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2016 (7) TMI 1577 - AT - Income TaxAssessment of trust - Accumulation of income u/s. 11(2) of the Act by filing Form No. 10 - assessee is following Cash System of accounting for the purpose of determination of income to be applied for charitable purpose u/s. 11 - 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 assessee is not eligible for benefit of accumulation of income - HELD THAT - If the Form No. 10 is not filed before completion of assessment, would mean that the assessment order will have to be reopened for the purpose of computation of income available for accumulation. Therefore, any form filed before the completion of assessment has to be accepted. In the present case on hand, we find that the assessee has filed Form No. 10 before completion of assessment. Therefore, we are of 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 once done is a fait accompli and the Assessing Officer cannot thereafter probe into the objects of the Trust - we are of the view that activities carried out by the assessee are in the nature of charitable activities as defined u/s. 2(15) of the Act. Therefore, we direct the AO to allow the exemption u/s. 11 as claimed by the assessee. Violation of Section 11(2)/(5) r.w.s. 13(1)(c) of the Act towards loans to two of its Settlers Association - AO held that the assessee has diverted its funds to other associations without charging any interest, therefore, opined that there is a violation of Section 13(1)(c) and hence not eligible for exemption u/s. 11 - HELD THAT - In assessee s own case 2010 (1) TMI 1276 - ITAT VISAKHAPATNAM authors of the assessee trust are two trade associations and as stated earlier there cannot be any personal interest so far as the trade associations are concerned. The impugned loans have not been given to the trustees but only to the trade associations. Though the trustees fall in the category of specified persons u/s 13(3), the trade associations in which they are office bearers cannot be treated as a concern in which they are substantial interested. Hence the question whether the provisions of section 13(1)(c) shall apply to the assessee in respect of the impugned advances or not is a debatable issue. Be that as it may, in any case, on merits, we have seen that the impugned advances have been made with adequate security and adequate interest and they have been collected subsequently. Hence we do not find any reason to suspect the adequacy of security or interest in terms of section 13(2)(a) Disallowance of depreciation on Fixed Assets - 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 - HELD THAT - 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. Therefore, the AO was not correct in disallowing the depreciation. Hence, we direct the AO to delete the additions made towards depreciation. Disallowance of income tax - assessee has claimed income tax payments as application 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 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 accounting. The CIT(A) after considering relevant submissions of the assessee, allowed the claim of the assessee.
Issues Involved:
1. Re-opening of assessment u/s. 147 of the Act 2. Accumulation of income u/s. 11(2) of the Act by filing Form No. 10 3. Method of accounting followed by the assessee 4. A.O.’s probing into objects of the assessee-trust 5. Violations of Section 11(2)/(5) r.w.s. 13(1)(c) of the Act 6. Deletion of additions made by the AO u/s. 43B of the Act Detailed Analysis: 1. Re-opening of assessment u/s. 147 of the Act: The assessee did not press the issue regarding the reopening of assessment for AYs 1997-98 and 1998-99. Consequently, the tribunal dismissed this ground as not pressed. 2. Accumulation of income u/s. 11(2) of the Act by filing Form No. 10: The assessee argued that it followed the Cash System of accounting for determining income to be applied for charitable purposes u/s. 11 of the Act. The A.O. rejected Form No. 10 filed by the assessee for accumulation of income, stating that it was not filed along with the original return of income. However, the tribunal found that the assessee consistently followed the Cash System and that the surplus was less than 25% of the total income, negating the need to file Form No. 10. The tribunal also referenced the Supreme Court's decision in Nagpur Hotel Owners Association Vs. CIT, which allows Form No. 10 to be filed before the completion of assessment. The tribunal directed the A.O. to re-compute the income after allowing the benefit of accumulation u/s. 11(2) of the Act. 3. Method of accounting followed by the assessee: The tribunal upheld that the assessee followed the Cash System of accounting for determining income for charitable purposes, as previously decided by the ITAT in the assessee's own case for earlier years. The A.O. was directed to compute the income as per the method of accounting followed by the assessee. 4. A.O.’s probing into objects of the assessee-trust: The tribunal noted that the assessee trust had been granted registration u/s. 12A from its inception, and the A.O. was not entitled to probe into the objects of the trust during assessment proceedings. The tribunal cited the Supreme Court's decision in ACIT Vs. Surat City Gymkhana, which states that once a trust is registered u/s. 12A, the A.O. cannot further probe into its objects. The tribunal concluded that the activities carried out by the assessee were charitable in nature and directed the A.O. to allow the exemption u/s. 11 as claimed by the assessee. 5. Violations of Section 11(2)/(5) r.w.s. 13(1)(c) of the Act: The tribunal found that the assessee had advanced loans to two of its settler associations with adequate security and interest, and these loans were subsequently collected. The tribunal referenced the Andhra Pradesh High Court's decision in Polisetty Somasundaram Charities, which distinguishes between lending and investment, stating that lending with adequate interest and security does not violate Section 13(1)(c). The tribunal held that there was no violation of Section 11(2)/(5) r.w.s. 13(1)(c) and directed the A.O. to allow the exemption u/s. 11. 6. Deletion of additions made by the AO u/s. 43B of the Act: The tribunal upheld the CIT(A)'s decision to delete the disallowance of unpaid liabilities u/s. 43B, as the assessee followed the Cash System of accounting and only considered actual payments made towards liabilities. The tribunal found no reason to interfere with the CIT(A)'s order. Additional Issues: Disallowance of Depreciation on Fixed Assets: The tribunal directed the A.O. to delete the disallowance of depreciation, as the assessee followed the Cash System of accounting and claimed the total cost of fixed assets as application of income without claiming depreciation for the purpose of application u/s. 11. Disallowance of Income Tax: The tribunal upheld the CIT(A)'s decision to allow the deduction of income tax payments as application of income for charitable purposes, referencing the Andhra Pradesh High Court's decision in CIT AP-1 Vs. Trustee of V.H.E.H. the Nizams Supplemental Trust. Conclusion: The appeals filed by the assessee were partly allowed, and the appeals filed by the Revenue were dismissed. The tribunal directed the A.O. to re-compute the income after considering the method of accounting followed by the assessee and allowing the benefit of accumulation u/s. 11(2) of the Act. The tribunal also upheld the CIT(A)'s decisions on various disallowances and exemptions claimed by the assessee.
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