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Facts
The assessee challenged the order of the CIT(A) concerning additions made on account of depreciation and interest-free advances. The assessee argued that the CIT(A) exceeded his powers by directing the AO to verify depreciation claims and that the advances given were for charitable activities, not subject to notional interest.
Held
The Tribunal held that the CIT(A) has the power to confirm, reduce, enhance, or annul the assessment but not to set aside an issue. Regarding depreciation, the matter was restored to the AO for verification. For interest-free advances, the Tribunal ruled that since the advances were for charitable activities and no income was generated, the notional interest added by the AO was not permissible.
Key Issues
Whether the CIT(A) had the power to set aside the issue of depreciation claim, and whether notional interest on advances given for charitable activities is taxable.
Sections Cited
Sec 11(5), Sec 13(1)(c)(ii), Sec 13(2)(g), Sec 13(2)(h), Sec 251
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Income Tax Appellate Tribunal, JAIPUR BENCHES, ‘’SMC” JAIPUR
Before: Hon’ble SHRI SANDEEP GOSAINvk;dj vihy la-@ITA No.338/JP/2024
ORDER PER: SANDEEP GOSAIN, JM This appeal filed by the assessee is directed against order of the ld. CIT(A) dated 25-01-2024, National Faceless Appeal Centre, Delhi [ hereinafter referred to as (NFAC) ] for the assessment year 2015-16 raising therein following grounds of appeal. ‘’1. The Ld. CIT(A), NFAC has erred on facts and in law in directing the AO to check and verify as to whether assets on which depreciation of Rs.53,40,017/- has been claimed has been allowed as application of income in the previous year or not ignoring that he has no power to set aside an issue u/s 251 of the Act.
2. The Ld. CIT(A), NFAC has erred on facts and in law in holding that Rs.5,16,000/- given to Santosh Yadav and Rs.10,00,000/- given to Nitish Yadav RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR being specified person is not for the purpose of core activities of institution and thereby confirming the addition for the same. 3.The Ld. CIT(A), NFAC has erred on facts and in law in confirming the addition of Rs.8,64,110/- on account of interest free advances given to various persons ignoring that such advances were given in course of carrying out educational activity and there is no provision under the Act to tax notional income on interest free advances given.
2.1 Through Ground No.1, the Appellant has challenged the action of ld. CIT(A), NFAC in directing the AO to check and verify as to whether Assets on which depreciation has been claimed has been allowed as application of income in the previous year or not. 2.2 In this regard it has been pointed out by ld AR that CIT(A), NFAC has no power to set aside an issue under section 251 of the Income Tax Act. The appellant has also relied upon his written submissions. The relevant portion is reproduced here in below:- ‘’4. It is submitted that as per section 251 of the Act, the Ld. CIT(A) has power to confirm, reduce, enhance or annul the assessment. He has no power to set aside. The direction given by Ld. CIT(A) amounts to setting aside the issue. The CIT(A) has coterminous power with the AO and where the assessee has specifically claimed that it has not claimed the capital expenditure as application of income and this fact is available from the income tax returns filed with the department, he ought to have directed the AO to allow the claim of depreciation instead of setting it aside for verification which is beyond the powers conferred on him u/s 251 by the statute. In view of above, AO be directed to allow depreciation as application of income.’’ RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR 2.3 On the other hand ld.DR relied upon the orders passed by the revenue authorities. 2.4 After having heard the Counsels for both the parties and also perused the documents placed on record, judgement cited by the parties as well as orders passed by the revenue authorities, I noticed from the record that the issue involved before ld. CIT(A) NFAC was with regard to claim of depreciation of assets. In this regard, the Appellant itself has submitted that the assets in question were never claimed as an application of money in the preceding years and thus is entitled for depreciation. The ld. AR himself before ld. CIT(A), NFAC relied upon the decision of CIT Alwar in the case of, Himalaya Shiksha Samiti, FY 2013-14. The ld CIT(A) has directed the AO to verify whether such assets have been taken into account while determining the application of such assets in the income earned or not. Moreover in the present case, Assessee had filed balance sheet, income and expenditure accounts and depreciation chart and in these documents it is found that the huge amount has been spent by the Appellant trust in all these years for purchasing and acquiring of fixed assets. However it was also noticed that these documents for the financial year for financial year 2009-10 to 2011-12 are neither having signature of auditors nor chairman/accountant of the appellant trust. Therefore, the documents in the case of the Appellant furnished before ld. CIT(A),NFAC were not found to be reliable. The ld. CIT(A), NFAC after RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR evaluating the documents had furnished a finding that this issue requires verification and checking and therefore necessary directions were given to the AO for verification. However, now before the Bench, ld. AR has raised a plea that as per section 251 of the Income Tax Act, the ld. CIT(A) has no power to set aside the issue as he enjoys coterminous powers with the AO. Hence, the ld. AR wants a direction to the AO to allow depreciation as application of income. After analysing the entire facts and circumstances and particular facts of the present case more particularly taking into consideration the documents in the shape of balance sheet, income and expenditure account and depreciation chart, it was found that the huge amount has been spent by the Appellant trust in previous year with effect from financial year 2009-10 to 2011-12, but these documents were neither having signatures of auditors nor chairman or Accountant of appellant trust. Since the issue of claim of depreciation is a factual issue and requires verification and checking of the records which are filed and available with the AO, therefore in the fitness of things, it is appropriate to restore this issue to the file of AO with a direction to verify from the records as to whether such assets have been taken into account while determining the application of such assets in the income earned or not. Accordingly the Appellant trust should be given the benefit as per the provisions of section 11 of the Act. It is further directed that the AO while doing this check and verification of the records would also grant reasonable opportunity RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR of hearing to the Appellant before taking any decision. Accordingly this ground No. 1 raised by the appellant stands allowed for statistical purposes. 3.1 Now coming to Ground No. 2 wherein the appellant has challenged the decision of ld. CIT(A), NFAC in holding that Rs.5,16,000/- given to Santosh Yadav and Rs 10 lakhs given to Nitish Yadav being specified person is not for the purpose of core activities of Institution and thereby conforming the addition of the same. 3.2 During the course of hearing, the ld. AR relied upon his written submissions. The relevant portion is reproduced below:-
‘’1. The assessee has taken on lease land of Smt. Santosh Yadav for 30 years as per lease agreement dt. 03.12.2005 (PB 32-38). On this land assessee constructed the school building from where educational activities are carried out. As per the lease agreement assessee was to pay Rs.5 lacs as security money and the lease rent as may be decided from time to time.
The assessee has not paid the security deposit nor the rent after entering into the lease deed. Thereafter assessee paid Rs.10,16,000/- to Smt. Santosh Yadav in the year under consideration. In the books of accounts it was debited to her account. The AO at Pg 8 of the order held that out of this amount Rs.5 lacs is considered as towards security money and balance Rs.5,16,000/- as violation of section 11(5) of the Act so as to attract section 13(1)(c)(ii) r.w.s. 13(2)(g) & 13(2)(h) of the Act. Accordingly addition of Rs.5,16,000/- was made.
Similarly assessee advanced Rs.20 lacs to Sh. Nitesh Yadav on 21.11.2014 against supply of stone material. However, out of it Rs.10 lacs were returned back on 28.11.2014 and the balance amount was returned back on 31.03.2016 as the material could not be supplied due to non availability of required quantity. The AO at Pg 8, Para c of the order held it to be violation of section 11(5) of the Act so as to attract section 13(1)(c)(ii) r.w.s. 13(2)(g) & 13(2)(h) of the Act.
The Ld. CIT(A), NFAC at Para 5.4, Pg 14 of the order observed that the advance so given is not for the purpose of core activities of the institution. By granting such advances a possibility has been created for diversion of funds to the specified person. Accordingly the addition made by AO is confirmed.
It is submitted that both the lower authorities have incorrectly invoked section 11(5) of the Act. Section 11(5) prescribes the modes of investing or depositing the money referred to in clause (b) of section 11(2). Section 11(2) provides that where 85% of the income is not applied to charitable purpose but is accumulated or set apart, the income so accumulated or set apart shall not be included in the total income if it is invested or deposited in the modes specified in section 11(5). Thus for applicability of section 11(5), there has to be an application in Form No.10 for accumulation of income. In the present case assessee has not filed any application for accumulation of income and therefore section 11(5) is not attracted. So far as section 13(1)(c)(ii) is concerned, the same applies where any income or property of the trust during the PY is used or applied directly or indirectly for the benefit of specified person. In the present case, amount was given to Smt. Santosh Yadav and Sh. Nitesh Yadav during the year under consideration for the activities of the trust. The same is either subsequently adjusted against the services provided or returned back as the purpose for which it was given was not fulfilled. Therefore, it cannot be said that there is any diversion of funds. On this amount the AO has calculated the notional interest and made addition for the same as discussed in the subsequent ground. There is no provision under the Act which provides that if advance is given to the specified person it would be added to the income. Reliance in this connection is placed on the decision of Hon’ble ITAT Chennai Bench in case of DDIT(Exemptions) Vs. Vels Institute of Science, Technology & Advanced Studies (2016) 157 ITD 237. In this case assessee, a charitable educational institution, was registered u/s 12AA. It intended to establish a medical college. It entered into an agreement with managing trustee for purchase of his land and paid certain amount to him in advance. Subsequently said agreement was cancelled and managing trustee returned principal amount along with interest. Assessee claimed exemption u/s 11. AO denied exemption holding that payment of advance to managing trustee was in excess of market value of land and money was advanced without any adequate security and therefore, there was violation of section 13(1)(c). It was held that since it was nobody’s case that the price agreed between the managing trustee and assessee was not actually the agreed price, observation of the AO that the value of the land was much less than what was agreed between the parties cannot stand in the eye of law. When money was advanced to managing trustee in pursuance of agreement for sale and after cancellation of agreement entire principal amount RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR along with interest was returned, it could not be said that money was diverted for interest of managing trustee. Therefore, there was no violation of section 13(1)(c). Hence addition made by AO and confirmed by Ld. CIT(A) is not as per the provisions of the Act and the same be directed to be deleted.’’ 3.3 On the other hand ld. DR appearing on behalf of the revenue relied upon the orders passed by the revenue authorities 3.4 I have heard the counsels for both the parties and perused the material placed on record, judgements cited before the Bench and the orders passed by the revenue authorities. After evaluating the entire records, I found that the additions were sustained by the revenue authorities in the case of Santosh Yadav and Nitish Yadav by holding that the amount given by the trust to these respective persons were in violation of section 11(5) of the Act. However in my view, both the lower authorities have incorrectly invoked Section 11(5) of the Act. Section 11(5) prescribes the modes of investing or depositing the money referred to in clause (b) of section 11(2). Section 11(2) provides that where 85% of the income is not applied to charitable purpose but is accumulated or set apart, the income so accumulated or set apart shall not be included in the total income if it is invested or deposited in the modes specified in section 11(5). Thus for applicability of section 11(5), there has to be an application in Form No.10 for accumulation of income. In the present case assessee has not filed any application for accumulation of income RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR and therefore section 11(5) is not attracted. So far as section 13(1)(c)(ii) is concerned, the same applies where any income or property of the trust during the PY is used or applied directly or indirectly for the benefit of specified person. In the present case, amount was given to Smt. Santosh Yadav and Sh. Nitesh Yadav during the year under consideration for the activities of the trust. The same is either subsequently adjusted against the services provided or returned back as the purpose for which it was given was not fulfilled. Therefore, it cannot be said that there is any diversion of funds. On this amount the AO has calculated the notional interest and made addition for the same as discussed in the subsequent ground. There is no provision under the Act which provides that if advance is given to the specified person it would be added to the income. Reliance in this connection is placed on the decision of Hon’ble ITAT Chennai Bench in case of DDIT(Exemptions) Vs. Vels Institute of Science, Technology & Advanced Studies (2016) 157 ITD 237. In this case assessee, a charitable educational institution, was registered u/s 12AA. It intended to establish a medical college. It entered into an agreement with managing trustee for purchase of his land and paid certain amount to him in advance. Subsequently said agreement was cancelled and managing trustee returned principal amount along with interest. Assessee claimed exemption u/s 11. AO denied exemption holding that payment of advance to managing trustee was in excess of market value of land and money was advanced without any adequate RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR security and therefore, there was violation of section 13(1)(c). It was held that since it was nobody’s case that the price agreed between the managing trustee and assessee was not actually the agreed price, observation of the AO that the value of the land was much less than what was agreed between the parties cannot stand in the eye of law. When money was advanced to managing trustee in pursuance of agreement for sale and after cancellation of agreement entire principal amount along with interest was returned, it could not be said that money was diverted for interest of managing trustee. Therefore, there was no violation of section 13(1)(c). Hence, in this view of the matter, the Ground No. 2 raised by the assessee stands allowed. 4.1 Now coming to Ground No. 3 wherein the appellant has challenged the order of ld. CIT(A),NFAC wherein additions on account of interest free advances given to the various persons were confirmed. 4.2 During the course of hearing, the ld. AR relied upon the written submissions and the relevant portion is reproduced here in below. ‘’1. The AO at Pg 11-12 of its order observed that assessee has given advance to specified person and therefore on such advances he computed interest @ 12% and made addition of Rs.8,64,110/- as per table provided at Pg 12 of the assessment order.
The Ld. CIT(A), NFAC confirmed the addition made by the AO as per the finding given at Para 6.3, Pg 15 of the order.
RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR 3. It is submitted that advances were given in course of carrying out the charitable activity. The purpose for which the advances are given is tabulated as under:- Name of Amount Purpose of advance person advanced Ashok Rs.2,50,000/- He was advanced Rs.2,50,000/- on 26.03.2015 against supply of Kumar stone but since he could not supply the required quantity due to Bohra non availability, he return back the same on 08.04.2015. Thus amount remained with him only for 13 days. His confirmation and the ledger account is at PB 22-24. Hence it is incorrect to hold that advance was not given for the activities of the assessee. Chanchal Rs.15,00,000/- Advance was given to it on 19.03.2013 against which cement Sales was supplied by it during FY 2016-17. Copy of confirmation, Agencies ledger account and the bills of supply is at PB 25-31. Thus the advance was given for the activities of the assessee. Priyanka Rs.3,00,000/- She is employee of the assessee and amount was advanced Yadav against the salary. It was added by AO. However, the Ld. CIT(A) at Para 5.3 while deleting the addition held that advance given is not very high considering the market conditions and the average remuneration of the teachers. Thus the advance is given for the activities of the assessee. Santosh Rs.5,16,000/- She was advanced Rs.10,16,000/- during the year out of which Yadav AO accepted that Rs.5 lacs was against the security amount. The remaining Rs.5,16,000/- was adjusted against the rent payable to her as explained in Ground No.2 above. Copy of ledger account is at PB 39-42. Thus the advance is given for the activities of the assessee. Sarjeet Rs.10,00,000/- He was advanced this amount on 28.10.2013 against supply of Yadav computer material but due to non availability of required quantity he returned back the same on 30.11.2015. The confirmation and ledger account is at PB 43-45. Thus the advance is given for the activities of the assessee. Rama Rs.17,50,000/- This amount was advanced against supply of stone material on Udyog 27.02.2015 & 07.03.2015 but since the material could not be supplied it was returned back on 28.09.2015, 13.12.2016 & 19.05.2017. The confirmation and ledger account is at PB 46- 49. Thus the advance is given for the activities of the assessee. Murlidhar Rs.10,00,000/- This amount was advanced against bus services on 28.10.2013 but since services could not be supplied it was returned back on 27.06.2016. The confirmation and ledger account is at PB 50- 52. Thus the advance is given for the activities of the assessee. Nitesh Rs.10,00,000/- He was advanced Rs.20 lacs on 21.11.2014 against supply of Yadav stone material but he could not supply the same due to non RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR availability of the required quantity. Accordingly he returned back Rs.10 lacs on 28.11.2014 and Rs.10 lacs on 30.03.2016. The confirmation and ledger account is at PB 53-55. Thus the advance is given for the activities of the assessee.
From the above it can be noted that the amount was advanced in course of carrying out the charitable activity. Therefore, the notional interest added by AO is not as per law. For this purpose reliance is placed on the following cases:- B and A Plantations and Industries Ltd. Vs. CIT242 ITR 22 (Gauhati) (HC) When there is no finding that assessee had in fact received interest on advance made to a sister concern or the debtor paid the interest to assessee; notional interest cannot be charged to tax CIT Vs. Shoorji Vallabhdas And Co. (1962) 46 ITR 144 (SC) It was held that Income tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income, if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income " which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that, effect might,, incineration circumstances, have been made in the books of, account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account A mere book- keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a. gift by the assessee firm to the manager companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated.
Without prejudice to above, even the calculation of interest in case of Chanchal Sales Agencies, Sarjeet Yadav and Murlidhar where interest is calculated for 732 days, 519 days and 519 days which is more than 365 days is apparently incorrect. Even if interest is to be calculated, it can be only for the year under consideration, i.e. for 365 days. Thus the excess interest calculated works out at Rs.2,82,246/- as under:-
RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR Name of Amount Rate of No. of Interest Correct Difference person advanced interest days amount as interest (in Rs.) (in Rs.) as per per AO (in amount for AO Rs.) 365 days (in Rs.) Chanchal 15,00,000/- 12% 732 3,60,986/- 1,80,000/- 1,80,986/- Sales Agencies Sarjeet 10,00,000/- 12% 519 1,70,630/- 1,20,000/- 50,630/- Yadav Murlidhar 10,00,000/- 12% 519 1,70,630/- 1,20,000/- 50,630/- Total 2,82,246/- In view of above, addition confirmed by Ld. CIT(A) be deleted. 4.3 On the other hand, the ld.DR relied upon the orders passed by the Revenue Authorities. 4.4 I have heard the counsels for both the parties and also perused the material placed on record, judgement cited before the Bench and also the orders passed by the revenue authorities on this issue. From the records I found that the AO in his order observed that Appellant had given advance to specified persons and therefore on such advances he computed interest at the rate of 12% and accordingly made additions where as it was specifically argued by ld. AR that the advances were given in the course of carrying out the charitable activities and in this regard the purpose for which the advances were given has also been tabulated in the chart placed on record. After analysing the purposes contained in the said chart, it can safely be concluded that the amount was advanced in the course of carrying out the charitable activities therefore the notional interest in my view could not have been RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR added by the AO as per law. For this legal preposition I rely upon the decisions in the case of B and A Plantations and Industries Ltd. Vs. CIT242 ITR 22 (Gauhati) (HC) wherein it has been held that when there is no finding that assessee had in fact received interest on advance made to a sister concern or the debtor paid the interest to assessee; notional interest cannot be charged to tax and also in the case of CIT Vs. Shoorji Vallabhdas And Co. (1962) 46 ITR 144 (SC) wherein it was held that Income tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income, if income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a "hypothetical income " which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that, effect might,, incineration circumstances, have been made in the books of, account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the RAATH VIDYAPEETH VS ITO (EXEMPTION) WARD-ALWAR terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a. gift by the assessee firm to the manager companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. Therefore considering the entire facts and circumstances as well as discussion made in the above Paras and also taking into consideration the legal preposition I direct the AO to delete the additions. Hence this ground No. 3 raised by the appellant stands allowed. 5.0 In the result, the appeal of the assesee is partly allowed with no orders as to costs. Order pronounced in the open court on 11/09/2024.