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Income Tax Appellate Tribunal, “B” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the order dated 12.01.2015 passed by Ld CIT(A)-1, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in dismissing the appeal of the assessee by making adverse observations with regard to the exemption claimed u/s 11 of the Act.
We heard the parties and perused the record. The assessee is a charitable trust and is registered u/s 12A of the Act. It filed its return of income for the year under consideration by claiming exemption u/s 11 and also deduction for accumulation of income as provided u/s 11(1)(a) and also u/s 11(2). The AO noticed that the assessee has earned income by way of rental income, interest income and income on sale of investments. The rental income was seen earned from four premises, out of which one premises was let out to M/s Idea Cellular Ltd. The AO noticed that the assessee has been earning these incomes year after year. Further the AO noticed that the assessee has claimed depreciation to the tune of Rs.69.93 lakhs and claimed the same as application of income.
2 Nandlal Tolani Charitable Trust
The AO took the view that the letting out of property to Idea Cellular Ltd is not related to the education activity, but a business activity of the assessee. Similarly he took the view that the receipt of interest income and income received on sale of investments are also business activities of the assessee. Accordingly he refused to apply the provisions of sec. 11(1) to the above said three types of income and assessed them separately. The AO also took the view that the depreciation claimed by the assessee would amount to allowing double deduction, since the cost of the assets have already been allowed as application of income. Accordingly he did not consider depreciation amount of Rs.69.93 lakhs as application of income. Accordingly the AO applied the provisions of sec. 11(1) and 11(2) on some part of income and did not apply the said provisions on the three types of income referred above. Accordingly he determined the total income of the assessee at Rs.142.22 lakhs.
The assessee challenged the assessment order by filing appeal before ld CIT(A). The first appellate authority expressed different views, which can be summarized as under:- (a) The assessee has filed prescribed form for accumulation of income u/s 11(2) of the Act with the following objective:-
“For pursuing the charitable objectives of trust including establishment of educational structures /buildings.”
The above objective is very vague and does not meet the mandatory requirements of sec. 11(2) of the Act.
(b) The income has to be computed under commercial principles. Hence the deduction @ 30% allowed by the AO against rental income u/s 24 of the Act should not have been allowed. Accordingly he made a revised working of total income of the assessee.
(c) The assessee has filed prescribed form for accumulation of income u/s 11(2) of the Act to the tune of Rs.125.26 lakhs. As per the revised working made by Ld CIT(A), there still remains income of Rs.72.94 lakhs
3 Nandlal Tolani Charitable Trust even after allowing deduction u/s 11(2) to the tune of Rs.125.26 lakhs. This difference amount has not been explained nor has it been accumulated further.
(d) Since the assessee has failed to comply with the requirements of sec. 11(2) and also did not explain the unutilized amount properly, the various grounds raised by the assessee are liable to be dismissed.
Accordingly he dismissed the appeal of the assessee.
A perusal of the order passed by Ld CIT(A) would show that the Ld CIT(A), in effect, did not discuss any of the issues raised by the assessing officer. Instead he has made his own observations about the compliance of provisions of sec. 11 and accordingly dismissed the appeal of the assessee. The Ld A.R submitted that the Ld CIT(A) had held in AY 2009-10 that the rental income and interest income cannot be considered as business activities of the assessee. In the year under consideration, the Ld CIT(A) has refused to follow his own order by observing that each year is different. We are unable to agree with the view taken by Ld CIT(A). There is no dispute with regard to the fact that the assessee has been receiving rental income, interest income and profit on sale of investments from the assets held by the assessee as part of the Charitable trust. All these assets have been purchased/invested in terms of requirements of sec. 11(5) of the Act or as application of income from out of trust funds only. Merely because these income are received year after year, the same does not mean that it shall constitute business activities of the assessee. The basic attributes of attached to “business activities” like commercial exploitation, risk taking, profit intention etc. are absent in the in the instant case. We also notice that the AO did not bring any material on record to support his view that these receipts constitute business receipts. In the case of DIT (Exemptions) Vs. Shri Vile Parle Kelavani Mandal (2015)(232 Taxmann.com 288), the Hon’ble Bombay High Court has held that the rental income generated by a trust and used for educational institution itself could
4 Nandlal Tolani Charitable Trust not be brought to tax. In our view, the facts of the present case, being identical, we are of the view that the view taken by tax authorities are not sustainable. Accordingly we set aside the orders passed by the tax authorities on this issue and direct the AO not to treat these three income as business income.
The next issue raised by the AO related to rejection of claim of depreciation. This issue has also been decided in favour of the assessee by the Hon’ble Bombay High Court in the case of CIT Vs. Institution of Banking Personnel Selection (264 ITR 110). Accordingly we direct the AO to allow the depreciation as application of income.
Even though the Ld CIT(A) has made observations about amounts accumulated u/s 11(1) and 11(2) and observed that the assessee is not eligible for exemption u/s 11 of the Act, he has not given any direction to the assessing officer in this regard. By making the above said observations, he has simply dismissed the appeal of the assessee. We also notice that the said observations would result in enhancement of income, in which case, certain prescribed procedures have to be followed. We notice that the Ld CIT(A) has not followed the mandatory procedures prescribed in this regard. Under these set of facts, we are of the view that the various observations made by Ld CIT(A) should be considered as academic discussions only and cannot be considered as direction given to the AO. Under these set of facts, we decline to comment upon the various observations made by him.
Apart from two main issues discussed above, the assessee has also urged certain grounds relating to mistakes committed by the AO while framing assessment order. We have noticed that the Ld CIT(A) has already observed that the assessing officer may be requested to rectify those mistakes in pursuance of petition filed before him. Accordingly we direct the AO to expeditiously dispose of the rectification petition filed by the assessee.
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Accordingly the various grounds urged by the assessee are disposed of in terms of discussions made supra.
In the result, the appeal of the assessee is treated as allowed. Order has been pronounced in the Court on 19.1.2018.