Cargo Handling Private Workers Pool, Hiramandalam V. THE DCIT, Visakhapatnam

ITA 498/VIZ/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1066 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 24-11-2015
• Assessment Year: 1997-1998
• Appeal Filed On: 21-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D KOMALI KRISHNA
• Assessee Lawyers: C P RAMASWAMI
• Keywords: Reopening of assessment; Business income; Depreciation; Charitable institution; Opportunity of being heard; Revised return
• Section: 43B; 143(3); 142(1); 12A; 147; 27; 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , & BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A. NOS. 498 & 499/VIZAG/2014 ( /ASSESSMENT YEARS: 1997-98 & 1998-99) M/S. CARGO HANDLING PRIVATE WORKERS POOL, VISAKHAPATNAM VS. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, VISAKHAPATNAM [PAN: AAATC1920F] ( / APPELLANT) ( / RESPONDENT) ./I.T.A. NOS. 525, 526, 527, 528 & 529/VIZAG/2014 ( /ASSESSMENT YEARS: 1997-98, 1998-99, 2005-06, 2006-07 & 2007-08) ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1), VISAKHAPATNAM VS. M/S. CARGO HANDLING PRIVATE WORKERS POOL, VISAKHAPATNAM [PAN: AAATC1920F] ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY: SHRI C.P. RAMASWAMI, AR / RESPONDENT BY : SMT. D. KOMALI KRISHNA, DR / DATE OF HEARING : 05-05-2016 /DATE OF PRONOUNCEMENT: 01-07-2016 M/S. CARGO HANDLING PRIVATE WORKERS POOL 2 / O R D E R PER BENCH: THESE CROSS-APPEALS FILED BY THE ASSESSEE, AS WELL AS REVENUE ARE DIRECTED AGAINST THE COMMON ORDER PASSE D BY THE COMMISSIONER OF INCOME TAX (APPEALS), VISAKHAPATNAM DATED 20-06-2014 FOR THE AYS. 1997-98, 1998-99, 2005-06, 2006-07 & 2007-08. SINCE, THE FACTS ARE IDENTICAL AND ISSUE S ARE COMMON, THEY ARE CLUBBED, HEARD TOGETHER AND DISPOS ED-OFF BY WAY OF THIS COMMON ORDER FOR THE SAKE OF CONVENIENC E. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A TRUST CREATED BY A TRUST DEED DT. 19-01-1994 AND RE GISTERED U/S. 12A OF THE INCOME TAX ACT, 1961 [ACT]. THE AUT HORS OF THE TRUST WERE TWO TRADE BODIES, WHICH ARE VISAKHAPATNA M STEVEDORES ASSOCIATION AND VISAKHAPATNAM CLEARING AND FORWARDING AGENTS ASSOCIATION. THE MAIN OBJECTS O F THE TRUST AS SPELT OUT IN CLASUE-3 OF THE TRUST DEED READ AS UNDER: M/S. CARGO HANDLING PRIVATE WORKERS POOL 3 A) TO IDENTIFY, ENROLL, ALLOT THE WORK AND REGULATE TH E PRIVATE WORKERS ENGAGED BY THE MEMBERS AND USERS OF STEVEDORES ASSOCIATION AND CLEARING AND FORWARDING AGENTS ASSOCIATION OF VISAKHAPATNAM, ONLY AGAINST SHORT SUPPLY OF THE LABOUR BY THE VISAKHAPATNAM DOCK LABO UR 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 PUR POSES AND ALSO FOR OTHER CHARITABLE PURPOSES SUCH AS EDUC ATION, HEALTH, SPORTS AND ALLEVIATION OF SUFFERINGS OF THE POOR AND THE NEEDY ETC., D) TO CARRY OUT OTHER PUBLIC UTILITY ACTIVITY WITHIN T HE MEANING OF CHARITABLE PURPOSES DEFINED IN THE INCOME-TAX ACT. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ABOVE ASSESSMENT YEARS DECLARING NIL TOTAL INCOME, AFTER CLAIMING EXEMPTION U/S. 11 OF THE ACT. THE ASSESSMENT WAS CO MPLETED M/S. CARGO HANDLING PRIVATE WORKERS POOL 4 U/S. 143(3) ON 23-03-2000 ACCEPTING THE INCOME RETU RNED. SUBSEQUENTLY, THE CASE HAS BEEN REOPENED U/S. 147 O F THE ACT, FOR THE REASONS THAT THE ASSESSEE WAS NOT ENGAGED I N ANY CHARITABLE ACTIVITY, BUT WAS MERELY SUPPLYING LABOU R IN AN ORGANIZED MANNER. THE A.O. ALSO NOTED THAT THE ASS ESSEE HAS VIOLATED THE PROVISIONS OF SECTION 11(2)/(5) AND SE CTION 13(1)(C) OF THE ACT, BY INVESTING PART OF ITS FUNDS IN NON- SPECIFIED MODE OF INVESTMENT, THAT TOO IN THE CONCE RNS IN WHICH THE TRUSTEES ARE INTERESTED. THE A.O. ALSO NOTED T HAT THERE WAS UN-SPENT SURPLUS INCOME OF MORE THAN 25% OF THE TOT AL INCOME FOR WHICH THERE WAS NO APPLICATION HAS BEEN FILED F OR 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 FO R ACCUMULATION OF INCOME TOWARDS WORKERS WELFARE AND BUILDING CONSTRUCTION. 3. THE CASE HAS BEEN SELECTED FOR SCRUTINY AND ACCORDINGLY, NOTICE U/S. 143(2) AND 142(1) OF THE A CT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORISED REP RESENTATIVE M/S. CARGO HANDLING PRIVATE WORKERS POOL 5 (AR) OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED THE DETAILS. DURING THE COURSE OF ASSESSMENT PROCEE DINGS, AFTER CONSIDERING THE DETAILS FURNISHED BY THE ASSESSEE, THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE IS NOT ENGAGED IN ANY CHARITABLE ACTIVITY. IT WAS FURTHER OBSERVED THAT THE TRUST WAS CREATED WITH A VIEW TO SUPPLY ORGANIZED LABOUR TO T HE USERS OF TWO SETTLERS ASSOCIATIONS. THE MAIN OBJECT OF THE A SSESSEE- TRUST WAS TO IDENTIFY, ENROLL, ALLOT THE WORK AND R EGULATE THE PRIVATE WORKERS ENGAGED BY THE MEMBERS AND USERS OF STEVEDORES ASSOCIATION AND CLEARING AND FORWARDING AGENTS ASSOCIATION AT VISAKHAPATNAM PORT TRUST. THE A.O. F URTHER OBSERVED THAT THE DOMINANT OBJECT OF THE TRUST IS N OT CHARITABLE IN NATURE WITHIN THE MEANING OF SECTION 2(15) OF TH E ACT AND THAT THE INCOME DERIVED BY PERFORMING SPECIFIC SERV ICES BY THE WORKERS ENGAGED BY THE SETTLERS ASSOCIATION IS TAXA BLE AS BUSINESS INCOME. AS THE ASSESSEE WAS ENGAGED ONL Y WITH THE OBJECT OF ENROLLING AND SUPPLY OF THE LABOUR, EARNI NG SURPLUS, AND DISTRIBUTING SURPLUS TO ITS WORKERS IS COMMERCI AL IN NATURE, THEREFORE, THE INCOME GENERATED FROM SUCH ACTIVITY WOULD NOT BE QUALIFIED FOR EXEMPTION U/S. 11 OF THE ACT. THE A.O. FURTHER NOTED THAT THE ASSESSEE EXISTED FOR THE BENEFIT OF ITS OWN M/S. CARGO HANDLING PRIVATE WORKERS POOL 6 MEMBERS/EMPLOYEES/WORKERS AND HENCE, THERE