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Facts
The assessee trust's assessment for AY 2016-17 was reopened under Section 147 after it initially filed a NIL return. The AO added substantial amounts, contending that loan repayments, capital expenditures from borrowed funds, and bank interest claimed as application of income were not allowable, either due to double deduction under Section 11(6) or because borrowed funds are not considered income for application. The assessee's non-compliance led to an ex-parte assessment, which the CIT(A) partly allowed, leading to the Revenue's appeal.
Held
The Income Tax Appellate Tribunal noted the assessee's consistent failure to respond to notices and provide information to the AO, and also the AO's failure to furnish a remand report to the CIT(A). Considering these procedural lapses and in the interest of justice, the Tribunal set aside the CIT(A)'s order and remanded the entire matter back to the AO for fresh adjudication on merits, with directions for the assessee to provide all necessary details.
Key Issues
1. Validity of the reopening of assessment. 2. Whether repayment of loans and capital expenditure incurred from borrowed funds can be treated as application of income under Sections 11 and 11(6). 3. Whether interest paid on loans taken for trust activities can be allowed as application of income.
Sections Cited
12A, 11, 147, 143(3), 11(6), 142(1), 144, 144B, 148, 153, 139, 10(23C)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
आदेश / ORDER
PER ASTHA CHANDRA, JM :
The appeal filed by the Revenue is directed against the order dated 25.03.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)”] pertaining to Assessment Year (“AY”) 2016-17.
Briefly stated, the facts are that the assessee trust is registered under Bombay Public Trust Act, 1950 and also under the Societies Registration Act, 1860 and is engaged in the education activities. The assessee obtained registration u/s 12A of the Income Tax Act, 1961 (the “Act”) on 02.02.2011. For AY 2016-17, the assessee trust filed its return of income on 30.09.2016 declaring total income at Rs.Nil. Scrutiny assessment was completed by the Ld. AO on 23.12.2018 determining the total income at Rs.Nil by accepting the return of income of the assessee for the reason that the income arriving from the activities of the trust has been applied on the objects of the trust and therefore exempt u/s 11 of the Act. Subsequently, the case of the assessee was reopened u/s 147 of the Act for the following reasons which formed the basis and reason to believe for the Ld. Assessing Officer (“AO”) of such income being escaped assessment. The relevant extract of para 2.1 and 2.2 of the Ld. CIT(A)’s order is reproduced below : “2.1 The Assessing Officer, subsequent to the assessment made u/s 143(3) dated 23/12/2018 found that the assessee had claimed application of income on account of repayment of loans which were availed as capital expenditure incurred during FYs 2009-10 to 2013-14. The Assessing officer also noticed that the assessee had not claimed depreciation on such assets during earlier assessment years, which indicated to the Assessing Officer that the assessee had claimed exemption in respect of acquisition of capital asset as per the provisions of section 11(6) of the Act. Since the assessee had already availed the exemption towards acquisition of capital assets which was acquired from loan fund, the application on account of the repayment of loan claimed of Rs.6.68,20,391/-was not found to be in order by the Assessing Officer who held that the said claim was tantamount to double deduction. It was also found by him that an amount of Rs.4,04,00,243/- was debited by the assessee Trust towards bank interest in the Income and Expenditure Account which was incorrectly claimed as application of income towards the objects of the Trust. Therefore, a total amount of Rs. 10,72,20,634/- according to the Assessing Officer, had been incorrectly claimed by the assessee as application of income and therefore the same was required to be disallowed being under assessed in the assessment made earlier. 2.2 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.”
2.1 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 construed that the assessee has neither concurred on the income escaped assessment nor has furnished cogent documents to object the re-opening. In the absence of any response received by the assessee, the Ld. AO passed the ex-parte order based on tangible material available on record u/s 147 r.w.s. 144 read with section 144B of the Act thereby making addition of Rs.15,38,40,655/- being the total amount of the application of income of Rs.6,68,20,391/- claimed by the assessee on account of repayment of loan being disallowed and amount of Rs.8,70,20,264/- claimed by the assessee towards application of income on account of capital expenditure, for the reasons reproduced above. It is against this ex-parte order of the Ld. AO that the assessee went into appeal before the Ld. CIT(A) challenging the reopening of assessment.
2.2 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 Validity of Proceedings 6. 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. 6.1 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: 147. 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): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub- section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: 6.2 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. Loan repayment as application. 6.3 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: 11(6) In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income 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 this section in the same or any other previous year. 6.4 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. 6.5 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. 6.6 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: 7.5. 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 and such notional amount does not get excluded from the condition of application of income for charitable purpose. 7.5.1 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. 6.7 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. Capital Expenditure 6.8 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. 6.9 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. 6.10 The disallowance made by the AO is not sound. The same may be deleted Grounds 4 and 5 are allowed. Interest paid as application 6.11 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. 6.12 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. 6.13 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 been incurred from the borrowed funds and not from the free funds available to the assessee and the assessee has not offered this borrowed amount as receipt in the Income and Expenditure Account for the relevant AY 2016-17. The Revenue is also aggrieved by the allowance of the claim of application of income on entire expenditure by the Ld. CIT(A).
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.
2. 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.
3. 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.
4. 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.
7. 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 response to the notice(s) issued to the assessee seeking the information/details regarding the impugned addition made by the Ld. AO. The Ld. AR has fairly conceded that the assessee failed to file the requisite information/details before the Ld. AO. We note that the Ld. CIT(A) called for the remand report but the Ld. AO failed to respond. The Revenue is therefore aggrieved by the order of the Ld. CIT(A) in allowing the capital expenditure of Rs.8,70,20,264/- which was added to the income of the assessee by the Ld. AO for the reasons reproduced above in this order. Considering the totality of the facts and in circumstances of the case, we deem it fit and in the interest of justice and fair play to set aside the order of the Ld. CIT(A) and remand the matter back to the file of the Ld. AO for adjudicating the impugned issue afresh on merits as per facts and law after giving adequate opportunity of hearing to the assessee. The assessee is hereby directed to file all the requisite details/information as may be called upon by the Ld. AO during the fresh proceedings before him. We direct and hold accordingly. The grounds raised by the Revenue are therefore allowed for statistical purposes.
In the result, the appeal of the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 14th January, 2025.
Sd/- Sd/- (R.K. Panda) (Astha Chandra) JUDICIAL MEMBER VICE PRESIDENT पुणे / Pune; दिन ांक / Dated : 14th January, 2025. रदि आदेश की प्रधिधलधप अग्रेधर्ि / Copy of the Order forwarded to : अपील र्थी / The Appellant. 1. प्रत्यर्थी / The Respondent. 2. 3. The Pr. CIT concerned. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, “बी” बेंच, 4. पुणे / DR, ITAT, “B” Bench, Pune. ग र्ड फ़ इल / Guard File. 5. //सत्य दपि प्रदि// True Copy// आिेश नुस र / BY ORDER,
िररष्ठ दनजी सदचि / Sr. Private Secretary आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune