2016 (7) TMI 1014 - AT - Income Tax

Tribunal partially allows appeal, remits issues back to AO for review.

The appeal was partly allowed by the Tribunal, with various issues remitted back to the Assessing Officer for further examination. The Tribunal supported ... Condonation of delay - allowance of depreciation by charitable trust despite prior application of income - double deduction rule - treatment of advance fees as income - retention money - liability versus income - incidental activity versus business income (pharmacy attached to hospital) - 15% accumulation under section 11(1)(a) - computation on gross receipts - remand for verificationCondonation of delay - Delay of 17 days in filing the appeal was condoned. - HELD THAT: - The assessee explained that a search and seizure on 6.8.2015 engaged responsible staff in post-search proceedings and prevented timely filing. The Tribunal, after hearing parties and considering the affidavit, found the cause reasonable, noted absence of any ulterior purpose in the short delay, and exercised discretion in the interest of justice to condone the 17-day delay. [Paras 5]Delay condoned and appeal admitted to adjudication on merits.Allowance of depreciation by charitable trust despite prior application of income - double deduction rule - Depreciation claimed on assets whose cost had earlier been shown as application of income was allowed for the year under consideration. - HELD THAT: - The Assessing Officer disallowed depreciation as amounting to double deduction, relying on Escorts (SC) and CIT(A) confirmed that view while noting a later statutory amendment. The Tribunal followed its coordinate precedents (including CMR Janardhana Trust and other High Court decisions) holding that depreciation debited in books is deductible for computing income of a charitable trust and does not equate to impermissible double benefit. The Finance Act, 2014 amendment is prospective from 1.4.2015 and therefore not operative for the assessment year 2011-12; accordingly the Tribunal decided the issue in favour of the assessee. [Paras 11]Disallowance of depreciation set aside; depreciation allowed for the assessment year 2011-12.Treatment of advance fees as income - remand for verification - Addition of advance fees to income was set aside and remitted to the Assessing Officer for fresh examination. - HELD THAT: - The Assessing Officer treated advances (shown in books as advance tuition fees) as income, relying on a statement recorded under section 133A and on the assessee's use of funds for expenditure. The Tribunal observed that the books evidenced opening balance, receipts and closing balance, and the correctness of accounts was not disputed. It noted that part of advance related to subsequent academic year cannot be taxed in the impugned year and that a statement under section 133A cannot be the sole basis without corroboration. Consequently the Tribunal set aside the additions and remitted the matter to the Assessing Officer to re examine the records produced by the assessee and decide in accordance with law. [Paras 12]Addition on account of advance fees set aside; issue remanded to Assessing Officer for reconsideration on record.Retention money - liability versus income - remand for verification - Retention money held by the trust is, in principle, a liability and not income; matter remitted for factual verification to determine extent of use and effect on application of income claim. - HELD THAT: - The Assessing Officer added the entire retention money to income observing it had been mixed with other funds and used for expenditures. The Tribunal held as a principle that retention money retained to be refunded on project completion is a liability and not income. Simultaneously it recognised that if such amounts were actually used for expenses or investments, the assessee cannot both treat them as still available for application of income and also have used them; therefore the Assessing Officer was directed to verify relevant facts and decide only on the question of allowance of application of income, not to treat retention money as income without such verification. [Paras 15]Principle declared in favour of assessee; matter remitted to Assessing Officer for factual verification and decision.Incidental activity versus business income (pharmacy attached to hospital) - Receipts from the pharmacy attached to the hospital were held to be incidental/integral to hospital operations and not a separate business, and thus to be considered part of charitable activity for exemption purposes. - HELD THAT: - The Assessing Officer treated pharmacy receipts as business income because separate books/accounts were not presented in the manner demanded. The Tribunal relied on precedents (including the Chennai Bench decision in Franciscan Sisters of St. Joseph Society) holding that a pharmacy within hospital premises is an integral and indispensable part of running a hospital, that modest sales to outsiders do not convert it into a commercial undertaking, and that separate accounting for internal control does not alter its character. On this basis the Tribunal decided the issue in favour of the assessee. [Paras 16]Addition treating pharmacy receipts as business income deleted; pharmacy receipts to be treated as part of charitable activity.15% accumulation under section 11(1)(a) - computation on gross receipts - The 15% accumulation allowable under section 11(1)(a) is to be computed on gross receipts and not on net income after revenue expenditure. - HELD THAT: - There was dispute whether the 15% permitted accumulation applies to gross receipts or net of revenue expenditure. The Tribunal followed coordinate Bench precedents and