M/s GSL Trust, Rajahmundry V. The ITO, Ward-4, Rajahmundry

CO 29/VIZ/2008

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6488 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 11 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 11-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 30-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 09-09-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C SUBRAMANYAM
• Assessee Lawyers: TH LUCAS PETER
• Keywords: Capital asset; Depreciation; Charitable institution; Opportunity of being heard; Diversion of income; Deemed to accrue or arise in india; Additional evidence; Capital receipt; Capital expenditure
• Section: 12A; 12; 11

Judgement Text

ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 1 OF 25 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NOS.372/VIZAG/2008 & ITA NO.220/VIZAG/2010 ASSESSMENT YEARS:2005-06 & 2007-08 ITO WARD-4, RAJAHMUNDRY VS. M/S GSL TRUST, RAJAHMUNDRY (APPELLANT) (RESPONDENT) PAN NO:AAATG 3008 N ITA NOS.387/VIZAG/2008 & ITA NO.243/VIZAG/2010 ASSESSMENT YEARS:2005-06 & 2007-08 M/S GSL TRUST, RAJAHMUNDRY VS. ITO WARD-4, RAJAHMUNDRY (APPELLANT PAN NO:AAATG 3008 N (RESPONDENT) C.O. NO.29/VIZAG/2008 (ARISING OUT OF ITA NO.372/VIZAG/2008) ASSESSMENT YEARS:2005-06 M/S GSL TRUST, RAJAHMUNDRY VS. ITO WARD-4, RAJAHMUNDRY (APPELLANT PAN NO:AAATG 3008 N (RESPONDENT) APPELLANT BY: SHRI TH. LUCAS PETER, CIT (DR) RESPONDENT BY: SHRI C. SUBRAMANYAM, CA DATE OF HEARING: 06-07-2011 DATE OF PRONOUNCEMENT: 11-08-2011 ORDER PER BENCH: THESE APPEALS FILED BY THE REVENUE AS WELL AS THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS PASSED BY LD CIT(A), RAJAHMUNDRY AND THEY RELATE TO THE ASSESSMENT YEARS 2005-06 AND 2007-08. THE ASSE SSEE HAS ALSO FILED CROSS OBJECTION FOR THE ASSESSMENT YEAR 2005-06. S INCE THE ISSUES URGED IN ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 2 OF 25 ALL THESE CASES ARE BASED ON IDENTICAL FACTS, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. IN THE APPEALS FILED BY THE REVENUE FOR BOTH THE YEARS, FOLLOWING ISSUES URGED BY THEM ARE IDENTICAL IN NATURE. A) THE LD CIT(A) HAS ERRED IN RELYING ON THE RECEIPTS AND PAYMENTS ACCOUNT FOR COMPUTING THE INCOME INSTEAD OF THE INCOME AND EXPENDITURE ACCOUNT, WITHOUT APPRECIATING THAT ON CE THE ASSESSEE HAS BEEN DENIED EXEMPTION U/S 11, THE INCOME HAS TO BE COMPUTED ON THE BASIS OF ONLY THE INCOME AND EXPENDITURE AC COUNT. B) THE LD CIT(A) HAS NOT PROPERLY COMPUTED THE INCOME OF THE ASSESSEE FROM THE RECEIPTS AND PAYMENTS ACCOUNT. C) THE LD CIT(A) HAS ACCEPTED ADDITIONAL EVIDENCE IN THE FORM OF RECEIPTS AND PAYMENTS ACCOUNT WITHOUT PROVIDING AN OPPORTUNITY TO THE ASSESSING OFFICER TO EXAMINE THE SAID ADDITIONA L EVIDENCE. 2.1 IN ASSESSMENT YEAR 2005-06, THE REVENUE IS C ONTESTING FOLLOWING THREE ISSUES ALSO. (A) THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 46,55,000/-, BEING THE AMOUNT ADVANCED TO A CONCE RN IN WHICH THE MANAGING TRUSTEE OF THE ASSESSEE TRUST IS INTERESTED. THE LD CIT(A) HAS ERRED IN HOLDING THAT ONLY SEC. 1 3(2)(A) IS VIOLATED AND NOT SEC. 13(2)(H) OF THE ACT . THE AM OUNT OF SAID LOAN SHALL BE TREATED AS THE DEEMED INCOME OF THE A SSESSEE AS HELD IN DIRECTOR OF INCOME TAX (EXEMPTIONS) VS. SHE TH MAFATLAL GOGAL FOUNDATION TRUST (2001)(249 ITR 533) AND ALSO AS PER THE VIEW EXPRESSED BY CBDT IN CIRCULAR NO.387 DATED 6-7-1984. (B) THE LD CIT(A) HAS ERRED IN DELETING THE ADDITION R ELATING TO EXCESS RENT PAID TO M/S SWATANTRA HOSPITALS PVT LTD MADE U/S 13(2)(G) OF THE ACT. (C) THE LD CIT(A) HAS ERRED IN ALLOWING DEPRECIATION TO THE ASSESSEE. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 3 OF 25 3. IN THE APPEAL OF THE ASSESSEE, FOLLOWING ISS UES ARE CONTESTED IN ASST. YEAR 2005-06. (A) THERE IS NO VIOLATION OF THE PROVISIONS OF SEC. 11(2) AS HELD BY LD CIT(A). (B) THERE IS NO VIOLATION OF PROVISIONS OF EITHER SEC.13(2)(A) OR 13(2)(H) OF THE ACT IN RESPECT OF AMOUNT ADVANCED T O A CONCERN IN WHICH THE MANAGING TRUSTEE IS INTERESTED. (C) THE LD CIT(A) IS NOT JUSTIFIED IN MAKING DI SALLOWANCE OF CAR RENTALS, AS THE SAID EXPENDITURE WAS INCURRED BY TH E ASSESSEE SOCIETY IN THE NORMAL COURSE OF CARRYING ON TRUST A CTIVITIES. (D) THE INCOME OF ` 39,70,360/- COMPUTED BY LD CIT(A) IS NOT CORRECT. 3.1 IN THE CROSS OBJECTION FILED BY THE ASSESSEE FOR THE YEAR ASSESSMENT YEAR 2005-06, FOLLOWING GROUNDS ARE URGED. (A) EVEN IF THE TRUST IS TREATED AS AOP, THE INCOM E SHOULD NOT BE COMPUTED AS PER NORMAL PROVISIONS OF THE ACT, SINCE THE TRUST IS GRANTED REGISTRATION U/S 12A OF THE ACT. (B) THERE IS NO VIOLATION OF SEC. 13(2)(H) OF THE ACT IN RESPECT OF LOAN GIVEN BY THE ASSESSEE, AS THE LOAN CANNOT BE T REATED AS INVESTMENT. THE LOAN SO GIVEN CANNOT BE TREATED AS DEEMED INCOME OF THE ASSESSEE CONSIDERING THE ASSURED REPA YMENT. (C) THE RENT HAS BEEN PAID TO M/S SWATANTRA HOSPITA L PVT. LTD ON DIFFERENT SET OF FACTS AND HENCE THE SAID RENT PAYM ENT CANNOT BE TERMED AS EXCESSIVE. (D) THE LD CIT(A) WAS RIGHT IN LAW IN ALLOWING DE PRECIATION. (E) THE RECEIPTS AND PAYMENTS ACCOUNT IS ONLY EX TRACT OF THE ACCOUNT BOOKS, I.E., DAY BOOK AND LEDGER AND HENCE THE SAME CANNOT BE TERMED AS NEW EVIDENCE. 3.2 IN THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2007-08, FOLLOWING ISSUES ARE URGED. (A) THERE IS NO VIOLATION OF PROVISIONS OF EITHER SEC.13(2)(A) OR 13(2)(G) OF THE ACT IN RESPECT OF AMOUNT ADVANCED T O A CONCERN IN WHICH THE MANAGING TRUSTEE IS INTERESTED. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 4 OF 25 (B) THE LD CIT(A) HAS ERRED IN MAKING DISALLOWANCE OF EXPENDITURE PERTAINING TO VEHICLES, AS IT WAS INCURRED IN THE N ORMAL COURSE WHILE CARRYING OUT THE TRUST ACTIVITIES. (C) THE FUNDS EARMARKED FOR SPECIFIC PURPOSE SHOUL D HAVE BEEN TREATED AS CAPITAL RECEIPTS. THE SAID FUND, EVEN I F ROUTED THROUGH THE INCOME AND EXPENDITURE ACCOUNT DOES NOT EFFECT ON THE NET INCOME OF THE ASSESSEE. 4. THE FACTS RELATING TO THE CASE ARE STATED IN BRIEF. THE ASSESSEE IS AN EDUCATIONAL TRUST RUNNING FOUR EDUCATIONAL INSTITUT IONS. IT WAS GRANTED REGISTRATION U/S 12A OF THE ACT AS A CHARITABLE TRU ST BY LD CIT, VISAKHAPATNAM BY HIS ORDER DATED 25-03-1998. ACCOR DINGLY, THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 CLAIMING EXEMPTION U/S 11 OF THE ACT. THE SAID RETURN OF IN COME WAS TAKEN UP FOR SCRUTINY BY THE ASSESSING OFFICER, WHO COMPLETED TH E ASSESSMENT BY MAKING FOLLOWING ADDITIONS. (A) THE ASSESSEE HAD TRANSFERRED A SUM OF RS.24,15 ,000/- TO A RESERVE ACCOUNT CALLED SPECIAL FUND FROM OUT OF T HE FEE COLLECTED FROM THE STUDENTS. THE ABOVE SAID AMOUNT WAS TRANS FERRED DIRECTLY TO THE SAID RESERVE ACCOUNT WITHOUT ROUTING THE SAM E THROUGH THE INCOME AND EXPENDITURE ACCOUNT. THE ASSESSEE CLAIME D THAT IT HAS BEEN EARMARKED THE SAME FOR DEVELOPMENT OF COLLEGE BY ACQUIRING CAPITAL ITEMS AND ACCORDINGLY TREATED THE SAME AS CAPITAL FUND. ACCORDINGLY, THE ASSESSEE CLAIMED THAT THE AMOUNT S O TRANSFERRED TO SPECIAL FUND SHALL BE EXCLUDED FROM ITS INCOME. T HE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS COLLECTED FEES FR OM THE STUDENTS UNDER THE HEAD TUITION FEE AND SPECIAL FEE. THUS , THERE WAS NO MENTION OF ANY SPECIAL FUND, AS CLAIMED BY THE AS SESSEE. HENCE THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE CL AIM OF THE ASSESSEE STATED ABOVE. THE ASSESSING OFFICER ALSO NOTICED THAT THE ASSESSEE HAS NOT ACCUMULATED THE AMOUNT SO TRANSFER RED TO THE SPECIAL FUND IN ACCORDANCE WITH THE REQUIREMENTS PRESCRIBED UNDER SEC.11(2) OF THE ACT. HENCE, THE ASSESSING OFFICER TREATED THE ABOVE SAID AMOUNT AS PART OF NORMAL FEE RECEIPTS OF THE A SSESSEE AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. (B) THE ASSESSING OFFICER HELD THAT THE ASSESSEE H AS VIOLATED THE PROVISIONS OF SEC.13(2)(H) OF THE ACT BY GIVING LOA N OF RS.46.55 LAKHS (WRONGLY MENTIONED AS RS.45.47 LAKHS BY THE ASSESSI NG OFFICER) TO A COMPANY NAMED M/S SWATANTRA CANCER HOSPITAL AND RES EARCH ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 5 OF 25 CENTRE P LTD, (HEREINAFTER SCHRC), IN WHICH THE M ANAGING TRUSTEE OF THE ASSESSEE TRUST WAS SUBSTANTIALLY INTERESTED. CONSEQUENTLY, THE ASSESSING OFFICER, NOT ONLY DENIED EXEMPTION U/S 11 TO THE ASSESSEE, BUT ALSO TREATED THE SAID LOAN AMOUNT AS THE INCOME OF THE ASSESSEE. (C) THE ASSESSING OFFICER ALSO DISALLOWED CERTAIN PAYMENTS AGGREGATING TO ` 80,20,500/- U/S 40(A)(IA) OF THE ACT FOR THE REASON THAT THE ASSESSEE TRUST HAS FAILED TO DEDUCT TAX AT SOURCE FROM THE SAID PAYMENTS. (D) THE ASSESSEE PAID A RENT OF RS.12.00 LAKHS TO A CONCERN NAMED M/S SWATANTRA HOSPITAL PVT. LTD. THE ASSESSING OFF ICER CONSIDERED THE SAME AS EXCESSIVE AND ACCORDINGLY DISALLOWED A SUM OF RS.10.92 LAKHS FROM OUT THE ABOVE SAID RENTAL PAYMENT. 5. THE ASSESSEE CHALLENGED ALL THESE ADDITIONS BE FORE LD CIT(A) AND THE FIRST APPELLATE AUTHORITY DELETED THE FOLLOWING ADD ITIONS:- (A) DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT FOR THE REASON THAT THE SAID DISALLOWANCE IS REQUIRED TO BE MADE ONLY A T THE TIME OF COMPUTING INCOME FROM BUSINESS. (B) DISALLOWANCE OF EXCESS PAYMENT OF RENT BY HOLD ING THAT THE PAYMENT OF ` 12.00 LAKHS IS REASONABLE CONSIDERING THE FACT THAT THE SAID RENT IS PAID FOR USING AN AREA OF 16,500 SQ. F T. (C) ADDITION OF LOAN AMOUNT OF RS.46.55 LAKHS GIVE N TO M/S SWATANTRA CANCER HOSPITAL. THE LD CIT(A) HELD THAT THE ASSESSEE HAS NOT INVESTED ITS FUND IN THE ABOVE SAID CONCERN , BUT ONLY PARKED ITS FUND THEREIN. ACCORDINGLY HE HELD THAT THE PRO VISION OF SEC. 13(2)(H) OF THE ACT, WHICH WAS INVOKED BY THE ASSES SING OFFICER, IS NOT APPLICABLE TO THE INSTANT CASE. HOWEVER THE LEA RNED CIT(A) HELD THAT PROVISION OF SEC. 13(2)(A) IS APPLICABLE TO TH E IMPUGNED TRANSACTION, WHICH WOULD ALSO RENDER THE ASSESSEE I NELIGIBLE FOR EXEMPTION U/S 11 OF THE ACT. ACCORDINGLY HE HELD TH AT THE ASSESSE IS NOT ELIGIBLE FOR EXEMPTION UNDER SECTION 11 OF THE ACT. HOWEVER, THE LEARNED CIT(A) HELD THAT THERE IS NO REQUIREMENT TO ADD THE LOAN AMOUNT SO GIVEN AS THE INCOME OF THE ASSESSEE, AS T HE SAME DOES NOT CONSTITUTE EXPENDITURE IN THE HANDS OF THE ASSE SSEE. 5.1 THE LD CIT(A) CONFIRMED THE ADDITION OF ` 24.15 LAKHS MADE BY THE ASSESSING OFFICER RELATING TO THE AMOUNT TRANSFERRE D TO SPECIAL FUND. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 6 OF 25 5.2 DURING THE COURSE OF APPELLATE PROCEEDING B EFORE LEARNED CIT(A), THE ASSESSEE SUBMITTED THAT THE INCOME OF CHARITABL E TRUST SHOULD BE COMPUTED IN ACCORDANCE WITH THE COMMERCIAL PRINCIPL ES AND ACCORDINGLY CONTENDED THAT ITS INCOME SHOULD BE COMPUTED ON THE BASIS OF RECEIPTS AND PAYMENTS ACCOUNT OF THE CONCERNED YEAR. THE L EARNED CIT(A) WAS CONVINCED WITH THE SAID SUBMISSIONS AND IN THIS REG ARD HE PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF CIT VS. PROGRAMME FOR COMMUNITY ORGANIZATION (2001)(248 ITR 1) AND ALSO THE CBDT CIRCULAR NO.5-P (LXX-6) DATED JULY 19,1968, WH ERE IN IT WAS HELD THAT THE NET INCOME OF THE ASSESSEE SHOULD BE COMPUTED O N COMMERCIAL BASIS. ACCORDINGLY HE ENTERTAINED THE RECEIPTS AND PAYMEN TS ACCOUNT SUBMITTED BY THE ASSESSEE. THE LEARNED CIT(A) ACCEPTED THE C ONTENTIONS OF THE ASSESSEE THAT THE DEPRECIATION SHOULD BE ALLOWED TO IT WHILE COMPUTING THE TOTAL INCOME. ACCORDINGLY, THE LEARNED CIT(A) COMP UTED THE NET INCOME OF THE ASSESSEE ON THE BASIS OF RECEIPTS AND PAYMENTS ACCOUNT. ` TOTAL RECEIPTS AS PER RECEIPTS AND PAYMENTS A/C 2,83,43,391 LESS:- OPENING BALANCES OF BANK A/C 56,43,685 ----------------- (A) ADJUSTED NET RECEIPTS 2,26,99,696 ========= TOTAL PAYMENTS AS PER RECEIPTS AND PAYMENTS ACCOUNT 2,83,43,146 LESS:- (A) CLOSING BANK BALANCES 3, 93,247 (B) LOAN TO GSL EDUC. SOCIETY 50,00,000 (C) LOAN TO SWATANTRA CANCER HOSPITAL 46 ,55,000 (D) CAPITAL EXPENDITURE 10,94,10 3 -------------- 1,14,17,350 ----------------- (B) ADJUSTED NET PAYMENT 1,69,25, 796 ======== NET INCOME BEFORE DEPRECIATION (A-B) 57,73,900 ======= ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 7 OF 25 THE LEARNED CIT(A), DURING THE COURSE OF APPELLATE PROCEEDINGS, NOTICED THAT THE ASSESSEE HAD PAID CAR RENTAL CHARGES AGGREGATING TO ` 9,14,600/- TO A TRUSTEE AND TO THE SPOUSE OF THE SAID TRUSTEE. THE LEARNED CIT (A) TOOK THE VIEW THAT THE SAID VEHICLES WERE USED BY THE TRUSTEES FOR THEIR P ERSONAL PURPOSES AND ACCORDINGLY DISALLOWED THE SAME BY INVOKING THE PRO VISIONS OF SEC. 13(2)(G) R/W SEC. 13(3)(C) AND 13(3)(CC) OF THE ACT. ACCORDINGL Y THE LEARNED CIT(A) COMPUTED THE TOTAL INCOME OF THE ASSESSEE AS UNDER: NET INCOME COMPUTED (AS ABOVE) 57,73, 900 ADD:- DISALLOWANCE OF CAR RENTAL CHARGES 9,14,600 -------------- 66,88,500 LESS:- DEPRECIATION CLAIMED 27,18,141 --------------- TOTAL INCOME ` 39,70,359 ======= 6. IN THE ASSESSMENT YEAR 2007-08, THE ASSESSING OFFICER ADDED THE AMOUNT OF ` 61,27,600/- TRANSFERRED TO THE SPECIAL FUND ACCOUN T FROM OUT OF THE FEES COLLECTED FROM THE STUDENTS. CONSIDERING THE FACT THAT THE AMOUNT ADVANCED TO M/S SCHRC CONTINUED TO REMAIN WITH THE SAID COMPANY , THE ASSESSING