2024 (10) TMI 1557 - AT - Income Tax

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 ... Assessment of trust - Claim of depreciation of assets - HELD THAT:- AR wants a direction to the AO to allow depreciation as application of income. After analysing the entire facts and circumstances and particular facts of the present case more particularly taking into consideration the documents in the shape of balance sheet, income and expenditure account and depreciation chart, it was found that the huge amount has been spent by the Appellant trust in previous year with effect from financial year 2009-10 to 2011-12, but these documents were neither having signatures of auditors nor chairman or Accountant of appellant trust. Since the issue of claim of depreciation is a factual issue and requires verification and checking of the records which are filed and available with the AO, therefore in the fitness of things, it is appropriate to restore this issue to the file of AO with a direction to verify from the records as to whether such assets have been taken into account while determining the application of such assets in the income earned or not. Accordingly the Appellant trust should be given the benefit as per the provisions of section 11 - As further directed that the AO while doing this check and verification of the records would also grant reasonable opportunity of hearing to the Appellant before taking any decision. Accordingly this ground No. 1 raised by the appellant stands allowed for statistical purposes. Payment of Specified person - There is no provision under the Act which provides that if advance is given to the specified person it would be added to the income. Reliance in this connection is placed on the decision of Vels Institute of Science, Technology & Advanced Studies [2015 (11) TMI 857 - ITAT CHENNAI] - In this case assessee, a charitable educational institution, was registered u/s 12AA. It intended to establish a medical college. It entered into an agreement with managing trustee for purchase of his land and paid certain amount to him in advance. Subsequently said agreement was cancelled and managing trustee returned principal amount along with interest. Assessee claimed exemption u/s 11. AO denied exemption holding that payment of advance to managing trustee was in excess of market value of land and money was advanced without any adequate security and therefore, there was violation of section 13(1)(c). It was held that since it was nobody’s case that the price agreed between the managing trustee and assessee was not actually the agreed price, observation of the AO that the value of the land was much less than what was agreed between the parties cannot stand in the eye of law. When money was advanced to managing trustee in pursuance of agreement for sale and after cancellation of agreement entire principal amount along with interest was returned, it could not be said that money was diverted for interest of managing trustee. Therefore, there was no violation of section 13(1)(c). Hence, in this view of the matter, the Ground No. 2 raised by the assessee stands allowed. Additions on account of interest free advances given to the various persons were confirmed - Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that, effect might,, incineration circumstances, have been made in the books of, account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account - A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the terms the income which accrued and was received consisted of the lesser amounts and not the larger. This was not a. gift by the assessee firm to the manager companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. Therefore considering the entire facts and circumstances as well as discussion made in the above Paras and also taking into consideration the legal preposition. 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.