Sale Consideration Invested In Purchase Of Property, With Prior Permission Of Charity Commissioner; ITAT Deletes Disallowance

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that no disallowance can be made as the sale consideration was invested in the purchase of property with the prior permission of the charity commissioner.

The bench of Sandeep Singh Karhail (Judicial Member) and Narendra Kumar Billaiya (Accountant Member) has observed that whenever the properties are purchased, they are shown as applications of funds and claimed as capital expenditures in the computation of income. Similar treatment was given in the computation of income for AY 2005–06 and 2006–07. Insofar as the investment of capital gain is concerned, there is no dispute that the entire sale consideration has been invested in the purchase of immovable properties.

The respondent assessee is a trust registered as a charitable organization with DIT (Exemptions), Mumbai, under Section 12A of the Income Tax Act. The assessee filed its return of income electronically, declaring total income at nil and claiming exemption under Section 11 of the Income Act. The return was selected for scrutiny under CASS, and accordingly, statutory notices were issued and served upon the assessee.

During the course of scrutiny and assessment proceedings, the AO noticed capital gains on the sale of immovable properties. The AO found that the assessee has sold properties and was accordingly asked to explain how the provisions of Section 11(1A) 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 from the Charity Commissioner for a total consideration, and the surplus arising out of the transaction amounts and the amount has been credited to the corpus account of the trust. The assessee has advanced money for the purchase of immovable property after obtaining prior permission from the Charity Commissioner and has advanced a sum of Rs. 203 crore. Since the entire sale consideration is used for the purchase of another capital asset, the provisions of Section 11(1A) of the Income Tax Act have been complied with.

The AO found that the assessee had a huge deficit from earlier years brought forward. The assessee was asked to furnish details of the deficit claimed along with the relevant work. The assessee filed a detailed reply explaining the deficit as an excess of expenditure over income for AY 1995–96 to AY 2017–18. In all the earlier AYs, the deficit is already allowed to be carried forward to subsequent years. The AO was of the opinion that the assessee had created an 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 that cannot be carried forward and accordingly rejected the claim of a deficit.

The assessee challenged the assessment before the CIT (A) and reiterated its claim of exemption under Section 11(1A) of the Income Tax Act. The CIT(A) found that since the entire consideration received on sale of immovable property was invested towards the purchase of new property, the amount invested is in line with the provisions of Section 11(1A) and allowed the entire capital gain to be exempt in terms of the provisions of Section 11(1A) of the Income Tax Act.

The department contended that nothing is coming out of the records to show that the investment in properties in earlier years was considered capital expenditure.

The tribunal, while upholding the CIT (A) order, held that in the earlier AYs, the losses and disallowances had been allowed by the appellate authorities in favor of the assessee and against the department, and it cannot be said that the assessee has artificially created the deficit when the same is emanating from the records of the assessee.

Counsel for the appellant: Foroz B. Adhyarujina

Counsel for Respondent: Sanyogita Nagpal

Case Title: DCIT (E) Versus Dawat E Hadiyah

Case No.: I.T.A. No. 1345/Mum/2024

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