the AO to compute the income to be accumulated u/s 11(1)(a) of the Act on the gross receipts. Accordingly ground no. 2 is allowed. Disallowing the provisions created for accrued and determined liability - CIT-A observing that the actual payment made by the assessee towards gratuity and leave encashment was rightly treated as application of income and dismissed the appeal of the assessee on this issue - HELD THAT - In the present case, we note that the expenses charged to the income and expenditure account by the assessee trust has already crystallized and quantified but not paid and therefore we find merit in the arguments of assessee that once the expenses are charged to the income expenditure after being foreseen with certainly are not in the nature of contingent but certainly to be considered as application of income to be discharged in the subsequent year. We also note that these were, in fact, paid in the subsequent years. We also look at this issue from another angle where the assessee has not charged anything to the income expenditure account and resulting into surplus going up and the assessee availing the benefit of accumulation u/s 11(2) to be carried forwards for the subsequent years. But in the present case, the facts are quite different as the assessee has calculated and charged these expenses to Income and Expenditure account. We have also examined the explanation inserted after subsection As amendment by Finance Act, 2022 by inserting explanation is very clear and conspicuous that w.e.f AY 2023-24 any sum payable by any trust or institution shall be considered as application of income in the previous year in which sum is actually paid by it irrespective in which the liability to pay such sum was incurred by the trust/institution according to the method of accounting regularly employed by it. So we draw strength from the said explanation to section 11(7) that prior to AY 2023-24 the expenses were allowable to the trust as application of income even on accrual basis and thereafter specifically provided to be treated as application of income on the payment basis w.e.f. AY 2023-24. We have perused the provisions of section 11(1) of the Act which specifies only application of income and not the actual spending which has been amended to by Finance Act, 2022 w.e.f. 01.04.2023 as stated above. The case of the assessee finds support from the decision of Coordinate Bench of Kolkata in the case of Apeejay Education 2021 (7) TMI 906 - ITAT KOLKATA - We are not in agreement with the Ld. CIT(A) on this issue and direct the AO to delete this disallowance. Computing the capital gain on sale of assets - According to the AO assessee was registered u/s 12AA and the entire expenditure incurred for acquisition of capital assets has been treated as application of income for charitable purposes in the year in which the acquisition was made , since the assessee has written off the cost of the capital asset fully in the year of acquisition and therefore there is no cost left to be taken as WDV or cost of acquisition as capital asset was fully written off in the year and accordingly the AO treated the entire sale consideration as capital gain - HELD THAT - Once the trust or institution is registered u/s 12AA of the Act there is no dispute or controversy that whatever is purchased by the assesse even on capital account is treated as application of income. CIT(A) has observed that the assessee has been benefitted twice. Once by way of allowing cost of acquisition of application of income in the year of acquisition and secondly be allowing depreciation on the same. As perused the amendment brought in by Section 11 by inserting sub-section 6 by Finance (No. 2) Act, 2014 w.e.f. 1.4.2015 providing that the income of the trust is required to be applied or accumulated or set apart for application, then, for such purposes, the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year. Keeping in view the various judicial decisions passed by various judicial forums on the issue that the assessee is entitled to claim the application of income as well as depreciation on the cost of acquisition of the capital assets . In the present case, we note that the assessee has partly claimed the depreciation on this asset and when the asset was sold the remaining WDV which was determined by reducing the depreciation from the cost of acquisition claimed till date existed in the books of account. In our considered view to this extent we find merit in the contention of the A.R that whatever left in the books of account in the form of WDV has to be allowed while computing the capital gain till A.Y. 2015-16. In our considered view this has to be allowed till the AY 2014- 15 and accordingly we set aside the order of CIT(A) and direct the AO to accept the capital gain as calculated above. Accordingly ground no. 4 is allowed.
Issues Involved:
1. Validity of the CIT(A)'s order. 2. Computation of "Accumulation of Income" under Section 11(1)(a). 3. Disallowance of provision for accrued and determined liability. 4. Computation of Capital Gain on sale of assets. 5. Exemption of entire income under Section 10(21). Issue-wise Detailed Analysis: 1. Validity of the CIT(A)'s Order: The first ground of appeal raised by the assessee was general in nature, challenging the validity of the CIT(A)'s order without specific adjudication. The tribunal found this issue to be general and did not require specific adjudication. 2. Computation of "Accumulation of Income" under Section 11(1)(a): The assessee contended that the CIT(A) erred by not instructing the AO to compute the accumulation of income based on the gross receipts of the trust. The AO had computed the allowable accumulation of 15% under Section 11(1)(a) on the net income after deducting administrative and establishment expenses. The CIT(A) affirmed this approach. However, the tribunal held that for the purpose of accumulation under Section 11(1)(a), the gross receipts should be considered, not the net income after expenses. This view was supported by the decision of the Special Bench in Bai Sonabai Hirji Agiary Trust vs. ITO and the case of Kanehialall Lohia Trust vs. ITO. The tribunal directed the AO to compute the accumulation based on the gross receipts, allowing this ground of appeal. 3. Disallowance of Provision for Accrued and Determined Liability: The AO had disallowed the provision for gratuity and leave encashment amounting to Rs. 43,14,446/-, allowing only the actual payment of Rs. 5,29,401/- as application of income. The CIT(A) affirmed this decision. The tribunal, however, found merit in the assessee's argument that the expenses, though not paid, were crystallized and should be considered as application of income. The tribunal also noted the amendment by the Finance Act, 2022, effective from AY 2023-24, which clarified that such expenses should be considered as application of income in the year they are paid. Prior to this amendment, the expenses were allowable on an accrual basis. The tribunal cited the case of Apeejay Education Trust vs. DCIT, where provision for gratuity was allowed as application of income. Consequently, the tribunal directed the AO to delete the disallowance, allowing this ground of appeal. 4. Computation of Capital Gain on Sale of Assets: The AO had computed the capital gain on the sale of assets at Rs. 10,08,645/-, treating the entire sale consideration as capital gain since the cost of acquisition was fully written off in the year of acquisition. The assessee had computed the capital gain at Rs. 4,14,577/-. The CIT(A) dismissed the appeal, observing that the assessee had benefited twice by claiming the cost of acquisition as application of income and depreciation. The tribunal noted that the trust was registered under Section 12AA and that the cost of acquisition of capital assets is treated as application of income. The tribunal held that the WDV of the asset, reduced by depreciation claimed till date, should be considered while computing the capital gain. This approach was valid until AY 2014-15. The tribunal set aside the CIT(A)'s order and directed the AO to accept the capital gain as computed by the assessee, allowing this ground of appeal. 5. Exemption of Entire Income under Section 10(21): The tribunal did not specifically address this issue as it was not separately adjudicated. Conclusion: The tribunal allowed the appeal, setting aside the CIT(A)'s order on the grounds of accumulation of income, provision for accrued liability, and computation of capital gain. The order was pronounced on January 4, 2023.
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