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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM: This appeal filed by the assessee is directed against the order passed u/.s 263 of the I.T. Act by the CIT(Exemptions), Kochi dated 10/02/2017 and pertains to assessment year 2012-13.
There was a delay of 24 days in filing the appeal before the Tribunal. The assessee has filed condonation petition accompanied by an affidavit stating that the office bearers of the Trust were fully engaged in the activities of the school in connection with the final examination of students in March and thereafter on
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matters relating to closure of the schools for summer vacation and again after closure, they had to go for religious retreat. It was submitted that from May onwards, they had to attend to new admission process in the school. Further, it was submitted that the Chartered Accountants had consumed time for preparation of necessary papers for filing the appeal. Hence, it was prayed that the delay in filing the appeal may be condoned.
2.1 After going through the condonation petition, we find there is good and sufficient cause for delay in filing the appeal before the Tribunal. Accordingly, we condone the delay of 24 days in filing the appeal and admit the appeal.
The assessee has raised the following ground of appeal: 1. The learned Commissioner ought to have convinced with the fact that depreciation is an allowable application of income u/s. 11, as the amendment is prospective in nature and effective from assessment year 2015-16. 2. The learned Commissioner ought to have understood that the Lissie Medical Institutions case does not hold good as it was arisen prior to the amendment in section 11. Also, Al-Ameen Charitable Fund Trust case was non the issue subsequent to the amendment. 3. The learned Commissioner erred in directing the Assessing Officer to proceed with imposition of penalty u/s. 272A(2)(e) stating that the “assessee’s submissions in this regard is not at all convincing. This is without properly issuing a formal notice u/s. 272A(4) by authorities u/s. 272A(3) inviting objections thereto.
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The facts of the case are that for the assessment year 2012-13, the Assessing Officer completed the assessment u/s. 143(3) of the Act, granting exemption to the Trust u/s. 11 of the Act. After going through the assessment records of the assessee, the Commissioner of Income-tax(Exemptions) pointed out the following discrepancies: i) Permissible accumulation of income u/s 11(1)(a) shall be 15% of the income of Rs.2,21,00,736/- which will come to Rs.33,15,110/- only as against Rs.1,17,96,711/- allowed in assessment. Hence, the total income chargeable to tax after deducting Rs.33,15,110/- from Rs.1,17,96,722/- would come to Rs.84,81,600/-. ii) School Development fee of Rs.26,35,000/- (net) received and booked in the accounts of Trust and Public School was not taken as income of the trust or school for application. However, the entire expenses including capital and revenue incurred for the development of the school has been taken as application of income. A similar treatment was given to the building fund collected of Rs.75,100/- in the higher secondary school division. This treatment is not in order. The contribution received as development fee and building construction fund has either to be taken as income or has to be deducted from the development expenses incurred and the net expenses can only be considered as application of income. iii) The return due on 30-09-2012 was filed on 12-10-2013. Penalty proceedings u/s 272A(2)(e) were not initiated.
Accordingly, a notice u/s 263 of the Income Tax Act was issued to the assessee on 06-01-2017 The assessee filed a written submission dated 16-01- 2017 stating as under :- "1. 15% accumulation on gross income :- Your kind attention is invited to the fact that there was an error in assessment order on account of disallowance of depreciation. The depreciation disallowed in the Assessment Order was Rs.1,02,37,922/-. But the actual depreciation claimed in the Return for the year was only
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Rs.8,82,711/-. This is evidenced by the final accounts filed along with Return. A copy of Depreciation schedule is enclosed. The amount of Depreciation disallowed by the Assessing Officer is relating to total depreciation upto 31-03-2012 Rs. 1,02,37,922/-, This is wrong (see Depreciation schedule). Being this was a grave error came 'across in the assessment order a petition to rectify the error was filed on 17-04-2015 at ASK(Ack. No.071170415000364) detailing the error. But nothing has been done so far on the matter. A copy of the petition is enclosed. Your kind attention is again invited to the fact that there was an amendment in the Income Tax Act in section 11 through Finance (No. 2) Act 2014, with effect from 01-04-2015. This was by inserting a new sub section (6) to section 11. This is narrated below :- Section 11(6): In this section where any amount is required to be applied or accumulated or set apart for application, then. For such purposes the income shall be determined without deduction or allowance by way of depreciation or otherwise in respect of any asset, acquired of which has been claimed as an application of income under this section in the same or any other precious year. Accordingly, in the case of charitable organizations depreciation cannot be treated as application from assessment year 2015-16 onwards. So it is very clear that they can claim depreciation as application of income upto and including assessment year 2014-15. Kind attention of Hon'ble Commissioner is invited to the recent judgment of Karnataka High Court in the case Director of Income Tax Vs. Al-Ameen Charitable Fund Trust (2016) 383 ITR 517 (Kam). The decision was in favour of the assessee. Copy enclosed. 2. School Development Fee and Fund ' School Development fee Rs.26,35,000/- is an earmarked collection as corpus fund for development of the school Trust for rendering advanced facilities to the students who are its beneficiaries. Similarly, Building Fund of Rs. 75,100/- is also of the same nature. So these are non taxable corpus receipts. 3. The delay in filing of the Return was due to inadvertent reasons of frequent change of Governing Body and office bearers in the school, delay in getting the documents audited.”
