TMI Blog2016 (7) TMI 1577X X X X Extracts X X X X X X X X Extracts X X X X ..... f the opinion that the A.O. is not correct in rejecting the Form No. 10 and denying the benefit of accumulation of income u/s. 11(2) of the Act. Hence, we direct the A.O. to re-compute the income after allowing benefit of accumulation u/s. 11(2) of the Act. Method of accounting followed by the assessee - HELD THAT:- Considering the facts and circumstances of this case and also respectfully following the Co-ordinate Bench decision in assessee s own case [ 2010 (1) TMI 1276 - ITAT VISAKHAPATNAM] , we are of the view that the assessee is following Cash System of accounting for determination of income for the purpose of application of income for charitable purpose. Therefore, we direct the A.O. to compute the income as per the method of accounting followed by the assessee. Denial of exemption u/s. 11 - AO was of the opinion that the activities carried out by the assessee are not in the nature of charitable activity as defined u/s. 2(15) as merely engaged in the business of providing organized labour to two of its Settlors Association - HELD THAT:- As decided in own case [ 2010 (1) TMI 1276 - ITAT VISAKHAPATNAM] registration of a Trust u/s 12A of the Income-tax Act of 1961 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of income for charitable purpose - AO disallowed income tax and added back to total income of the assessee - Contention of the assessee that income tax is allowable as a deduction while computing income in the case of trust claiming exemption u/s. 11 - HELD THAT:- We find force in the arguments of the assessee for the reason that income of any trust or society claiming exemption u/s. 11 has to be computed under normal commercial principles. Income tax payable is necessarily an out go from the income of the trust. Therefore, once there is out go towards income tax payment, it has to be allowed as a deduction towards income available for application of income for charitable purpose as held in Trustee of V.H.E.H. the Nizams Supplemental Trust [ 1978 (2) TMI 7 - ANDHRA PRADESH HIGH COURT] The CIT(A) after considering the relevant submissions rightly allowed the claim of the assessee. Disallowance of un-paid liability u/s. 43B - contention of the assessee that it is following Cash System of accounting for the purpose of determination of income u/s. 11 of the Act and hence not considered any liability on accrual basis while computing the income - HELD THAT:- We find force in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of charitable purposes defined in the Income-tax Act. The assessee has filed its return of income for the above assessment year s declaring NIL total income, after claiming exemption u/s. 11 of the Act. The assessment was completed u/s. 143(3) on 23-03-2000 accepting the income returned. Subsequently, the case has been reopened u/s. 147 of the Act, for the reasons that the assessee was not engaged in any charitable activity, but was merely supplying labour in an organized manner. The A.O. also noted that the assessee has violated the provisions of Section 11(2)/(5) and Section 13(1)(c) of the Act, by investing part of its funds in nonspecified mode of investment, that too in the concerns in which the trustees are interested. The A.O. also noted that there was un-spent surplus income of more than 25% of the total income for which there was no application has been filed for accumulation of income in Form No. 10. In response to notice u/s. 148, the assessee filed return of income on 20-04-2004 declaring NIL total income after claiming exemption u/s. 11 of the Act. The assessee also enclosed Form No. 10 for accumulation of income towards Workers Welfare and Buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing mercantile system of accounting, the excess of income over expenditure as per the Income and Expenditure Account should be treated as surplus for the purpose of determination of income u/s. 11 of the Act, whereas the assessee has followed Mercantile System for book keeping and considered Cash System of accounting for filing Income-tax returns, therefore considered excess of income over expenditure as per the Income and Expenditure Account for the purpose of computation of income. With these observations, the A.O. denied the benefit of sec.11 and computed the income under the normal provisions of business and made additions towards disallowance of donation, disallowance of un-paid liability u/s. 43B of the Act and Advertisement Expenditure. 5. For the A.Y. 1998-99, the facts were identical with the difference that the assessee did not file any Form No. 10, taking the plea that there was no un-spent surplus in excess of 25% of the total income. The A.O. for the reasons recorded in the preceding paragraphs, denied the benefit of exemption u/s. 11 and computed the income by taking the excess of income over expenditure as per the Income and Expenditure Account, further dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues to the file of learned CIT(A) in order to enable him to pass appropriate orders by duly following the orders passed by the ITAT in the assessee s own case referred (Supra) for other years. Accordingly we set aside the impugned common order of learned CIT(A) and restore all the issues to his file for adjudicating them afresh by following the decision of ITAT referred supra. Needless to mention, the assessee should be given necessary opportunity of being heard . 