Deemed Application of Income Spent on Immovable Property Does Not Require Schedule-I Disclosure under Form I-TR7

ORDER

Nikhil Choudhary, Accountant Member. – This is an appeal filed by the assessee against the order of the ld. CIT, NFAC wherein the ld. CIT(A), vide his order under section 250 of the Income Tax Act, 1961 dated 30.07.2025, has dismissed the appeal filed by the assessee against the order of the Assessing Officer passed under section 147 for the Assessment Year 2015-16, on 28.03.2022. The grounds of appeal are as under:-

“1. Because in the facts and circumstances of the case the Ld. CIT(A), (NFAC) erred in law in upholding the issuing notice by AO under section 148 and in making assessment without disposing by reasoned order of our objections to the reopening of the case.

2. Because in the facts and circumstances of the case the Ld. CIT(A), (NFAC) erred in law and on facts in confirming the addition of Rs. 4,00,16, 602/- made by AO for the reason that this is not disclosed in Schedule-I of ITR ignoring the fact that Schedule-I of ITR is not applicable to the amount of deemed application under clause (2) of Explanation to Section 11(1) of the I.T. Act, 1961.

3. Because the Notice of demand and assessment order appealed against is contrary to facts, law and principles of natural justice.

4. The appellant craves leave to add, amend, alter, modify or withdraw any ground of appeal during the course of hearing and until disposal of this appeal.”

2. The facts of the case are that in this case, the Assessing Officer had reason to believe that the investment made by the assessee society in the purchase of immovable property to the tune of Rs. 3,96,06,150/- had not been shown in its accounts and was therefore, unexplained in the hands of the assessee. A notice under section 148 was issued in response to which the assessee filed a return declaring total income at Nil. The ld. AO records that subsequently notices accompanied with questionnaires were issued, but the same were not responded to. Therefore, a show cause notice was issued to the assessee asking why the assessment should not be done as a best judgment assessment. In response to the same, the assessee made compliance and submitted certain documents. On perusal of these documents, the AO came to the conclusion that the assessee had accumulated an amount of Rs. 4,00,16,602/- under clause (2) of Explanation 1 to Section 11(1) of the Income Tax Act for the A.Y. 2014-15 and as per the Income Tax Act, this should have been shown as accumulated in Schedule-I of ITR for the A.Y. 2015-16. However, the assessee had not shown the same in column 1 of Schedule-I of ITR for the said assessment year. Accordingly, the assessee was asked to clarify the issue. In response, the assessee submitted that the Schedule-I related to amounts accumulated or set apart for specified purpose as per section 11(2), Since the amount of Rs. 4,00,16,602/- is deemed application under clause (2) of Explanation (1) to Section 11(1), Schedule-I of the ITR was not related to this amount. The AO was not convinced with the reply and therefore, he issued a show cause notice to the assessee against which the assessee reiterated its submissions. However, the ld. AO invited attention to clause 4 (vi) of the instruction for filing of ITR where it had been mentioned that amounts accumulated or set apart was mandatorily to be filled and shown in Schedule-I and since the assessee had failed to record the amount so accumulated and set apart, hence the said amount of Rs. 4,00,16,602/- claimed as deemed application, was added back to the total income of the assessee.

3. Aggrieved with the said order of the Assessing Officer, the assessee went in appeal before the ld. CIT(A). Before the ld. CIT(A), it was submitted that the AO had erred in law because he had failed to take cognizance of the fact that Schedule-I of the ITR was only related to the amount accumulated / set apart for specified purpose as per the option under section 11(2). Schedule I of the ITR was not applicable to any amount of deemed application under clause (2) of Explanation (1) to Section 11(1). It was further submitted that they had invested a sum of Rs. 3,96,06,150/- for purchase of immovable property during the F.Y. 2014-15. It was further submitted that as per clause (2) of Explanation (1) to Section 11(1) in the case of deemed application, the amount was to be utilized in the next previous year. In the case of the assessee, there was deemed application for Rs. 4,00,16,602/- for the assessment year 2014-15. This had been utilized during the assessment year 2015-16 by way of purchase of immovable property to the tune of Rs. 3,96,06,150/-. The source of purchase of the immovable property was duly disclosed in the audited accounts of the society. Form No. 10B was filed on 29.09.2014 which disclosed the deemed application of Rs. 4,00,16,602/-. The assessee filed copies of sale deed dated 28.07.2014, copy of bank statement, audited income and expenditure statement of affairs for F.Y. 2014-15 and submitted that the reasons to believe did not consider the material on record. The assessee had protested against the issue of notice under section 148, vide submission dated 17.12.2021 but the assessment had been proceeded without disposing the objections to the reopening assessment. It was submitted that the amount of Rs. 4,00,16,602/-, had neither accrued nor been received during the assessment year 2015-16. Therefore, there was no claim for this amount as deduction from income for the A.Y. 2015-16. In assessment year 2014-15, this had been disclosed and allowed as deemed application for charitable purposes. The addition had wrongly been made on account of the reason that it had not been disclosed in Schedule-I of ITR ignoring that Schedule-I of ITR related to amounts set apart under section 11(2) and had no application for deemed application under clause (2) of Explanation (1) to Section 11(1) of the I.T. Act, 1961. It was further submitted that the assessee had submitted Form No. 10 in paper mode in the office of ITO (Exemption) on 30.09.2014. There was an amendment in the Rules and Form No. 10 was required to be submitted online on the e-portal. Therefore, the assessee had submitted Form 10 online on 4.08.2016 and requested the CIT (Exemption), Lucknow for condonation of delay under section 119(2)(b) of the Income Tax Act, 1961. The ld. CIT (Exemption) had, vide his order dated 28.02.2018, condoned the delay in filing Form No. 10. This information was on the record of the ld. AO. The ld. CIT(A) considered these submissions of the assessee. He rejected the submissions of the assessee on the ground that the assessee had not provided any evidence that the AO had failed to dispose the objections raised regarding the reopening of assessment, because a copy of the said objections had not been placed before him. He also held that the argument that disclosure of Rs. 4,00,16,602/- was not required in Schedule-I of the ITR for the assessment year 2015-16, on account of deemed application under Explanation 1 to section 11(1) was fundamentally flawed. He held that both forms of income being retained for charitable purposes were required to be reported in Schedule-I. He drew reference to clause 4(vi) of the ITR instruction and held that it expressly mandated the disclosure of both accumulated income and deemed application in Schedule-I. The assessee’s failure to comply with this instruction led to the omission of Rs. 4,00,16,602/-, which was not just a procedural oversight but a failure to comply with statutory requirements. The ld. CIT(A) held that Schedule-I was not an optional disclosure, its purpose was to provide a clear and accurate trail of how income was applied for charitable purposes to help the AO to verify whether the society was meeting statutory obligations under section 11. Accordingly, he held that the AO had acted within the statutory framework in making the disallowance of deemed application and he accordingly dismissed the appeal of the assessee.

4. The assessee is aggrieved at this order of the ld. CIT(A) and has accordingly come in appeal before us. Sh. U.S. Gupta, Advocate (hereinafter referred to as the ld. AR) representing the assessee submitted that the assessee had filed a return on 5.04.2021, in response to the notice under section 148. It has been served a copy of the reasons in 29.06.2021 and it had raised objections to the issue of the notice under section 148 vide its submission dated 17.12.2021. However, the assessment had been proceeded with and completed without disposing of its objections. It was further submitted that the case had been reopened for examining unexplained investment in the purchase of immovable property to the tune of Rs. 3,96,06,150/-, but no additions had been made on this account. The addition had instead been made for non-disclosure of information in Schedule-I of the ITR amounting to Rs. 4,00,16,602/-. It was argued that several Courts had held that where the primary grounds on which the case was reopened did not survive, the ld. AO lacked the jurisdiction to make any other addition. It was further informed that the AO was under a mistaken impression, that the investment in the purchase of the property had not been disclosed, because the same had been made out of income deemed to be applied in A.Y. 201415 and out of the accounted income of the assessee. The ld. AR further submitted that the ld. AO and the ld. CIT(A) had completely confused the issues of deemed application under Explanation (1) to section 11(1), (which was relevant to the assessment year 2014-15) and accumulation for specified reasons under section 11(2). It was further submitted that Schedule-I of the ITR was not applicable to deemed application but only to accumulation under section 11(2). It was further submitted that the assessee had filed Form 10B manually on 28.09.2015 and subsequently online with a condonation petition, which had been condoned by the ld. CIT (E) on 28.02.2018. Therefore, since the assessee had fulfilled all statutory requirements and since the ld. AO and the CIT(A) had made and confirmed the addition on incorrect appreciation of law, the disallowance and addition made by them should be deleted.

5. Sh. Shaurya Shashwat Shukla, CIT DR (hereinafter referred to as the ld. DR) pointed out that the so-called objections filed by the assessee were not on departmental records. He further pointed out that the assessee was allowed a period of 60 days to file an objection to the notice under section148, after receiving a copy of the reasons recorded and the delay in filing the objections had not been explained by the assessee. Therefore, since the so-called objections had been, even otherwise, filed beyond the permissible time limits, the ld. AO was not obliged to take them into cognizance. The ld. CIT DR further drew our attention to the comments of the ld. CIT(A) that even if the assessee was not required to fill Form No. 9A, he was still required to adhere to the provisions of Schedule-I of the ITR and in view of the failure to do so, he held that the actions of the lower authorities should be confirmed.

6. We have duly considered the facts and circumstances of the case and gone through the relevant legal provisions, rules and prescribed formats. We have also perused the instructions for filling out Form No. ITR 7, which has been supplied to us by the ld. AR during the course of hearing. As regards the assessee’s prayer to quash the assessment because the ld. AO did not dispose of its objections, we note that the assessee has raised these objections in its very first reply to the AO and the AO has not taken any cognizance of the same in his order. We are of the view that it was obligatory for the ld. AO to consider the objections and dispose them and the failure to do so in violation of the principles of natural justice, which renders the order bad in law. Furthermore, the ld. CIT(A) could not have refused to adjudicate the matter as the objection raised by the assessee on 17.12.2021 had quite clearly been uploaded alongwith the Form No. 35. Hence ground no. 1 of the assessee’s appeal is allowed.

7. On a perusal of clause 9 which relates to scheme of the form ITR-7, we noticed that as per 9(iii)(a), it is quite clearly spelt out that in Schedule-I, it is the details of the amounts accumulated or set apart under section 11(2) which are required to be disclosed and not amounts deemed to be applied by virtue of clause (2) to Explanation (1) to section 11(1). Thus the belief of the ld. CIT(A) that even the deemed application under clause (2) to Explanation (1) to section 11(1) is required to be disclosed in Schedule I, is not borne out from the examination of the instructions. We accordingly delete the addition made on this account and ground no. 2 is accordingly allowed.

8. Ground no. 3, flows from the aforesaid and is therefore allowed. Ground no. 4 does not require a decision.

9. In the result, the appeal of the assessee is allowed.