2016 (3) TMI 546 - AT - Income Tax

Denial of benefit of exemption u/s 11(2) - Held that - It was not a case of A.O. that there was no form at all. If at all, any defects in the form, they are procedural defects and which can be rectified. There is no specific bar prohibiting the assessee from modifying the figures of accumulation as held by the Hon ble High Court of Punjab & Haryana in the case of CIT vs. Simla Chandigarh Diocese Society (2009 (8) TMI 103 - PUNJAB AND HARYANA HIGH COURT) . In any case period of accumulation cannot be more than five years. In the absence of specific period, it can be always presumed that the period of accumulation is five years. Therefore, we are of the opinion that the CIT(A) should have allowed the assessee to file the revised form no.10 rectifying the defects pointed out by the A.O., which was not done. Therefore, we deem it appropriate to remit the issue back to the file of the A.O. and direct the A.O. to allow the assessee to file revised form no.10 and consider the exemption claimed u/s 11 of the Act. Depreciation claim - Held that - Depreciation on assets, the cost of which was allowed has application of income in earlier year is to be allowed while computing the income available for application for charitable purpose. The CIT(A) rightly directed the A.O. to allow the depreciation. We do not see any error or infirmity in the order passed by the CIT(A). Application of income towards release of funds to Horticulture department - Held that - The assessee being a State Govt. organization, constituted under sec. 15 Andhra Pradesh (Agricultural Produce and Livestock) Market Act, 1966 is authorized to spend funds specified by the Government through general or special orders. Therefore, when the Government is directed to spend amount for particular purpose as per the said Act, the assessee is bound to follow the instructions of the Government. The amount is paid to farmers in the form of horticulture subsidy for establishment of cold storage facility, which is coming under one of the objects of the assessee. Therefore, we are of the opinion that the amount spent for the welfare of farmers and paid through horticulture department as directed by the Govt. is application of income for charitable purpose. The CIT(A) has rightly deleted the addition subject to verification by the A.O. We do not see any error or infirmity in the order passed by CIT(A). Hence, we inclined to upheld the order of CIT(A) and set aside the issue to the A.O. for the limited purpose of verification and direct the A.O. to allow the claim subject to verification of directions of the Director of horticulture or Govt., after giving due opportunity to the assessee.

Summary

Issues Involved:
1. Rejection of revised Form No. 10 and denial of exemption under Section 11 of the Income Tax Act.
2. Allowance of depreciation claim by the assessee.
3. Application of income towards release of funds to the Horticulture Department.

Detailed Analysis:

1. Rejection of Revised Form No. 10 and Denial of Exemption under Section 11 of the Income Tax Act:

The assessee, a local authority known as Agricultural Market Committee, filed its return of income for the assessment year 2008-09 claiming exemption under Sections 10(26AAB) and 11 of the Income Tax Act. The Assessing Officer (A.O.) reopened the assessment and issued a notice under Section 148. During scrutiny, the A.O. noticed defects in Form No. 10 filed by the assessee, specifically: (1) the amount of income accumulated was not specified, (2) the period for which the income was accumulated was not mentioned, and (3) the purpose for accumulation was general and not specific. Consequently, the A.O. rejected the form and denied the exemption under Section 11(2).

On appeal, the CIT(A) acknowledged that the form mentioned the purpose for accumulation but failed to specify the period and amount, rendering it invalid. The assessee argued that defects in Form No. 10 could be rectified before the completion of assessment proceedings. The ITAT referenced previous decisions, including the ITAT Visakhapatnam bench in similar cases and the Hon'ble Supreme Court in CIT vs. Nagpur Hotel Owners Association, which allowed rectification of such defects. The ITAT concluded that the A.O. and CIT(A) erred in rejecting the form and denying the exemption, and directed the A.O. to allow the assessee to file a revised Form No. 10 and reconsider the exemption under Section 11.

2. Allowance of Depreciation Claim by the Assessee:

The assessee claimed depreciation on fixed assets, which the A.O. disallowed, arguing that it would amount to double deduction since the cost of the assets was already allowed as application of income in earlier years. The CIT(A) allowed the depreciation claim, referencing judgments that income of a trust should be computed on commercial principles, which include allowing depreciation.

The ITAT upheld the CIT(A)'s decision, citing the Hon'ble Karnataka High Court in CIT vs. Society of Sisters of St. Anne and other judicial precedents which support the allowance of depreciation on capital assets for determining the quantum of funds to be applied for charitable purposes. The ITAT directed the A.O. to allow the depreciation after obtaining necessary details from the assessee.

3. Application of Income towards Release of Funds to the Horticulture Department:

The A.O. disallowed the amount paid to the Horticulture Department, stating that the recipient was not a charitable institution registered under Section 12AA. The assessee contended that the payment was made as per the State Government's directions for the welfare of farmers, which aligns with its charitable objectives.

The CIT(A) directed the A.O. to allow the expenditure subject to verification of the purpose. The ITAT referenced the Hon'ble Jurisdictional High Court in CIT vs. Agricultural Market Committee, Giddalore, which recognized that payments made as per government directions for statutory purposes should be considered for the objects of the assessee. The ITAT upheld the CIT(A)'s decision, directing the A.O. to verify the directions from the Director of Horticulture or the Government and allow the claim accordingly.

Conclusion:

The ITAT allowed the assessee's appeals for statistical purposes and partly allowed the revenue's appeals for statistical purposes. The A.O. was directed to reconsider the exemption under Section 11 after allowing the assessee to file a revised Form No. 10, allow the depreciation claim after obtaining necessary details, and verify the directions for the expenditure towards the Horticulture Department before allowing the claim.