8. In this background and in the light of the above direction of the ITAT, the issues were set aside to the file of CIT(A) for fresh adjudication. The CIT(A) in the second round of appeals, partly allowed the appeal filed by the assessee. The Ld. CIT(A) upheld the action of the A.O. in reopening the assessment for the AY. 1997-98 and 1998-99. However, the other issues with regard to exemption u/s. 11, method of accounting followed by the assessee and computation of income available for application has been held in favour of the assessee. As regards the accumulation of income u/s. 11 of the Act, the CIT(A) rejected the claim of the assessee by holding that the assessee has not filed Form No. 10 along with original retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The A.R. further submitted that as per the Cash System of accounting, the surplus as per Receipts and Payments A/c is less than 25% of the total income and hence, filing Form No. 10 for accumulation of income u/s. 11(2) of the Act does not arise. However, during the course of re-assessment proceedings, the assessee has filed Form No. 10, as the A.O. has adopted Mercantile System of accounting for the purpose of determination of total income. The assessee further submitted that the Hon ble Supreme Court in the case of Nagpur Hotel Owners Association Vs. CIT [247 ITR 201] held that if Form No. 10 is filed before completion of assessment, the assessee cannot be denied benefit of accumulation of income u/s. 11(2) of the Act. 13. Ld. DR on the other hand strongly supported the order of CIT(A). 14. We have heard both the parties and perused the material available on record. The A.O. rejected Form No. 10 filed by the assessee for accumulation of income u/s. 11(2) of the Act. The A.O. was of the opinion that though assessee filed Form No. 10 along with revised return in response to notice u/s. 148, failed to file Form No. 10 along with original return of income, therefore, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 2004-05 in ITA Nos. 272 to 274/Vizag/2005. We find that the Co-ordinate Bench of this Tribunal, in assessee s own case for the earlier period held that the assessee is following Cash System of accounting for the purpose of determination of income u/s. 11 of the Act. The relevant portion of the order is extracted below: 11.3 The next issue is whether there is any violation of section 13(1)(c) r.w.s. 13(2) of the Act. The impugned amount of ₹ 30.00 lakhs and ₹ 5.00 lacs have been advanced to the two settler associations. Since they are the authors of the assessee trust and the trustees of the assessee trust are also the office bearers in the above said two associations, the AO treated the two associations as the persons referred to in section 13(3) of the Act. As pointed out in Para 11.1 supra, a charitable trust will loose exemption u/s 11, if any income or property is used or applied for the benefit of any person referred to in Section 13(3). According to Ld AR, though the assessee did not charge interest on these two loans initially, later on both the amounts were collected along with the interest @ 12%. According to Ld AR, since the impugned loans are covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less 15-10-2003 Interest amount received 22,56,000.00 07-07-2007 Interest amount received 12,51,121.86 26-11-2007 Interest amount received 10,98,248.00 29-01-2008 Interest amount received 20,000.00 24-03-2008 Interest amount received 35,082.00 26-11-2007 Principal amount received 10,00,000.00 29-01-2008 Principal amount received 10,00,000.00 24-03-2008 Principal amount received 10,00,000.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the method of accounting followed by the assessee. 16. The next issue that came up for our consideration is denial of exemption u/s. 11 of the Act. The AO denied the exemption u/s. 11 of the Act and computed the income under the normal provisions of the Act. The AO was of the opinion that the activities carried out by the assessee are not in the nature of charitable activity as defined u/s. 2(15) of the Act. The AO further was of the opinion that the assessee merely engaged in the business of providing organized labour to two of its Settlors Association. Therefore, it cannot be held that the assessee is involved in any charitable activity which entitles the assessee for exemption u/s. 11 of the Act. The Ld. AR submitted that the issue is squarely covered by the decision of the ITAT, Visakhapatnam Bench in assessee s own case for the AYs. 1999-2000 to 2004-05 in ITA Nos. 272 to 274/Vizag/2005. We find that the Co-ordinate Bench of this Tribunal, in assessee s own case for the earlier period held that the activities carried out by the assessee are in the nature of charitable activities, eligible for exemption u/s. 11 of the Act. The relevant portion of the order is reproduced