WAS NO B ENEFIT TO THE GENERAL PUBLIC. WITH THESE OBSERVATIONS, CO NCLUDED THAT THE ASSESSEE FAILED TO MEET THE REQUIREMENTS OF GEN ERAL PUBLIC UTILITY AND AS THE ELEMENT OF CHARITY WAS NOT PRESE NT, IT WOULD NOT BE ELIGIBLE FOR EXEMPTION U/S. 11 OF THE ACT. 4. THE A.O. FURTHER OBSERVED THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 11(2)/(5) R.W.S. 13(1)(C) , AS THE ASSESSEE HAS ADVANCED UNSECURED LOANS OF RS. 30 LAK HS AND RS. 5 LAKHS TO M/S. VISAKHAPATNAM STEVEDORES ASSOC IATION AND VISAKHAPATNAM CLEARING AND FORWARDING AGENTS ASSOCIATION WITHOUT CHARGING ANY INTEREST. THE A.O . FURTHER OBSERVED THAT THE ASSESSEE HAS FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING FOR THE PURPOSE OF MAINTENANCE OF ACCOUN TS, HOWEVER, FOLLOWED CASH SYSTEM OF ACCOUNTING FOR THE PURPOSE OF COMPUTATION OF INCOME AVAILABLE FOR APPLICATION FOR CHARTABLE PURPOSE. SINCE, ASSESSEE IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING, THE EXCESS OF INCOME OVER EXPENDITURE A S 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 FO R FILING M/S. CARGO HANDLING PRIVATE WORKERS POOL 7 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 THES E 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 A CT AND ADVERTISEMENT EXPENDITURE. 5. FOR THE A.Y. 1998-99, THE FACTS WERE IDENTICAL WITH THE DIFFERENCE THAT THE ASSESSEE DID NOT FILE ANY F ORM 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 R ECORDED IN THE PRECEDING PARAGRAPHS, DENIED THE BENEFIT OF EXE MPTION 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 EXPENDITURES. FOR SIMIL AR REASONS, THE ASSESSEE WAS DENIED EXEMPTION U/S. 11 FOR AY. 2 005-06, 2006-07 AND 2007-08. THE MAJOR DIFFERENCE BEING THA T THESE THREE ASSESSMENTS WERE NOT REOPENED ASSESSMENTS. TH E A.O. M/S. CARGO HANDLING PRIVATE WORKERS POOL 8 COMPLETED THESE ASSESSMENTS AND MADE ADDITIONS TOWA RDS CERTAIN EXPENDITURES. 6. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE C IT(A), THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AO. THE CIT(A) VIDE COMMON ORDER DT. 31-01-2011, UPHELD THE ACTION OF THE A.O. IN DENYING EXEMPTION U/S. 11 OF THE ACT . THE CIT(A) ALSO NOTED THAT THERE WAS VIOLATION OF SECTI ON 13(1)(C)/(D) OF THE ACT, IN SO FAR AS THE ADVANCE O F LOANS TO THE SETTLORS ASSOCIATION BY THE TRUST WITHOUT ANY INTER EST AND IT WAS HELD THAT FOR SUCH VIOLATION ALSO, THE TRUST WOULD FORFEIT EXEMPTION OF ITS INCOME U/S. 11 OF THE ACT. THE CIT (A) ALSO UPHELD THE DETERMINATION OF TAXABLE INCOME WITH REF ERENCE TO THE INCOME AND EXPENDITURE ACCOUNT AND ALSO UPHELD DISALLOWANCE MADE BY THE AO. AS A RESULT, THE APPE ALS FOR THE A.Y. 1997-98, 1998-99, 2005-06, 2006-07 AND 2007-08 WERE DISMISSED. 7. SUBSEQUENT THERE TO, THE ASSESSEE PREFERRED AN APPEAL AGAINST THE CIT(A) ORDER BEFORE THE ITAT, M/S. CARGO HANDLING PRIVATE WORKERS POOL 9 VISAKHAPATNAM BENCH. IN THE APPEAL BEFORE THE ITAT , THE ASSESSEE CONTENDED THAT THE VARIOUS ISSUES RAISED B Y THE ASSESSEE IN APPEAL BEFORE THE CIT(A) WERE ALREADY D ECIDED BY THE JURISDICTIONAL ITAT, IN ASSESSEES OWN CASE FOR THE A.YS. 1999-2000 TO 2004-05 VIDE ITS ORDER DT. 08-01-2010 IN ITA NOS. 272 TO 274/VIZAG/2005. THEREFORE, THE CIT(A) OUGHT TO HAVE FOLLOWED THE SAID ORDER OF THE ITAT. THE ITAT , HELD THAT THE DECISION RENDERED VIDE ORDER DT. 08-01-2010 IS BINDING ON THE CIT(A) AND THAT THE LD. CIT(A) BY WAY OF JUDICI AL DISCIPLINE SHOULD HAVE FOLLOWED THE SAME. THE RELEVANT PORTIO N OF THE ORDERS IS EXTRACTED BELOW: 13. IN THE INSTANT CASES, THE APPEALS HAVE BEEN P REFERRED BY THE ASSESSEE ONLY BECAUSE THE LEARNED CIT(A) HAS RE NDERED HIS DECISION WITHOUT FOLLOWING THE DECISION OF THIS TRI BUNAL. IT CANNOT BE DENIED THAT WE WOULD BE REQUIRED TO REVISIT ALL THE ISSUES ON WHICH WE HAVE ALREADY RENDERED OUR DECISION, WHILE IT IS THE DUTY OF THE LEARNED CIT(A) TO PASS ORDERS IN TERMS OF THE EARLI ER DECISION OF THE ITAT SO LONG AS THE SAME IS NOT SUSPENDED/REVERSED BY HONOURABLE HIGH COURT. HENCE WE DEEM IT PROPER TO SET ASIDE A LL THE ISSUES TO THE FILE OF LEARNED CIT(A) IN ORDER TO ENABLE HIM T O PASS APPROPRIATE ORDERS BY DULY FOLLOWING THE ORDERS PASSED BY THE I TAT IN THE ASSESSEES OWN CASE REFERRED (SUPRA) FOR OTHER YEAR S. ACCORDINGLY WE SET ASIDE THE IMPUGNED COMMON ORDER OF LEARNED C IT(A) AND RESTORE ALL THE ISSUES TO HIS FILE FOR ADJUDICATING THEM AFRESH BY FOLLOWING THE DECISION OF ITAT REFERRED SUPRA. NEE DLESS 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 M/S. CARGO HANDLING PRIVATE WORKERS POOL 10 CIT(A) FOR FRESH ADJUDICATION. THE CIT(A) IN THE S ECOND ROUND OF APPEALS, PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. THE LD. CIT(A) UPHELD THE ACTION OF THE A.O. IN REO PENING THE ASSESSMENT FOR THE AY. 1997-98 AND 1998-99. HOWEVE R, THE OTHER ISSUES WITH REGARD TO EXEMPTION U/S. 11, METH OD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND COMPUTATION OF INCOME AVAILABLE FOR APPLICATION HAS BEEN HELD IN F AVOUR 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 W ITH ORIGINAL RETURN OF INCOME FILED FOR THE RELEVANT ASSESSMENT YEARS. THE CIT(A) FURTHER HELD THAT FOR THE A.Y. 1998-99, THE ASSESSEE HAS NOT FILED ANY FORM NO. 10 SEEKING ACCUMULATION OF I NCOME U/S. 11 OF THE ACT. WITH THESE OBSERVATIONS, DENIED THE ACCUMULATION OF INCOME U/S. 11 AND UPHELD THE ACTIO N OF THE A.O. BUT, FOR THE A.YS 2005-06, 2006-07 AND 2007-08 , THE ASSESSEE HAS FILED FORM NO. 10 WITHIN THE TIME ALLO WED UNDER THE ACT. IN VIEW OF THE DIRECTIONS OF THE ITAT, TH E CIT(A) DIRECTED THE A.O. TO ACCEPT THE FORM NO. 10 FILED B