2024 (4) TMI 835 - AT - Income Tax

Trust exemption upheld for running Kalyanamandapam as incidental charitable activity under Section 11(4)

ITAT Chennai held that reopening of assessments for AYs 2012-13 to 2014-15 was invalid due to lack of allegation regarding non-disclosure of material ... Re-opening of assessment - failure to disclose fully and truly all material facts - income escaping assessment - exemption under section 11 - property held under trust and business incidental under section 11(4) - proviso to section 2(15) concerning advancement of objects of general public utility - section 13(1)(c) - benefit to persons referred to in section 13(2) - disallowance of depreciation where cost was claimed as application of income - section 11(6) as amended by Finance Act, 2014Re-opening of assessment - failure to disclose fully and truly all material facts - income escaping assessment - Validity of reopening assessments under section 147/148 for AYs 2012-13 to 2016-17 - HELD THAT: - The Tribunal examined the AO's reasons recorded after a survey u/s.133A and applied the proviso to section 147 where original assessments were completed under section 143(3). For AYs 2012-13 to 2014-15 the assessee had disclosed rental income from letting to the partnership firm in returns and filed requisite records; no finding of failure to disclose fully and truly was made by the AO. Reliance on authoritative precedent established that reopening after four years where there is no failure to disclose is barred. For AYs 2015-16 and 2016-17 the original assessments were completed u/s.143(1) and, accordingly, the proviso to section 147 did not operate; survey revealed fresh tangible material and the AO formed a reasonable belief of escapement of income, rendering reopening valid for those years. [Paras 16, 17]Reopening for AYs 2012-13 to 2014-15 quashed; reopening for AYs 2015-16 and 2016-17 upheld.Exemption under section 11 - property held under trust and business incidental under section 11(4) - proviso to section 2(15) concerning advancement of objects of general public utility - Allowability of exemption under section 11 in respect of income from Kalyanamandapams and other charitable activities for AYs 2012-13 to 2018-19 - HELD THAT: - On facts the Trust's objects and activities (medical relief, education and related undertakings) were held charitable and the Tribunal relied on its Coordinate Bench's earlier decision in the assessee's own case that running of Kalyanamandapams is incidental to the Trust's objects and qualifies as a business undertaking held under trust within section 11(4). Separate books were maintained for the activity and predominant work was charitable. The proviso to section 2(15) applies to advancement of objects of general public utility other than education/medical relief; it was not attracted here. Consequently the AO and CIT(A) erred in denying section 11 exemption for the impugned years. [Paras 22]Section 11 exemption allowed for AYs 2012-13 to 2018-19; AO directed to grant the claimed exemption.Section 13(1)(c) - benefit to persons referred to in section 13(2) - disallowance of additions by comparing rent received by lessee and sub-lessee - Validity of additions treating difference between rent received by the Trust from the partnership firm and rent received by the partnership firm from sub-tenants as income of the Trust - HELD THAT: - The Tribunal analysed the lease documents and evidence showing the lessee (partnership firm) had rebuilt/remodeled the premises since 1975 and sub-let different (reconstructed) premises to third parties. The description of property in lessee's sub-leases differed from the original lease schedule and the assessee produced records and municipal fair-rent comparators. The AO made additions on suspicion by mechanically comparing amounts without establishing that the Trust had allowed property or income to interested persons without adequate consideration. Where consideration is commensurate with market value and factual distinctions between the leased and sub-leased premises exist, section 13(1)(c) is not attracted. [Paras 28]Additions on account of the alleged difference in rental income deleted for the impugned years.Disallowance of depreciation where cost was claimed as application of income - section 11(6) as amended by Finance Act, 2014 - Allowability of depreciation as application of income where cost of asset was claimed as application of income for AYs 2012-13 to 2018-19 - HELD THAT: - The Tribunal followed settled law that, up to AY 2014-15, depreciation on assets should be allowed even if the cost had earlier been treated as application of income, aligning computation of a trust's income with normal commercial accounting principles and Supreme Court authority. Consequently depreciation was to be allowed for AYs 2012-13 to 2014-15. For AYs 2015-16 to 2018-19 the Finance Act, 2014 amendment to section 11(6) precludes deduction by way of depreciation where acquisition cost has been claimed as application of income in the same or any earlier year; the AO's disallowance for these years was therefore sustained. [Paras 30]Depreciation allowed for AYs 2012-13 to 2014-15; disallowance upheld for AYs 2015-16 to 2018-19 under amended section 11(6).Final Conclusion: The Tribunal quashed reopening and set aside reassessments for AYs 2012-13 to 2014-15; upheld reopening for AYs 2015-16 and 2016-17. The Tribunal allowed exemption under section 11 for AYs 2012-13 to 2018-19, deleted additions computed by comparing rents between the Trust and the lessee, allowed depreciation for AYs 2012-13 to 2014-15 and upheld disallowance of depreciation for AYs 2015-16 to 2018-19 in view of the amendment to section 11(6). Issues Involved:1. Reopening of assessment u/s 147.2. Denial of exemption u/s 11.3. Addition towards difference in rental income.4. Disallowance of depreciation on fixed assets.Summary:1. Reopening of assessment u/s 147:The assessee challenged the reopening of assessments for AYs 2012-13 to 2016-17 on the grounds that it was based on a 'change of opinion' without fresh tangible material suggesting escapement of income, and it was reopened beyond four years without any failure on the part of the assessee to disclose fully and truly all material facts. The Tribunal held that the reopening of assessments for AYs 2012-13 to 2014-15 was bad in law and quashed the reopening as it was done without any allegation of failure to disclose material facts. For AYs 2015-16 and 2016-17, the Tribunal upheld the reopening as these assessments were completed u/s 143(1) and were based on fresh tangible material found during a survey u/s 133A.2. Denial of exemption u/s 11:The AO denied the exemption u/s 11 on the grounds that the activity of running Kalyanamandapam was in the nature of trade and commerce, which is hit by the proviso to Sec. 2(15) of the Act. The Tribunal, following its earlier decision, held that the activity of running Kalyanamandapam is incidental to the attainment of the main objects of the Trust and is covered by Sec. 11(4) of the Act. The Tribunal directed the AO to allow the benefit of exemption u/s 11 for AYs 2012-13 to 2018-19.3. Addition towards difference in rental income:The AO added the difference between the rental income received by the assessee from M/s CFD and the rental income received by M/s CFD from subletting the property to three tenants, invoking provisions of Sec. 13(1)(c) r.w.s. 13(2) of the Act. The Tribunal held that the property let out by the assessee to M/s CFD and the property sublet by M/s CFD were different due to significant renovations and improvements made by M/s CFD. The Tribunal found the AO's addition to be based on suspicion and surmise and directed the deletion of the addition.4. Disallowance of depreciation on fixed assets:The AO disallowed the depreciation on fixed assets, arguing that allowing depreciation on assets whose cost was already claimed as application of income amounts to double deduction. The Tribunal, following the decision of the Hon'ble Supreme Court in CIT v. Rajasthan & Gujarati Charitable Foundation, Poona, allowed the depreciation on fixed assets as application of income up to AY 2014-15. For AYs 2015-16 to 2018-19, the Tribunal upheld the disallowance of depreciation due to the amendment to Sec. 11(6) by the Finance Act, 2014, which disallows depreciation on assets whose cost was claimed as application of income.Conclusion:- Appeals for AYs 2012-13 to 2014-15 were allowed.- Appeals for AYs 2015-16 to 2018-19 were partly allowed.