2025 (2) TMI 859 - AT - Income Tax

Denial of registration u/s 12A/12AA - assessee claimed deduction of City Environment Expenses which the AO disallowed - HELD THAT - We find that the same is already decided in assessee s favour 2019 (11) TMI 271 - ITAT INDORE for earlier AY 2011-12 held AO himself in the body of the assessment order has given a finding that the facilities on which such City Environmental Development and Preservation Expenses have been incurred are not an item of sale or revenue generating item. Thus by giving this finding the AO has impliedly accepted the claim of the appellant that these expenditure are in the nature of sunk cost in the hands of the Appellant. I find force in the contention of the appellant that these expenditure have been incurred by the appellant in pursuance of its main objective of development of notified area. Further by incurring these expenditure the appellant authority would not be deriving any revenue in future as is the finding of the AO himself. Further these expenditure cannot be said to be income generating apparatus of the appellant authority and in my view by incurring these expenditure the appellant would not be deriving any benefit of enduring nature. Also find that these expenditure have consistently been claimed by the appellant for the last many years and even in the subsequent ears these expenditure have been claimed by the appellant. It has been claimed that the assessments of the appellant since A.Y. 2003-04 are consistently being framed u/s 143(3) and in none of the assessments any adverse view on this issue has been taken by any of the AOs. It has further been contended that all these assessment orders were also subject matter of appeals before the appellate authorities. From the copies of the assessment orders of various other assessment years filed by the appellant before me I found that in none of the other assessment years any part of these expenditure have been disallowed for the reasons has brought down by the AO in the instant case. AO cannot be permitted to take a different view from that consistently taken by his predecessors. Thus we uphold the deletion of disallowance made by CIT(A). The revenue s grounds qua this issue are dismissed. Deduction of Contribution Aid Expenses given to other bodies/institutions disallowed - HELD THAT - As respectfully following the judgment of M/s. Indian Farm Forestry Development 2018 (12) TMI 762 - DELHI HIGH COURT are of the considered view that the alleged amount should be allowed as business expenditure as it indirectly help to increase business of the assessee authority. Thus disallowance stands deleted. Deduction of IMC Transfer Expenses - assessee debited to its P L A/c certain expenses incurred by it for the Schemes transferred to Indore Municipal Corporation (IMC) and claimed deduction under the heading IMC Transfer Expenses - HELD THAT - The expenses incurred by assessee are prima facie for its own purpose although they have been incurred after transfer of schemes to IMC. Ld. AR s submission is also meritorious that the assessee is a wing of State Govt.; the assessee maintains every voucher/document of expenses incurred; the assessee s accounts are duly audited by various auditors; there is a system of approval of every penny spent at all levels by authorities; every expenditure is incurred as per pre-set procedure which includes inviting bids/tenders. Therefore there cannot be any doubt qua the necessity and genuineness of expenses incurred by assessee. Even in assessment-order the AO has not doubted the genuineness of expenses claimed by assessee. That apart it is also noteworthy that the assessee has claimed such expenses consistently in earlier years and the assessing authority has allowed the same in scrutiny assessments u/s 143(3). The disallowance has been made for the first time in AY 2014-15 without any change in facts. It is an accepted principle that the tax authorities have to be consistent in approach unless there is any change in facts or law. We find that the Ld. CIT(A) has deleted AO s disallowance by taking a judicious approach having regard to these facts. Therefore we do not find any reason to interfere in the order of CIT(A) the same is hereby upheld. Deduction of Land acquisition and diversion Expenses - CIT(A) deleted addition - HELD THAT - AO has himself noted in assessment-order that the expenses claimed by assessee are forming part of WIP/stock therefore when it is so the claim of assessee is revenue-neutral because on one hand the assessee has debited expenditure to P L A/c and on other hand there is a credit in P L A/c in the form of WIP/stock. Ld. AR submitted that no disallowance is warranted in such a situation when there is effectively no claim by assessee. We find sufficient merit in the submission of Ld. AR. We agree that once the impugned expenses are included in closing inventory effectively there is no deduction claimed by assessee and no disallowance is warranted. Therefore the deletion made by CIT(A) is valid.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment involved the following issues:

