Addition unsustainable as exemption not claimed in preceding year as application of income on purchase of assets

Varthur Foundation Trust Vs ITO (ITAT Bangalore)

Addition unsustainable as exemption not claimed in preceding year as application of income on purchase of assets

ITAT Bangalore held that no exemption has been claimed by the assessee in the preceding year as application of income on the purchase of fixed assets. Accordingly, addition doesn’t survive.

Facts- The assessee filed return of income declaring excess expenditure over income. The case was processed u/s. 143(1) of the Income Tax Act, 1961 and income was determined by observing that depreciation was not allowed. The assessee filed a rectification application u/s. 154 of the Act which was disposed of by the CPC, denying the claim of depreciation and not accepting the 154 applications of the assessee for rectification of mistake apparent on the face of the record.

CIT(A) dismissed the appeal filed by the assessee. Being aggrieved, the present appeal is filed by the assessee.

Conclusion- AO has noted that no exemption has been claimed by the assessee in the preceding year as application of income on the purchase of fixed assets. Therefore, the additions made by the CPC under Section 143(1) of the Act is on the same issue as accepted in the course of scrutiny assessment does not survive, accordingly the order passed by the CIT (A) becomes infructuous. It is ordered accordingly.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the assessee against the CIT(A)’s order DIN & order No. ITBA/NFAC/S/250/2022-23/1057949859(1) dated 12.12.2022 for AY 2016-7 on the following grounds of appeal: –

“1.     General Ground

1.1. The learned Deputy Commissioner of Income Tax, Centralized Processing Centre, Bengaluru [‘DCIT(CPC)’ for short hereinafter] has erred in passing the order of rectification under section 154 of the Income-tax Act, 1961 (‘the Act’) and the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [“CIT(A) for short here in after”] has erred in passing the order under section 250 of the Act, in the manner passed by them. The orders so passed are bad in law and liable to be quashed.

2. Order passed dismissing the appeal in Linline is bad in law

2.1. The learned CIT(A) has erred in dismissing the appeal in limine for the reason that the Appellant ought to have filed an appeal against the intimation passed under section 143( 1) instead of filing an appeal against the order of rectification passed under section 154 of the Act. The said reason for dismissal is bad in law and therefore the impugned order passed is liable to be quashed.

3. Claim of depreciation as application of income to be allowed

3.1. The learned DCIT, CPC has erred in making an addition amounting to Rs. 36,47,213 to the income of the Appellant without providing an opportunity or stating any reason for the same. The said addition made without adhering to the principles of natural justice is bad in law and liable to be deleted.

3.2. The learned DCIT, CPC has erred in not appreciating that the addition of Rs. 36,47,213 which represented the claim of depreciation is allowable under section 11 (6) of the Act as the Appellant had not claimed the expenditure towards acquisition of any asset as an application of income, either during the year under consideration or preceding years.

3.3. Without prejudice, the impugned addition as per the rectification order is to be deleted as the learned AO accepted the income returned in the assessment order passed under section 143(3) for the very same assessment year.

3.4. On facts and circumstances of the case and law applicable, the impugned addition made amounting to Rs. 36,47,213 is bad in law and liable to be deleted.

4. Levy of consequential interest under section 234B and 234C

4.1. The learned DCIT, CPC has erred in levyinginterest under sections234B and 234Cof the Act amounting to Rs. 1,87,243 and Rs. 30,122, respectively. On facts and circumstances of the case and law applicable, levy of interest under sections234B and234C is incorrect. The appellant denies its liability to pay the interest under sections234B and 234C of the Act.

5. Prayer:- In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A) be quashed.

OR IN THE ALTERNATIVE

i) Addition made amounting to Rs. 36,47,213 be deleted; and

ii) Interest under sections 234B and 234C be deleted”

2. The brief facts of the case are that the assessee filed return of income on 15.10.2016 declaring excess expenditure over income at Rs.3,26,100/-. The case was processed under Section 143(1) of the Income Tax Act, 1961 (the Act) on 21.04.2018 and income was determined at Rs.33,21,113/- by observing that depreciation was not allowed. The assessee filed rectification application under Section 154 of the Act on 21.03.2018 which was disposed off by the CPC on 23.05.2018, denying the claim of depreciation and not accepting the 154 application of the assessee for rectification of mistake apparent on the face of the record.

3. Aggrieved by the above order the assessee filed appeal before the CIT(A) and the assessee also filed detailed submission which has been incorporated by the CIT(A) in his order. After considering the submissions of the assessee the CIT(A) passed an order dismissing the appeal of the assessee in limine without going into the merits of the case.

4. Aggrieved by the order of the CIT(A) assessee filed the present appeal before the Tribunal. The learned A.R. submitted that the assessee is a Trust registered under Section 12A of the Act and it is eligible for claim of exemption under Section 11 of the Act, since the assessee has not claimed any application of income when the fixed assets were first purchased by the assessee. He also submitted that the CIT(A) has passed the order in limine without deciding the merits of the case. The learned A.R. further submitted that the case was selected for limited scrutiny vide notice under Section 143(2) of the Act dated 15.10.2016 and the issue was covered for the scrutiny assessment. The AO, during the courses of assessment proceedings, examined the correctness of the claim of depreciation and he found, it was correct and no addition was made. Therefore, the addition made by the CPC under Section 143(1) of the Act does not have legs to stand and the CIT(A)’s order is also non-est.

5. The learned D.R., on the other hand, relied on the order of the CIT(A).

6. After hearing the rival contentions it is found that while processing the return under Section 143(1) of the Act the depreciation claim on fixed assets has not been allowed to the assessee and the rectification application filed by the assessee was also rejected by the CPC and the CIT(A) also dismissed the appeal in limine without going into the merits of the case. The learned A.R. of the assessee drew my attention to the assessment order passed by the ITO (Exemption), Ward -2, Bengaluru vide order No. ITBA/AST/S/143(3)/2018-19/10133266056(1) dated 26.10.2018 in which the same issue has been examined by him and he has observed as under: –

“Further the assessee while claiming expenses as application, also claimed depreciation as deduction u/s 11 of the I.T. Act for an amount of Rs.36,47,213. The assessee submitted that since the provision of sec 11(6) of the I.T. Act is not applicable in the assessee’s case, because in the preceding years the assessee has not claimed any application out of capital expenditure. Details of last year computation also uploaded for verification.”

7. I noted from the above findings recorded by the AO in the scrutiny assessment that there is no addition made by the AO and the AO has noted that no exemption has been claimed by the assessee in the preceding year as application of income on the purchase of fixed assets. Therefore, the additions made by the CPC under Section 143(1) of the Act is on the same issue as accepted in the course of scrutiny assessment does not survive, accordingly the order passed by the CIT (A) becomes infructuous. It is ordered accordingly.

8. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 21^st March, 2023.