Trust wins depreciation verification and advances challenge, no income addition without actual accrual under section 11 and 13(1)(c)

The ITAT Jaipur remanded the trust's depreciation claim to the AO for verification of asset records and application of income, directing reasonable opportunity of hearing under section 11. The tribunal allowed the trust's challenge regarding advances to specified persons, holding no statutory provision deems such advances as income additions, citing precedent where advance payments under cancelled agreements with returned principal and interest didn't violate section 13(1)(c). The tribunal emphasized that mere book entries without actual income accrual cannot constitute taxable income, distinguishing between income received and subsequently given up versus income that never actually resulted.

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Issues Involved:

1. Power of CIT(A) to set aside an issue under Section 251 of the Income Tax Act.
2. Validity of additions for amounts given to specified persons under Sections 11(5) and 13(1)(c)(ii) of the Income Tax Act.
3. Legality of additions on account of notional interest on interest-free advances.

Issue-wise Detailed Analysis:

1. Power of CIT(A) to Set Aside an Issue:

The first issue revolves around whether the CIT(A) has the authority to set aside an issue under Section 251 of the Income Tax Act. The appellant argued that the CIT(A), NFAC, erred by directing the Assessing Officer (AO) to verify whether assets on which depreciation was claimed were allowed as an application of income in the previous year. According to the appellant, Section 251 empowers the CIT(A) to confirm, reduce, enhance, or annul the assessment but not to set aside an issue. The appellant contended that the CIT(A) should have directed the AO to allow the claim of depreciation as the assets were not claimed as an application of money in preceding years. The Tribunal concluded that the issue of claim of depreciation is factual and requires verification. Therefore, it was appropriate to restore the issue to the AO for verification, with instructions to provide a reasonable opportunity for a hearing to the appellant. This ground was allowed for statistical purposes.

2. Validity of Additions for Amounts Given to Specified Persons:

The second issue concerns the addition of amounts given to specified persons, namely Santosh Yadav and Nitish Yadav, which were considered not for the core activities of the institution. The appellant argued that the amounts were either adjusted against services provided or returned, and thus, there was no diversion of funds. They contended that Section 11(5) was incorrectly invoked, as it prescribes modes of investing or depositing accumulated income, which was not applicable since no application for accumulation was filed. The Tribunal found that the amounts given were for the activities of the trust and were either adjusted or returned. Citing the decision of the ITAT Chennai Bench in a similar case, the Tribunal held that there was no violation of Section 13(1)(c) as the funds were not diverted for the benefit of specified persons. Consequently, this ground was allowed.

3. Legality of Additions on Account of Notional Interest:

The third issue addressed the addition of notional interest on interest-free advances given to various persons. The appellant argued that these advances were made in the course of charitable activities and should not attract notional interest. They cited cases where it was held that notional interest cannot be charged if there is no actual receipt of interest. The Tribunal agreed, stating that the advances were indeed for charitable activities and the notional interest could not be added as per law. The Tribunal relied on precedents that emphasized the principle that income tax is levied on real income, not hypothetical or notional income. Therefore, the Tribunal directed the AO to delete the additions related to notional interest, allowing this ground.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the AO to verify and allow the claim of depreciation, delete the additions related to specified persons, and remove the notional interest additions. The order was pronounced in the open court on 11/09/2024.

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