Crescent Educational & Charitable Trust Vs ACIT (ITAT Chennai)
SEO Title: ITAT Chennai Deletes Section 68 and Expense Disallowances for AY 2023-24
SEO Description: ITAT Chennai deletes Rs.1 crore section 68 addition and Rs.94.86 lakh expense disallowances for a stone-crushing firm for AY 2023-24.
Summary: The assessee, a firm engaged in crushing stones and manufacturing and selling jelly and M-sand, challenged the CIT(A), NFAC, Delhi order dated 20.01.2026 arising from the assessment order dated 21.03.2025 for AY 2023-24. The assessee had declared total income of Rs.11,35,90,330/-. The Assessing Officer disallowed commission expenditure of Rs.32,56,324/-, made an addition of Rs.1 crore under section 68 towards a loan received from Mr. A. Karuppaiah, and disallowed Rs.62,30,330/- under section 37(1) towards lorry tips/refreshment expenditure. The CIT(A) confirmed the additions and disallowances.
Regarding the commission paid to Mr. Arumugasamy, the assessee had furnished his PAN, GST returns, GSTR-2B, TDS particulars/Form 26Q and evidence that the payment was made through banking channels. The disallowance was principally sustained because the recipient did not respond to the notice issued under section 133(6). The Tribunal held that once primary documentary evidence had been furnished, non-response by the recipient could not by itself establish that the transaction was non-genuine. The Revenue had not shown that the recipient was fictitious, that the payment had flowed back to the assessee, or that the GST, TDS and banking records were false or unreliable. The Tribunal accordingly directed deletion of the Rs.32,56,324/- commission disallowance. The assessee’s contention was also supported by Unique Finance & Securities Private Limited v. ACIT, ITA No.110/Kol/2025, order dated 13.05.2025, and the precedents referred to therein. :contentReference[oaicite:0]{index=0}
In respect of the Rs.1 crore addition under section 68, the assessee furnished the lender’s PAN, income-tax return, confirmation and bank statements, while the lender had declared income of Rs.1,39,35,010/- during the relevant year. A State Bank of India certificate also confirmed receipt through RTGS from the lender’s bank account. The Tribunal found that the assessee had furnished documentary evidence addressing the identity, prima facie creditworthiness and genuineness of the transaction. Since the Revenue had not brought contrary material showing that the transaction or supporting documents were fictitious or unreliable, the Tribunal held that the addition could not be sustained and directed its deletion. :contentReference[oaicite:1]{index=1}
The remaining issue concerned Rs.62,30,330/- claimed as lorry tips/refreshment expenditure. The assessee explained that its business involved approximately 200 lorries daily and that payments were made to drivers and cleaners during waiting periods for loading and unloading, at approximately Rs.50/- per lorry. The assessee had disclosed turnover of Rs.69.41 crores and hire charges of Rs.27.99 lakhs. The Tribunal considered the expenditure commercially plausible having regard to the nature and scale of the business. It noted that no specific payment had been identified as bogus, inflated or unrelated to business and that the disallowance substantially arose from the absence of formal supporting vouchers. Relying, inter alia, on the principles reflected in Sri Ganesh Shipping Agency v. ACIT and M/s Sunita Finlease Limited v. ITO, the Tribunal held that the wholesale disallowance could not be sustained and directed deletion of the entire Rs.62,30,330/-. :contentReference[oaicite:2]{index=2}
Accordingly, the Tribunal directed deletion of the commission disallowance of Rs.32,56,324/-, the section 68 addition of Rs.1 crore and the lorry tips/refreshment expenditure disallowance of Rs.62,30,330/-. The assessee’s appeal was therefore allowed. The order was pronounced in the open court on 17.08.2026 at Chennai. :contentReference[oaicite:3]{index=3}
List of Cases Discussed / Relied Upon
