TMI Blog2010 (1) TMI 1276X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT (A) erred in holding that the activity of the appellant trust in supplying organized labour force as required by the Dock Labour Force is a business activity and not a charitable activity. (c) The Learned CIT (A) erred in holding that the element of charity is not present by relying on irrelevant decisions and by ignoring the relevant decisions of the Supreme Court and the jurisdictional High Court. (d) The Learned CIT (A) erred in not applying the provisions of Sec.11(4A) to the facts of the appellant Trust. He failed to appreciate that if there were a business activity, it was incidental to the attainment of objectives of the appellant trust. 3 (a) Without prejudice, the Learned CIT (A) erred in denying exemption on the reason that moneys have been advanced to the Settlor associations ignoring the fact that the loans were advanced with interest and such interest and part of principal had been recovered from the borrowers. (b) The Learned CIT (A) failed to apply the ratio of the jurisdictional High Court in the case of Polisetty Somasundaram Charities 133 ITR 377 which is in favour of the appellant in this regard. 4. Without prejudice to ground No.3, the Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Trust by a Trust Deed dated 19.01.1994. The authors of the trust were two trade bodies viz., Visakhapatnam Stevedor s Association and the Visakhapatnam Clearing and Forwarding Agents Association (here in after Settlor Associations ). The main objects of the Trust, as spelt out in Clause no.3 of the Trust Deed, read as under: 3. The Main objects of the Trust are: a) To identify, enroll, allot the work and regulate the Private Workers engaged by the Members and users of Stevedor s Association and Clearing and Forwarding Agents Association of Visakhapatnam, only against short supply of the labour by the Visakhapatnam Dock Labour Board, Visakhapatnam. b) To generally promote the welfare of the workers who are identified and enrolled in the Trust. c) To utilize the Funds of the Trust for the above purposes and also for other Charitable purposes such as Education, Health, Sports and Alleviation of sufferings of the Poor and the needy etc., d) To carryout other public utility activity within the meaning of Charitable purposes defined in the Income-tax Act . The assessee trust has also been registered u/s 12A of the Income Tax Act, vide order dated 02-03-2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objective is commercial in nature. The primary objective of the assessee, viz., enrolling the private workers and supplying them to the members of the Settlors Association is a business activity. The assessee receives charges from the users of the labourers, retains a part of it for the general welfare of the workers and passes on the remaining amount to the workers. This is only a labour contract activity and hence it cannot be treated as a charitable activity. The assessee has failed to maintain separate books of account as mandated u/s 11(4A) of the Act. B) No charitable activity is undertaken till date. Since inception, the assessee trust has undertaken only its primary objective of supplying labour, which is purely commercial in nature, and did not carry out any other charitable activity. The relationship between the assessee and the workers is that of employer and employee relationship. Hence the other objectives can only be treated as a commercial obligation incidental to the employment of the workers and they cannot be viewed as Charitable in nature. C) Mere registration u/s 12A of the Act will not confer exemption automatically u/s 11. D) Violation of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general charity but in practice the assessee could only do a minimum welfare work for the workers as per the labour rules which is generally being done in any other organizations. Therefore, the accumulated funds of the appellant has not been utilized for any general charitable purpose. iv) The members of the Trustee Board are again members of the Settlers Association only and they have total control of the management with regard to dealing with labourers, finance etc., The labourers have no say in the management of the appellate trust. Therefore, assessee functions like employer dealing with employees to safeguard its interest and occasionally does some welfare activity for its workers. v) Assessee has been functioning for the last 10 years and accumulated huge surplus funds but not taken up any public charity works. Therefore, it cannot be said that the appellant trust is formed for charitable purpose to general public. vi) The stevedoring association and the C F Association utilized ₹ 30 lakhs ₹ 5 lakhs respectively without interest being charged by the settlers. It is only when the assessee was pointed out by the Department, a special resolution was passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer cannot thereafter probe into the objects of the Trust. For the sake of convenience, we extract below the head notes of the Surat City Gymkhana case cited supra: The registration of a trust under section 12A of the Income-tax Act, 1961, once done is a fait accompli and the Assessing Officer cannot thereafter make further probe into the objects of the trust. The decision of the High Court in the Hiralal Bhagwati v.CIT (2000) 246 ITR 188 (Guj) attained finality on this point also since that decision also covered this point and the Department had not challenged that decision before the Supreme Court We notice that the assessing officer has dealt in detail to state that the objects of the trust are not charitable in nature. In view of the decision of the Hon ble Apex Court, the Assessing Officer is not right in law in probing into the objects of the Trust during the course of the assessment proceedings. Accordingly the denial of exemption u/s 11 is also not in accordance with law. 10. The next question that comes for consideration is whether the activities carried on by the assessee trust can be termed as business activity as per the view of the AO. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss activity for the detailed reasons discussed supra. 11. The next two issues are inter connected. They relate to the issue of violation of section 11(5) and section 13(1)(c) r.w.s. 13(2) of the Act As per the provisions of section 11(5) of the Act, the amount accumulated u/s 11(2) of the Act have to be invested or deposited in the forms and modes specified in the said section. According to section 13(1)(d), a charitable trust will lose exemption u/s 11 or section 12, if any funds of trust are invested otherwise than in any one or more of the forms or modes specified in section 11(5) of the Act. 11.1 According to section 13(2)(a), if any part of income or property of the trust is or continues to be lent to any person referred to in section 13(3) for any period during the previous year without adequate security or adequate interest or both, the income or the property of the trust shall be deemed to have been used or applied for the benefit of a person referred to in section 13(3). According to section 13(1)(c), if any income or property of the trust is directly or indirectly used or applied for the benefit of any person referred to in section 13(3), the provisions of section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red as confined to laying out the amount in a venture or institution with a profit motive and with no promise of assured return. It is not feasible to survey the multifarious modes of investment and it is sufficient to indicate prominent modes to convey the width of the expression invest . Investment involves laying out the amount in partnership firms, shares in joint stock companies, real estate business and such other concerns or business. In the process of investment, an element of risk is involved and the expectation of return or profit is not assured and the depletion of capital itself is not an abnormal feature. In the case of lending, the return by way of interest is generally assured and the element of risk is minimal. In Nawan Estates (P) Ltd. Vs. CIT (1977) 106 ITR 45 (SC), in the context of considering the connotation of the expression investment in section 23A and whether investment in Section 23A can be stretched to house property or capital gains apart from the holding of shares, debentures, stocks or other securities, the Supreme Court held that investment covers acquisition of house property or capital gains and investment primarily means the act of laying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as to attract the denial of exemption under clause (h). The amount is advanced on an agreed rate of interest and, therefore, the transaction is within the fold of lending and it cannot be considered as an investment. The lending in clause (a) should be supported by adequate interest or security. The Appellant Assistant Commissioner found that the rate of interest at 12% is normal and adequate and the firm is financially sound and the Appellant Tribunal confirmed the finding. Therefore, the assessee is entitled to exemption under Section 11 and the conditions under Section 13(2) are satisfied and Section 13 (2) (h) is not applicable . The Ld AR also submitted that for the purpose of computing the income u/s 11 to 13 of the Income Tax Act, the assessee is following the cash system of accounting. The interest collected from the impugned two loans has been offered to tax in the year of receipt. The details of loans granted and receipt of interest and principal on these two loans have been extracted below from the written submissions of Ld AR. VISAKHAPATNAM STEVEDORES ASSOCIATION Date Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000.00 15-05-2002 Interest amount received 3,62,137.00 8,62,137.00 NIL According to Ld AR, the interest rate of 12% was more than the interest earned by the assessee by parking the surplus funds in the fixed deposits of the Scheduled banks. Thus, there can not be any dispute that the interest rate of 12% received by the assessee is adequate. The AO has not expressed any doubt about the financial stability of the two settler associations. Thus the amounts lent to the two founder associations were adequately secured and also earned adequate interest @ 12%. It was stated that the assessee is following cash system of accounting for the income tax purposes and hence the interest can be offered to tax only in the year of receipt. Though initially the assessee trust did not charge interest, later it has fully collected the due interest. According to the cash system, the interest has been offered to tax in the year of receipt which is also in accordance with the provisions of the Income tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount that should have been applied as per section 11 is not applied during any year and the assessee accumulates or set apart any amount for application for charitable purposes in future, then the amount so accumulated shall not be included in the total income provided the following conditions are complied with, viz., a. such person specifies, by notice in writing given to the AO in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, subject to the ceiling of certain years. b. the money so accumulated or set apart is invested or deposited in the forms and modes specified in sub section (5). The prescribed form is Form No.10. In the Form No.10 for the assessment year 1999-2000, the assessee as stated the purposes of accumulation as under: a. Building construction b. for payment of provident fund, pension, gratuity, productivity bonus, family security scheme, time rate and piece rate wages and to meet the expenditure for other welfare amenities provided by the pool. According to the AO, the purpose of accumulation is general in nature and for welfare of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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