Special Bench/Supreme Court authority reasoning that accumulation is to be computed on income before application (i.e., commercial or gross receipts relevant for section 11(1)(a)), and that outgoings which are application of income should not be excluded while determining the percentage that may be set apart. Applying that line of authority, the Tribunal directed the Assessing Officer to allow accumulation at 15% of gross receipts. [Paras 17]15% accumulation to be computed on gross receipts; Assessing Officer directed to allow accumulation accordingly.Remand for verification - Claimed liability for capital expenditure shown as unpaid liability was remitted to the Assessing Officer for verification of supporting evidence and genuineness. - HELD THAT: - The assessee claimed substantial liability for capital expenditure appearing as sundry creditors/advances and relied on authorities holding earmarked or allocated amounts may be regarded as application. The lower authorities doubted genuineness because details and supporting evidence of parties and purpose were not furnished. The Tribunal considered the conflicting positions and concluded that proper verification of the documents and details produced by the assessee is necessary; accordingly the issue was set aside to the Assessing Officer for examination and decision in accordance with law. [Paras 19]Claim of liability for capital expenditure remitted to Assessing Officer for verification and fresh decision.Procedural dismissal - not pressed - Ground relating to set off of excess application of income for AY 2010-11 against AY 2011-12 was dismissed as not pressed. - HELD THAT: - At hearing the authorised representative stated the ground was not pressed and the Departmental Representative did not object. The Tribunal accordingly dismissed the ground as not pressed. [Paras 18]Ground dismissed as not pressed.Final Conclusion: The Tribunal partly allowed the appeal for Assessment Year 2011-12: condoned delay; allowed depreciation; treated pharmacy receipts as part of charitable activity; directed 15% accumulation to be computed on gross receipts; set aside additions relating to advance fees and retention money and remitted those matters to the Assessing Officer for factual verification and fresh decision; remitted the claim of capital expenditure liability for verification; one ground was dismissed as not pressed. Issues Involved:1. Condonation of delay in filing the appeal.2. Claim of depreciation.3. Addition of advance fee received as income.4. Addition on account of retention money.5. Addition of income from pharmacy.6. Allowing 15% accumulation on net income.7. Set off of excess application of income from previous year.8. Deduction of liability for capital expenditure.Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The assessee filed the appeal 17 days late due to a search and seizure action under Section 132 of the Act, which involved the accounts section in post-search proceedings. The Tribunal found the delay justified and condoned it, noting no ulterior motive behind the delay.2. Claim of Depreciation:The assessee claimed depreciation of Rs. 10,73,00,124, which the Assessing Officer disallowed, citing it as a double deduction. The CIT (Appeals) upheld this view, referencing the amended Section 11(6) effective from 1.4.2015. However, the Tribunal sided with the assessee, referencing previous Tribunal decisions and the prospective nature of the amendment, allowing the depreciation claim.3. Addition of Advance Fee Received as Income:The Assessing Officer added Rs. 1,27,67,530 as income, considering it advance fees. The assessee argued that part of this amount was an opening balance and not income for the current year. The Tribunal found that the authorities did not dispute the recording of this amount as advance fees and remitted the issue back to the Assessing Officer for re-examination with the provided records.4. Addition on Account of Retention Money:The Assessing Officer added Rs. 1,10,25,800 as income, arguing the retention money was used for expenses. The Tribunal held that retention money is a liability and not income but directed the Assessing Officer to verify if the assessee had sufficient funds to cover this amount and adjust the application of income accordingly.5. Addition of Income from Pharmacy:The Assessing Officer treated Rs. 50,66,973 from the pharmacy as business income, which the CIT (Appeals) upheld. The Tribunal, referencing a similar case, concluded that the pharmacy, being part of the hospital, should not be treated as a separate business unit. The Tribunal ruled in favor of the assessee, recognizing the pharmacy as integral to the hospital.6. Allowing 15% Accumulation on Net Income:The Tribunal decided in favor of the assessee, allowing the 15% accumulation on gross receipts, referencing a previous Tribunal decision which supported the assessee's claim.7. Set Off of Excess Application of Income from Previous Year:The assessee did not press this ground, and the Tribunal dismissed it accordingly.8. Deduction of Liability for Capital Expenditure:The Assessing Officer disallowed Rs. 7,58,82,285 claimed for capital expenditure, doubting its genuineness due to lack of details. The Tribunal acknowledged the need for proper verification and remitted the issue back to the Assessing Officer for examination of the relevant records and details to be produced by the assessee.Conclusion:The appeal was partly allowed, with several issues remitted back to the Assessing Officer for further examination and verification. The Tribunal emphasized the need for detailed scrutiny of the records and upheld the principles of fair application of income and proper accounting practices.