- Unique Finance & Securities Private Limited v. ACIT, ITA No.110/Kol/2025, order dated 13.05.2025 — relied upon concerning non-compliance with notices under sections 133(6) and 131 where the assessee has furnished documentary evidence; the decision itself relied on several judicial precedents. :contentReference[oaicite:4]{index=4}
- CIT v. Orissa Corporation Pvt. Ltd.,(1986) 159 ITR 78 (SC) — referred to in support of the principle concerning the assessee’s evidentiary burden and non-compliance by the concerned party with departmental notices. :contentReference[oaicite:5]{index=5}
- CIT v. Orchid Industries (P.) Ltd.,(2017) 397 ITR 136 (Bom) — referred to concerning the evidentiary burden where the assessee has furnished supporting documentary material. :contentReference[oaicite:6]{index=6}
- Crystal Networks Pvt. Ltd. v. CIT,(2013) 353 ITR 171 (Cal) — referred to among the authorities concerning documentary evidence and non-compliance with departmental notices. :contentReference[oaicite:7]{index=7}
- ITO v. Cygnus Developers India Pvt. Ltd.,ITA No.282/Kol/2012 — referred to concerning non-compliance with departmental notices and the evidentiary burden. :contentReference[oaicite:8]{index=8}
- Joy Consolidated Pvt. Ltd. v. ITO,ITA No.547/Kol/2020, order dated 12.06.2023 — referred to concerning documentary evidence and non-compliance with departmental notices. :contentReference[oaicite:9]{index=9}
- Sri Ganesh Shipping Agency v. ACIT,ITA No.366 of 2015, dated 06.02.2021 (Karnataka High Court) — relied upon regarding ad hoc disallowance of expenditure, commercial expediency and prevailing trade practice. :contentReference[oaicite:10]{index=10}
- CIT v. Sri Clifford D’Souza — relied upon by the assessee in support of the claim concerning lorry tips/refreshment expenditure. :contentReference[oaicite:11]{index=11}
- CIT v. Konkan Marine Agencies,313 ITR 308 (Kar) — relied upon by the assessee concerning the allowability of the expenditure. :contentReference[oaicite:12]{index=12}
- M/s Sunita Finlease Limited v. ITO,ITA No.244/RPR/2017 — relied upon for the principle that an ad hoc disallowance cannot be sustained without identifying specific expenditure that is unverifiable or unsupported. :contentReference[oaicite:13]{index=13}
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Chennai ITAT: Subsequent 12AA Registration Benefits Earlier Pending Assessment – Trust Entitled to Section 11 Exemption & Depreciation
The Chennai ITAT in Crescent Educational & Charitable Trust v. ACIT (Exemptions), ITA No. 2734/Chny/2025, AY 2018-19, held that where registration under Section 12AA was granted while the assessment for an earlier year was still pending, the benefit of the proviso to Section 12A(2) was available for that earlier assessment year.
The assessee, a charitable trust running a school, had originally offered its receipts under “Income from Other Sources” because its application for registration was pending. The AO consequently disallowed depreciation of ₹35.09 lakh, holding that depreciation could not be claimed under Section 57. The CIT(A) confirmed the disallowance.
The Tribunal noted that the trust was granted Section 12AA registration on 15.02.2021, whereas the assessment was completed only on 20.04.2021. Thus, when registration was granted, the assessment proceedings for AY 2018-19 were still pending. The ITAT held that the proviso to Section 12A(2) consequently became applicable, entitling the trust to claim exemption under Sections 11 and 12, subject to fulfilment of the statutory conditions. The authorities had erred in continuing to assess the trust merely under Section 57.
Once Sections 11 and 12 became applicable, the trust’s income had to be computed under the provisions governing charitable institutions rather than under “Income from Other Sources.” Consequently, depreciation could not be denied merely because Section 57 did not provide for it. Relying on CIT v. Society of Sisters of St. Anne (1984) 146 ITR 28 (Kar), the ITAT reiterated that depreciation is allowable while computing the income of a charitable institution on commercial principles.
