In a recent case, the Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) upheld the Commissioner of Income Tax [CIT(A)] which allowed the exemption on sale consideration invested in purchase of property with prior permission of charity.
The appeal was filed by the revenue against the order pertaining to Assessment Year 2017-18. The assessee, Dawat E Hadiyah trust is an institution registered as a charitable organization with CIT(Exemptions), Mumbai, under Section 12A of the Income Tax Act, 1961.
The assessee filed its return of income electronically declaring total income at Nil, claiming exemption under Section 11 of the Income tax law. The return was selected for scrutiny under CASS and accordingly, statutory notices were issued and served upon the assessee.
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During the course of scrutiny assessment proceedings, the AO noticed capital gains on sale of immovable properties. The AO found that the assessee has sold properties and was accordingly asked to explain as to how the provisions of Section 11(1A) of the Income tax legislation have been complied with. In its reply, the assessee explained that the assessee had sold four flats in a building known as Ahmed Manzil, after taking prior permission of the Charity Commissioner under Section 36(1) of the Maharashtra Public Trusts Act, 1950 for a total consideration of Rs. 7,04,24,000/- and the surplus arising out of the above transaction amounts to Rs. 5,37,06,050/- and the said amount has been credited to the Corpus Account of the Trust.
The assessee has advanced money for purchase of Immovable property after taking Prior permission of Charity Commissioner and has advanced a sum of Rs.203 Crores. Since the entire sale consideration is utilized for purchase of another capital asset, provision of Section 11(1A) of the Act have been complied with.
The reply of the assessee did not find any favour with the AO who was of the firm belief that the investment in the immovable properties, is not treated by the Trust as expenditure incurred on capital assets. Therefore, investment made in purchase of immovable properties is not sufficient to claim exemption under section 11A of the Act and accordingly added the entire sale consideration of Rs.7,04,24,000/- to the income of the assessee trust.
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The AO found that the assessee had huge deficit of earlier years brought forward. The assessee was asked to furnish details of deficit claimed with the relevant working. The assessee filed the detailed reply explaining the deficit being excess of expenditure over income for AY 1995-96 to AY 2017-18. It was explained that in all the earlier AYs, the deficit is already allowed to be carried forward to subsequent years. Strong reliance was placed on the decision of the Supreme Court in the case of CIT vs. Rajasthan and Gujarati Charitable Foundation.
The AO was of the opinion that the assessee had created artificial deficit and came to the conclusion that the deficit claimed in AY 2013-14 to AY 2017-18, is not the actual deficit but an artificially calculated deficit which cannot be allowed to be carried forward and accordingly rejected the claim of deficit of Rs.3,66,11,44,839/-.
The assessee challenged the assessment before the CIT(A) and reiterated its claim of exemption under Section 11(1A) of the Income tax statute. After considering the facts and submissions, the CIT(A) found that since the entire consideration received on sale of immovable property was invested towards purchase of new property, the amount invested is in line with the provisions of Section 11(1A) of the Act and accordingly, allowed the entire capital gain as exempt in terms of provision of Section 11(1A) of the Income tax law.
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The CIT(A) found that the Bombay High Court, in the assessee’s own case has decided the appeal in favour of the assessee and against the revenue in respect of such arbitrary disallowance of carried forward loss.
The first appeal authority also found that addition on this account has been made in various other orders by the AO which have subsequently been deleted by the appellate authorities at different levels. Since the impugned additions/disallowances have been allowed in earlier AYs, taking a leaf out of them, the CIT(A) deleted the disallowance of carried forward loss of Rs.3,66,11,44,389/-
A two member bench of Narendra Kumar Billaiya, Accountant Member and Sandeep Singh Karhail,Judicial Member observed that since the entire sale consideration has been invested in the purchase of property, with the prior permission of the Charity Commissioner, we do not find any reason to interfere with the findings of the CIT(A).
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The Tribunal allowed the losses/disallowances by the appellate authorities in favour of the assessee and against the revenue and it cannot be said that the assessee has artificially created the deficit when the same is emanating from the records of the assessee. The ITAT dismissed the appeal.
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