ITAT directs AO to allow accumulation of deemed income under Section 11(3)

The ITAT held that adjustments under Section 143(1) cannot be made for debatable claims, directing the AO to allow the assessee's accumulation of deemed income under Section 11(3). The ITAT found the denial of exemption by the CIT(A) unsustainable, referencing precedents and circulars. As a result, both appeals for A.Y. 2014-15 and A.Y. 2015-16 were allowed, with the ITAT's order issued in Ahmedabad on 14/09/2022.

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Issues Involved:
1. Whether the adjustment made by the AO in the intimation issued under Section 143(1) of the Act is sustainable.
2. Whether the assessee is eligible to accumulate its deemed income specified under section 11(3) of the Act in the manner provided under Section 11(1)/11(2) of the Act.

Issue-wise Detailed Analysis:

1. Adjustment under Section 143(1):

The assessee, a public charitable trust registered under Section 12A, filed its return of income at NIL after claiming exemption under Section 11 of the Act, including a deemed income of Rs. 17,00,000 under Section 11(3). The Centralized Processing Center (CPC) denied this exemption in the intimation generated under Section 143(1), raising a demand of Rs. 3,50,200.

The CIT(A) confirmed the AO's order, stating that the computation was strictly as per the prescribed format and existing provisions of law. The CIT(A) referenced Circular No. 29 and Circular 5P, which clarified that deemed income under Section 11(3) is not eligible for exemption under Section 11(1). The CIT(A) distinguished this from the Calcutta High Court's decision, which allowed such exemption, arguing that the court's decision did not consider these circulars.

Upon appeal, the ITAT noted that the scope of adjustments under Section 143(1) is limited to arithmetic errors or incorrect claims apparent from the return. The ITAT referenced the Calcutta High Court's decision in CIT vs. Natwarlal Chowdhury Trust, which allowed accumulation of deemed income under Section 11(3). The ITAT emphasized that the CIT(A) did not identify any distinguishing features from this precedent.

The ITAT further cited the Pune Tribunal's decision in CIT vs. Aurangabad Holiday Resorts Pvt. Ltd., which held that decisions of non-jurisdictional High Courts are applicable unless contradicted by a jurisdictional High Court. The ITAT also referenced CBDT Instruction No. 1814/1989, which prohibits disallowing claims based on High Court decisions, even if contrary views exist.

Conclusion on Adjustment:
The ITAT concluded that the claim to accumulate deemed income under Section 11(3) is debatable and cannot be classified as an incorrect claim. Therefore, such adjustments cannot be made under Section 143(1). The ITAT set aside the CIT(A)'s order and directed the AO to allow the assessee's claim, rendering the adjustment unsustainable.

2. Eligibility to Accumulate Deemed Income:

Given the favorable decision on the first issue, the ITAT did not find it necessary to adjudicate the second issue. The question of whether the deemed income under Section 11(3) can be accumulated under Sections 11(1) and 11(2) was left open, as the primary issue's resolution rendered further analysis unnecessary.

Application to Subsequent Year:

For the Assessment Year 2015-16, the ITAT noted that the issues were identical to those of the previous year. Therefore, the findings for A.Y. 2014-15 were applied, and the appeal for A.Y. 2015-16 was also allowed.

Combined Result:
Both appeals filed by the assessee for A.Y. 2014-15 and A.Y. 2015-16 were allowed. The ITAT pronounced the order on 14/09/2022 at Ahmedabad.

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