2011 (5) TMI 972 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for exemption u/s 11 & 12 due to alleged violation of section 13(1)(c)(ii).
2. Addition of amounts set apart u/s 11(1)(a).
3. Initiation of penalty proceedings u/s 271(1)(c).
4. Disallowance of depreciation on assets purchased from exempted funds.

Summary:

Issue 1: Eligibility for Exemption u/s 11 & 12

The primary issue was whether the assessee trust could be denied exemption u/s 11 & 12 due to advances paid to M/s Adharshila Associates, a concern where some partners are trustees of the assessee trust. The AO found that the trust had advanced Rs. 21,50,860/- to M/s Adharshila Associates, which was considered an application of income for the benefit of persons referred to in section 13(3), thus making sections 11 & 12 inoperative. The CIT(A) upheld this view, stating that the trust had provided benefits to Adharshila Associates, which could not be related to services rendered. However, the Tribunal found no borrower-lender relationship between the trust and Adharshila Associates. It was determined that the trust should charge interest on any excess amount advanced over rental liability and offer it to tax, but this would not be a basis for denying exemption.

Issue 2: Addition of Amounts Set Apart u/s 11(1)(a)

The assessee argued that the amount set apart u/s 11(1)(a) should not be added back as it was not considered while allowing the deduction. The Tribunal directed that the AO should calculate interest on the excess amount advanced and charge it to tax, subject to the exemption of 85% of total receipts applied for charitable purposes.

Issue 3: Initiation of Penalty Proceedings u/s 271(1)(c)

The CIT(A) did not consider the ground related to the initiation of penalty proceedings u/s 271(1)(c). The Tribunal noted that the question of penalty would be decided when the issue comes before them, making it premature and thus rejected this ground.

Issue 4: Disallowance of Depreciation on Assets Purchased from Exempted Funds

The Revenue's appeal involved the disallowance of depreciation claimed on assets purchased from exempted funds. The AO disallowed the depreciation based on the decision in Escorts Ltd. vs. Union of India. However, the CIT(A) allowed the claim, stating that depreciation should be allowed when computing income under normal provisions. The Tribunal upheld this view, referencing previous decisions that supported the allowance of depreciation on assets owned and used by the trust in their activities.

Conclusion:

The Tribunal partly allowed the appeals filed by the assessee for statistical purposes and dismissed the appeal filed by the Revenue. The order was pronounced in open Court on 6/5/11.