Y THE ASSESSEE FOR AYS. 2005-06 TO 2007-08 AND RE-COMPUTE D THE INCOME AFTER ALLOWING 25% ACCUMULATION OF INCOME. SIMILARLY, M/S. CARGO HANDLING PRIVATE WORKERS POOL 11 AS REGARDS THE DISALLOWANCE OF CERTAIN EXPENDITURE AND ALSO UN- PAID LIABILITY U/S. 43B, THE CIT(A) DIRECTED THE A. O. TO DELETE THE DISALLOWANCE OF EXPENDITURES AND DISALLOWANCE O F UNPAID LIABILITY U/S. 43B OF THE ACT. AGGRIEVED BY THE CIT (A)S ORDER, THE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEALS BEFORE US. 9. THE ASSESSEE HAS RAISED COMMON GROUNDS FOR THE A.YS. 1997-98 AND 1998-99. FROM THESE GROUND OF AP PEAL, THE ASSESSEE HAS AGITATED TWO ISSUES I.E., I. RE-OPENING OF ASSESSMENT U/S. 147 OF THE ACT; II. ACCUMULATION OF INCOME U/S. 11(2) OF THE ACT BY FILING FORM NO. 10; 10. THE REVENUE HAS RAISED COMMON GROUNDS FOR ALL THE ASSESSMENT YEARS. FROM THESE GROUNDS, THE REVENUE HAS I. CHALLENGED THE ACTION OF THE CIT(A) REGARDING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE; II. A.O.S PROBING INTO OBJECTS OF THE ASSESSEE-TRUST; III. VIOLATIONS OF SECTION 11(2)/(5) R.W.S. 13(1)(C) OF THE ACT; M/S. CARGO HANDLING PRIVATE WORKERS POOL 12 IV. DELETION OF ADDITIONS MADE BY THE AO U/S. 43B OF TH E ACT; 11. THE LD. COUNSEL FOR THE ASSESSEE, AT THE TIME OF HEARING SUBMITTED THAT THE GROUND RELATING TO REOPE NING OF ASSESSMENT FOR THE AYS. 1997-98 AND 1998-99 IS NOT PRESSED. THEREFORE, THE SAME HAS BEEN DISMISSED AS NOT PRESS ED. 12. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERA TION IS FILING FORM NO. 10 AND ACCUMULATION OF INCOME U/S. 11(2) OF THE ACT. THE LD. A.R. FOR THE ASSESSEE, SUBMITTED T HAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF INCOME TO BE APPLIED FO R CHARITABLE PURPOSE U/S. 11 OF THE ACT. THOUGH IT HAS FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING FOR THE PURPOSE OF MAINTENANCE OF BOOKS OF ACCOUNTS FOR ALL THE ASSESSMENT YEARS, IT HAS FO LLOWED CASH SYSTEM WHILE FILING THE RETURN OF INCOME. THE A.R. FURTHER SUBMITTED THAT AS PER THE CASH SYSTEM OF ACCOUNTING , THE SURPLUS AS PER RECEIPTS AND PAYMENTS A/C IS LESS TH AN 25% OF THE TOTAL INCOME AND HENCE, FILING FORM NO. 10 FOR ACCUMULATION OF INCOME U/S. 11(2) OF THE ACT DOES N OT ARISE. M/S. CARGO HANDLING PRIVATE WORKERS POOL 13 HOWEVER, DURING THE COURSE OF RE-ASSESSMENT PROCEED INGS, THE ASSESSEE HAS FILED FORM NO. 10, AS THE A.O. HAS ADO PTED MERCANTILE SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF TOTAL INCOME. THE ASSESSEE FURTHE R SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CASE OF NAGPU R HOTEL OWNERS ASSOCIATION VS. CIT [247 ITR 201] HELD THAT IF FORM NO. 10 IS FILED BEFORE COMPLETION OF ASSESSMENT, THE AS SESSEE CANNOT BE DENIED BENEFIT OF ACCUMULATION OF INCOME U/S. 11(2) OF THE ACT. 13. LD. DR ON THE OTHER HAND STRONGLY SUPPORTED TH E ORDER OF CIT(A). 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE A.O. REJECTED FO RM 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 A SSESSEE FILED FORM NO. 10 ALONG WITH REVISED RETURN IN RESPONSE T O NOTICE U/S. 148, FAILED TO FILE FORM NO. 10 ALONG WITH ORI GINAL RETURN OF INCOME, THEREFORE, THE ASSESSEE IS NOT ELIGIBLE FOR BENEFIT OF ACCUMULATION OF INCOME. IT IS THE CONTENTION OF TH E ASSESSEE M/S. CARGO HANDLING PRIVATE WORKERS POOL 14 THAT AS PER THE CASH SYSTEM OF ACCOUNTING, THERE IS NO SURPLUS IN EXCESS OF 25% OF THE TOTAL INCOME AVAILABLE FOR APPLICATION; THEREFORE, FILING FORM NO. 10 DOES NOT ARISE. HOWE VER, IT HAS FILED FORM NO. 10 ALONG WITH REVISED RETURN FILED I N RESPONSE TO SECTION 148, BECAUSE THE A.O. HAS FOLLOWED MERCANTI LE SYSTEM FOR COMPUTATION OF INCOME. WE FIND FORCE IN THE AR GUMENTS OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE IS CO NSISTENTLY FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF INCOME U/S. 11 OF THE ACT. THOUGH IT HAS FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING FOR THE PU RPOSE OF MAINTENANCE OF ACCOUNTS, ALL ALONG IT HAS FOLLOWED CASH SYSTEM OF ACCOUNTING AND AS PER WHICH, THE SURPLUS FOR THE YEAR IS LESS THAN 25%. AS PER THE PROVISIONS OF SECTION 11, ONCE SURPLUS IS LESS THAN 25% OF TOTAL INCOME FROM PROPERTY HELD UN DER TRUST, THE ASSESSEE NEED NOT TO FILE FORM NO. 10 TO ACCUMU LATE THE INCOME AVAILABLE FOR APPLICATION. THEREFORE, WE AR E OF THE VIEW THAT THE A.O. WAS NOT CORRECT IN DENYING THE BENEFI T OF ACCUMULATION OF INCOME U/S. 11(2) OF THE ACT. WE FU RTHER OBSERVED THAT THE HONBLE SUPREME COURT, IN THE CAS E OF NAGPUR HOTEL OWNERS ASSOCIATION VS. CIT [247 ITR 20 1] (SUPRA) HELD THAT FORM NO. 10 SHOULD BE FILED BEFOR E THE M/S. CARGO HANDLING PRIVATE WORKERS POOL 15 ASSESSING AUTHORITY BEFORE THE COMPLETION OF ASSESS MENT PROCEEDINGS. IF THE FORM NO. 10 IS NOT FILED BEFOR E 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 FI LED BEFORE THE COMPLETION OF ASSESSMENT HAS TO BE ACCEPTED. I N 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 REJECTI NG THE FORM NO. 10 AND DENYING THE BENEFIT OF ACCUMULATION OF I NCOME 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. 15. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION IS METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE LD. A.R. FOR THE ASSESSEE SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED BY THE DECISION OF THE I TAT, VISAKHAPATNAM BENCH IN ASSESSEES OWN CASE FOR THE AYS. 1999-2000 TO 2004-05 IN ITA NOS. 272 TO 274/VIZAG/2 005. WE FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL, I N ASSESSEES M/S. CARGO HANDLING PRIVATE WORKERS POOL 16 OWN CASE FOR THE EARLIER PERIOD HELD THAT THE ASSES SEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF INCOME U/S. 11 OF THE ACT. THE REL EVANT PORTION OF THE ORDER IS EXTRACTED BELOW: 11.3 THE NEXT ISSUE IS WHETHER THERE IS ANY V IOLATION OF SECTION 13(1)(C) R.W.S. 13(2) OF THE ACT. THE IMPU GNED AMOUNT OF RS.30.00 LAKHS AND RS.5.00 LACS HAVE BEEN ADVANCED TO THE TWO SETTLER ASSOCIATIONS. SINCE THEY ARE THE AUTHORS O F 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 E XEMPTION U/S 11, IF ANY INCOME OR PROPERTY IS USED OR APPLIED FOR THE B ENEFIT OF ANY PERSON REFERRED TO IN SECTION 13(3). ACCORDING TO L D AR, THOUGH THE ASSESSEE DID NOT CHARGE INTEREST ON THESE TWO LOANS INITIALLY, LATER ON BOTH THE AMOUNTS WERE COLLECTED ALONG WITH THE INTE REST @ 12%. ACCORDING TO LD AR, SINCE THE IMPUGNED LOANS ARE CO VERED BY ADEQUATE SECURITY AND ADEQUATE INTEREST, THERE IS N O 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 HONBLE JURISDICTIONAL AP HIGH COURT IN THE CASE OF POLISETTY SOMASUNDARAM CH ARITIES, SUPRA. THE RELEVANT OBSERVATIONS OF THE HONBLE 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 TA KEN 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 EXE MPTION 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 INVESTMEN T. THE LENDING IN CLAUSE (A) SHOULD BE SUPPORTED BY ADEQUA TE INTEREST OR SECURITY. THE APPELLANT ASSISTANT COMMISSIONER FOUN D THAT THE RATE OF INTEREST AT 12% IS NORMAL AND ADEQUATE AND THE F IRM IS FINANCIALLY SOUND AND THE APPELLANT TRIBUNAL CONFIRMED THE FIND ING. THEREFORE, M/S. CARGO HANDLING PRIVATE WORKERS POOL 17 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. THE LD AR ALSO SUBMITTED THAT FOR THE PURPOSE OF CO MPUTING THE INCOME U/S 11 TO 13 OF THE INCOME TAX ACT, THE ASSE SSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. THE INTEREST COLLECT ED FROM THE IMPUGNED TWO LOANS HAS BEEN OFFERED TO TAX IN THE Y EAR OF RECEIPT. THE DETAILS OF LOANS GRANTED AND RECEIPT OF INTERES T AND PRINCIPAL ON THESE TWO LOANS HAVE BEEN EXTRACTED BELOW FROM THE WRITTEN SUBMISSIONS OF LD AR. VISAKHAPATNAM STEVEDORES ASSOCIATION DATE RS. PS. 03-04-1995 LOAN AMOUNT GRANTED 30,00,000.00 INTEREST ACCRUED ON LOAN 46,60,451.86 ---------------- 76,60,451.86 LESS 15-10-2003 INTEREST AMOUNT RECEIVED 22,56,000.00 07-07-2007 INTEREST AMOUNT RECEIVED 12,51,121.86 26-11-2007 INTEREST AMOUNT RECEIVED 10,98,248.00 29-01-2008 INTEREST AMOUNT RECEIVED 20,000.00 24-03-2008 INTEREST AMOUNT RECEIVED 35,082.00 26-11-2007 PRINCIPAL AMOUNT RECEIVED 10,00,00 0.00 29-01-2008 PRINCIPAL AMOUNT RECEIVED 10,00,00 0.00 24-03-2008 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 --------------- M/S. CARGO HANDLING PRIVATE WORKERS POOL 18 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 MO RE THAN THE INTEREST EARNED BY THE ASSESSEE BY PARKING THE SURP LUS FUNDS IN THE FIXED DEPOSITS OF THE SCHEDULED BANKS. THUS, THERE CAN NOT BE ANY DISPUTE THAT THE INTEREST RATE OF 12% RECEIVED BY T HE ASSESSEE IS ADEQUATE. THE AO HAS NOT EXPRESSED ANY DOUBT ABOUT THE FINANCIAL STABILITY OF THE TWO SETTLER ASSOCIATIONS. THUS TH E AMOUNTS LENT TO THE TWO FOUNDER ASSOCIATIONS WERE ADEQUATELY SECURED AN D ALSO EARNED ADEQUATE INTEREST @ 12%. IT WAS STATED THAT THE ASS ESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE INCOME TAX PURPOS ES AND HENCE THE INTEREST CAN BE OFFERED TO TAX ONLY IN THE YEAR OF RECEIPT. THOUGH INITIALLY THE ASSESSEE TRUST DID NOT CHARGE INTERES T, 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 WHIC H IS ALSO IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T. 15.1. CONSIDERING THE FACTS AND CIRCUMSTANCES OF T HIS CASE AND ALSO RESPECTFULLY FOLLOWING THE CO-ORDINAT E BENCH DECISION IN ASSESSEES OWN CASE, WE ARE OF THE VIEW THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR DETERMINATION OF INCOME FOR THE PURPOSE OF APPLICAT ION OF INCOME FOR CHARITABLE PURPOSE. THEREFORE, WE DIREC T THE A.O. TO COMPUTE THE INCOME AS PER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. M/S. CARGO HANDLING PRIVATE WORKERS POOL 19 16. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION IS DENIAL OF EXEMPTION U/S. 11 OF THE ACT. THE AO DENI ED THE EXEMPTION U/S. 11 OF THE ACT AND COMPUTED THE INCOM E UNDER THE NORMAL PROVISIONS OF THE ACT. THE AO WAS OF TH E OPINION THAT THE ACTIVITIES CARRIED OUT BY THE ASSESSEE ARE NOT IN THE NATURE OF CHARITABLE ACTIVITY AS DEFINED U/S. 2(15) OF THE ACT. THE AO FURTHER WAS OF THE OPINION THAT THE ASSESSEE MERELY ENGAGED IN THE BUSINESS OF PROVIDING ORGANIZED LABO UR TO TWO OF ITS SETTLORS ASSOCIATION. THEREFORE, IT CANNOT BE HELD THAT THE ASSESSEE IS INVOLVED IN ANY CHARITABLE ACTIVITY WHI CH ENTITLES THE ASSESSEE FOR EXEMPTION U/S. 11 OF THE ACT. THE LD. AR SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE ITAT, VISAKHAPATNAM BENCH IN ASSESSEES OWN CAS E FOR THE AYS. 1999-2000 TO 2004-05 IN ITA NOS. 272 TO 274/VIZAG/2005. WE FIND THAT THE CO-ORDINATE BENCH OF THIS TRIBUNAL, IN ASSESSEES OWN CASE FOR THE EARLIER PE RIOD HELD THAT THE ACTIVITIES CARRIED OUT BY THE ASSESSEE ARE IN T HE NATURE OF CHARITABLE ACTIVITIES, ELIGIBLE FOR EXEMPTION U/S. 11 OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HER E UNDER: 9. NOW LET US DEAL WITH THE FIRST ISSUE. THER E IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE TRUST HAS BEEN GRANTED REGISTRATION BY LD CIT, VISAKHAPATNAM U/S 12A OF TH E ACT FROM THE DATE M/S. CARGO HANDLING PRIVATE WORKERS POOL 20 OF ITS INCEPTION. IN THIS REGARD, IT IS PERTINENT TO NOTE THE CASE LAW RELIED UPON BY LD AR. IN THE CASE OF ACIT VS. SURA T CITY GYMKHANA (2008) (300 ITR 214), THE HONBLE SUPREME COURT HAS AFFIRMED THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF HIRALAL BHAGWATI VVS. CIT (2000) (246 ITR 188 (GUJ) IN HOLDING THAT THE REGISTRATION OF A TRUST U/S 12A OF THE INCOME-TAX ACT OF 1961 ONCE DO NE IS A FAIT ACCOMPLI AND THE ASSESSING OFFICER CANNOT THEREAFTE R PROBE INTO THE OBJECTS OF THE TRUST. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE HEAD NOTES OF THE SURAT CITY GYMKHANA CASE CITED SU PRA: THE REGISTRATION OF A TRUST UNDER SECTION 12A OF T HE INCOME-TAX ACT, 1961, ONCE DONE IS A FAIT ACCOMPLI AND THE ASSESSING OFFICER C ANNOT THEREAFTER MAKE FURTHER PROBE INTO THE OBJECTS OF THE TRUST. THE DECISION OF THE HIGH COURT IN THE HIRALAL BHAGW ATI V.CIT (2000) 246 ITR 188 (GUJ) ATTAINED FINALITY ON THIS POINT ALSO SINCE TH AT DECISION ALSO COVERED THIS POINT AND THE DEPARTMENT HAD NOT CHALLENGED THAT DE CISION BEFORE THE SUPREME COURT WE NOTICE THAT THE ASSESSING OFFICER HAS DEALT IN D ETAIL TO STATE THAT THE OBJECTS OF THE TRUST ARE NOT CHARITABLE IN NATURE. IN VIEW OF THE DECISION OF THE HONBLE APEX COURT, THE ASSESSING OFFICER I S NOT RIGHT IN LAW IN PROBING INTO THE OBJECTS OF THE TRUST DURING THE CO URSE OF THE ASSESSMENT PROCEEDINGS. ACCORDINGLY THE DENIAL OF E XEMPTION U/S 11 IS ALSO NOT IN ACCORDANCE WITH LAW. 10. THE NEXT QUESTION THAT COMES FOR CONSIDERAT ION 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 SY STEMATIC EXERCISE OF AN OCCUPATION OR PROFESSION WITH THE OBJECT OF M AKING INCOME OR PROFIT . HENCE THE PROFIT MOTIVE IS ONE OF THE MAIN INGRE DIENTS TO TEST THE NATURE OF ACTIVITY CARRIED ON BY THE ASSESSEE. 10.1 THE PREAMBLE OF THE TRUST DEED STATES THAT THE ASSESSEE TRUST WAS CONSTITUTED IN ORDER TO ORGANIZE THE FUNCTIONIN G OF PRIVATE WORKERS POOL FOR THE BENEFIT OF SUCH WORKERS . CLAUSE 16 OF THE TRUST DEED STATES THAT THE BOARD OF TRUSTEES SHALL NOT BE ENTI TLED TO ANY REMUNERATION AND SHALL WORK IN AN HONORARY CAPACITY . CLAUSE 34 OF THE TRUST DEED STATES THAT THE IN THE EVENT OF THE DISS OLUTION OF THE TRUST, THE REMAINING PROPERTY SHALL NOT BE DISTRIBUTED AMO NG THE MEMBERS OF THE TRUST BUT SHALL BE GIVEN OR TRANSFERRED TO ANY OTHER INSTITUTION WITH SIMILAR OBJECTIVES AND AIMS AND WHICH IS REGISTERED U/S 12A OF THE INCOME-TAX ACT. THE MAIN OBJECTS FOR WHICH THE TRU ST WAS FORMED, AS EXTRACTED IN PARA 4 SUPRA, DOES NOT DEPICT ANY PROF IT MOTIVE. THE PRIMARY OBJECT OF THE TRUST IS TO IDENTIFY, ENROLL, ALLOT THE WORK AND M/S. CARGO HANDLING PRIVATE WORKERS POOL 21 REGULATE THE OPERATION OF THE PRIVATE WORKERS. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS CARRYING ON THE VERY SAME ACTIVITY SINCE ITS INCEPTION. THE SURPLUS EARNED ON CARRYING ON THE SAID ACTIVITY ARE NOT TO BE DISTRIBUTED BETWEEN THE TRUSTEES, BUT TO BE RETAINE D BY THE ASSESSEE TRUST FOR THE PURPOSE OF CARRYING ON THE OBJECTS OF THE TRUST. HENCE IN THE ABSENCE OF THE PROFIT MOTIVE ATTACHED TO THE AC TIVITIES CARRIED ON BY THE TRUST, IN OUR OPINION, THE ACTIVITIES CARRIED O N BY THE TRUST CANNOT BE TREATED AS A BUSINESS ACTIVITY. FURTHER THE ASS ESSEE TRUST WAS FORMED ONLY FOR THE PURPOSE OF THE REGULATING THE O PERATIONS OF THE PRIVATE WORKERS IN THE DOCK YARD AND SAID OBJECT HA VE BEEN APPROVED AS CHARITABLE PURPOSE BY THE LD CIT. FURTHER AS POINTED OUT BY LD AR, AS PER SEC.42 OF THE MAJOR PORT TRUST ACT, 1963 , THE PERFORMANCE OF SERVICE BY BOARD OR OTHER PERSON INCLUDE RECEIVING, REMOVI NG, SHIFTING, TRANSPORTING, STORING OR DELIVERING GOODS BROUGHT W ITHIN THE BOARD PREMISES. HENCE THE ACTIVITIES OF THE ASSESSEE TRUS T FALLS IN THE CATEGORY OF ONE OF THE SERVICES AS DEFINED IN THE MAJOR PORT TRUST ACT, 1963. SINCE THE ACTIVITIES CARRIED ON WITHOUT ANY PROFIT MOTIVE AND ONLY FOR THE PURPOSE OF THE WELFARE OF THE WORKERS, IN OUR OPINI ON, IT CANNOT BE TREATED AS BUSINESS ACTIVITY FOR THE DETAILED REASO NS DISCUSSED SUPRA. 16.1. CONSIDERING THE FACTS AND CIRCUMSTANCES OF T HIS CASE AND ALSO RESPECTFULLY FOLLOWING THE CO-ORDINAT E BENCH DECISION IN ASSESSEES OWN CASE, WE ARE OF THE VIEW THAT ACTIVITIES CARRIED OUT BY THE ASSESSEE ARE IN THE N ATURE 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 CONSIDERAT ION IS VIOLATION OF SECTION 11(2)/(5) R.W.S. 13(1)(C) OF T HE ACT TOWARDS LOANS TO TWO OF ITS SETTLERS ASSOCIATION. THE ASSE SSEE HAS GIVEN RS. 30 LAKHS AND RS. 5 LAKHS RESPECTFULLY TO VISAKH APATNAM M/S. CARGO HANDLING PRIVATE WORKERS POOL 22 STEVEDORES ASSOCIATION AND VISAKHAPATNAM CLEARING AND FORWARDING AGENTS ASSOCIATION. THE AO WAS OF THE O PINION THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 13(1)(C), BY ALLOWING ITS RESOURCES TO BE USED BY ITS SETTLORS A SSOCIATION. THE AO FURTHER HELD THAT THE ASSESSEE HAS DIVERTED ITS FUNDS TO OTHER ASSOCIATIONS WITHOUT CHARGING ANY INTEREST, T HEREFORE, 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 C OVERED BY THE DECISION OF THE ITAT, VISAKHAPATNAM BENCH IN AS SESSEES OWN CASE FOR THE AYS. 1999-2000 TO 2004-05 IN ITA N OS. 272 TO 274/VIZAG/2005. WE FIND THAT THE CO-ORDINATE BE NCH OF THIS TRIBUNAL, UNDER SIMILAR CIRCUMSTANCES HELD AS UNDER : 11. THE NEXT TWO ISSUES ARE INTER CONNECTED. TH EY RELATE TO THE ISSUE OF VIOLATION OF SECTION 11(5) AND SECTION 13(1)(C) R.W.S. 13(2) OF THE ACT AS PER THE PROVISIONS OF SECTION 11(5) OF THE ACT, THE AMOUNT ACCUMULATED U/S 11(2) OF THE ACT HAVE TO BE INVESTED OR DEPOSITED IN THE FORMS AND MODES SPECIFIED IN THE S AID SECTION. ACCORDING TO SECTION 13(1)(D), A CHARITABLE TRUST W ILL LOSE EXEMPTION U/S 11 OR SECTION 12, IF ANY FUNDS OF TRUST ARE INVESTE D OTHERWISE THAN IN ANY ONE OR MORE OF THE FORMS OR MODES SPECIFIED IN SECTION 11(5) OF THE ACT. 11.1 ACCORDING TO SECTION 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 SECTION 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 SECTION 13(3 ). ACCORDING TO M/S. CARGO HANDLING PRIVATE WORKERS POOL 23 SECTION 13(1)(C), IF ANY INCOME OR PROPERTY OF THE TRUST IS DIRECTLY OR INDIRECTLY USED OR APPLIED FOR THE BENEFIT OF ANY P ERSON REFERRED TO IN SECTION 13(3), THE PROVISIONS OF SECTION 11 OR SECT ION 12 SHALL NOT APPLY TO THE INCOME OF THE CHARITABLE TRUST. 