2016 (7) TMI 1578 - AT - Income Tax

Assessment of trust - determination of income for the purpose of application of income for charitable purpose method of accounting followed by the assessee - HELD THAT - As decided in own case 2010 (1) TMI 1276 - ITAT VISAKHAPATNAM 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 - violation of the provisions of section 13(1)(c) 13(2)(g) r.w.s. 13(2) - addition towards refund of excess amount - HELD THAT - As decided in own case 2015 (5) TMI 1210 - ITAT VISAKHAPATNAM Excess amount refunded to M/s. South India Corporation Ltd. does not amount to diversion of funds as defined u/s. 13(2)(g) of the Act. The assessee has refunded excess amount collected from the party by way of anonymous decision of the Board of Directors of the Trust further supported by proof of payment. Therefore, we are of the view that the A.O. was not correct in holding that the assessee has violated the provisions of section 13(1)(c) 13(2)(g) r.w.s 13(3) of the Act. Hence, we direct the A.O. to allow the exemption as claimed by the assessee and delete the additions made towards refund of excess amount to M/s. South India Corporation Ltd. Addition towards accrued interest - A.O. observed that the assessee itself has offered interest as per the TDS certificate - HELD THAT - We find force in the arguments of the assessee for the reason that the assessee is consistently following cash system of accounting for the purpose of determination of income. However, though assessee claims that it is following cash system of accounting for the purpose of determination of income, the assessee itself admitted that it has offered interest income based on TDS certificate. There is a contradictory statement from the assessee as regards the method of accounting followed for the purpose of determination of income and treatment of interest accrued on fixed deposits for the purpose of tax. Though, in principle, we accept the contention of the assessee that it is following cash system of accounting, in view of the claim made by the assessee that it has offered interest on accrual basis, we deem it appropriate to remit the issue back to the file of the A.O. and direct the A.O. to examine the issue afresh in the light of the above discussions. Penalty u/s 271(1) - refund of excess amount made - HELD THAT - Since, the quantum addition on which penalty levied was deleted, the penalty levied u/s. 271(1)(c) of the Act cannot sustain. Even otherwise, the question whether the refund of excess amount made to M/s. South India Corporation Ltd. is an expenditure incurred for the purpose of the Trust or the said payment is a diversion of funds to the interested persons which violates the provisions of section 13(1)(c) r.w.s. 13(3) of the Act, is a legal issue and could involve difference of opinion. A.O. disallowed the amount because he had denied the benefit of exemption u/s. 11 of the Act. The Hon'ble Supreme Court in the case of CIT v. Reliance Petro Products Ltd. 2010 (3) TMI 19 - SUPREME COURT clearly held that disallowance of expenditure does not amount to concealment of particulars of income or furnishing inaccurate particulars of income which leads to levy of penalty u/s. 271(1)(c) of the Act. Therefore, considering the facts and circumstances of this case, we direct the A.O. to delete the penalty levied u/s. 271(1)(c) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Method of accounting followed by the assessee.
2. Denial of exemption under Section 11 of the Income Tax Act for violation of Section 13(1)(c) & 13(2)(g) read with Section 13(2) of the Act.
3. Addition towards accrued interest.
4. Penalty under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Method of Accounting Followed by the Assessee:
The primary issue was whether the assessee's method of accounting, specifically the cash system, was acceptable for determining income under Section 11 of the Income Tax Act. The Tribunal noted that the issue had already been settled in favor of the assessee in previous years (1999-2000 to 2004-05) by the ITAT, Visakhapatnam Bench. The Tribunal reiterated that the assessee consistently followed the cash system of accounting for determining income for charitable purposes. Thus, the Tribunal directed the Assessing Officer (A.O.) to compute the income as per the cash system of accounting followed by the assessee.

2. Denial of Exemption Under Section 11:
The A.O. denied exemption under Section 11, citing that the assessee violated the provisions of Section 13(1)(c) & 13(2)(g) read with Section 13(2) by refunding excess amounts collected from M/s. South India Corporation Ltd. The Tribunal referred to its own decision in ITA No. 269/Vizag/2013, which clarified that the refund was in the normal course of business and did not constitute a diversion of funds to interested persons. The Tribunal held that the refund was legally due and supported by Board resolutions and payment proofs. Consequently, the Tribunal directed the A.O. to allow the exemption under Section 11 and delete the additions made for the refund.

3. Addition Towards Accrued Interest:
The A.O. added ?50,74,385 towards accrued interest, based on TDS certificates, while the assessee claimed to follow the cash system of accounting. The Tribunal found inconsistencies in the assessee's statements regarding the method of accounting for interest income. Although the Tribunal accepted the assessee's claim of following the cash system in principle, it remitted the issue back to the A.O. for fresh examination, considering the contradictory statements and directing the A.O. to determine taxability based on the actual method of accounting followed.

4. Penalty Under Section 271(1)(c):
The A.O. levied a penalty under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars, linked to the disallowance of the refund of excess fees to M/s. South India Corporation Ltd. The CIT(A) deleted the penalty, noting that the assessee had disclosed all particulars and that the issue involved a difference of opinion on a legal matter. The Tribunal upheld the CIT(A)'s decision, referencing its earlier finding that the refund did not constitute a diversion of funds. It also cited the Supreme Court's decision in CIT v. Reliance Petro Products Ltd., which held that disallowance of expenditure does not amount to concealment of income. Thus, the Tribunal directed the A.O. to delete the penalty.

Conclusion:
The appeals filed by the assessee were allowed for statistical purposes, and the appeals filed by the revenue were dismissed. The Tribunal's order was pronounced in open court on July 22, 2016.