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TMI Blog2016 (7) TMI 1578X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The main objects of the Trust as spelt out in clause 3 of the Trust deed read as under: a) To identify, enroll, allot the work and regulate the Private Workers engaged by the Members and users of Stevedore'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 carry out other public utility activity within the meaning of 'charitable purposes' defined in the Income-tax Act. 3. The assessee has filed return of income for the assessment year 2009-10 declaring nil total income after claiming exemption u/s. 11 of the Act. The case was selected for scrutiny and accordingly, notice u/s. 143(2) of the Act was issued. In response to notice, the authorized representative of the assessee appeared from time to time and furnished the details called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption u/s. 11 of the Act. The CIT(A) further held that as regards the method of accounting followed by the assessee, the assessee is following cash system of accounting for the purpose of determination of income under the provisions of section 11 of the Act continuously for the past several years, therefore, directed the A.O. to adopt cash system of accounting for the purpose of determination of income. Similarly, as regards disallowance of excess amount refunded to M/s. South India Corporation Ltd., the CIT(A) upheld the action of the A.O. in making additions towards amount refunded to M/s. South India Corporation Ltd. As regards the additions towards accrued interest, the CIT(A) upheld the additions made by the A.O. Aggrieved by the CIT(A) order, the assessee as well as revenue are in appeal before us. 5. The assessee has raised common grounds for the assessment years 2009-10 2010-11. From these grounds of appeal, the assessee challenged the action of A.O. in denying the benefit of exemption u/s. 11 of the Act and additions towards refund of excess amount collected from M/s. South India Corporation Ltd. for violation of the provisions of section 13(1)(c), 13(2)(g) r.w.s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the exemption. In view of this seminal distinction, the Revenue endeavoured to bracket the transaction under investment so 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Principal amount received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s own case in ITA No. 269/Vizag/2013 held that excess amount collected from M/s. South India Corporation Ltd. and refunded subsequently does not amounts to diversion of funds as defined u/s. 13(2)(g) of the Act and accordingly the assessee has not violated the provisions of section 13(1)(c) 13(2)(g) r.w.s 13(3) of the Act. The relevant portion of the order is reproduced below: 16. The last question is whether the assessee has violated the provisions of S. 13(3)(g) rws 13(cc) of the Act. At the outset the violation has to be looked into at the time of the assessment and not for applying the provisions of S. 12AA(3) of the Act. Sec. 12AA(3) does not permit the CIT to examine violation u/s. 13 etc. 16.1. Be it as it may, on facts we find that the Representative of M/s. South India Corporation Ltd. was not a trustee of the assessee trust, during the period when excess fee collected was refunded. This factual position, as already stated, was not controverted by the Ld. CIT, D.R. Thus prima facie, invocation of S. 13(2)(g) of the Act rws 13(3)(cc) is bad in law. 16.2. Even otherwise, the fee to be charged by the assessee trust is fixed by the Visakhapatnam Port Trust throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed interest as per the TDS certificate. The A.O. further observed that as per the income and expenditure account, the assessee has shown interest income of ' 39,91,593/-, whereas the actual interest accrued to the assessee for the year as per the TDS certificate is at ' 50,74,385/-, which is shown in annexure 7 of the income and expenditure account. It is the contention of the assessee that it is following cash system of accounting for the purpose of determination of income and offered interest income on receipt basis, however, for the purpose of preparation of financial statements, it has considered interest accrued for the period. Therefore, the A.O. was not correct in making additions based on the income expenditure account. 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 regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) after considering the explanations of the assessee, held that the assessee has disclosed particulars of payment made to M/s. South India Corporation Ltd. and disclosed the information in the regular return of income. The CIT(A) further held that the A.O. has not pointed out any factual inconsistency or inaccuracy in the particulars disclosed. It was further observed that the question whether refund of levy amount made to M/s. South India Corporation Ltd. is an expenditure incurred for the purpose of trust or whether the said amount is a diversion of funds to the interested persons, thereby violates the provisions of section 13(1)(c), 13(2)(g) r.w.s. 13(3) of the Act and is not an expenditure incurred for the purpose of Trust or only a legal issue is the factual matrix of the assessee's case and could involve difference of opinion. With these observations, by following the decision of Hon'ble apex court, in the case of CIT v. Reliance Petro Products Ltd. deleted the penalty levied by the A.O. u/s. 271(1)(c) of the Act. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 13. The Ld. Counsel for the assessee at the time of hearing, submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has considered the plea of the assessee and held that the excess amount refunded to M/s. South India Corporation Ltd. is not a diversion of funds to interested persons, thereby the assessee has not violated the provisions of section 13(1)(c) 13(2)(g) r.w.s. 13(3) of the Act. 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. The 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. 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 circums ..... X X X X Extracts X X X X X X X X Extracts X X X X
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