11.2 NOW THE FACTS RELATING TO THESE TWO ISSUES ARE DISCUSSED IN BRIEF. THE ASSESSEE HAD ADVANCED AN AMOUNT OF RS .30,00,000/- AND RS.5,00,000/- RESPECTIVELY TO M/S VISAKHAPATNAM STE VEDORS ASSOCIATION AND M/S VISAKHAPATNAM CLEARING AND FORWARDING AGENT S ASSOCIATION IN THE YEAR 1995. THE FIRST AMOUNT OF RS.30.00 LAKHS WERE RECEIVED BACK IN THE FINANCIAL YEAR 2007-08. THE SECOND AMOUNT OF RS.5.00 LAKH WAS RECEIVED BACK IN THE FINANCIAL YEAR 2000-2001. THE ASSESSING OFFICER TREATED BOTH THE AMOUNTS AS AN INVESTMENT IN VIOLAT ION OF SEC.11(5) OF THE ACT. HOWEVER, THE LD AR BY PLACING RELIANCE ON THE DECISION OF THE JURISDICTIONAL ANDHRA PRADESH HIGH COURT IN THE CAS E OF CIT VS. POLISETTY SOMASUNDARAM CHARITIES 183 ITR 377 (AP) HAS CONTENT ED THAT THE AMOUNT ADVANCED BY THE ASSESSEE TRUST TO THE TWO AS SOCIATIONS CANNOT BE TREATED AS AN INVESTMENT. THE CONTENTIONS OF THE LD AR AS GIVEN IN HIS WRITTEN SUBMISSIONS ARE EXTRACTED BELOW: 7. THE APPELLANT HAS MADE ALL THE INVESTMENTS ON LY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 11(5) OF INCOME TAX ACT, 1 961 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 37 7 (AP). AT PAGES 381 AND 382 OF THE JUDGEMENT THE HONBLE A NDHRA PRADESH HIGH COURT HELD AS UNDER: THE BENEFIT TO THE PROHIBITED PERSONS LISTED OUT I N SUB SECTION (3) IS ELUCIDATED AND SHOULD BE DEEMED TO HAVE BEEN CONFER RED 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) ADVERT S TO THE BENEFIT IN THE EVENT OF INVESTMENT ALONE. THE CONTROVERSY IS FOCUS ED UPON THE CONNOTATION OF THE WORDS LEND AND INVEST. AS THESE EXPRESSIONS ARE SOUGHT TO BE MADE APPLICABLE IN DIFFERENT SITUATION S, THE LEGITIMATE INFERENCE IS THAT THEY BEAR A DISTINCT INTERPRETATI ON IN THE CONTEXT OF THE SET UP AND SYNONYMITY IS RULED OUT. IN COMMERCIAL P ARLANCE, LENDING IS ASSOCIATED WITH ADVANCING MONEY FOR AN AGREED RATE OF INTEREST RETURNABLE WITHIN A SPECIFIED PERIOD OR ON DEMAND. THOUGH THE EXPRESSION INVEST IN A BROAD SWEEP TAKES IN LENDING ALSO, IT CAN BE CONSIDERED AS CONFINED TO LAYING OUT THE AMOUNT IN A VENTURE OR I NSTITUTION WITH A PROFIT MOTIVE AND WITH NO PROMISE OF ASSURED RETURN. IT IS NOT FEASIBLE TO SURVEY THE MULTIFARIOUS MODES OF INVESTMENT AND IT IS SUFF ICIENT TO INDICATE PROMINENT MODES TO CONVEY THE WIDTH OF THE EXPRESSI ON INVEST. INVESTMENT INVOLVES LAYING OUT THE AMOUNT IN PARTNE RSHIP FIRMS, SHARES IN JOINT STOCK COMPANIES, REAL ESTATE BUSINESS AND SUC H OTHER CONCERNS OR M/S. CARGO HANDLING PRIVATE WORKERS POOL 24 BUSINESS. IN THE PROCESS OF INVESTMENT, AN ELEMENT OF RISK I S INVOLVED AND THE EXPECTATION OF RETURN OR PROFIT IS NOT ASSU RED AND THE DEPLETION OF CAPITAL ITSELF IS NOT AN ABNORMAL FEAT URE. IN THE CASE OF LENDING, THE RETURN BY WAY OF INTEREST IS GENERALLY 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 CONN OTATION OF THE EXPRESSION 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 O THER SECURITIES, THE SUPREME COURT HELD THAT INVESTMENT COVERS ACQUISI TION OF HOUSE PROPERTY OR CAPITAL GAINS AND INVESTMENT PRIMARIL Y MEANS THE ACT OF LAYING OUT MONEYS IN THE ACQUISITION OF SOME SPECIE S OF PROPERTY. IN CIT VS. ETERNAL SCIENCE OF MANS SOCIETY (19812) 128 ITR 45 6, THE DELHI HIGH COURT HELD THAT THE INTEREST INCOME RECEIVED BY A C HARITABLE INSTITUTION HAS TO BE EXCLUDED FROM THE TAXABLE INCOME OF THE A SSESSEE IN VIEW OF CLAUSE SECTION (2) AND CLAUSE (H) IS NOT ATTRACTED. WE ARE IN AGREEMENT WITH THIS VIEW . IN VIEW OF THE DECISION OF HONBLE JURISDICTIONAL H IGH COURT CITED SUPRA, THE AMOUNT OF RS.30.00 LACS AND RS.5.00 LACS ADVANCED BY THE ASSESSEE CANNOT BE TREATED AS AN INVESTMENT AND ACC ORDINGLY THERE IS NO VIOLATION OF SECTION 11(5) OF THE ACT. HENCE THE QUESTION OF VIOLATION OF SECTION 11(3) ALSO DOES NOT ARISE. 11.3 THE NEXT ISSUE IS WHETHER THERE IS ANY VI OLATION OF SECTION 13(1)(C) R.W.S. 13(2) OF THE ACT. THE IMPU GNED AMOUNT OF RS.30.00 LAKHS AND RS.5.00 LACS HAVE BEEN ADVANCED TO THE TWO SETTLER ASSOCIATIONS. SINCE THEY ARE THE AUTHORS O F 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 E XEMPTION U/S 11, IF ANY INCOME OR PROPERTY IS USED OR APPLIED FOR THE B ENEFIT OF ANY PERSON REFERRED TO IN SECTION 13(3). ACCORDING TO L D AR, THOUGH THE ASSESSEE DID NOT CHARGE INTEREST ON THESE TWO LOANS INITIALLY, LATER ON BOTH THE AMOUNTS WERE COLLECTED ALONG WITH THE INTE REST @ 12%. ACCORDING TO LD AR, SINCE THE IMPUGNED LOANS ARE CO VERED BY ADEQUATE SECURITY AND ADEQUATE INTEREST, THERE IS N O 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 HONBLE JURISDICTIONAL AP HIGH COURT IN THE CASE OF POLISETTY SOMASUNDARAM CH ARITIES, SUPRA. THE RELEVANT OBSERVATIONS OF THE HONBLE 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 M/S. CARGO HANDLING PRIVATE WORKERS POOL 25 INTEREST OR ADEQUATE SECURITY OR BOTH. THE LENDING AS SUCH IS NOT PROHIBITED IF ADEQUATE INTEREST AND SECURITY ARE TA KEN 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 EXE MPTION 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 INVESTMEN T. THE LENDING IN CLAUSE (A) SHOULD BE SUPPORTED BY ADEQUA TE INTEREST OR SECURITY. THE APPELLANT ASSISTANT COMMISSIONER FOUN D THAT THE RATE OF INTEREST AT 12% IS NORMAL AND ADEQUATE AND THE F IRM IS FINANCIALLY SOUND AND THE APPELLANT TRIBUNAL CONFIRMED THE FIND ING. THEREFORE, 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. THE LD AR ALSO SUBMITTED THAT FOR THE PURPOSE OF CO MPUTING THE INCOME U/S 11 TO 13 OF THE INCOME TAX ACT, THE ASSE SSEE IS FOLLOWING THE CASH SYSTEM OF ACCOUNTING. THE INTEREST COLLECT ED FROM THE IMPUGNED TWO LOANS HAS BEEN OFFERED TO TAX IN THE Y EAR OF RECEIPT. THE DETAILS OF LOANS GRANTED AND RECEIPT OF INTERES T AND PRINCIPAL ON THESE TWO LOANS HAVE BEEN EXTRACTED BELOW FROM THE WRITTEN SUBMISSIONS OF LD AR. VISAKHAPATNAM STEVEDORES ASSOCIATION DATE RS. PS. 03-04-1995 LOAN AMOUNT GRANTED 30,00,000.00 INTEREST ACCRUED ON LOAN 46,60,451.86 ---------------- 76,60,451.86 LESS 15-10-2003 INTEREST AMOUNT RECEIVED 22,56,000.00 07-07-2007 INTEREST AMOUNT RECEIVED 12,51,121.86 26-11-2007 INTEREST AMOUNT RECEIVED 10,98,248.00 29-01-2008 INTEREST AMOUNT RECEIVED 20,000.00 24-03-2008 INTEREST AMOUNT RECEIVED 35,082.00 26-11-2007 PRINCIPAL AMOUNT RECEIVED 10,00,00 0.00 29-01-2008 PRINCIPAL AMOUNT RECEIVED 10,00,00 0.00 24-03-2008 PRINCIPAL AMOUNT RECEIVED 10,00,000 .00 ------------------------------------- 46,60,451.86 30,00,000.00 76,60,451.86 --------------------------------------------- -------- NIL --------------- M/S. CARGO HANDLING PRIVATE WORKERS POOL 26 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 MO RE THAN THE INTEREST EARNED BY THE ASSESSEE BY PARKING THE SURPLUS FUNDS IN THE FIXED DEPOSITS OF THE SCHEDULED BANKS. THUS, THERE CAN NO T BE ANY DISPUTE THAT THE INTEREST RATE OF 12% RECEIVED BY THE ASSES SEE IS ADEQUATE. THE AO HAS NOT EXPRESSED ANY DOUBT ABOUT THE FINANC IAL STABILITY OF THE TWO SETTLER ASSOCIATIONS. THUS THE AMOUNTS LENT TO THE TWO FOUNDER ASSOCIATIONS WERE ADEQUATELY SECURED AND ALSO EARNE D ADEQUATE INTEREST @ 12%. IT WAS STATED THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE INCOME TAX PURPOSES AN D HENCE THE INTEREST CAN BE OFFERED TO TAX ONLY IN THE YEAR OF RECEIPT. THOUGH INITIALLY THE ASSESSEE TRUST DID NOT CHARGE INTERES T, 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 WHIC H IS ALSO IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T. 11.4 IT IS NECESSARY HERE TO CONSIDER A PECULIA R FEATURE ATTACHED TO THE ASSESSEE TRUST. GENERALLY THE TRU STS ARE FOUNDED BY NATURAL PERSONS OR COMMERCIAL LEGAL PERSONS. HOWEV ER, IN THE INSTANT CASE, THE ASSESSEE TRUST WAS FOUNDED BY TWO TRADE A SSOCIATIONS, WHICH ARE NON-COMMERCIAL LEGAL PERSONS. THE CONCEPT OF P ERSONAL INTEREST IS ATTACHED TO NATURAL PERSONS ONLY. IT IS VERY MUCH SETTLED THAT THERE CANNOT BE ANY PERSONAL ELEMENT IN THE CASE LEGAL PE RSONS. THE AUTHORS OF THE ASSESSEE TRUST ARE TRADE ASSOCIATIONS, I.E. NON-COMMERCIAL LEGAL PERSONS. ITS OFFICE BEARERS ARE PRECLUDED FROM ENJO YING ANY PERSONAL BENEFITS OR GAINS. THE TRUSTEES OF A TRUST OR THE OFFICER BEARERS OF A TRADE ASSOCIATION WORK FOR THE WELFARE OF THE TRUST /ASSOCIATION WITHOUT ANY MONETARY BENEFIT. THE OBJECT OF INTRODUCING RESTRICTIONS THROUGH M/S. CARGO HANDLING PRIVATE WORKERS POOL 27 SECTION 13 IS STATED IN SAMPATH IYENGARS LAW OF IN COME 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 AWAY TO THE BENEFIT PERSONS WHO ARE CLOSELY CONNECTED WITH THE CREATION, ESTABLISHM ENT AND CONDUCT OF THE TRUST OR INSTITUTION. THE AUTHORS OF THE ASSESSEE TRUST ARE TWO TRADE ASS OCIATIONS AND AS STATED EARLIER THERE CANNOT BE ANY PERSONAL INTERES T SO FAR AS THE TRADE ASSOCIATIONS ARE CONCERNED. THE IMPUGNED LOANS HAV E 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 CANNO T BE TREATED AS A CONCERN IN WHICH THEY ARE SUBSTANTIAL INTERESTED. HENCE THE QUESTION WHETHER THE PROVISIONS OF SECTION 13(1)(C) SHALL AP PLY TO THE ASSESSEE IN RESPECT OF THE IMPUGNED ADVANCES OR NOT IS A DEBATA BLE ISSUE. BE THAT AS IT MAY, IN ANY CASE, ON MERITS, WE HAVE SEEN THA T 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) OF THE ACT. IN VIEW OF THE FOR EGOING REASONS, WE HOLD THAT THERE IS NO VIOLATION OF SECTION 13(1)(C) R.W.S. SECTION 13(2) OF THE ACT. 17.1. CONSIDERING THE FACTS AND CIRCUMSTANCES OF T HIS CASE AND ALSO RESPECTFULLY FOLLOWING THE CO-ORDINAT E BENCH DECISION, IN ASSESSEES OWN CASE, WE ARE OF THE VIE W THAT THE AO WAS NOT CORRECT IN HOLDING THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 11(2)/(5) R.W.S. 13(1)(C) BY ADVANCING LOANS TO TWO OF ITS SETTLORS ASSOCIATION. THE FACTS CLEARLY SHOWS THAT THE ASSESSEE HAS ADVANCED INTERE ST BEARING LOANS TO TWO OF ITS ASSOCIATION AND COLLECTED INTER EST. THEREFORE, M/S. CARGO HANDLING PRIVATE WORKERS POOL 28 WE DIRECT THE AO TO ALLOW THE EXEMPTION U/S. 11 AS CLAIMED BY THE ASSESSEE. 18. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION IS DISALLOWANCE OF DEPRECIATION ON FIXED ASSETS. THE A O COMPUTED INCOME UNDER THE NORMAL PROVISIONS OF THE ACT BY AD OPTING THE EXCESS OF INCOME OVER EXPENDITURE AS PER THE INCOME AND EXPENDITURE A/C. THE AO FURTHER OF THE OPINION THA T WHEN THE ASSESSEE HAS CLAIMED TOTAL COST OF FIXED ASSETS AS APPLICATION OF INCOME, THEN CLAIMING DEPRECIATION ON THE SAME A MOUNTS TO DOUBLE DEDUCTION, THEREFORE, CANNOT BE ALLOWED. IT IS THE CONTENTION OF THE ASSESSEE THAT IT IS FOLLOWING CAS H SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF INCO ME AVAILABLE FOR APPLICATION AND CLAIMED COST OF FIXED ASSETS AS APPLICATION OF INCOME AND NOT CLAIMED ANY DEPRECIAT ION FOR THE PURPOSE OF APPLICATION OF INCOME U/S. 11 OF THE ACT . WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE FOR THE REAS ON THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING. TH E ASSESSEE HAS CLAIMED COST OF TOTAL ASSETS PURCHASED AS APPLI CATION OF INCOME. WE FURTHER NOTICED THAT THE ASSESSEE HAS N OT CLAIMED DEPRECIATION ON FIXED ASSETS AS APPLICATION OF INCO ME. M/S. CARGO HANDLING PRIVATE WORKERS POOL 29 THEREFORE, THE AO WAS NOT CORRECT IN DISALLOWING TH E DEPRECIATION. HENCE, WE DIRECT THE AO TO DELETE TH E ADDITIONS MADE TOWARDS DEPRECIATION. 19. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION IS DISALLOWANCE OF INCOME TAX. THE ASSESSEE HAS CLAIM ED INCOME TAX PAYMENTS AS APPLICATION OF INCOME FOR CHARITABL E PURPOSE. THE AO DISALLOWED INCOME TAX AND ADDED BACK TO TOTA L INCOME OF THE ASSESSEE. THE AO HELD THAT INCOME TAX IS NO T ALLOWABLE AS DEDUCTION WHILE COMPUTING INCOME OF THE ASSESSEE . IT IS THE CONTENTION OF THE ASSESSEE THAT IN THE CASE OF CHAR ITABLE TRUST, PAYMENT OF TAX IS CONSIDERED AS APPLICATION OF INCO ME BECAUSE THE PAYMENT IS MADE TO PRESERVE A CORPUS, THE EXIST ENCE OF WHICH IS ABSOLUTELY NECESSARY FOR THE TRUST. THOUG H PAYMENT OF INCOME TAX AND WEALTH TAX HAS BEEN MADE DURING THE YEAR, IT PERTAINS TO PREVIOUS ASSESSMENT YEARS AND IT COULD NOT BE DISPUTED THAT SUCH EXPENSES WERE INCIDENTAL TO CARR YING OUT OBJECTS OF CHARITABLE TRUST. SUCH PAYMENTS WERE OUT GOING IN THAT PARTICULAR YEAR AND WERE INCIDENTAL TO THE CAR RYING OUT THE OBJECTS OF THE TRUST. THEREFORE, WHILE COMPUTING T HE INCOME AVAILABLE FOR APPLICATION, THE PAYMENT OF TAXES HAS TO BE M/S. CARGO HANDLING PRIVATE WORKERS POOL 30 ALLOWED. IN SUPPORT OF HIS ARGUMENTS, RELIED UPON T HE DECISION OF HONBLE AP HIGH COURT IN THE CASE OF CIT AP-1 VS . TRUSTEE OF V.H.E.H. THE NIZAMS SUPPLEMENTAL TRUST [127 ITR 378 ]. 19.1. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL AVAILABLE ON RECORD. THE AO DISALLOWED IN COME TAX WHILE COMPUTING INCOME AVAILABLE FOR APPLICATION FO R CHARITABLE PURPOSES. THE AO WAS OF THE OPINION THAT INCOME TA X IS NOT ALLOWABLE AS DEDUCTION WHILE COMPUTING INCOME AVAIL ABLE FOR CHARITABLE PURPOSE. IT IS THE CONTENTION OF THE AS SESSEE THAT INCOME TAX IS ALLOWABLE AS A DEDUCTION WHILE COMPUT ING INCOME IN THE CASE OF TRUST CLAIMING EXEMPTION U/S. 11 OF THE ACT. 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 INCOM E OF THE TRUST. THEREFORE, ONCE THERE IS OUT GO TOWARDS INC OME TAX PAYMENT, IT HAS TO BE ALLOWED AS A DEDUCTION TOWARD S INCOME AVAILABLE FOR APPLICATION OF INCOME FOR CHARITABLE PURPOSE AS HELD BY THE HONBLE AP HIGH COURT IN THE CASE OF CI T AP-1 VS. TRUSTEE OF V.H.E.H. THE NIZAMS SUPPLEMENTAL TRUST [ 127 ITR M/S. CARGO HANDLING PRIVATE WORKERS POOL 31 378]. THE CIT(A) AFTER CONSIDERING THE RELEVANT SUB MISSIONS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. WE DO N OT SEE ANY ERROR OR INFIRMITY IN THE ORDER PASSED BY THE CIT(A ). HENCE, WE INCLINED TO UPHELD THE ORDER OF CIT(A) AND REJECT T HE GROUNDS RAISED BY THE REVENUE. 20. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERAT ION IS DISALLOWANCE OF UN-PAID LIABILITY U/S. 43B. THE AO DISALLOWED UN-PAID LIABILITY BY INVOKING THE PROVISIONS OF SEC TION 43B. IT IS THE CONTENTION OF THE ASSESSEE THAT IT IS FOLLOWING CASH SYSTEM OF ACCOUNTING FOR THE PURPOSE OF DETERMINATION OF I NCOME U/S. 11 OF THE ACT AND HENCE NOT CONSIDERED ANY LIABILIT Y ON ACCRUAL BASIS WHILE COMPUTING THE INCOME. WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE FOR THE REASON THAT THE A SSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING, ACCORDINGLY, N ET CASH SURPLUS FOR THE YEAR IS CONSIDERED AS INCOME AVAILA BLE FOR APPLICATION OF INCOME AS PER THE RECEIPTS AND PAYME NTS ACCOUNTS. THE ASSESSEE HAS CONSIDERED ONLY ACTUAL P AYMENTS MADE TOWARDS LIABILITY REFERRED TO IN SEC. 43B FOR THE PURPOSE OF APPLICATION OF INCOME. THEREFORE, THE AO WAS NOT CO RRECT IN MAKING ADDITIONS TOWARDS UNPAID LIABILITY BY FOLLOW ING THE M/S. CARGO HANDLING PRIVATE WORKERS POOL 32 MERCANTILE SYSTEM OF ACCOUNTING. THE CIT(A) AFTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE, ALLOWED THE C LAIM OF THE ASSESSEE. WE DO NOT SEE ANY REASONS TO INTERFERE W ITH THE ORDER PASSED BY THE LD. CIT(A). HENCE, WE REJECT TH E GROUND RAISED BY THE REVENUE. 21. IN THE RESULT, APPEALS FILED BY THE ASSESSEE I N ITA NOS. 498 & 499/VIZAG/2014 ARE PARTLY ALLOWED AND AP PEALS FILED BY THE REVENUE IN ITA NOS. 525, 526, 527, 528 & 529/VIZAG/2014 ARE DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 1 ST JULY, 2016 SD/- SD/- (. ) ( . ) ( V. DURGA RAO ) ( G. MANJUNATHA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / VISAKHAPATNAM / DATED : 1.7.2016 TNMM M/S. CARGO HANDLING PRIVATE WORKERS POOL 33 $ %/ COPY OF THE ORDER FORWARDED TO :- 1. M/S. CARGO HANDLING PRIVATE WORKERS POOL, OPP: F IRE STATION, PORT AREA, VISAKHAPATNAM. C/O. DR. C.P. RAMASWAMI, ADVOCATE, FLAT NOS. 102 & 303, GITANJALI APTS., PLOT NO. 108, SRINAGAR COLONY, HYDERABAD. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CI RCLE-1, VISAKHAPATNAM. 3. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 1(1), VISAKHAPATNAM. 4. + () / THE CIT(APPEALS), VISAKHAPATNAM. 5. + / THE CIT(CENTRAL), HYDERABAD. 6. 2, 4 2 , / DR, ITAT, VISAKHAPATNAM 7 . / GUARD FILE / BY ORDER // TRUE COPY // 89 2 ( SR.PRIVATE SECRETARY ) 4 2 , / ITAT, VISAKHAPATNAM