OFFICER HELD THAT THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTIO N UNDER SECTION 11 OF THE ACT DURING THIS YEAR ALSO. 6.1 IN THE APPEAL FILED BY THE ASSESSEE, THE LE ARNED CIT(A) CONFIRMED THE ADDITION OF ` 61,27,600/- PERTAINING TO THE AMOUNT TRANSFERRED TO SPECIAL FUND. THE LEARNED CIT(A) FURTHER HELD THAT THE PROVISIONS OF SEC. 13(2)(A) ARE VIOLATED IN RESPECT OF AMOUNT ADVANCED TO M/S SWATHANTRA CAN CER HOSPITAL AND RESEARCH CENTRE AND ACCORDINGLY CONFIRMED THE DENIAL OF EXEM PTION UNDER SECTION 11 TO THE ASSESSEE. IDENTICAL WITH THE VIEW TAKEN IN THE ASSESSMENT YEAR 2005-06, THE LEARNED CIT(A) HELD THAT THERE IS VIOLATION OF SEC. 13(2)(G) OF THE ACT IN RESPECT OF CAR RENTALS PAID TO THE TRUSTEE AND HIS SPOUSE A MOUNTING TO ` 13,65,000/- AND ACCORDINGLY DISALLOWED THE SAME. IN THIS YEAR ALSO, THE LEARNED CIT(A) COMPUTED THE INCOME OF THE ASSESSEE ON THE BASIS OF RECEIPTS AND PAYMENTS ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 8 OF 25 ACCOUNT FILED BEFORE HIM. ACCORDINGLY THE TOTAL INCOME WAS COMPUTED AS UNDER BY LEARNED CIT(A):- NET INCOME COMPUTED ON THE BASIS OF RECEIPTS AND PAYMENTS ACCOUNT (PARA 3.2(II) OF ` CIT(A)S ORDER) 14,59,915 ADD:- CAR RENTAL PAYMENTS DISALLOWED 13,65,00 0 --------------- 28,24,915 LESS:- DEPRECIATION CLAIMED 17,43,880 --------------- TOTAL INCOME 10,81,035 ======= IN EFFECT, THE LEARNED CIT(A) FOLLOWED THE METHODOLO GY ADOPTED IN THE APPELLATE ORDER RELATING TO THE ASSESSMENT YEAR 2005-06. 7. THE OBJECTION OF THE REVENUE IS THAT THE LEA RNED CIT(A) SHOULD HAVE COMPUTED THE INCOME OF THE ASSESSEE ON THE BASIS OF INCOME AND EXPENDITURE ACCOUNT ONLY AND NOT ON THE BASIS OF RECEIPTS AND PAYMENTS ACCOUNT. FOR THIS PURPOSE, WE FEEL IT PERTINENT TO EXPLAIN THE CONCEP T OF FINANCIAL STATEMENTS IN A BROADER TERMS. WE MAY STATE THAT THE INCOME OF A PA RTICULAR YEAR IS TO BE COMPUTED FROM THE TRANSACTIONS CARRIED ON BY AN ASS ESSEE IN THAT YEAR. NORMALLY MANY TYPES OF FINANCIAL STATEMENTS ARE PRE PARED FOR THE SAID PURPOSE AND EACH FINANCIAL STATEMENT HAS ITS OWN UNIQUE CHA RACTERISTICS. IT IS KNOWN TO ALL THAT THE FINANCIAL TRANSACTIONS INVOLVE EITHER RECEIPT OF MONEY OR MONEYS WORTH OR PAYMENT OF MONEY OR MONEYS WORTH. FOR ACCOUNTING PURPOSES, ALL THE RECEIPTS ARE CATEGORIZED AS EITHER CAPITAL REC EIPTS OR REVENUE RECEIPTS. SIMILARLY ALL PAYMENTS ARE CATEGORIZED AS EITHER C APITAL PAYMENTS OR REVENUE PAYMENTS. FOR THE SAKE OF CONVENIENCE, ALL THE FI NANCIAL TRANSACTIONS HAVING IDENTICAL FEATURES ARE GROUPED BY GIVING PARTICULAR NAME TO THAT GROUP. FOR EXAMPLE, ALL PURCHASES ARE GROUPED UNDER THE HEAD PURCHASES, ALL SALARY PAYMENTS ARE GROUPED UNDER THE HEAD SALARIES ETC. THESE GROUP HEADS ARE NORMALLY CALLED LEDGER ACCOUNTS. ALL THE LEDGER A CCOUNTS ARE CLOSED ON THE LAST DAY OF THE ACCOUNTING YEAR. AFTER THAT, THESE LEDG ER ACCOUNT BALANCES ARE COLLATED TO PREPARE MANY TYPES OF FINANCIAL STATEME NTS TO SUIT THE PURPOSE OF THE ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 9 OF 25 USER. FOR EXAMPLE, THE TRIAL BALANCE IS A FINANC IAL STATEMENT CONTAINING THE CLOSING BALANCES OF ALL THE LEDGER ACCOUNTS. THE PROFIT AND LOSS ACCOUNT OR INCOME AND EXPENDITURE ACCOUNT IS A FINANCIAL STA TEMENT PREPARED TO ARRIVE AT THE PROFIT OR LOSS OF A PERSON OF A PARTICULAR YEAR . THE TRIAL BALANCE SHALL CONTAIN CAPITAL RECEIPTS, REVENUE RECEIPTS, CAPITAL PAYMENT S AND REVENUE PAYMENTS. HOWEVER, THE PROFIT AND LOSS ACCOUNT OR INCOME AND E XPENDITURE ACCOUNT SHALL CONTAIN ONLY REVENUE RECEIPTS AND REVENUE EXPENDITU RE. THE BALANCE SHEET IS A FINANCIAL STATEMENT CONTAINING THE LEDGER BALANCE S OF CAPITAL RECEIPTS AND CAPITAL PAYMENTS. THE RECEIPTS AND PAYMENTS ACC OUNT IS A FINANCIAL STATEMENT, WHICH IS PREPARED TO DEPICT THE FUND MOV EMENT THAT OCCURRED IN A PARTICULAR YEAR. ON THE RECEIPT SIDE OF THE SAID S TATEMENT, THE OPENING BALANCES OF CASH AND BANK ACCOUNTS AT THE START OF A PARTI CULAR YEAR ARE SHOWN AND THERE AFTER ALL THE RECEIPTS WHETHER CAPITAL RECEI PTS OR REVENUE RECEIPTS ARE SHOWN. IN THE PAYMENTS SIDE, ALL THE PAYMENTS EFF ECTED DURING THE YEAR WHETHER CAPITAL PAYMENTS OR REVENUE PAYMENTS AR E SHOWN AND THERE AFTER THE CLOSING BALANCES OF CASH AND BANK BALANCES ARE SHOWN. NORMALLY THE ACCRUED INCOME OR ACCRUED EXPENSES ARE NOT CONSIDER ED IN RECEIPTS AND PAYMENTS ACCOUNT. BESIDES THE ABOVE, NON-CASH EXP ENSES LIKE DEPRECIATION ARE ALSO NOT TAKEN INTO ACCOUNT IN THE RECEIPTS AND PAYMENTS ACCOUNT. IN OTHER FINANCIAL STATEMENTS ALSO, THESE ITEMS WILL BE CONS IDERED ONLY IF THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. 7.1 THERE CANNOT BE ANY DOUBT THAT THE OBJECTIV E OF A TAX AUTHORITY IS TO COMPUTE THE CORRECT INCOME OF THE ASSESSEE. THE IN COME IS NORMALLY ARRIVED BY DEDUCTING ALL REVENUE EXPENSES FROM THE REVENUE RECEIPTS UNDER COMMERCIAL PRINCIPLES. IN CASE OF OTHER COMMERCIAL CONCERNS, ALL THE PROVISIONS OF INCOME TAX ARE TO BE FOLLOWED FOR COMPUTING THE TOTAL INCOME O F AN ASSESSEE. HOWEVER, IN CASE OF TRUST, THERE CANNOT BE ANY DISPUTE THAT THE INCOME HAS TO BE COMPUTED UNDER COMMERCIAL PRINCIPLES, WHICH MEANS REVENUE RE CEIPTS LESS REVENUE EXPENSES. TO THE SAID INCOME THE VOLUNTARY CONTRIB UTIONS REFERRED TO IN SEC. 12 OF THE ACT IS REQUIRED TO BE ADDED. THE PROVISIONS OF SEC. 11, OF COURSE SUBJECT ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 10 OF 25 TO THE PROVISIONS OF SEC.13, ARE APPLIED TO THE GRO SS INCOME SO ARRIVED AT IN ORDER TO ARRIVE AT THE TAXABLE INCOME OF THE TRUST. 7.2 THERE CANNOT BE ANY DOUBT THAT THE REVENUE RECEIPTS AND REVENUE EXPENSES COULD BE IDENTIFIED AND PICKED UP BOTH FRO M THE TRIAL BALANCE AND RECEIPTS AND PAYMENTS ACCOUNT. HENCE, IN OUR VI EW, THE INCOME COMPUTED ON THE BASIS OF FIGURES OBTAINED FROM BOTH THE STATEME NTS, SUBJECT TO THE ADJUSTMENT OF ACCRUALS AND NON-CASH EXPENSES, SHOUL D BE THE SAME. IF THERE IS ANY DIFFERENCE, THEN EFFORT SHOULD BE TAKEN TO RECO NCILE THE SAID DIFFERENCE AND THE SAID RECONCILIATION STATEMENT WOULD BRING OUT T HE MISTAKES THAT MIGHT HAVE BEEN COMMITTED WHILE COMPUTING THE INCOME. 