ASSTT. COMMISSIONER OF INCOME TAX (EXEMPTIONS), CIRCLE, PUNE, PUNE vs. THE SHETKARI SHIKSHAN MANDAL, PUNE

2 The Assessing Officer also found that the assessee had claimed an amount of Rs. 13,37,30,869/- as capital expenditure being application of income (excluding application from borrowed capital). He further found that such expenditure was incurred for addition of various assets which inter-alia had included the addition for building of Rs.8.70,20,264/-, The Balance Sheet further revealed that an amount of Rs.27,31,07,846/- and Rs.2,20,00,000/- were secured and unsecured loans respectively. The secured loans were taken from Punjab National Bank and Piramal Enterprises Ltd. From the loan sanction letter issued by Punjab National Bank, it was found by the Assessing Officer that such loan was sanctioned for construction of college /school building and therefore the same indicated that the addition of capital expenditure was made from application of borrowed capital. Accordingly, it was opined by the Assessing Officer that the assessee's claim of capital expenditure being incurred from free funds and not borrowed capital was not correct. The Assessing Officer further re- iterated that the assessee had debited bank interest of Rs.4,04,00,243/- in the I&E A/c, and therefore considering the above facts, the amount of Rs.8,70,20,264/- claimed by the assessee towards application on account of capital expenditure i.e. additions for building was required to be disallowed and added to the total income.”

1 Notice u/s 148 of the Act was e-served on the assessee on 30.03.2021. As the assessee failed to respond, a letter dated 17.06.2021 was issued which also remained un-complied with. Thereafter, notice u/s 142(1) of the Act was issued on 26.11.2021 but the assessee again failed to respond. Another notice u/s 142(1) of the Act was issued on 11.02.2022 pursuant to the transfer of the assessee’s case to Regional Faceless Assessment Unit seeking detailed clarifications/submissions on the queries as observed in the reasons for reopening was sought. The notice(s) were successfully e-delivered to the registered email id of the assessee, however, remained un-complied by the assessee. The Ld. AO therefore

2 The Ld. CIT(A) after considering the submissions of the assessee (recorded in para 5.2 of the appellate order) partly allowed the appeal of the assessee. The Ld. CIT(A) called for a remand report from the Ld. AO under Rule 46A of the Income Tax Rules, 1962 vide order dated 21.01.2024, the compliance of which was sought by 11.03.2024. However, the Ld. AO failed to respond. The relevant observations and findings of the Ld. CIT(A) are reproduced below : “Decision

Ground is 1 is about the validity of re-opening of assessment since a regular assessment u/s 143(3) had already been completed in this case on 23.12.2018 wherein the total income has been accepted.

1 In this case original assessment u/s 143(3) was completed on 23.12.2018. The assessment was re-opened by issuing notice u/s 148 on 30.03.2021 which is within 4 years from the end of the relevant assessment year. It may be noted that if an assessment (even in a case where an assessment is already completed u/s 143(3)) is reopened within 4 years from the end of the assessment year, some of the rigors of section 147 is avoided. The relevant section as it stood in AY 2016-17 is reproduced below:

If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):

2 Upto four years, an assessment can be re-opened if the AO has 'reason to believe that income has escaped assessment. Since the assessment has been re-opened after duly recording the reasons by the AO, the assessment is on sound grounds. In Kelvinator of India [2010] 187 Taxman 312 (SC), the Hon Supreme Court held that u/s 147, the AO has power to re-assess and not no power to review. That is to say, he cannot revisit issues already considered in an earlier assessment. The appellant has not established that the AO had considered and decided the issues that were taken up in reassessment. Therefore, the assessment is valid. Ground 1 is dismissed.

3 While computing income, appellant claimed as application of income. repayment of loan amounting to Rs.6,68,20,391. The AO disallowed this claim on the ground that since the assets, for the acquiring of which loan was availed, have already been allowed as application in earlier years, allowing loan repayment as application would amount to double deduction. In support of this position the AO relied on section 11(6) which provides as under:

4 The assessee argues that loan taken, repayment of which is claimed as application, was fully applied for incurring capital expenditure in earlier years. The application towards capital expenditure in the current year (Rs. 13,37,30,869) does not include any amount from the loan. In earlier years the appellant had shown excess application over income.

5 The appellant has not denied that loan was availed for undertaking capital expenditure. It is also not denied that addition of such capital assets was claimed as application is earlier years. It follows that when assets have been allowed as application, to allow repayment of loan would amount to double deduction. The claim of excess application also does not work because even if the appellant undertook application exceeding income, application has to be claimed in the year in which it is incurred, there is no scope of accumulating it or setting it off in later years.

