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TMI Blog2016 (7) TMI 1577X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Building Constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tile 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 disallowed certain e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned 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 return of income filed for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee is not eligible for benefit of accum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. 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 by adequate security and adequate interest, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,00,000.00 46,60,451.86 30,00,000.00 76,60,451.86 NIL VISAKHAPATNAM CUSTOMS CLEARANCE & FORWARDING AGENTS' ASSOCIATION Date Rs. Ps. 03-04-2005 Loan amount granted 5,00,000.00 Interest accrued on loan 3,62,137.00 8,62,137.00 Less 26-02-2001 Principal amount received 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvenience, 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 now well settled preposition that the term "Business" denotes "continuous and systematic exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of this case and also respectfully following the Co-ordinate Bench decision in assessee's own case, 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. 17. The next issue that came up for our consideration is violation of Section 11(2)/(5) r.w.s. 13(1)(c) of the Act towards loans to two of its Settlers Association. The assessee has given ₹ 30 Lakhs and ₹ 5 Lakhs respectfully to Visakhapatnam Stevedore's Association and Visakhapatnam Clearing and Forwarding Agents' Association. The AO was of the opinion that the assessee has violated the provisions of Section 13(1)(c), by allowing its resources to be used by its Settlors Association. The AO further 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 of the Act. The Ld. AR for the assessee submitted that the issue is squarely covered by the decision of the ITAT, Visakhapatnam Bench in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments only in accordance with the provisions of Section 11(5) of Income Tax Act, 1961 in specified assets. Advancing loan is not an investment, as held by the jurisdictional High Court in the case of CIT Vs. Polisetty Somasundaram Charities 183 ITR 377 (AP). At pages 381 and 382 of the judgement the Hon'ble Andhra Pradesh High Court held as under: "The benefit to the prohibited persons listed out in sub section (3) is elucidated and should be deemed to have been conferred in the circumstances detailed in sub-section (2). The two crucial provisions for the purpose of this reference are clause (a) of sub-section (2) which postulates the benefit in the event of lending the amount without adequate interest or security and clause (h) adverts to the benefit in the event of investment alone. The controversy is focused upon the connotation of the words "lend" and "invest". As these expressions are sought to be made applicable in different situations, the legitimate inference is that they bear a distinct interpretation in the context of the set up and synonymity is ruled out. In commercial parlance, lending is associated with advancing money for an agreed rate of interest returnable withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by adequate security and adequate interest, there is no violation of section 13(1)(c) r.w.s. section 13(2) of the Act. In this regard, Ld AR has placed reliance on the decision of the Hon'ble Jurisdictional AP High Court in the case of Polisetty Somasundaram Charities, supra. The relevant observations of the Hon'ble High Court are extracted below: "Section 13(2)(a) provides that the exemption under section 11 cannot be denied in the event of lending the amount jacked up by interest or adequate security or both. The lending as such is not prohibited if adequate interest and security are taken care of. Section 13(2) (h) interdicts investment and the act of investment alone is sufficient to deny ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressed 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 attached to natural persons only. It is very much settled that there cannot be any personal element in the case legal persons. The authors of the assessee trust are trade associations, i.e. non-commercial legal persons. Its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted 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. Therefore, the AO was not correct in disallowing the depreciation. Hence, we direct the AO to delete the additions made towards depreciation. 19. The next issue that came up for our consideration is disallowance of income tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds 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 accounting. The CIT(A) after considering relevant submissions of the assessee, allowed the claim of the assessee. We do not see any reasons to interfere with the order passed by the Ld. CIT(A). Hence, we reject the ground raised by the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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