The Tribunal therefore directed the AO to recompute the income by granting Section 11 exemption and deleted the addition arising from denial of depreciation. The assessee’s appeal was allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
The present appeal has been preferred by the Assessee against the order dated 21.07.2025 passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the Ld. CIT(A)”], arising from the assessment order dated 20.04.2021 passed by the Assessing Officer, National e-Assessment Centre [hereinafter referred to as “the AO”], u/s.143(3) r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2018-19.
2. The brief facts of the case emanating from the records are that the assessee is a Trust, running a school in the name of Crescent Matriculation Higher Secondary School. The assessee filed its return of income on 07.10.2018 declaring total income of Rs.Nil and claimed substantial deduction under the head income from other sources’ u/s.57 of the Act. The case was selected for limited scrutiny for the reason to verify deductions from income from other sources claim. Accordingly, statutory notices were issued to the assessee by calling for required details and documents. The assessee submitted the details as and when called for and stated that “since the application for registration of the Trust u/s.12AA of the Act is pending, all the receipts are shown as income from other sources and corresponding expenditure to run the institution is shown under the expenditure against income from other sources”. The assessee submitted the details of expenditure claimed like electricity charges, function expenses, photo expenses, painting expenses, co-ordination fees, development along with the depreciation of Rs.35,09.850/-. On perusal of the submissions made by the assessee, the claim of depreciation u/s.57(ii) of the Act is disallowed and added back to the total income of the assessee by passing an order dated 20.04.2021 u/s.143(3) r.w.s. 144B of the Act.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the Id.CIT(A). The assessee filed its submissions and also filed additional evidences along with the application under Rule 46A of the Income-tax Rules, 1962. The Id.CIT(A) obtained a remand report from the AO in respect of additional evidences filed by the assessee. On perusal of the submissions of the assessee along with the remand report given by the AO, the Id.CIT(A) confirmed the addition made by the AO by passing an order dated 21.07.2025 by upholding as under:-
“8. In Ground No. 1 to 3, the appellant has contested the disallowance of Rs. 35,09,850/-.
9. I find that depreciation is a statutory allowance u/s 32 of the Act, available only in computing income under the heads “Profits and gains of business or profession” or “Income from house property.” When income is assessed under the head “Income from other sources,” Section 57 (iii) of the Act, which permits only “expenditure (not being in the nature of capital expenditure)…wholly and exclusively for the purpose of making or earning such income.” Depreciation is by its very nature a capital allowance and cannot be treated as revenue expenditure. Accordingly, I am of the view that the AO was correct in disallowing the depreciation claimed by the appellant.
10. The appellant’s reliance on Section 57(ii) is misplaced, as that provision applies exclusively to income from letting of machinery, plant or furniture, and in any event. the appellant was neither engaged in a business of hiring out assets nor did it earn any income from such letting. In the Remand Proceedings, the AO specifically called upon the appellant to furnish documentary evidence to link the depreciation to income from “school fees”. However, no fixed asset register, ledger abstracts or depreciation schedules were placed on record to substantiate that the assets were used “wholly and exclusively for earning the declared income from other sources. In the absence of such evidence, the depreciation claim rightly stood disallowed. OME TAX DEPARTN
11. It is pertinent to note that the appellant’s application u/s 12AA remained pending throughout AY 2018-19, and consequently no exemption u/s 11 or 12 was ever claimed. All of the appellant’s receipts were therefore correctly assessed under the head “Income from Other Sources” and only eligible for deductions permissible u/s 57 of the Act. Depreciation is a capital allowance granted exclusively u/s 32, applicable only against income assessed under “Profits and gains of business or profession,” “Income from house property,” or income applied to charitable purposes u/s 11 or 12 once registration is granted. The Hon’ble Supreme Court in CIT v. Rajasthan & Gujarati Charitable Foundation [2018] 402 ITR 441 (SC) and the Hon’ble Karnataka High Court in CIT v. Society of Sisters of St. Anne 146 ITR 28 (Kar) both recognise that section 32 operates independently to grant depreciation only where income is either taxable on commercial principles or applied to charity post-registration. Neither of the decision supports an allowance under “other sources.” As such, these precedents are inapplicable by analogy to an unregistered trust whose income is assessable solely u/s 56, and the AO rightly declined to extend a section 32 allowance here.
