2025 (1) TMI 1048 - AT - Income Tax

Denial of exemption u/s 11 12 - whether or not the assessee society per the 1st proviso of sub-section (2) of section 12A of the Act based on the registration granted u/s 12A is entitled for exemption u/ss. 11/12 for the reason that its application for registration filed u/s 12A was pending prior to the disposal of its appeal by CIT(A)/ NFAC Delhi who had disposed of the same vide his order dated 30.05.2024? HELD THAT - Accordingly Sec.12A(b) as was available on the statute during the year under consideration i.e AY 2017-18 had for claiming of exemption u/s 11 or Sec. 12 inter alia set out a pro- condition as per which the trust or institution was statutorily required to cumulatively satisfy two conditions viz. (i) to get its accounts audited by an accountant defined in the Explanation below sub-section (2) of Sec. 288; and (ii). to furnish alongwith the return of income for the relevant assessment year the report of audit in the prescribed form As the present assessee society had not filed any return of income for the year under consideration i.e AY 2017-18 therefore the pre-condition is not satisfied by it. In fact it transpires on a perusal of the CIT(A) order that the assessee society had in its written submissions filed before him stated that it had filed its audited financial statements only in the course of the assessment proceedings. As it is a matter of fact borne from the record that the assessee society had failed to file its return of income as required per the mandate of section 12A(1)(b) (as was applicable during the year under consideration) therefore for the said reason it would stand disentitled for claiming exemption u/s 11 and 12 of the Act. The assessee society is disentitled from claiming exemption u/ss. 11/12 of the Act therefore we refrain from looking into the scope of 1st proviso to section 12A. The Ground of appeal No. 1 is dismissed. Entitlement for claim of depreciation on its fixed assets despite the fact that it had not raised a claim for the same in its return of income for the year under consideration i.e AY 2071-18 - HELD THAT -Though the assessee society is not entitled for claiming exemption under Sec. 11 and Sec. 12 of the Act but at the same time as per Explanation 5 to Sec. 32(1) of the Act the deduction for depreciation on the fixed assets though not claimed ought to be allowed while computing its income in a commercial manner. Accordingly the A.O is directed to allow depreciation on the fixed assets though after verifying satisfaction of the requisite conditions contemplated in Sec. 32(1) of the Act. The Ground of appeal No. 2 is allowed in terms of my aforesaid observations. Enhancement of the income of the assessee society by CIT(A) without affording an opportunity to the assessee to put forth an explanation - We are unable to concur with the same. As the CIT(A) had taken the net income/surplus disclosed by the assessee society in its Income and expenditure account for the subject year for computing its taxable income therefore the same cannot be construed as enhancement of income as canvassed by the Ld. AR before me. The Ground of appeal No. 3 of the appeal is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Whether the assessee society is entitled to exemption under Sections 11 and 12 of the Income Tax Act, 1961, based on the registration granted under Section 12A, considering the "1st proviso" to Section 12A(2).
• Whether the assessee society is entitled to claim depreciation on its fixed assets despite not having claimed it in the return of income for the assessment year 2017-18.
• Whether the enhancement of the income by the Commissioner of Income-Tax (Appeals) without providing an opportunity to the assessee constitutes an error.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Exemption under Sections 11 and 12

• Relevant Legal Framework and Precedents: The legal framework involves Sections 11 and 12 of the Income Tax Act, which provide exemptions for income derived from property held under trust. Section 12A sets conditions for applicability, including the requirement of filing a return of income and audit of accounts.
• Court's Interpretation and Reasoning: The court highlighted that the assessee society did not file a return of income as required by Section 12A(1)(b), thus failing to meet the pre-condition for claiming exemptions under Sections 11 and 12.
• Key Evidence and Findings: The assessee society had not filed its return of income, which was a mandatory requirement for claiming the exemption.
• Application of Law to Facts: As the assessee did not fulfill the statutory requirements, it was disentitled from claiming the exemption.
• Treatment of Competing Arguments: The assessee argued that the proceedings before the CIT(A) were a continuation of assessment proceedings, thus entitling it to exemptions. However, the court did not address this argument due to the failure to meet the basic statutory requirements.
• Conclusions: The court concluded that the assessee society is not entitled to exemptions under Sections 11 and 12 due to non-compliance with Section 12A(1)(b).

Issue 2: Entitlement to Claim Depreciation on Fixed Assets

• Relevant Legal Framework and Precedents: Section 32 of the Income Tax Act, particularly "Explanation 5," mandates the allowance of depreciation whether or not it is claimed by the assessee.
• Court's Interpretation and Reasoning: The court acknowledged that depreciation is mandatory and should be allowed even if not claimed, as per "Explanation 5" to Section 32(1).
• Key Evidence and Findings: The court found that the assessee society had not claimed depreciation, but it was entitled to it under the statutory framework.
• Application of Law to Facts: The court directed the Assessing Officer to allow depreciation on the fixed assets after verifying the requisite conditions under Section 32(1).
• Treatment of Competing Arguments: The court did not encounter significant competing arguments against allowing depreciation.
• Conclusions: The court allowed the claim for depreciation on fixed assets, directing the AO to verify conditions under Section 32(1).

Issue 3: Enhancement of Income by CIT(A)

• Relevant Legal Framework and Precedents: The enhancement of income by CIT(A) is governed by principles of natural justice, requiring an opportunity for the assessee to respond.
• Court's Interpretation and Reasoning: The court found that the CIT(A) did not enhance the income but merely computed the taxable income based on the net income/surplus disclosed by the assessee.
• Key Evidence and Findings: The court noted that the CIT(A) used the figures from the assessee's own "Income and Expenditure Account."
• Application of Law to Facts: The court determined that the CIT(A)'s actions did not constitute an enhancement of income as argued by the assessee.
• Treatment of Competing Arguments: The court addressed the assessee's claim of lack of opportunity but found no merit in the argument.
• Conclusions: The court dismissed the appeal concerning the alleged enhancement of income.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The assessee society is disentitled from claiming exemption u/ss. 11/12 of the Act, therefore, I refrain from looking into the scope of '1st proviso' to section 12A of the Act."
• Core Principles Established: Compliance with statutory requirements is crucial for claiming exemptions; depreciation is mandatory and must be allowed even if not claimed.
• Final Determinations on Each Issue: The appeal was partly allowed, granting depreciation on fixed assets but denying exemptions under Sections 11 and 12 and dismissing the claim of error in income enhancement.