2015 (2) TMI 684 - AT - Income Tax

Exemption under section 11 denied - CIT(A) held that proviso to section 2(15) became applicable, because the transaction entered into by the assessee was outside the scope and object of the trust as it became profit motive - Held that - CIT(A) while holding the transaction entered into by the assessee was outside the scope and object of the trust did not give any reason, that how in the current year, the objects were alienated. If at all some juggle was done with the objects, it was done in 1984 and not in the year under consideration. CIT(A) to gain some brownie points, the CIT(A) went beyond and in complete disregard to the provisions of section 251(2), by not allowing the assessee to even know about the enhancement being contemplated by him. This, in our opinion made the addition, consequence of enhancement, by way of denying the exemption under section 11, fallacious. Even if we accept the arguments of the DR that the CIT(A) was exercising his coterminous powers on the issue of allowance of exemption under section 11, even then the argument of the DR deserves to be rejected, because, the statute itself has given the safe guard under section 251(2), as mentioned earlier. In such a case, accepting or sustaining the order of the CIT(A) in denying the exemption under section 11, would amount to injustice to the assessee. - addition on account of section 41(1) is concerned, we set aside the order of CIT(A) and direct the AO to delete the addition made under section 41(1) - Decided in favour of assessee. Disallowance of depreciation - Held that - Depreciation cannot be denied. Respectfully, therefore, following the decisions of Hon ble Bombay High Court in the case of DIT (Ex) vs Framjee Cawasjee Institute 1992 (7) TMI 331 - BOMBAY HIGH COURT wherein held that Depreciation on depreciable assets had to be taken into account in computing income of trust although the amount spent on acquiring such assets had been treated as application of income of trust in the year in which assets were acquired, we set aside the order of the CIT(A) and direct the AO to allow the rightful claim of depreciation. - Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under section 11 of the Income-tax Act, 1961.
2. Enhancement of income by the Commissioner of Income-tax (Appeals) (CIT(A)).
3. Addition of Rs. 32,50,00,000/- as advance received from Lokhandwala Construction Industries Ltd. (LCIL) under section 41(1) of the Income-tax Act, 1961.
4. Disallowance of Rs. 2,26,836/- as depreciation claimed on fixed assets.
5. Non-setting off of the brought forward deficit.
6. Not allowing and quantifying the deficit of earlier years to be carried forward for set-off in subsequent years.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
The CIT(A) denied the exemption under section 11, asserting that the proviso to section 2(15) applied, alleging the appellant was carrying on business and that the alienation of property was beyond the trust's objectives. The Tribunal found that the CIT(A) took up the issue suo moto without showing cause to the assessee, which was against the mandatory provisions of section 251(2). The Tribunal concluded that the CIT(A) erred in denying the exemption under section 11, as there was no change in the facts of the transaction since 1984, and the trust's status had been consistently accepted by the revenue authorities. The Tribunal restored the order of the AO, allowing the exemption under section 11.

2. Enhancement of Income by CIT(A):
The CIT(A) enhanced the appellant's income without complying with section 251(2), which mandates giving the appellant a reasonable opportunity to show cause against such enhancement. The Tribunal held that the CIT(A) overstepped by not adhering to the statutory safeguard provided under section 251(2). The Tribunal set aside the enhancement made by the CIT(A), terming it fallacious and unjust.

3. Addition of Rs. 32,50,00,000/- under Section 41(1):
The AO added Rs. 32.50 crores as income under section 41(1), claiming cessation of liability. The Tribunal observed that the amount was shown as an advance due to an ongoing dispute with LCIL over the exact FSI, and there was no remission of liability. The Tribunal emphasized that for section 41(1) to apply, the liability must cease to exist, which was not the case here. The Tribunal directed the AO to delete the addition, as the provisions of section 41(1) were inapplicable.

4. Disallowance of Rs. 2,26,836/- as Depreciation:
The CIT(A) disallowed the depreciation claim following the denial of exemption under section 11. The Tribunal, referencing decisions from the Hon'ble Bombay High Court, held that depreciation on assets must be allowed even if the cost of acquiring the assets had been treated as application of income in earlier years. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the depreciation claim.

5. Non-setting off of the Brought Forward Deficit:
The CIT(A) did not permit the set-off of the unabsorbed brought forward deficit due to the denial of section 11 benefits. The Tribunal applied the same rationale as in the depreciation issue, directing the AO to allow the brought forward deficit to be set off against the surplus for the year.

6. Not Allowing and Quantifying the Deficit of Earlier Years:
The CIT(A) failed to allow the set-off of the brought forward unabsorbed deficit and did not quantify it for subsequent years. The Tribunal directed the AO to quantify and allow the deficit to be carried forward for setting off against future surpluses.

Conclusion:
The Tribunal allowed the appeal, setting aside the orders of the CIT(A) on all grounds. It restored the AO's original order granting exemption under section 11, deleted the addition under section 41(1), allowed the depreciation claim, and directed the AO to permit the set-off and carry forward of the brought forward deficit.