• Whether the Commissioner of Income-tax (Appeal) [CIT(A)] erred in not providing specific directions regarding the computation of the appellant's income under sections 11 and 12 of the Income-tax Act, 1961, contingent upon the grant of registration under section 12A/12AA.
• Whether the disallowance of deductions for various expenses claimed by the assessee, including City Environment Expenses, Contribution & Aid Expenses, IMC Transfer Expenses, and Land Acquisition and Diversion Expenses, was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Computation of Income under Sections 11 and 12:

• The relevant legal framework involves sections 11, 12, 12A, and 12AA of the Income-tax Act, 1961, which pertain to the taxation of income from property held for charitable or religious purposes and the conditions for registration of charitable trusts.
• The Court noted that the CIT(A) had previously provided specific directions for earlier assessment years (AYs) 2011-12 and 2012-13, pending the High Court's decision on the registration issue. The CIT(A) failed to provide similar directions for AYs 2013-14 to 2018-19 and 2021-22.
• The Court agreed with the assessee's request that the CIT(A) should be directed to include such directions in the impugned orders for the relevant AYs, as the issue of registration was still pending before the High Court.
• The Court concluded that the assessee's appeals on this ground were allowed, directing the CIT(A) to modify the orders accordingly.

2. Deduction of City Environment Expenses:

• The legal framework involves the assessment of whether expenses are capital or revenue in nature, impacting their deductibility under the Income-tax Act.
• The CIT(A) had reversed the Assessing Officer's (AO) disallowance, and the Court found that the issue had been previously decided in favor of the assessee by a Co-ordinate Bench of the ITAT.
• The Court observed that the expenses were incurred for city development and preservation, aligning with the statutory objectives of the assessee, and were consistently allowed in earlier assessments.
• The Court upheld the CIT(A)'s decision to delete the disallowance, dismissing the revenue's grounds on this issue.

3. Deduction of Contribution & Aid Expenses:

• This issue also involved the determination of whether expenses were allowable as business expenditure under section 37 of the Income-tax Act.
• The CIT(A) had reversed the AO's disallowance, and the Court noted that a Co-ordinate Bench had previously decided the issue in favor of the assessee.
• The expenses were related to contributions to cultural events, which were deemed necessary for maintaining the city's traditions and indirectly benefited the assessee's business.
• The Court upheld the CIT(A)'s decision to delete the disallowance, dismissing the revenue's grounds on this issue.

4. Deduction of IMC Transfer Expenses:

• The issue involved expenses incurred for schemes transferred to the Indore Municipal Corporation (IMC) and whether they were allowable as business expenditure.
• The CIT(A) had reversed the AO's disallowance, and the Court noted that the expenses were incurred for maintenance and rectification obligations even after the transfer of schemes to IMC.
• The Court found that the expenses were consistent with the assessee's statutory objectives and had been allowed in earlier assessments.
• The Court upheld the CIT(A)'s decision to delete the disallowance, dismissing the revenue's grounds on this issue.

5. Deduction of Land Acquisition and Diversion Expenses:

• This issue pertained to whether certain expenses were capital in nature and thus not deductible.
• The CIT(A) had deleted the AO's disallowance, noting that the expenses were part of the assessee's development objectives and were not directly attributable to specific projects.
• The Court agreed that the expenses were effectively revenue-neutral, as they were included in the closing inventory, and thus no disallowance was warranted.
• The Court upheld the CIT(A)'s decision to delete the disallowance, dismissing the revenue's grounds on this issue.

SIGNIFICANT HOLDINGS

• The Court directed the CIT(A) to include specific findings/directions in the orders for AYs 2013-14 to 2018-19 and 2021-22, similar to those provided for AYs 2011-12 and 2012-13, regarding the computation of income under sections 11 and 12, contingent upon the grant of registration under section 12A/12AA.
• The Court upheld the CIT(A)'s deletion of disallowances related to City Environment Expenses, Contribution & Aid Expenses, IMC Transfer Expenses, and Land Acquisition and Diversion Expenses, finding that these expenses were consistent with the assessee's statutory objectives and had been consistently allowed in earlier assessments.
• The Court emphasized the principle of consistency in tax assessments, noting that unless there is a change in facts or law, the approach adopted in earlier years should be followed.
• The Court concluded that the assessee's appeals were allowed, and the revenue's appeals were dismissed, affirming the CIT(A)'s decisions on the contested issues.