Assessment order validly applied sections 11 and 12, merged with CIT(A) order under doctrine of merger

ITAT Chandigarh held that the original assessment order validly applied sections 11 and 12 of the Income Tax Act and merged with the CIT(A)'s confirmatory order under the doctrine of merger. The tribunal rejected the department's contention that the assessment was void ab-initio due to alleged inadvertent reference to sections 11 and 12. For an educational institution approved under section 10(23C)(vi), the tribunal deleted additions made by invoking sections 11 and 12, ruled that tied-up government grants constituted grant-in-aid and were exempt from tax, and allowed depreciation as the assessee had not claimed asset acquisition as application of income under section 11.

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Issues Involved:

1. Legality of the CIT(A)'s order upholding the addition made by the Assessing Officer (AO) by invoking the provisions of Sections 11 & 12 of the Income Tax Act.
2. Treatment of tied-up grants received from the government as income of the appellant.
3. Disallowance of depreciation as an application of income.

Summary:

Issue 1: Legality of the CIT(A)'s order upholding the addition made by the AO by invoking the provisions of Sections 11 & 12 of the Income Tax Act.

The AO made an addition of Rs. 2,47,58,982/- to the appellant's income, invoking Sections 11 & 12, alleging failure to utilize 85% of receipts towards its objects. The CIT(A) upheld this addition, treating the collected amounts as income. The Tribunal found that the appellant was approved under Section 10(23C)(vi) and had claimed exemption accordingly. The Tribunal agreed with the appellant that the CIT(A) erred in upholding the addition under Sections 11 & 12, as the appellant was an educational institution approved under Section 10(23C)(vi), and no disallowance should have been made under Sections 11 and 12. The Tribunal referenced CBDT Circular No. 14 of 2015 and case laws supporting this view, thereby deleting the addition.

Issue 2: Treatment of tied-up grants received from the government as income of the appellant.

The AO treated tied-up grants from the government as income, which the CIT(A) upheld. The Tribunal noted that the CIT(A) accepted that the excess of income over expenditure was a grant-in-aid belonging to the consolidated fund of the State and could not be considered the appellant's income. The Tribunal found that these grants, being in the nature of grant-in-aid, were not the income of the appellant and were exempt from tax. Thus, the Tribunal accepted the appellant's grievance and deleted the addition.

Issue 3: Disallowance of depreciation as an application of income.

The AO disallowed depreciation claimed by the appellant as an application of income, arguing that the expenditure on asset acquisition had already been treated as an application of income. The CIT(A) confirmed this disallowance. The Tribunal found that the appellant had not claimed the cost of fixed assets as an application of income in earlier years, as it had claimed exemption under Section 10(23C)(iiiab) previously. The Tribunal held that the CIT(A) erred in disallowing depreciation, as the appellant had not claimed such expenditure as revenue expenditure in prior years. Consequently, the Tribunal deleted the disallowance of depreciation amounting to Rs. 51,69,258/-.

Conclusion:

The Tribunal allowed the appeal, deleting the additions and disallowances made by the AO and upheld by the CIT(A), and pronounced the order on 04th January 2024.

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