11. In procedural terms, the appellant was afforded ample opportunities, both during assessment and in the remand proceedings, to present documentary proof. The AO’s queries dated 05.03.2021 & 08.10.2024 were specific and gave clear directions as to the nature of evidence required. The appellant’s failure to comply with these directions has led to an inevitable inference that the claim was unsupported.
12. In view of the above discussion, the disallowance of depreciation to the tune of Rs. 35,09,850/- is upheld. Accordingly, Ground No. 1 to 3 stand Dismissed.
4. Aggrieved by the order of the Id.CIT(A), the assessee is in appeal before us by raising the following grounds of appeal.
“1. The order of the NFAC, Delhi dated 21.07.2025 vide DIN & Order No. ITBA/NFAC/S/250/2025-26/1078727083(1) for the above mentioned Assessment Year is contrary to law, fact and in circumstances of the case.
2. The NFAC, Delhi erred in sustaining the disallowance of the claim of depreciation to the tune of Rs. 35,09,850/- forming part of the return of income filed for the assessment year under consideration by invoking the provisions in Section 57(ii) of the Act and consequently erred in sustaining the addition of such sum in the computation of taxable total income without assigning proper reasons and justification.
3. The NFAC, Delhi failed to appreciate that the claim of depreciation was correct on various facets and ought to have appreciated that the arbitrary disallowance of such valid claim of depreciation by invoking the provisions in 56(2)(i0 and Section 56(2)(iii) of the Act, which provisions had no application to the facts of the present case should accordingly be reckoned as bad in law.
4. The NFAC, Delhi failed to appreciate that the mere filing of return of income in reporting such income under the head “Income from Other Source” would not disentitle the claim of depreciation in terms of Section 32 of the Act and ought to have appreciated that the said filing / reporting was on account of pendency of registration initiated under Section 12A of the Act, thereby vitiating the impugned order passed in its entirety.
5. The NFAC, Delhi failed to appreciate that proviso below Section 12(2) of the Act was lost sight off while passing the impugned order and ought to have appreciated that the having taken note of pendency of the registration proceedings in terms of Section 12A of the Act before the CIT (Exemptions), Chennai, the consequential rejection of the claim of depreciation in terms of Section 32 of the Act was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
6. The NFAC, Delhi failed to appreciate that in any event having not independently examined the disputed disallowance, the consequential sustenance of the entire claim of depreciation as income of the appellant was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
7. The NFAC, Delhi failed to appreciate that the scrutiny assessment order was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law
8. The NFAC, Delhi failed to appreciate that the entire re-computation of taxable total income was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
9. The NFAC, Delhi failed to appreciate that having not adhered to the prescription of faceless appellate regime, the consequential appellate order passed should be reckoned as bad in law.
10. The NFAC, Delhi failed to appreciate that there was no effective/proper opportunity given before passing the impugned order including non granting of personal hearing and any order passed in violation of the principles of natural justice is nullity in law.