her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neration and shall work in an honorary capacity. Clause 34 of the Trust Deed states that the in the event of the dissolution of the Trust, the remaining property shall not be distributed among the members of the Trust but shall be given or transferred to any other institution with similar objectives and aims and which is registered u/s 12A of the Income-tax Act. The main objects for which the trust was formed, as extracted in Para 4 supra, does not depict any profit motive. The primary object of the Trust is to identify, enroll, allot the work and regulate the operation of the private workers. It is not in dispute that the assessee is carrying on the very same activity since its inception. The surplus earned on carrying on the said activity are not to be distributed between the trustees, but to be retained by the assessee trust for the purpose of carrying on the objects of the trust. Hence in the absence of the profit motive attached to the activities carried on by the Trust, in our opinion, the activities carried on by the Trust cannot be treated as a business activity. Further the assessee trust was formed only for the purpose of the regulating the operations of the private worke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 11 or section 12 shall not apply to the income of the charitable trust. 11.2 Now the facts relating to these two issues are discussed in brief. The assessee had advanced an amount of ₹ 30,00,000/- and ₹ 5,00,000/- respectively to M/s Visakhapatnam Stevedors Association and M/s Visakhapatnam Clearing and Forwarding Agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 out moneys in the acquisition of some species of property. In CIT Vs. Eternal Science of Man s Society (19812) 128 ITR 456, the Delhi High Court held that the interest income received by a charitable institution has to be excluded from the taxable income of the assessee in view of clause Section (2) and clause (h) is not attracted. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. Ps. 03-04-1995 Loan amount granted 30,00,000.00 Interest accrued on loan 46,60,451.86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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. 11.4 It is necessary here to consider a peculiar feature attached to the assessee trust. Generally the trusts are founded by natural persons or commercial legal persons. However, in the instant case, the assessee trust was founded by two trade associations, which are non-commercial legal persons. The concept of personal interest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and collected interest. Therefore, we direct the AO to allow the exemption u/s. 11 as claimed by the assessee. 18. The next issue that came up for our consideration is disallowance of depreciation on Fixed Assets. The AO computed income under the normal provisions of the Act by adopting the excess of income over expenditure as per the Income and Expenditure A/c. The AO further of the opinion that when the assessee has claimed total cost of Fixed Assets as application of income, then claiming depreciation on the same amounts to double deduction, therefore, cannot be allowed. It is the contention of the assessee that it is following Cash System of accounting for the purpose of determination of income available for application and claimed cost of Fixed Assets as application of income and not claimed any depreciation for the purpose of application of income u/s. 11 of the Act. We find force in the arguments of the assessee for the reason that the assessee is following Cash System of accounting. The assessee has claimed cost of total assets purchased as application of income. We further noticed that the assessee has not claimed depreciation on Fixed Assets as application of income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) after considering the relevant submissions rightly allowed the claim of the assessee. We do not see any error or infirmity in the order passed by the CIT(A). Hence, we inclined to upheld the order of CIT(A) and reject the grounds raised by the Revenue. 20. The next issue that came up for our consideration is disallowance of un-paid liability u/s. 43B. The AO disallowed un-paid liability by invoking the provisions of Section 43B. It is the contention of the assessee that it is following Cash System of accounting for the purpose of determination of income u/s. 11 of the Act and hence not considered any liability on accrual basis while computing the income. We find force in the arguments of the assessee for the reason that the assessee is following Cash System of accounting, accordingly, net cash surplus for the year is considered as income available for application of income as per the receipts and payments accounts. The assessee has considered only actual payments made towards liability referred to in sec. 43B for the purpose of application of income. Therefore, the AO was not correct in making additions towards unpaid liability by following the Mercantile System of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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