7.3 IN THE INSTANT CASE, THE ASSESSEE HAS COMPU TED THE INCOME ON THE BASIS OF INCOME AND EXPENDITURE ACCOUNT. HOWEVER, THE LEA RNED CIT(A) HAS COMPUTED THE INCOME FROM THE RECEIPTS AND PAYMENTS ACCOUNT . WHILE THE ASSESSEE DID NOT CONSIDER THE AMOUNT TRANSFERRED TO SPECIAL FUN D AS REVENUE RECEIPT, THE LEARNED CIT(A) HAS CONSIDERED THE SAME AS REVENUE RECEIPT. SINCE THE ACCOUNTS OF THE ASSESSEE HAS BEEN AUDITED, NORMALLY THE DEPRECIATION SHOULD HAVE BEEN DEDUCTED. HOWEVER, THE SAID FACT NEEDS V ERIFICATION. HOWEVER IT IS NOT KNOWN WHETHER THERE WAS ANY AMOUNT OF ACCRUE D EXPENSES WAS CLAIMED BY THE ASSESSEE. SUBJECT TO THESE OBSERVATIONS, TH E INCOME COMPUTED BOTH THE PARTIES ARE AS UNDER: (A) INCOME COMPUTED BY THE LEARNED CIT(A) - ` 39,70,360/- ========= (B) LOSS SHOWN BY THE ASSESSEE (-) 1,4 2,788 ADD:- AMOUNT TRANSFERRED TO SPECIAL FUND 24,15,000 CAR RENTALS DISALLOWED BY LEARNED CIT(A) 9,14,600 -------------- ` 31,86,812 ======== THUS IT IS SEEN THAT THERE IS DIFFERENCE BETWEEN TH E AMOUNTS OF INCOME COMPUTED BY BOTH THE PARTIES. HOWEVER, WE NOTICE THAT NO EF FORT WAS TAKEN TO RECONCILE THE SAID DIFFERENCE. THE CONTENTION OF THE REVENUE IS THAT THE INCOME AND ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 11 OF 25 EXPENDITURE ACCOUNT PREPARED BY THE ASSESSEE IS REL IABLE SINCE THE SAME HAS BEEN SUBJECTED TO AUDIT. HOWEVER, IT IS NOT KNOWN WHETHER THE RECEIPTS AND PAYMENTS ACCOUNT SUBMITTED BEFORE THE LEARNED CIT( A) WAS AUDITED OR NOT. HENCE PREPARATION OF A RECONCILIATION STATEMENT W OULD HELP TO IDENTIFY THE MISTAKES, IF ANY IN THE EXERCISE CARRIED OUT BY LEA RNED CIT(A). 7.4 HOWEVER, A CURSORY LOOK OF THE RECEIPTS AND PAYMENTS ACCOUNT SHOWS THAT THE LD CIT(A) HAS NOT EXCLUDED FOLLOWING ITEMS, WHI CH ARE PURELY CAPITAL IN NATURE AND HENCE THEY CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING THE INCOME OF THE ASSESSEE. L.F PARTICULARS HEAD 27 CH PATIENTS DEPOSIT 55 BPT CAUTION DEPOSITS 88 NURSING CAUTION DEPOSIT 102 NURSING EXAM ADVANCE 130 MPT CAUTION DEPOSIT 166 MESS ADVANCE 169 TRAVELLING ADVANCE 171 FEE RECEIVABLE 403 NTR UNIVERSITY OF HEALTH SCIENCE 431 RENT ADVANCE 2,75,000/- (APPEARS TO HAVE BE EN DEDUCTED) 439 SWATANTRA AGENCIES 448 STAFF ADVANCE 450 LAKSHMI ELECTRIC STORES 450 THAMMANA ENTERPRISES 458 LAKSHMI GENERAL FINANCE 481 RAJEEV MATHIEU THUS, IN OUR VIEW, THE INCOME COMPUTED BY LD CIT(A) SUFFERS FROM INFIRMITIES. HOWEVER, WE NOTICE THAT IT IS THE ASSESSEE, WHO HAS INSISTED BEFORE LD CIT(A) FOR CONSIDERING THE RECEIPTS AND PAYMENTS ACCOUNT AS THE BASIS FOR COMPUTING ITS INCOME. HENCE, IN OUR VIEW, THE ASSESSEE SHOULD HA VE PREPARED THE RECONCILIATION STATEMENT, WHICH WOULD HAVE HELPED T HE LD CIT(A) TO COMPUTE THE INCOME CORRECTLY. IN VIEW OF THE INFIRMITIES POINT ED OUT ABOVE, THE INCOME COMPUTED BY LEARNED CIT(A), IN OUR VIEW, IS NOT A C ORRECT COMPUTATION AND ACCORDINGLY WE SET ASIDE THE SAID COMPUTATION. AS STATED EARLIER, THERE SHOULD ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 12 OF 25 NOT BE ANY DIFFERENCE IN THE AMOUNT OF INCOME COMPU TED FROM THE RECEIPTS AND PAYMENT ACCOUNT VIS--VIS THE INCOME AND EXPENDITUR E ACCOUNT EXCEPT THE ITEMS RELATING TO ACCRUALS AND NON-CASH EXPENSES. ACCORDI NGLY, WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO COMPUTE THE CORRECT INCOME OF THE ASSESSEE AFTER CONSIDERING THE PLEA OF THE A SSESSEE TO ADOPT THE RECEIPTS AND PAYMENTS ACCOUNT AS THE BASIS. TO THE INCOME SO ARRIVED AT, THE ADJUSTMENTS THAT ARE REQUIRED TO BE MADE AS PER THE DISCUSSIONS MADE HEREINAFTER. 8. IN THE ASSESSMENT YEAR 2005-06, THE ASSESSING O FFICER ADDED THE ENTIRE AMOUNT OF ` 46.55 LAKHS (WRONGLY MENTIONED AS ` 45.47 LAKHS BY THE ASSESSING OFFICER) TO THE INCOME OF THE ASSESSEE BY HOLDING T HAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SEC. 13(2)(H) OF THE ACT. THE LD CIT(A) HELD THAT THE SAID TRANSACTION VIOLATES ONLY SEC. 13(2)(A) OF THE ACT AND FURTHER HELD THAT THE LOAN AMOUNT DOES NOT CONSTITUTE EXPENDITURE REQUIRING DISALLOWANCE THEREOF. THE DEPARTMENT IS AGGRIEVED BY THE DECISION OF LD CIT(A ). 8.1 WE HAVE CONSIDERED THE RIVAL CONTENTIONS ON THIS ISSUE. SEC. 13(2)(H) OF THE ACT READS AS UNDER: (H) IF ANY FUNDS OF THE TRUST OR INSTITUTION ARE O R CONTINUE TO REMAIN INVESTED FOR ANY PERIOD DURING THE PREVIOUS YEAR (N OT BEING A PERIOD BEFORE 1 ST DAY OF JANUARY, 1971), IN ANY CONCERN IN WHICH ANY PERSON REFERRED TO IN SUB SECTION (3) HAS A SUBSTANTIAL IN TEREST SEC. 13(2)(A) READS AS UNDER: (A) IF ANY PART OF THE INCOME OR PROPERTY OF THE T RUST OR INSTITUTION IS OR CONTINUES TO BE, LENT TO ANY PERSON REFERRED TO IN SUB-SECTION () FOR ANY PERIOD DURING THE PREVIOUS YEAR WITHOUT EITHER ADEQ UATE SECURITY OR ADEQUATE INTEREST OR BOTH. IN THE INSTANT CASE, THE ASSESSEE HAS RELIED UPON TH E DECISIONS RENDERED IN THE CASES OF CIT VS. POLISETTY SOMASUNDARAM CHARITIES (183 ITR 377)(AP), CIT VS. SIR SABHA SINGH PUBLIC CHARITIES TRUST (250 ITR 475 (DELHI)) AND CIT VS. SIR SHRIRAM FOUNDATION (250 ITR 55(DEL)), WHEREIN IT WA S HELD THAT THE EXPRESSION ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 13 OF 25 INVEST CONNOTES A POSITIVE ACT ON THE PART OF THE TRUST, WHEREBY THE FUNDS OF THE TRUST ARE LAID OUT OR COMMITTED IN ANY PARTICUL AR PROPERTY OR BUSINESS OR TRANSACTION WITH THE OBJECT OF EARNING A PROFIT OR FINANCIAL ADVANTAGE OR RETURN. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE R ELEVANT OBSERVATIONS MADE BY HON'BLE JURISDICTIONAL AP HIGH COURT IN THE CASE OF POLISETTY SOMASUNDARAM CHARITIES, (SUPRA). THE BENEFIT TO THE PROHIBITED PERSONS LISTED OUT I N SUB SECTION (3) IS ELUCIDATED AND SHOULD BE DEEMED TO H AVE 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 P OSTULATES THE BENEFIT IN THE EVENT OF LENDING THE AMOUNT WITH OUT ADEQUATE INTEREST OR SECURITY AND CLAUSE (H) ADVERT S TO THE BENEFIT IN THE EVENT OF INVESTMENT ALONE. THE CONTR OVERSY 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 CON TEXT OF THE SET UP AND SYNONYMITY IS RULED OUT. IN COMMERCIAL P ARLANCE, LENDING IS ASSOCIATED WITH ADVANCING MONEY FOR AN A GREED RATE OF INTEREST RETURNABLE WITHIN A SPECIFIED PERI OD OR ON DEMAND. THOUGH THE EXPRESSION INVEST IN A BROAD S WEEP TAKES IN LENDING ALSO, IT CAN BE CONSIDERED AS CONF INED TO LAYING OUT THE AMOUNT IN A VENTURE OR INSTITUTION W ITH A PROFIT MOTIVE AND WITH NO PROMISE OF ASSURED RETURN . IT IS NOT FEASIBLE TO SURVEY THE MULTIFARIOUS MODES OF IN VESTMENT AND IT IS SUFFICIENT TO INDICATE PROMINENT MODES TO CONVEY THE WIDTH OF THE EXPRESSION INVEST. INVESTMENT INV OLVES LAYING OUT THE AMOUNT IN PARTNERSHIP FIRMS, SHARES IN JOINT STOCK COMPANIES, REAL ESTATE BUSINESS AND SUCH OTHE R 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 O F CAPITAL ITSELF IS NOT AN ABNORMAL FEATURE. IN THE C ASE OF LENDING, THE RETURN BY WAY OF INTEREST IS GENERA LLY 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 EXPRE SSION INVESTMENT IN SECTION 23A AND WHETHER INVESTMENT