On appeal, the CIT(E) directed the assessing officer to verify the claim of the assessee that depreciation was disallowed at Rs.1,02,37,922/- instead of the
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actual amount of Rs.8,82,711/- and adopt the correct amount for disallowance. However, the assessee claimed that they can claim depreciation as application of income upto and including the assessment year 2014-15 on the basis of section 11(6) inserted by Finance (No.2) Act, 2014, with effect from 01-04-2015 which was not acceptable by the CIT(E). Before the CIT(E), the assessee placed reliance on section 11(6) of the Act inserted by the Finance No.2 Act 2014 with effect from 01-04-2015 to contend that the said amendment applies retrospectively being clarificatory in nature and reliance was also placed on the jurisdictional High Court judgment in the case of Lissie Medical Institutions vs. Commissioner of Income Tax (2012) reported in 348 ITR 344.
4.1 Regarding School Development fee of Rs.26,35,000/- and building fund collected of Rs.75,000/-, the CIT(E) was of the opinion that the contribution received as development fee and building construction fund has to be taken as income or has to be deducted from the development expenses and the net expenses can only be considered as application of income. However, it was observed from the records that the Assessing Officer had taken the entire expenses including capital and revenue incurred for the development of the school as application of income. In view of the above, the CIT(E) directed the Assessing Officer to verify the same and the net expenses, if any, be considered as application of income.
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4.2 Regarding the delay in filing of return of income for the assessment year 2012-13, the CIT(E) held that the assessee should have filed the return of income on or before 30-09-2012 against which the same was filed only on 12.10.2013.
4.3 In the light of the above discussion, the CIT(E) found that the assessment order passed by the Assessing Officer was erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, invoking the provisions of section 263 of the Income Tax -1961, the CIT(E) set aside the assessment order and directed the Assessing Officer to redo the same afresh after considering all issues raised and after affording sufficient opportunity of being heard to the assessee.
Now the contention of the Ld. AR before us is that depreciation claimed on the fixed asset could not be denied on the reason that expenditure on acquisition of assets has been treated as application of income in the year of acquisition of asset. Further, it was submitted that there was amendment of section 11 by insertion of sub section (6) by Finance (No.2) Act, 2014 w.e.f. 01/04/2015 and the assessment year under consideration is 2012-13. Being so, the said amendment has no application to the present assessment year.
5.1 Regarding the findings of the CIT(Exemptions) with reference to the levy of penalty u/s. 272A(2)(e) of the Act, it was submitted that it cannot be the
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subject matter for issue of notice u/s. 263 of the Act by the CIT(E) and does not fall under the jurisdiction of the CIT(E) to issue notice u/s. 263 for initiating penalty proceedings. This issue should be kept open to the wisdom of Joint Director or Joint Commissioner and it is to be decided only after providing appropriate opportunity of being heard in the matter by such authority.
On the other hand, the Ld. DR relied on the order of the CIT(E).
We have heard the rival submissions and perused the record. With regard to depreciation, in our opinion, this issue is covered by the judgment of the Supreme Court in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation Poona (402 ITR 441) wherein it upheld the judgment of the Bombay High Court in the case of CIT vs. Institute of Banking Personnel Selection (264 ITR 110) by observing that income of an institution was to be computed on commercial principles, after providing for allowance of normal depreciation. It was observed that while section 11 of the Act provides for computation of income of an institution from the property held for charitable or religious purposes and for the application of income, section 28 of the Act deals with chargeability of income from profits and gains of business. Section 29 provides for computation of such income in accordance with section 32 to 43C of the Act. It was observed that even though section 32 of the Act is not applicable to an institution since it does not carry on business, income of the institution derived
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from building, plant and machinery and furniture was liable to be computed in normal commercial manner under section 11 of the Act on the basis of commercial principles after providing for allowance for normal depreciation and deduction of depreciation from gross income of the Institution. Accordingly, it was held that normal depreciation could be considered as legitimate deduction in computing real income of assessee on general principles or section 11(1)(a) of the Act.
7.1 Further, it may also be mentioned at this stage that the legislature, realizing that there was no specific provision in this behalf in the Income Tax Act, has made amendment in Section 11(6) of the Act vide Finance Act No. 2/2014 which became effective from the Assessment Year 2015-16. The Supreme Court has taken the view that the said amendment is prospective in nature. In view of the above judgment of the Supreme Court (supra), we are inclined to allow this ground of appeal of the assessee.
7.2 With regard to the imposition of penalty u/s. 272A(2)(e) of the I.T. Act, as pointed out by the Ld. AR, it cannot be levied without giving opportunity of being heard in the subject matter by an authority prescribed u/s. 272A(3)(a) of the Act. However, in the present case the CIT(E) has not directed the Assessing Officer to levy penalty. He has given direction to the Assessing Officer to levy penalty after giving opportunity of hearing to the assessee. Hence, we do not
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find any infirmity in the order of the CIT(E). However, we make it clear that if the Assessing Officer intends to levy penalty u/s. 272A(2)(e) of the Act, he shall give opportunity of proper hearing to the assessee before levying penalty. Thus, with this direction, we dismiss this ground of appeal of the assessee.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open Court on this 5th September, 2018.
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Dated: 5th September, 2018 GJ Copy to: 1. M/s. Mary Matha School Trust, Thrikkakara P.O. Kochi-682 021. 2. The Income Tax Officer(Exemptions), Kochi. 3. The Commissioner of Income-tax(Exemptions), Kochi. 4. The Pr. Commissioner of Income-tax, 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin