KUPPAM EDUCATIONAL SOCIETY,KUPPAM vs. INCOME TAX OFFICER (EXEMPTIONS), TIRUPATI

आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M:

“ 1. The ground on which the assessing officer has disallowed the depreciation claim of the appellant society as an application of income is not at all sustainable for the simple reason that the depreciation is allowable to every assessee and it is not right on part of the assessing officer to state that the depreciation is allowable only in dealing with business profits. This has never been the provision of the law and depreciation is expenditure just like any other expenditure which ought to be allowed to the appellant society. Moreover various courts have held that the depreciation is a valid application of income and the jurisdictional ITAT, HYD has very recently upheld the claim of depreciation. The assessing authority is bound by the ITAT, HYD and the claim depreciation is ought to be allowed by the appellate authority 2. All the bank transactions and the banking transactions have been duly disclosed and accounted for in the books of accounts of the appellants and as such there are no undisclosed bank accounts and the addition made by the assessing authority requires to be deleted by the appellate authority 3. The credit is transferred from the principal account and the dame is deposited as fixed deposit in the state bank of Mysore. But in the books of accounts it is treated as that the fixed deposits is made directly by principal account, there is no non disclosure of the credit in bank. Hence it is prayed your honourable appellate authority to delete the addition.

6. The assessing officer said that the bills that we are produced are bogus that the seller is not in the location and tampered. The purchases are purchased from the suppliers and the observation of the assessing officer is not genuine as the entity does not exist in the given address is not at all relevant to us. We cannot ensure the continuity of the business. Hence it prayed your honourable appellate authority to delete this addition. The said purchase is supported by bills/Invoices issued by the supplier and they carry the relevant VAT registration numbers etc. As such the said purchases are genuine and made in the normal course of the appellant society's activities. As such there are no bogus bills/Purchases so as to be subjected to an addition on the ground.

4. The assessee also raised the following additional ground before us:

“ Additional Ground (Ground No 8): 8. The Learned Assessing Officer (Ld. AO) has erred on facts of the case by making additions of the total adjustments without considering the loss computed in the return filed as per the provisions of the Income Tax Act, 1961.”

5. Ld. AR submitted that the additional ground so filed are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). The prayer for admission of additional ground noted above which are not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 owing to the fact that objections raised in additional ground are legal in nature for which relevant facts are stated to be emanating from the existing records.

7. The assessee raised as many as 7 grounds in this appeal and also has raised one additional ground before us.

8.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who dismissed the claim of the assessee as

per his observation under para no. 5.1.3 of his order, which is reproduced as under:

“ 5.1.3. DECISION:- The appellant claimed depreciation of Rs. 1,77,53,859/- which was debited to the Income & Expenditure Account and the same was treated as application of income. During the assessment proceedings, the AO asked the appellant to show cause as to why the same should not be considered as application od and of income. In response to the same, the appellant claimed that depreciation of Rs.1,77,53,859/- was an expenditure incurred by it towards wear & tear of the fixed assets of the society and hence the same should be considered as application of income. However the AO noted that acquisition of assets was already treated as application of income and hence depreciation of the same assets again can not be treated as application of income. If depreciation on such assets is claimed simultaneously, so much of depreciation allowed will generate income outside the books of accounts. Therefore, the AO has correctly disallowed the depreciation.

In view of the facts narrated above, the contention of the appellant society is wood hereby rejected and Ground No. 1 is dismissed.”

8.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR submitted that the Ld. AO disallowed Rs.1,77,53,859/- on account of claim of depreciation, contending that the assessee has already claimed the amount of investment made in fixed assets as application of income and the allowance of depreciation on the same fixed assets will result in allowance of double deduction to the assessee. In this regard, the Ld. AR submitted that the allowance of depreciation under similar cases has been restricted u/s. 11(6) of the Act w.e.f. 1.4.2015 i.e. w.e.f. A.Y. 2015-16. Hence for the year under consideration the provisions u/s. 11(6) of the Act are not applicable to the assessee. Therefore, the disallowance made by the Ld. AO is bad in law and is required to be deleted. To justify their claim, the Ld. AR also relied on the decision of Hon’ble Supreme Court in the case of Commissioner of Income Tax v/s Rajasthan and Gujarati Charitable Foundation Poona, 402 ITR 441,in which the Hon’ble Supreme Court held that depreciation should be allowed as a deduction while computing income for a charitable trust, even though the acquisition of the asset had already been treated as an application of income. The hon’ble Supreme Court also held that the restriction imposed by section 11(6) of the Act is prospective in nature and will be applicable w.e.f.

A.Y. 2015-16. Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

8.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

8.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. In the case of the assessee, the Ld. AO disallowed Rs.1,77,53,859/- on account of claim of depreciation, contending that the assessee has already claimed the amount of investment made in fixed assets as application of income and the allowance of depreciation on the same fixed assets will result in allowance of double deduction to the assessee. In this regard, it is relevant to mentioned here that, the allowance of depreciation under similar cases has been restricted u/s. 11(6) of the Act w.e.f. 1.4.2015 i.e. w.e.f. A.Y. 2015-16. Similar issue was also came before Hon’ble Supreme Court in the case of Commissioner of Income Tax v/s Rajasthan and Gujarati Charitable Foundation Poona(Supra), in which the Hon’ble Supreme Court held that depreciation should be allowed as a deduction while computing income for a charitable trust, even though the acquisition of the asset had already been treated as an application of income.

The hon’ble Supreme Court also held that the restriction imposed by section 11(6) of the Act is prospective in nature and will be applicable w.e.f. A.Y. 2015-

Accordingly, we delete the disallowance made by the Ld. AO amounting to Rs.1,77,53,859/- on account of claim of depreciation.

8.5 Hence the Ground No.1 of the assessee is allowed.

9.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who affirming the observation of the Ld. AO, dismissed the claim of the assessee.

9.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR innocently accepted before the revenue authority and before us that it is true that all the impugned five bank accounts were not disclosed in the audited financial statements of the assessee. He further submitted that, although the impugned five bank accounts were not disclosed in the financial statements of the assessee, the effect of the total income and expenditure corresponding to debit and credit entries of those impugned five bank accounts had been considered in the profit and loss account of the assessee. Hence the addition made by the Ld. AO on this account resulted in double taxation in the hands of the assessee, which is bad in law and therefore liable to be delete. Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

9.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

9.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. In support of their submission, the Ld. AR brought our attention to page number 27 of the PB and demonstrated, how the debit and credit entries of those five impugned bank accounts had been considered in the preparation of the profit and loss account of the assessee. However the Ld. AR accepted that some amounts still remained to be accounted for in the financial statement of the assessee. The working of the amount which have been considered in the preparation of the profit and loss account of the assessee and which still remained to be accounted for, require verification from the records and books of the accounts of the assessee. Keeping in our mind the principle of natural justice, so that, there should not be any double taxation in the hands of the assessee, we remand the matter to the Ld. AO with the direction to verify the contention of the assessee afresh and if any amount has already been considered by the assessee in the financial statements and already been offered to tax, to delete the addition to such extent, so that there should not be any double taxation in the hands of the assessee. It is needless to mention that the Ld. AO must provide opportunity of being heard to the assessee before deciding this issue.

Accordingly, we partly allow the appeal of the assessee for statistical purpose.

9.5 Hence the Ground No.2 of the assessee is partly allowed for statistical purpose.

10.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who affirming the observation of the Ld. AO, dismissed the claim of the assessee.

10.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR innocently accepted before the revenue authority and before us that it is true that one bank account of the assessee with the State bank of Mysore had not been disclosed in the audited financial statements of the assessee. He further submitted that, although the impugned bank account was not disclosed in the financial statements of the assessee, the effect of the debit and credit entries of that bank account had been considered in the financial statements of the assessee. Hence the addition made by the Ld. AO on this account is bad in law and therefore liable to be delete. Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

10.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

10.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. The Ld.AR submitted that, although the impugned bank account was not disclosed in the financial statements of the assessee, the effect of the debit and credit entries of that bank account had been considered in the financial statements of the assessee.

He further submitted that in effect, there was no undisclosed credits in books of accounts, because first the amount of Rs.50,00,000/- transferred from KEC principal account No:510940727 to State Bank of Mysore account No:

54038400732 and then two fixed deposits of Rs.25,00,000/- each were made with the State bank of Mysore. However in the books of accounts, it had been shown that the fixed deposits were directly made from principal account. The contention of the assessee, require verification from the records and books of the accounts of the assessee. Keeping in our mind the principle of natural justice, so that, there should not be any unlawful addition in the hands of the assessee, we remand the matter to the Ld. AO with the direction to verify the contention of the assessee afresh and decide the same as per law, so that there should not be any unlawful addition in the hands of the assessee. It is needless to mention that the Ld. AO must provide opportunity of being heard to the assessee before deciding this issue. Accordingly, we allow the appeal of the assessee for statistical purpose.

10.5 Hence the Ground No.3 of the assessee is allowed for statistical purpose. 11. Ground No.4 of the assessee relates to addition on account of Cash Deficit of Rs. 89,87,318/- in books of accounts of the assessee. The brief facts with regard to this ground are that, the Ld. AO found cash deficit in the cash book of 6 divisions of the assessee and added the same to the total income of the assessee.

11.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who affirming the observation of the Ld. AO, dismissed the claim of the assessee.

11.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The submission of the Ld. AR in this regard was in two fold. In their first argument, Ld.AR submitted that the assessee was maintaining separate set books of accounts for each division of educational institution, and all the divisions covered under the single society. The cash balance in one division was utilized by other division on need basis and such utilization once in a while was offset at a later date as and when the fund is available. As such, the cash deficit was only an internal accounting aspect and it did not represent the physical deficit in any way. Hence the addition made by the Ld. AO on this account is bad in law and therefore liable to be delete. Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

11.3 In their alternate argument, Ld.AR submitted that if the bench is not convinced with their first argument, then their alternate argument may kindly be considered by the bench. In this regard the Ld. AR submitted that the Ld. AO made addition to the total income of the assessee by making summation of cash deficit of each day during the year. The Ld. AR further submitted that as

per the settled legal position only the peak balance of the cash deficit during the year should be added to the total income. In support of their argument the Ld. AR place their reliance on decision of co-ordinate bench of ITAT in the case of Bandi Sadanandam v/s Income Tax Officer, for A.Y. 2010- 11 dated 03/05/2017, wherein the ITAT held at para no. 7 of their order as under :

“7. We have considered rival contentions and perused the orders of the authorities.Admittedly, Assessee is not in a position to justify fully the large number of deposits. Assessee before CIT(A) furnished certain sources for cash deposits and withdrawals, particularly amounts borrowed by cheques and drawn in cash. Considering that there is no allegation that Assessee has made unexplained investments and/or indulging any business, there is nothing on record to say that the withdrawals cannot be a source of subsequent deposits. In these circumstances, Assessee request for bringing to tax the peak credits can be accepted. Even though this working is not verifiable by us in the absence of complete details of domestic expenditure or expenditure which is in nature of outgoing out of the withdrawls and the Receipt-Payment statement. Since this aspect was not examined by A.O, we set aside the issue to the file of the A.O to examine the peak credit, based on receipts and payments statement of Assessee and the consolidated deposits and withdrawals in the five banks and to bring to tax only the amount of peak credit / deficit cash as the case may be. Assessee should be given due opportunity by AO to file necessary details. The grounds raised by Assessee are accordingly considered allowed.”

11.4 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

11.5 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. We are not in agreement with the first submission of the assessee that the cash balance in one division was utilized by other division on need basis and such utilization once in a while was offset at a later date as and when the fund is available and as such, the cash deficit was only an internal accounting aspect and it did not represent the physical deficit in any way. In our considered view, once a deficit balance arises in the cash book, it is only on account of the expenses incurred out of unaccounted cash only and no subsequent introduction of cash can make good the earlier balance of cash deficit. Hence in our opinion the contention of the assessee that the cash balance in one division was utilized by other division on need basis and such utilization once in a while was offset at a later date as and when the fund is available is not acceptable and we dismiss this contention of the assessee.

11.6 Now coming to the alternate submission of the assessee, we are in agreement with the submission of the assessee that if there were deficit cash balances on different dates during any year, only the peak balance of the cash deficit during the year should be added to the total income. The similar issue was came before the co-ordinate bench of ITAT in the case of Bandi Sadanandam v/s Income Tax Officer (Supra), wherein the ITAT was also of the same view. Hence respectfully relying on the decision of the co-ordinate bench of ITAT in the case of Bandi Sadanandam v/s Income Tax Officer (Supra),we hold that, the peak balance of the cash deficit during the year should be added to the total income of the assessee. Therefore we remand the matter to the Ld. AO with a direction to examine the peak credit/deficit cash, based on receipts and payments statement of assessee of all the five division of the assessee and to bring to tax only the amount of peak credit / deficit cash. It is needless to mention that the Ld. AO must provide opportunity of being heard to the assessee before deciding this issue. Accordingly, we allow the alternate ground of the assessee for statistical purpose.

11.7 Hence the Ground No.4 of the assessee is partly allowed for statistical purpose.

12.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who affirming the observation of the Ld. AO, dismissed the claim of the assessee.

12.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR brought our attention to page number 45 of PB and submitted that the difference is due to timing difference in passing the entry in the books of the assessee and its division. In fact there is no escapement of income due to such difference. Hence the addition made by the Ld. AO on this account is bad in law and therefore liable to be delete. Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

12.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

12.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. On perusal of page number 45 of the PB and the corresponding Ledger accounts, we came to know that there was a opening difference of Rs.47,00,000/- in the account of the assessee and it's KFC division, for which no proper explanation are provided by the Ld. AR. Therefore we did not find any merits in the submission made by the Ld. AR. Accordingly, we dismiss this ground of the assessee.

12.5 Hence the Ground No.5 of the assessee is dismissed.

13.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who affirming the observation of the Ld. AO, dismissed the claim of the assessee.

13.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR submitted that the purchases were made from the genuine suppliers and the observation of the Ld. AO that the entity did not exist at the given address was not genuine. The Ld. AR also submitted that the continuity of the business can not be ensured. He also submitted that all the purchases were supported by bills/Invoices issued by the supplier and they carried the relevant VAT registration numbers etc. As such the said purchases were genuine and were made in the normal course. As such there were no bogus bills/Purchases so as to be subjected to an addition on that ground.

Hence the Ld. AR prayed that this ground raised by the assessee be allowed.

13.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.

13.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. As pointed out by the Ld. AO in his order, there were many discrepancies with regards to purchases for Rs. 70,29,310/- e.g. the amount of the bills were tempered, the seller was not found at the given address, the payments were made through bearer cheques on the name of individuals which were identical with the first name of the firm from which the purchases were made, the payments were withdrawn in cash from local bank however many purchasers were located at other places. The Ld. AR did not able to substantiate the discrepancies notice by the Ld. AO i.e. why the amount of the bills were tempered, why the seller were not found at the given address, why the payments were made through the bearer cheques on the name of individual and not on the name of the firm from whom the purchases were made, why the cash had been withdrawn against the bearer cheques from a local bank in spite of the facts that the seller were located at different outside places. Therefore we did not find any merits in the submission made by the Ld. AR. Accordingly, we dismiss this ground of the assessee. 13.5 Hence the Ground No.6 & 7 of the assessee are dismissed.

14.1 Per contra, the Ld. DR did not make any objection against the submission made by the Ld. AR.

14.2 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. The Ld. AR brought our attention to the computation of income filed by the assessee for the year under consideration. There is no dispute about the fact that the assessee had applied funds in excess of their income during the year under consideration, which resulted into loss to the assessee. Agreeing to the submission made by the Ld. AR, we direct the Ld. AO to set off the amount of loss incurred by the assessee as per law against the additions made on the assessee. It is needless to mention that the Ld. AO must provide opportunity of being heard to the assessee before deciding this issue. Accordingly, we allow the additional ground of the assessee for statistical purpose.

14.3 Hence the additional ground of the assessee is allowed for statistical purpose. 15. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open Court on 16th Aug., 2024.