2022 (6) TMI 663 - AT - Income Tax

ITAT dismisses appeal on exemption, allows depreciation claim, directs AO on basic exemption.

The ITAT dismissed the appellant's appeal, upholding the denial of exemption under Section 11 and the addition of accrued interest. However, the ITAT ... Exemption under Sections 11 and 12 - effect of delayed filing under section 139(4A) - application of income for charitable objects (85% test) - accrual recognition of interest income - allowance of depreciation when income assessed as business incomeExemption under Sections 11 and 12 - effect of delayed filing under section 139(4A) - application of income for charitable objects (85% test) - Whether the assessee is entitled to exemption under Sections 11 and 12 for AY 2009-10 - HELD THAT: - The first appellate authority found that the assessee did not file its return within the period prescribed under section 139(1) and, consequently, in view of section 139(4A) the benefit of Sections 11 and 12 could not be allowed. On the facts adjudicated by the CIT(A), the surplus of income over expenditure exceeded 15%, indicating that 85% of income derived from charitable activity was not applied for charitable objects; accordingly the CIT(A) concluded that the assessee was not entitled to exemption under Sections 11 and 12. In ex parte proceedings before the Tribunal, no evidence or submission was placed to dislodge these factual findings and therefore the Tribunal declined to interfere with the CIT(A)'s conclusions on the merits. [Paras 6, 7]Denial of exemption under Sections 11 and 12 for AY 2009-10 upheld.Accrual recognition of interest income - Whether accrued interest on fixed deposit receipts was exigible to tax in AY 2009-10 - HELD THAT: - The CIT(A) accepted the Assessing Officer's view that interest on fixed deposits must be accounted for on accrual basis notwithstanding the assessee's contention that it maintains accounts on a cash basis; business income accounting on a receipt basis does not displace the accounting norm that interest income accrues and is taxable when accrued. No material was placed before the Tribunal to counter the CIT(A)'s conclusion and the Tribunal declined to interfere. [Paras 6, 7]Addition of accrued interest upheld.Allowance of depreciation when income assessed as business income - Whether depreciation on fixed assets claimed by the assessee was to be disallowed - HELD THAT: - The CIT(A) found the Assessing Officer's view internally inconsistent: the AO assessed the income as business income under section 28 yet disallowed depreciation without specifying what evidence was lacking or demonstrating that the assets were not owned and used for business. On that basis the CIT(A) allowed the claim for depreciation. The Tribunal, hearing the appeal ex parte and in absence of any material to challenge the CIT(A)'s reasoning, declined to interfere with the relief granted. [Paras 6, 7]Disallowance of depreciation set aside; depreciation allowed.Basic exemption entitlement - Whether the assessee was entitled to basic exemption in computing tax - HELD THAT: - The CIT(A) directed the Assessing Officer to consider the assessee's claim for benefit of basic exemption in accordance with law and the applicable rate of taxation for the assessment year. No contesting material was presented before the Tribunal to revisit this direction and therefore the Tribunal did not interfere with the CIT(A)'s direction. [Paras 6, 7]Claim for basic exemption to be considered by the Assessing Officer as directed by the CIT(A).Final Conclusion: In ex parte proceedings the Tribunal declined to interfere with the CIT(A)'s findings: exemption under Sections 11 and 12 denied for AY 2009-10 (surplus exceeds 15% and delayed filing rule applied); addition of accrued interest sustained; depreciation claim upheld as allowed by the CIT(A); and the Assessing Officer directed to consider the basic exemption as per law. The assessee's appeal is dismissed ex parte. Issues:1. Denial of exemption under Section 11 of the Income Tax Act, 1961.2. Addition of accrued interest on fixed deposit receipts as income from other sources.3. Disallowance of depreciation on fixed assets.4. Failure to allow the benefit of basic exemption while computing tax on total income.Analysis:1. Denial of exemption under Section 11:The appellant, a society engaged in educational activities, filed its return of income for AY 2009-10 claiming exemption under Sections 11 and 12 of the Act. The Assessing Officer denied the exemption, citing that the surplus of income over expenditure exceeded 15%, making the appellant ineligible for exemption under Section 11. The CIT(A) upheld the AO's decision, emphasizing that the appellant did not file its return before the due date under Section 139(1), rendering it ineligible for exemption under Section 11. The CIT(A) dismissed the appeal, stating that the appellant failed to provide sufficient evidence to challenge the denial of exemption.2. Addition of accrued interest on fixed deposit receipts:The AO added Rs. 24,61,996 as income from accrued interest on fixed deposit receipts, which the appellant had not declared. The AR argued that the appellant maintained its accounts on a cash basis and interest income should be recognized when the FDRs mature, not when accrued. However, the ITAT held that interest income must be accounted for on an accrual basis, even if the books are maintained on a cash basis. Consequently, the ITAT upheld the AO's decision to add the interest amount to the appellant's total income.3. Disallowance of depreciation on fixed assets:The AO disallowed depreciation of Rs. 18,79,013 on fixed assets, claiming that since the appellant had claimed exemptions in previous years, depreciation should be disallowed. The AR argued that depreciation should be allowed as the assets were used for business purposes. The ITAT found the AO's stance contradictory, as he assessed the appellant's income as business income under Section 28. The ITAT concluded that the appellant was entitled to depreciation on fixed assets used for business purposes, overturning the AO's disallowance.4. Failure to allow basic exemption while computing tax:The appellant contended that the AO did not allow the benefit of basic exemption while computing tax on total income. The ITAT directed the AO to consider the appellant's claim as per relevant law provisions and prescribed tax rates for the AY. The ITAT allowed this ground for statistical purposes, ensuring the appellant's claim for basic exemption was duly considered.In conclusion, the ITAT dismissed the appellant's appeal ex-parte, upholding the CIT(A)'s decision regarding the denial of exemption under Section 11 and the addition of accrued interest. However, the ITAT allowed the appellant's claim for depreciation on fixed assets and directed the AO to consider the basic exemption claim appropriately.