11. The Appellant craves leave to file additional grounds / arguments at the time of hearing.”
5. The Id.AR for the assessee submitted that the Id.CIT(A) has erred in confirming the disallowance of depreciation claimed by the assessee u/s.52(ii) of the Act. Further, the Id.AR submitted a paper book consisting of 424 pages containing the return of income, receipts filed along with the ledgers and bank account before the authorities, copies of remand report and rejoinder along with the application filed before the Id.CIT(Exemptions) for registration dated 30.01.2020 and the order of registration obtained by the assessee u/s.12AA of the Act dated 15.02.2021 from AY 2020-21. The Id.AR submitted that the assessee is eligible to claim deduction of depreciation even u/s.57(ii) of the Act when the assets are put to use for the specific purpose, which has been utilized and the corresponding income has been declared under the head income from other sources. Further, the Id.AR submitted that the Id.CIT(A) has failed to appreciate that proviso to sec.12(2) of the Act, wherein during the pendency of the registration proceedings u/s.12A of the Act before the Id.CIT(E), the consequential rejection of the claim of depreciation in terms of sec.32 of the Act is erroneous or unjustified, both on facts and in law. In support of that, the Id.AR drew our attention to the registration certification, which has been granted to the assessee dated 15.02.2021 with effect from AY 2020-21 in paper book page No.422. In view of the above, the Id.AR prayed for deleting the addition made by the AO, which has been confirmed by the Id.CIT(A).
6. Per contra, the Id.DR for the Revenue supported the orders of the authorities and submitted that the AO has rightly denied the depreciation expenditure incurred by the assessee u/s.57(ii) of the Act as the depreciation is eligible u/s.32 of the Act only. Further, the Id.DR also stated that the registration has been granted to the assessee-Trust only from AY 2020-21 and therefore, the authorities have rightly denied the allowance of depreciation as an expenditure and prayed for confirming the same.
7. We have carefully considered the rival submissions, perused the orders of the authorities below and examined the material available on record. It is an undisputed fact that the assessee is a charitable trust running an educational institution. The assessee had disclosed its receipts under the head “Income from Other Sources” only because the assessee did not have registration u/s.AS of the Act at the time of filing the return of income.
8. It is further noticed from the records that the assessee was granted registration u/s.12AA of the Act by order dated 15.02.2021vide registration No.CIT(EXEMPTION,CHENNAI/12aa/2020-21/11008 (Paper book Page No.422 & 423), i.e., prior to completion of the assessment on 20.04.2021. Thus, on the date of grant of registration, the assessment proceedings for the year under consideration were admittedly pending before the AO. In such circumstances, the benefit of the proviso to section 12A(2) of the Act becomes applicable and the assessee is entitled to claim exemption u/s.11 and 12 for the year under consideration, subject to fulfilment of the statutory conditions. The authorities below have completely failed to examine the effect of the registration granted during the pendency of the assessment proceedings and have proceeded to determine the claim only u/s.57 of the Act, which, in our considered opinion, is legally unsustainable.
9. Once the benefit of sections 11 and 12 becomes available by virtue of the proviso to section 12A(2), the income of the trust has to be computed in accordance with the provisions governing charitable institutions and not under the head “Income from Other Sources”. Consequently, the claim of depreciation cannot be rejected merely on the ground that section 57 does not specifically provide for such deduction. The Hon’ble Karnataka High Court in CIT v. Society of Sisters of St. Anne [(1984) 146 ITR 28 (Kar)] has recognised that depreciation is an allowable deduction while computing the income of a charitable institution on commercial principles, subject to the provisions of the Act.
10. In the present case, the Revenue has not disputed either the ownership of the assets or their use for carrying on the educational activities of the trust. The sole basis for disallowance is that the assessee had returned its income under the head “Income from Other Sources”. Such an approach overlooks the statutory consequence flowing from the grant of registration during the pendency of the assessment proceedings. Once the registration is granted and the benefit of the proviso to section 12A(2) is attracted, the assessee cannot be denied the consequential exemption u/s.11 and 12 nor can the claim of depreciation be rejected merely on technical or procedural grounds.
11. On the facts of the present case, we are of the view that the assessee is entitled to tax exemption u/s.11 of the Act in view of the provisos to section 12A of the Act referred to in the preceding paragraphs above and hence we direct the AO to re-compute the income by granting exemption u/s.11 of the Act. As a consequence, we are setting aside the order of the Id.CIT(A) by deleting the addition made by the AO by allowing the grounds of appeal of the assessee.
12. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the court on 18th August, 2026 at Chennai.