6 CBDT circular 100/1973 allows the repayment of loan as application of income. However, this circular does not appear to be applicable after the introduction of section 11(6) with effect from AY 2015-16. The explanatory memorandum accompanying the Finance Bill 2014 explains the logic of the amendment as under:

5. The second issue which had arisen was that the existing scheme of section 11 as wel as section 10(230) of the Income-tax Act provided exemption in respect of income when it is applied to acquire a capital asset Subsequently. while computing the income for purposes of these sections, notional deduction by way of depreciation etc was being claimed and such amount of notional deduction was not being applied for charitable purpose. As a result, double benefit was being claimed by the trusts and institutions Therefore, these provisions were required to be rationalized to ensure that double benefit is not claimed

5.1 Accordingly, the Income-tax Act has been amended to provide that under section 11 and section 10(230), income for the purposes of its application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year.

7 The basic logic of section 11(6) is that in respect of an asset two deductions cannot be claimed. If cost of the assets is claimed, then depreciation cannot be claimed. It follows that if cost of the asset is allowed as application, loan availed to purchase the asset cannot then be allowed. I find no infirmity in the finding of the AO. The disallowance of loan repayment claimed as application is upheld Grounds 2 and 3 are dismissed.

8 The AO pointed out that the appellant had claimed Rs.8.70.20,264 incurred in the construction of college building as capital application of income. Since this amount was incurred from loan availed from Punjab National Bank and Piramal Enterprises and not from the income for application, the AO held that the same was not allowable as application.

9 It is not in doubt that the capital expenditure was incurred towards the objects of the trust. Therefore, such expenditure has to be allowed as application of income. If the building is not allowed as application of income in the previous year, repayment of loan used for construction, would have to be allowed as application in the year of repayment. Following logic of the discussion on ground 2, the AO cannot take the position that loan repayment is not allowable as the assets have been allowed as application and then also claim that assets cannot be claimed as application as the same is from loan and not income.

10 The disallowance made by the AO is not sound. The same may be deleted Grounds 4 and 5 are allowed.

11 The AO has held that interest paid to banks (Rs.4,04,00,243) on account of loans availed does not amount to application of income. The logic of the AO is not clear from the assessment order. There is no clear discussion of this issue in the assessment order. The AO appears to believe that since loans are not part of the income for application interest paid on loans should not be claimed as application.

12 The finding of the AO is erroneous. Loans are availed to pursue the objects of the trust. So cost of such funds should logically be allowed as application of the income of the trust. Also interest on loans is paid from the income for application. The AO is directed to delete the addition. Ground 6 is allowed.

13 Grounds 7, 8, 9 are general/consequential and are not separately adjudicated.

In the result, appeal is partly allowed.”

The Revenue is aggrieved by the impugned order of the Ld. CIT(A) against the deletion of disallowance of capital expenditure of Rs.8,70,20,264/- made by the Ld. AO on the ground that the same has 6

The revised grounds of appeal filed by the Revenue are as under : “1. On the facts and circumstances of the case, the Ld. CIT (A) has erred in appreciating the fact that the AO has disallowed capital expenditure of Rs. 8,70,20,264/- primarily on the ground that the same has been incurred from the borrowed amount and not from the free funds available to the Appellant.

On the facts and circumstances of the case, the Ld. CIT (A) has erred in allowing capital expenditure of Rs.8.70.20.264/- incurred from borrowed funds, despite the fact that the Appellant has not offered this borrowed amount as Receipt in the I & E Account for the year under consideration which is contrary to the basic principle that the expenditure can only be made after the source is factored in as income and yet it has claimed application of income on the entire expenditure.

On the facts and circumstances of the case, the Ld. CIT (A) has erred in allowing claim of application of income on entire expenditure without considering the fact that it will lead to an artificial accumulation of income over the years.

The Appellant craves leave to add, alter or amend any or all the grounds of appeal.”

The Ld. DR contended that the assessment order has been passed ex-parte by the Ld. AO on account of assessee’s failure to respond to the notice(s) issued pursuant to the proceedings u/s 147 of the Act. He submitted that though the Ld. CIT(A) had called for the remand report from the Ld. AO but the same was not provided by him. Therefore, the Ld. CIT(A) was not justified in allowing the impugned claim of the assessee. Since, the Ld. AO has not examined/verified the claim of the assessee he prayed that the matter be set aside to the file of the Ld. AO.

The Ld. AR supported the order of the Ld. CIT(A), he, however, conceded to the request of the Ld. AR that the matter be set aside to the file of the Ld. AO as the assessee did not furnish any details/documents/information before the Ld. AO.

We have heard the Ld. Representatives of the parties and perused the material available on records. The facts are not in dispute. The case of the assessee was reopened u/s 147 of the Act and the reassessment proceedings were completed ex-parte by the Ld. AO due to the absence of 7

In the result, the appeal of the Revenue is allowed for statistical purposes.

अपील र्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The Pr. CIT concerned. 4. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, “बी” बेंच, पुणे / DR, ITAT, “B” Bench, Pune. 5. ग र्ड फ़ इल / Guard File. //सत्य दपि प्रदि//// आिेश नुस र / BY ORDER,