IN SECTION 23A CAN BE STRETCHED TO HOUSE PROPERTY OR C APITAL GAINS APART FROM THE HOLDING OF SHARES, DEBENTURES, STOCKS OR OTHER SECURITIES, THE SUPREME COURT HELD THAT INVESTMENT COVERS ACQUISITION OF HOUSE PROPERTY O R CAPITAL ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 14 OF 25 GAINS AND INVESTMENT PRIMARILY MEANS THE ACT OF L AYING OUT MONEYS IN THE ACQUISITION OF SOME SPECIES OF PR OPERTY. IN CIT VS. ETERNAL SCIENCE OF MANS SOCIETY (19812) 128 ITR 456, THE DELHI HIGH COURT HELD THAT THE INTEREST IN COME RECEIVED BY A CHARITABLE INSTITUTION HAS TO BE EXCL UDED FROM THE TAXABLE INCOME OF THE ASSESSEE IN VIEW OF CLAUS E SECTION (2) AND CLAUSE (H) IS NOT ATTRACTED. WE ARE IN AGREEMENT WITH THIS VIEW . IN THE INSTANT CASE, IT WAS SUBMITTED THAT THE IMPUG NED AMOUNT OF RS.46.55 LAKHS WAS GIVEN TO M/S SCHRC ONLY AS ADVANCE AND IN THAT REGARD AN INDEMNITY BOND WAS ALSO EXECUTED IN FAVOUR OF THE ASSESSEE TR UST. HENCE, IN OUR VIEW, THE IMPUGNED AMOUNT CANNOT BE CATEGORISED AS AN INVESTM ENT MADE BY THE ASSESSEE TRUST. ACCORDINGLY, IN OUR VIEW, THE LD CIT(A) IS R IGHT IN HOLDING THAT THE PROVISION OF SEC. 13(2)(A) IS APPLICABLE TO THE IMPUGNED TRAN SACTION. FURTHER, ON A CAREFUL READING OF PROVISIONS OF SEC. 13 OF THE ACT, WE NOT ICE THAT THE ACT PROVIDES FOR DENYING OF EXEMPTION U/S 11 OR 12 TO THE ASSESSEE F OR VIOLATION OF PROVISIONS OF SEC. 13, I.E. NO WHERE IT IS PROVIDED THAT THE ENTI RE LOAN AMOUNT IS REQUIRED TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE CASE LAW RELIED UPON THE REVENUE IN THE GROUNDS VIZ.,DIRECTOR OF INCOME TAX (EXEMPTI ONS) VS. SHETH MAFATLAL GOGALBHAI FOUNDATION, SUPRA HAS BEEN RENDERED ON A DIFFERENT CONTEXT. SIMILARLY THE CIRCULAR NO.387 DATED 6-7-1984 IS ALSO NOT APPL ICABLE TO THE INSTANT ISSUE. ACCORDINGLY WE UPHOLD THE ORDER OF LD CIT(A) IN DEL ETING THE ADDITION OF RS.46.55 LAKHS MADE BY THE ASSESSING OFFICER. 9. THE REVENUE IS ALSO AGGRIEVED BY THE DELETION OF EXCESS RENT OF ` 10,92,000/- ADDED BY THE ASSESSING OFFICER. THE FACTS RELATING TO THE SAID ISSUE ARE STATED IN BRIEF. DURING THE YEAR UNDER CONSIDERATION, THE AS SESSEE PAID A RENT OF ` 12.00 LAKHS TO M/S SWATHANTRA HOSPITALS PVT LTD. IT ALSO PAID A RENT OF ` 1,08,000/- TO M/S SCHRC. THE ASSESSING OFFICER CONSIDERED THE RE NT PAID TO THE LATER COMPANY AS THE BASE AND HELD THAT THE RENT PAID TO M/S SWAT HANTRA HOSPITALS PVT LTD IS EXCESSIVE TO THE TUNE OF ` 10,92,000/-. THE LD CIT(A) DELETED THE SAID DISALLOWANCE AND HENCE THE REVENUE IS AGGRIEVED BY IT. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 15 OF 25 9.1 BEFORE THE LD CIT(A) IT WAS POINTED OUT THAT THE ASSESSEE IS USING 4500 SQ. FT OF THE PROPERTY HELD BY M/S SCHRC AND ABOUT 16,5 00 SQ. FT OF THE AREA BELONGING TO M/S SWATHANTRA HOSPITALS P LTD. BESID ES THE ABOVE, IT WAS SUBMITTED THAT THE ASSESSEE IS ALSO USING THE MACHI NERY AND INFRASTRUCTURE OF SWATHANTRA HOSPITALS LTD. ACCORDINGLY IT WAS PLEADE D THAT THE PAYMENT OF ` 12.00 LAKHS PER ANNUM AS RENT TO M/S SWATHANTRA HOSPITALS P LTD IS REASONABLE. THE LD CIT(A) WAS CONVINCED WITH THE EXPLANATIONS OF THE A SSESSEE AND ACCORDINGLY DELETED THE IMPUGNED ADDITION. WE ALSO NOTICE THAT THE ASSESSING OFFICER DID NOT EXAMINE THE RELEVANT INFORMATION, SUCH AS USAGE ARE A, MACHINERY USAGE, INFRASTRUCTURE FACILITIES ETC. BEFORE COMING TO THE CONCLUSION THAT THERE WAS EXCESS PAYMENT OF RENT. BEFORE LD CIT(A), THE ASSE SSEE HAS DEMONSTRATED THAT THE RENT PAID TO M/S SWATHANTRA HOSPITALS P LTD IS NOT EXCESSIVE. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD CIT (A) IN DELETING THE IMPUGNED ADDITION OF ` 10,92,000/-. 10. THE REVENUE IS ALSO AGGRIEVED WITH THE DECI SION OF LEARNED CIT(A) IN ALLOWING DEPRECIATION TO THE ASSESSEE. AS STATED EA RLIER, THE ASSESSEE SHOULD HAVE CLAIMED DEPRECIATION IN THE INCOME AND EXPENDIT URE ACCOUNT. IN THAT CASE, THE REVENUE SHOULD NOT BE AGGRIEVED WITH THE DECISI ON OF LEARNED CIT(A) ON THIS ISSUE. WE HAVE ALREADY STATED THAT THE DEPRECIATIO N COULD NOT BE ACCOUNTED FOR IN THE RECEIPTS AND PAYMENTS ACCOUNT. HENCE THE LD CIT(A) WAS REQUIRED TO DEDUCT THE DEPRECIATION WHILE COMPUTING THE INCOME OF THE ASSESSEE ON THE BASIS OF RECEIPTS AND PAYMENTS ACCOUNT. EVEN OTHERWISE, THE FOLLOWING CASE LAW SUPPORT THE VIEW OF THE LEARNED CIT(A) THAT THE DEP RECIATION CAN BE ALLOWED WHILE COMPUTING THE INCOME OF A CHARITABLE TRUST. CIT VS. SOCIETY OF SISTERS OF ST. ANNE (1984)(146 ITR 28)(KAR) CIT VS. RAIPUR PALLOTTINE SOCIETY (1989)(180 ITR 5 79)(MP) CIT VS. SHETH MANILAL RANCHCHODDAS VISHRAM BHAVAN TRUST (1992)(198 ITR 598)(GUJ) CIT VS. BHORUKA PUBLIC WELFARE TRUST (1999)(240 IT R 513)(CAL) ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 16 OF 25 ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE DE CISION OF LD CIT(A) IN HOLDING THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION OF DEPR ECIATION WHILE COMPUTING THE INCOME OF THE ASSESSEE. 11. NOW WE SHALL TAKE UP THE APPEAL FILED BY TH E ASSESSEE FOR THE ASSESSMENT YEAR 2005-06. THE FIRST ISSUE RELATES TO THE ALLEG ED VIOLATION OF PROVISIONS OF SEC.11(2) OF THE ACT. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NOT COMPLIED WITH THE PROVISI ONS OF SEC. 11(2) WITH REGARD TO THE AMOUNTS TRANSFERRED TO SPECIAL FUND. AS STATED EARLIER, THE ASSESSEE HAD TRANSFERRED CERTAIN AMOUNTS FROM OUT OF FEE REC EIPTS TO A RESERVE ACCOUNT TITLED AS SPECIAL FUND, WITHOUT ROUTING THE SAME THROUGH THE INCOME AND EXPENDITURE ACCOUNT. THE ASSESSEE EXPLAINED THAT T HE AMOUNT TRANSFERRED TO THE SAID FUND HAS BEEN EARMARKED FOR DEVELOPING THE TRU ST BY ACQUISITION OF CAPITAL ASSETS. HOWEVER, THE ASSESSING OFFICER NOTICED THA T THE ASSESSEE HAS ONLY DIVERTED A PART OF FEE RECEIPTS TO THE SPECIAL FUN D AND FURTHER THE ASSESSEE DID NOT COMPLY WITH THE PROVISIONS OF SEC. 11(2), WHICH PRESCRIBES CERTAIN CONDITIONS TO BE FOLLOWED FOR ACCUMULATION OF INCOME OF THE AS SESSEE. ACCORDINGLY THE ASSESSING OFFICER TREATED THE AMOUNTS SO TRANSFERRE D TO THE SPECIAL FUND AS THE NORMAL INCOME OF THE ASSESSEE. THE LD CIT (A) ALSO ENDORSED THE VIEW OF THE ASSESSING OFFICER. HOWEVER, WHILE DOING SO, THE LD CIT(A) HELD THAT THE ASSESSEE IS NOT ENTITLED TO TREAT THE CAPITAL EXPENDITURE IN CURRED ON ACQUISITION OF ASSETS AS APPLICATION OF INCOME OF THE ASSESSEE. THE ASSESSE E IS AGGRIEVED BY THE SAID FOLLOWING DECISIONS OF LD CIT(A). (A) CAPITAL EXPENDITURE INCURRED ON ACQUISITION OF ASSETS CANNOT BE TREATED AS APPLICATION OF INCOME. (B) THE ASSESSEE HAS NOT COMPLIED WITH THE CONDITIO NS PRESCRIBED UNDER SECTION 11(2) IN RESPECT OF AMOUNT TRANSFERRED TO SPECIAL FUND. 11.1 THE FIRST ISSUE IS WHETHER THE CAPITAL EX PENDITURE INCURRED ON ACQUISITION OF ASSETS CAN BE TREATED AS APPLICATION OF INCOME F OR THE PURPOSES OF SEC.11 OF THE ACT. THE LEARNED A.R SUBMITTED THAT THE AMOUNT SPENT ON ACQUISITION OF ASSETS FOR FURTHERANCE OF OBJECTS OF THE TRUST IS A LWAYS TAKEN AS APPLICATION OF ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 17 OF 25 INCOME. IN THIS REGARD, THE ASSESSEE RELIED ON THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF PINEGROVE INTERNA TIONAL CHARITABLE TRUST & ORS. VS. UNION OF INDIA (2010)(327 ITR 73)(P & H). IT IS PERTINENT TO NOTE THAT THE EXEMPTION U/S 11 IS GRANTED TO THE INCOME DERIV ED FROM PROPERTY HELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES, TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES IN INDIA AND, WHE RE ANY SUCH INCOME IS ACCUMULATED OR SET APART FOR APPLICATION FOR SUCH P URPOSES IN INDIA TO THE EXTENT TO WHICH THE INCOME SO ACCUMULATED OR SET APART IS NOT IN EXCESS OF FIFTEEN PERCENT OF THE INCOME FROM SUCH PROPERTY. THUS, THE EXEMPTION IS GRANTED TO THE AMOUNT APPLIED FOR CHARITABLE/RELIGIOUS PURPOSES. THE WORD APPLIED IS WIDER IMPORT THAN THE WORD EXPENDITURE. IN THE CASE OF PINEGROVE INTERNATIONAL CHARITABLE TRUST AND ORS, (SUPRA), IT WAS HELD THAT THE CAPITAL EXPENDITURE INCURRED BY THE TRUST HAS TO BE DEDUCTED FROM THE G ROSS INCOME OF THE EDUCATIONAL INSTITUTION IN DETERMINING WHETHER 85% OF THE INCOME HAS BEEN APPLIED FOR ITS OBJECTS. THE HONBLE SUPREME COURT HAS HELD IN THE CASE OF M.CT.M.TIRUPPANI TRUST VS. CIT (230 ITR 636) THAT A LL CAPITAL EXPENDITURE LAID OUT IN FURTHERANCE OF THE OBJECTS AND PURPOSES OF THE T RUST WILL BE TREATED AS APPLICATION OF THE INCOME. HENCE THE CAPITAL EXPEN DITURE INCURRED BY THE ASSESSEE IN FURTHERANCE OF OBJECTS OF THE TRUST SHO ULD BE TREATED AS APPLICATION OF INCOME. ACCORDINGLY WE SET ASIDE THE ORDER OF LD C IT(A) ON THIS POINT. 11.2 THE NEXT IS WHETHER THE ASSESSEE HAS COMPLI ED WITH THE PROVISIONS OF SEC. 11(2) OF THE ACT WITH REGARD TO THE AMOUNT TRANSFER RED TO SPECIAL FUND. THE ASSESSEE CLAIMS THAT THERE IS NO VIOLATION OF PROVI SIONS OF SEC.11(2) OF THE ACT. SECTION 11(2) OF THE ACT READS AS UNDER: (2) WHERE EIGHTY FIVE PERCENT OF THE INCOME REFERR ED TO IN CLAUSE (A) OR CLAUSE (B) OF SUB-SECTION (1) READ WITH THE EXPLANA TION TO THAT SUB-SECTION IS NOT APPLIED, OR IS NOT DEEMED TO HAVE BEEN APPLI ED, TO CHARITABLE OR RELIGIOUS PURPOSES IN INDIA DURING THE PREVIOUS YEA R BUT IS ACCUMULATED OR SET APART, EITHER IN WHOLE OR IN PART, FOR APPLICAT ION TO SUCH PURPOSES IN INDIA, SUCH INCOME SO ACCUMULATED OR SET APART SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIPT OF THE INCOME, PROVIDED THE FOLLOWING CONDITIONS ARE COMPL IED WITH, NAMELY:- ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 18 OF 25 (A) SUCH PERSON SPECIFIES, BY NOTICE IN WRITING GIV EN TO THE ASSESSING OFFICER IN THE PRESCRIBED MANNER, THE PUR POSE FOR WHICH THE INCOME IS BEING ACCUMULATED OR SET APART AND TH E PERIOD FOR WHICH THE INCOME IS TO BE ACCUMULATED OR SET APART, WHICH SHALL IN NO CASE EXCEED TEN YEARS (B) THE MONEY SO ACCUMULATED OR SET APART IS INVEST ED OR DEPOSITED IN THE FORMS OR MODES SPECIFIED IN SUB-SECTION (5). .. PROVIDED FURTHER THAT IN RESPECT OF ANY INCOME ACC UMULATED OR SET APART ON OR AFTER THE 1 ST DAY OF APRIL, 2001, THE PROVISIONS OF THIS SUB- SECTION SHALL HAVE EFFECT AS IF FOR THE WORDS TEN YEARS AT BOTH THE PLACES WHERE THEY OCCUR, THE WORDS FIVE YEARS HAD BEEN S UBSTITUTED. IN THE INSTANT CASE, THE ASSESSEE HAD SET APART A PA RT OF FEE RECEIPTS TO SPECIAL FUND ACCOUNT AND CLAIMED THAT THE SAID ACCUMULATIO N IS FOR THE PURPOSES OF MEETING CAPITAL EXPENDITURE. IN THIS CONNECTION, T HE ASSESSING OFFICER HAS STATED THAT THE ACCUMULATION OR SETTING APART OF FEE RECEI PTS SO MADE CANNOT BE RECOGNIZED AS THE ASSESSEE HAS FAILED TO COMPLY WIT H THE CONDITIONS PRESCRIBED U/S 11(2) OF THE ACT. THE ASSESSING OFFICER HAS ALS O NOTICED THAT THE ASSESSEE DID NOT COLLECT ANY AMOUNT FOR THE SAID SPECIFIC PURPOS E, I.E. TOWARDS SPECIAL FUND. THE ASSESSEE HAS ONLY APPROPRIATED A PORTION OF FEE RECEIPTS COLLECTED BY IT. HENCE, THE ASSESSING OFFICER TREATED THE AMOUNT TRA NSFERRED TO THE SPECIAL FUND ALSO AS THE INCOME OF THE TRUST. ACCORDINGLY THE AS SESSING OFFICER HELD THAT THE SAID AMOUNT ALSO SHOULD SATISFY THE TEST OF APPLICA TION OF 85% OF SUCH INCOME AS PROVIDED U/S 11(1)(A) OF THE ACT. THE LD CIT(A) AL SO ENDORSED THE VIEW OF THE ASSESSING OFFICER. 11.3 ON A CAREFUL READING OF THE ORDERS OF THE TAX AUTHORITIES, WE NOTICE THAT THEY HAVE ONLY SPELT OUT THE REQUIREMENT OF LAW. B EFORE US, IT WAS NOT SHOWN THAT THE ASSESSEE HAS COMPLIED WITH THE CONDITIONS PRESCRIBED IN SEC.11(2) FOR SETTING APART THE FEE RECEIPTS TO THE SPECIAL FU ND. IN THIS CONTEXT ONLY, THE ASSESSING OFFICER HAS STATED THAT THE ASSESSEE HAS FAILED TO COMPLY WITH THE PROVISIONS OF SEC.11(2) OF THE ACT. THERE SHOULD N OT BE ANY DOUBT THAT THE ASSESSEE IS REQUIRED TO COMPLY WITH THE CONDITIONS PRESCRIBED UNDER SECTION ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 19 OF 25 11(2) OF THE ACT IN ORDER TO CLAIM EXEMPTION OF THE INCOME ACCUMULATED OR SET APART BY IT FOR SPECIFIC PURPOSES. NON-COMPLIANCE OF THE PRESCRIBED CONDITIONS, IN OUR VIEW, WOULD RENDER THE INCOME SO ACCUMULATED AS NOT EXEMPT UNDER SECTION 11(2) OF THE ACT. IN THAT CASE, THE AMOUNT SO ACCU MULATED OR SET APART WOULD FORM PART OF THE INCOME OF THE ASSESSEE ONLY AND IT HAS TO SATISFY THE TEST OF APPLICATION OF 85% OF IT AS PER THE PROVISIONS OF S EC.11(1)(A) OF THE ACT. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD CIT(A) ON THIS ISSUE. 12. THE NEXT ISSUE URGED IN THE APPEAL OF THE A SSESSEE RELATES TO THE ALLEGED VIOLATION OF PROVISIONS OF SEC.13(2)(A) IN RESPECT OF THE AMOUNT ADVANCED TO M/S SCHRC. DURING THE YEAR UNDER CONSIDERATION, THE AS SESSING OFFICER NOTICED THAT THE ASSESSEE TRUST HAS ADVANCED A SUM OF ` 46.55 LAKHS TO M/S SCHRC, A CONCERN IN WHICH ONE OF THE TRUSTEES HAD SUBSTANTIAL INTERE ST. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SE C. 13(2)(H) OF THE ACT BY INDULGING INTO THE SAID TRANSACTION. ACCORDINGLY T HE ASSESSING OFFICER HELD THAT THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/S 11 O F THE ACT. THE LD CIT(A) HELD THAT THE PROVISIONS OF SEC. 13(2)(H) SHALL APPLY ON LY TO INVESTMENTS AND ONLY THE PROVISIONS OF SEC. 13(2)(A) SHALL APPLY TO THE IMPU GNED ADVANCE GIVEN BY THE ASSESSEE, WHICH WOULD ALSO DISENTITLE THE ASSESSEE FOR EXEMPTION UNDER SECTION 11 OF THE ACT. IN THE PRECEDING PARAGRAPHS, WE HAV E AFFIRMED THE VIEW OF LD CIT(A) THAT ONLY THE PROVISIONS OF SEC. 13(2)(A) AR E ATTRACTED TO THE IMPUGNED TRANSACTION. HOWEVER THE QUESTION HERE IS WHETHER THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SEC. 13(2)(A) OF THE ACT.? 12.1 THE ASSESSEE CONTENDS THAT THERE IS NO VIO LATION OF SEC.13(2)(A) OF THE ACT. THE CONTENTIONS OF THE ASSESSEE IN THIS REGAR D ARE SUMMARIZED BELOW: (A) THE ASSESSEE TRUST HAS TAKEN THE BUILDING OWNE D BY M/S SCHRC, HAVING A PLINTH AREA OF ABOUT 4500 SQ.FT., O N A MONTHLY RENT OF ` 9,000/- ONLY, WHICH IS NEGLIGIBLE WHEN COMPARED WITH THE MARKET RATES. BESIDES THE ABOVE T HE ASSESSEE TRUST IS ALSO USING THE MACHINERY AND OTHE R INFRASTRUCTURE FACILITIES. HENCE THE IMPUGNED ADVAN CE OF ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 20 OF 25 ` 46.55 LAKHS MAY ALSO BE CONSTRUED AS AN ADVANCE IN COMPENSATION OF LOWER RENT. (B) THE DIRECTORS OF M/S SCHRC HAS EXECUTED A MOU/INDEMNITY BOND WAY BACK IN 2001 IN FAVOUR OF THE ASSESSEE TRUST AS A SECURITY MEASURE FOR THE LOANS GIVEN BY THE ASSESSEE TRUST TO IT. BESIDES THE ABOVE, THE A SSESSEE TRUST ITSELF IS IN POSSESSION OF THE ENTIRE BUILDIN G BELONGING TO M/S SCHRC, WHICH HAS TO BE TAKEN AS COLLATERAL SECU RITY. (C) ULTIMATELY THE ASSESSEE TRUST HAS RECEIVED BA CK THE IMPUGNED ADVANCE OF ` 46.55 LAKHS ALONG WITH THE INTEREST OF ` 23.63 LAKHS DURING THE YEAR ENDING 31.3.2010. (D) HENCE THE IMPUGNED ADVANCE IS ADEQUATELY SECUR ED AND ADEQUATE INTEREST WAS ALSO RECEIVED. ACCORDINGLY, AS PER THE DECISION OF JURISDICTIONAL HIGH COURT DECISION IN T HE CASE OF POLISETTY SOMASUNDARAM CHARITIES, (SUPRA), THERE IS NO VIOLATION OF SEC. 13(2)(A) R.W.S. SEC. 13(1)(C) OF THE ACT. 12.1 ON THE CONTRARY, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS RECEIVED INTEREST ON THE IMPU GNED ADVANCE ONLY IN THE YEAR 2010, THAT TOO AFTER THE DATE OF ORDER OF LEAR NED CIT(A), APPARENTLY TO COVER UP THE DEFICIENCY POINTED OUT BY THE TAX AUTH ORITIES. THE INDEMNITY BOND RELIED UPON BY THE ASSESSEE WAS EXECUTED IN THE YEA R 2001 AND MAY NOT BE APPLICABLE TO THE IMPUGNED TRANSACTION. THE ASSESS EE HAS FAILED TO PROVE THAT THERE WAS SPECIFIC TERMS AND CONDITIONS WITH REGARD TO THE SECURITY AND INTEREST FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY HE C ONTENDED THERE WAS VIOLATION OF PROVISIONS OF SEC. 13 OF THE ACT AND THE ASSESSE E IS NOT ELIGIBLE FOR EXEMPTION UNDER SECTION 11 OF THE ACT. 12.2 WE HAVE HEARD THE RIVAL CONTENTIONS ON THI S ISSUE. AS PER THE PROVISIONS OF SEC. 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 SEC. 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 SEC. 13(3) OF TH E ACT. ACCORDING TO SEC. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 21 OF 25 13(1)(C) OF THE ACT, IF ANY INCOME OR PROPERTY OF T HE TRUST IS DIRECTLY OR INDIRECTLY USED OR APPLIED FOR THE BENEFIT OF ANY PERSON REFER RED TO IN SECTION 13(3), THE PROVISIONS OF SECTION 11 OR SECTION 12 SHALL NOT AP PLY TO THE INCOME OF CHARITABLE TRUST. THE SCOPE OF SEC. 13(2)(A) WAS EXPLAINED BY HON'BLE JURISDICTIONAL AP HIGH COURT IN THE CASE OF POLISETTY SOMASUNDARAM CHARITI ES, (SUPRA) AS UNDER:- 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 O R BOTH. THE LENDING AS SUCH IS NOT PROHIBITED IF ADEQUATE I NTEREST AND SECURITY ARE TAKEN CARE OF. SECTION 13(2) (H) I NTERDICTS INVESTMENT AND THE ACT OF INVESTMENT ALONE IS SUFFI CIENT TO DENY THE EXEMPTION. IN VIEW OF THIS SEMINAL DISTINC TION, THE REVENUE ENDEAVOURED TO BRACKET THE TRANSACTION UNDE R 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 WITH IN THE FOLD OF LENDING AND IT CANNOT BE CONSIDERED AS AN INVESTMENT. THE LENDING IN CLAUSE (A) SHOULD BE SUPPORTED BY ADEQUATE INTEREST OR SECURITY. THE APPELLANT ASS ISTANT COMMISSIONER FOUND THAT THE RATE OF INTEREST AT 12% IS NORMAL AND ADEQUATE AND THE FIRM IS FINANCIALLY SOU ND AND THE APPELLANT TRIBUNAL CONFIRMED THE FINDING. THERE FORE, THE ASSESSEE IS ENTITLED TO EXEMPTION UNDER SECTION 11 AND THE CONDITIONS UNDER SECTION 13(2) ARE SATISFIED AND SE CTION 13 (2) (H) IS NOT APPLICABLE. IN THE INSTANT CASE, THE ASSESSEE WAS IN POSSESSION OF THE HUGE PROPERTY BELONGING TO M/S SCHRC BY PAYING VERY LOW RENT WHEN COMPARED WITH THE NORMAL MARKET RATES. THE ASSESSEE TRUST HAS TAKEN THE SAID BUILDING ON RENT FOR CONDUCTING ITS EDUCATIONAL COURSES, VIZ., B.SC. NUR SING, BPT, MPT, GNM, PARAMEDICAL COURSES, AS THE SAID BUILDING WAS HAVIN G ALL THE REQUIRED FACILITIES. ACCORDINGLY IT WAS SUBMITTED THAT THE BUILDING OCCU PIED BY THE ASSESSEE TRUST CONSTITUTES ADEQUATE SECURITY. IT WAS FURTHER SUBMI TTED THAT THE DIRECTORS OF THE COMPANY HAS ALSO EXECUTED A IRREVOCABLE INDEMNITY B OND IN FAVOUR OF THE ASSESSEE TRUST, ACCORDING TO WHICH THE DIRECTORS WO ULD BE PERSONALLY LIABLE TO COMPENSATE THE TRUST IN CASE OF ANY FAILURE ON THE PART OF THE SCHRC TO REPAY THE ADVANCES RECEIVED BY IT. ACCORDING TO THE ASSE SSEE THE SAID INDEMNITY BOND IS STILL IN VOGUE. FURTHER IT WAS SUBMITTED THAT T HE SAID COMPANY HAS REPAID THE ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 22 OF 25 LOAN ALONG WITH INTEREST IN THE YEAR 2010. IT WAS SUBMITTED THAT THE TDS WAS ALSO DEDUCTED FROM THE SAID INTEREST PAYMENT. IN TH IS REGARD, THE LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE CERTIFICATE ISSUED BY M/S SCHRC, LEDGER ACCOUNT COPY FOR RECEIPT OF INTEREST IN THE FINANCIAL YEAR ENDING 2010, COPY OF TDS CERTIFICATE, WHICH ARE PLACED IN PAGES 11 TO 13 OF THE PAPER BOOK FILED BY THE ASSESSEE. THUS ACCORDING TO THE A SSESSEE, THE SAID LOAN IS ALSO COVERED BY ADEQUATE INTEREST. ALTERNATIVELY, IT WA S SUBMITTED THAT THE IMPUGNED AMOUNT MAY ALSO BE TREATED AS AN ADVANCE TO COMPENS ATE THE LOW RENT. HOWEVER, THE MAIN CONTENTION OF LEARNED D.R IS THAT THE ASSESSEE HAS COLLECTED THE INTEREST ON THE IMPUGNED ADVANCE ONLY AFTER THE DEFICIENCY WAS POINTED OUT BY THE TAX AUTHORITIES. 12.3 THE OBJECT OF INTRODUCING RESTRICTIONS THR OUGH SECTION 13 IS STATED IN SAMPATH IYENGARS LAW OF INCOME TAX, 10 TH EDITION, PAGE 1807) AS UNDER: THE RESTRICTION PROVIDED FOR U/S 13(1)(C) IS OBVIO USLY INTENDED TO ENSURE THAT, DESPITE THE OSTENSIBLY CHARITABLE OBJE CTS OF SUCH A TRUST OR INSTITUTION, ITS INCOME IS NOT DIVERTED AW AY TO THE BENEFIT PERSONS WHO ARE CLOSELY CONNECTED WITH THE CREATION , ESTABLISHMENT AND CONDUCT OF THE TRUST OR INSTITUTI ON. IN THE INSTANT CASE, THE ASSESSEE TRUST IS NOT ONLY OCCUPYING THE BUILDING BELONGING TO M/S SHCRC, WHICH IS HAVING A PLINTH AR EA OF ABOUT 4500 SQ. FT., BUT ALSO UTILIZING THE VARIOUS MACHINERY AND OTHER INFR ASTRUCTURE FACILITIES BELONGING TO THE SAID COMPANY FOR A MONTHLY RENT OF RS.9000/- ON LY. HENCE, AS CONTENDED BY LEARNED A.R, THE ASSESSEE TRUST IS ACTUALLY AT THE RECEIVING END BY ENJOYING THE HUGE FACILITIES AT LOW RATE. BESIDES THE ABOVE, THE DIRECTORS OF THE COMPANY HAVE EXECUTED AN INDEMNITY BOND IN FAVOUR OF THE ASSESSE E TRUST. HENCE, WE FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE, PARTICULA RLY IN VIEW OF THE FACT THAT THE ASSESSEE TRUST IS IN POSSESSION OF BUILDING BELONGI NG TO M/S SCHRC AND IS ALSO UTILIZING THE MACHINERY AND OTHER INFRASTRUCTURE FA CILITIES AT A LOW RENT. HENCE, IN OUR VIEW, THE IMPUGNED ADVANCE IS ADEQUATELY SECURE D. WITH REGARD TO THE ADEQUACY OF INTEREST, IT WAS SUBMITTED THAT THE ASS ESSEE TRUST HAS RECEIVED BACK THE IMPUGNED ADVANCE ALONG WITH ADEQUATE INTEREST I N THE SUBSEQUENT YEAR AND ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 23 OF 25 IN THIS REGARD THE ASSESSEE HAS FILED CERTAIN DOCUM ENTS BEFORE US. HOWEVER, THESE DOCUMENTS ARE REQUIRED TO BE VERIFIED AT THE END OF THE ASSESSING OFFICER. THOUGH THE LEARNED D.R STATES THAT THE INTEREST WAS RECEIVED IN THE SUBSEQUENT YEAR, CONSIDERING THE FACT OF LOW RENT AND ALSO REC EIPT OF INTEREST IN SUBSEQUENT YEAR ALONG WITH PRINCIPAL AMOUNT, WE DO NOT FIND AN Y REASON TO SUSPECT THE ADEQUACY OF SECURITY OR INTEREST IN TERMS OF SECTIO N 13(2)(A) OF THE ACT. SINCE THE DOCUMENTS SUPPORTING THE CLAIM OF THE RECEIPT O F INTEREST ALONG WITH THE PRINCIPAL ARE REQUIRED TO BE VERIFIED, WE SET ASIDE THIS MATTER TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFY ING AND SATISFYING WITH THE SAID CLAIM OF THE ASSESSEE. IF THE SAID CLAIM IS FOUND TO BE CORRECT, THEN IN OUR VIEW, THERE IS NO VIOLATION OF PROVISIONS OF SEC. 13(1)(C ) R.W.S. SECTION 13(2)(A) OF THE ACT IN RESPECT OF THE ADVANCE GIVEN TO M/S SCHRC. THE ORDER OF LEARNED CIT(A) ON THIS ISSUE STANDS MODIFIED ACCORDINGLY. 13. THE LAST ISSUE IN THE APPEAL OF THE ASSESSE E RELATES TO THE DISALLOWANCE OF CAR RENTALS PAID BY THE ASSESSEE TO THE TRUSTEES. IT IS PERTINENT TO NOTE THAT THIS DISALLOWANCE WAS MADE BY LEARNED CIT(A) BY INVOKING THE PROVISIONS OF SEC. 13(2)(G) OF THE ACT. THE FACTS RELATING TO THE SAM E ARE SET OUT IN BRIEF. THE LEARNED CIT(A) NOTICED THAT THE ASSESSEE TRUST HAD MADE A PAYMENT OF RS.7,19,000/- TO THE MANAGING TRUSTEE SRI G.BHASKAR A RAO AS CAR RENTALS FOR USING A LUXURY CAR NAMED MITSUBISHI PAJERO AND ANOT HER VEHICLE IN THE NATURE OF VAN. SIMILARLY A SUM OF ` 1,95,600/- WAS PAID TO SMT. KASIMBI, WIFE OF SRI G.BHASKARA RAO AS CAR RENTALS FOR USING THE SCORPIO BRAND CAR. THE LEARNED CIT(A) CONSIDERED THESE PAYMENTS AS DIVERSION OF FU NDS AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO DISALLOW THE SAID PAYMENTS . BESIDES THAT HE ALSO HELD THAT THE ASSESSEE TRUST HAS VIOLATED THE PROVISIONS OF SEC. 13(2)(G) AND ACCORDINGLY DENIED EXEMPTION UNDER SECTION 11 OF TH E ACT. 13.1 WE HAVE HEARD THE RIVAL CONTENTIONS ON THI S ISSUE. AS PER THE PROVISIONS OF SECTION 13(2)(G), IF ANY INCOME OR PROPERTY OF T HE TRUST OR INSTITUTION IS DIVERTED DURING THE PREVIOUS YEAR IN FAVOUR OF ANY PERSON REFERRED TO IN SUB ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 24 OF 25 SECTION (3) OF SEC.13, THEN THE TRUST SHALL BE DENI ED EXEMPTION UNDER SECTION 11 OR 12 OF THE ACT. IN THE INSTANT CASE, THE VEHICLE S OWNED BY THE TRUSTEE AND HIS SPOUSE WERE CLAIMED TO HAVE BEEN RENTED OUT TO THE ASSESSEE TRUST FOR WHICH THEY ARE RECEIVING RENTAL AMOUNTS. THE CLAIM OF TH E ASSESSEE IS THAT THESE VEHICLES WERE FULLY UTILIZED FOR THE PURPOSE OF TRU ST ACTIVITIES. HOWEVER, THE LEARNED CIT(A) HAS PRESUMED THAT THESE VEHICLES ARE USED ONLY FOR THE PRIVATE BENEFIT OF THE TRUSTEES AND WE FIND THAT THE LEARNE D CIT(A) HAS NOT BROUGHT ON RECORD ANY MATERIAL TO SUBSTANTIATE HIS PRESUMPTION S. IN OUR VIEW, THERE IS NO BAR UNDER THE LAW IN TAKING THE VEHICLE OR ANY OTHE R PROPERTY BELONGING TO A TRUSTEE FOR THE PURPOSE OF CARRYING ON THE ACTIVITI ES OF THE TRUST. IF THE SAID TRUSTEE IS PAID FOR SUCH USE OF VEHICLE OR PROPERTY AT MARKET RATES, THEN THE SAID PAYMENT, IN OUR VIEW, CANNOT BE TREATED AS DIVERSI ON OF INCOME AS CONTEMPLATED IN SEC. 13(2)(G) OF THE ACT. HOWEVER, IF THE PAYMENT SO MADE IS MORE THAN THE MARKET RATE, THEN IT CAN BE SAID THAT THERE IS AN ELEMENT OF DIVERSION OF INCOME OR PROPERTY OF THE TRUST. IN THE INSTANT CASE, THE LEARNED CIT(A) HAS NOT MADE ANY ATTEMPT TO FIND OUT WHETHER THERE IS ANY SUCH EXCESS PAYMENT. HENCE, IN OUR VIEW, THE SAID ISSUE NEEDS TO BE EXAMINED AT THE END OF THE ASSESSING OFFICER. ACCORDINGLY WE SET ASIDE TH E ORDER OF LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO EXAMINE THE ADEQUACY OF THE IMPUGNED P AYMENTS, HAVING REGARD TO THE UTILIZATION OF VEHICLES VIS-A-VIS THE MARKET RA TES OF IDENTICAL FACILITIES AND THEN DECIDE THE MATTER IN ACCORDANCE WITH THE LAW. THE ASSESSEE SHOULD BE GIVEN NECESSARY OPPORTUNITY OF BEING HEARD. 14. IN THE APPEAL FILED BY THE REVENUE FOR THE A SSESSMENT YEAR 2007-08, ALL THE ISSUES ARE DIRECTED AGAINST THE DECISION OF LEA RNED CIT(A) IN ACCEPTING THE RECEIPTS AND PAYMENTS ACCOUNT AS THE BASE FOR COM PUTING THE INCOME OF THE ASSESSEE. WE HAVE DEALT WITH THE SAID ISSUE IN THE PRECEDING PARAGRAPHS. ITA NOS 372 OF 08, 220 OF 2010387 OF 08 & 243 OF 20 10 GSL TRUST RAJAHMUNDRY PAGE 25 OF 25 15. IN THE APPEAL FILED BY THE ASSESSEE FOR ASS ESSMENT YEAR 2007-08, FOLLOWING THREE ISSUES ARE URGED. (A) VIOLATION OF SEC. 13(2)(A) IN RESPECT OF ADVAN CE GIVEN TO M/S SCHRC. (B) DISALLOWANCE OF CAR RENTALS. (C) ADDITION OF AMOUNT TRANSFERRED TO SPECIAL FUN D. ALL THESE THREE ISSUES HAVE ALSO BEEN ADDRESSED BY US WHILE DEALING WITH THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2005 -06 AND THE DECISION RENDERED THEREIN SHALL BE FOLLOWED IN THIS YEAR ALS O. 16. IN THE RESULT, THE APPEALS OF THE REVENUE AS WELL AS THE APPEALS AND CROSS OBJECTION OF THE ASSESSEE ARE TREATED AS PARTLY ALL OWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 11 TH AUGUST, 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 11-08-2011 COPY TO 1 THE ITO WARD-4, RAJAHMUNDRY 2 M/S GSL TRUST, 23-12-4 SRIRAMNAGAR, RAJAHMUNDRY 3 4. THE CIT RAJAHMUNDRY THE CIT(A), RAJAHMUNDRY 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM