TaxTMI 
TaxTMI 
2010 (1) TMI 1276
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.... general public utility in terms of section 2(15) of the I.T Act, 1961. (b) The Learned CIT (A) erred in holding that the activity of the appellant trust in supplying organized labour force as required by the Dock Labour Force is a business activity and not a charitable activity. (c) The Learned CIT (A) erred in holding that the element of charity is not present by relying on irrelevant decisions and by ignoring the relevant decisions of the Supreme Court and the jurisdictional High Court. (d) The Learned CIT (A) erred in not applying the provisions of Sec.11(4A) to the facts of the appellant Trust. He failed to appreciate that if there were a business activity, it was incidental to the attainment of objectives of the appellant trust. 3 (a) Without prejudice, the Learned CIT (A) erred in denying exemption on the reason that moneys have been advanced to the Settlor associations ignoring the fact that the loans were advanced with interest and such interest and part of principal had been recovered from the borrowers. (b) The Learned CIT (A) failed to apply the ratio of the jurisdictional High Court in the case of Polisetty Somasundaram Char....
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....th the counsel have filed their written submissions also. 4. The facts relating to the cases are stated in brief. The assessee herein was constituted as a "Trust" by a Trust Deed dated 19.01.1994. The authors of the trust were two trade bodies viz., "Visakhapatnam Stevedor's Association and the Visakhapatnam Clearing and Forwarding Agents' Association (here in after "Settlor Associations"). The main objects of the Trust, as spelt out in Clause no.3 of the Trust Deed, read as under: "3. The Main objects of the Trust are: a) To identify, enroll, allot the work and regulate the Private Workers engaged by the Members and users of Stevedor's Association and Clearing and Forwarding Agents' Association of Visakhapatnam, only against short supply of the labour by the Visakhapatnam Dock Labour Board, Visakhapatnam. b) To generally promote the welfare of the workers who are identified and enrolled in the Trust. c) To utilize the Funds of the Trust for the above purposes and also for other Charitable purposes such as Education, Health, Sports and Alleviation of sufferings of the Poor and the needy etc., d) To carryout other public utility activi....
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....ficer rejected the claim for exemption of the assessee's income u/s 11 of the Act for the following reasons: (A) The assessee is engaged in commercial activity only. The predominant objective is commercial in nature. The primary objective of the assessee, viz., enrolling the private workers and supplying them to the members of the Settlors Association is a business activity. The assessee receives charges from the users of the labourers, retains a part of it for the general welfare of the workers and passes on the remaining amount to the workers. This is only a labour contract activity and hence it cannot be treated as a charitable activity. The assessee has failed to maintain separate books of account as mandated u/s 11(4A) of the Act. B) No charitable activity is undertaken till date. Since inception, the assessee trust has undertaken only its primary objective of supplying labour, which is purely commercial in nature, and did not carry out any other charitable activity. The relationship between the assessee and the workers is that of employer and employee relationship. Hence the other objectives can only be treated as a commercial obligation in....
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....rs who are engaged in services of stevedoring, clearing & forwarding agency works. The remuneration received by the trust in the process has partly been distributed among the workers and partly retained. The retained amount was supposed to be for the purpose of general charity but in practice the assessee could only do a minimum welfare work for the workers as per the labour rules which is generally being done in any other organizations. Therefore, the accumulated funds of the appellant has not been utilized for any general charitable purpose. iv) The members of the Trustee Board are again members of the Settlers Association only and they have total control of the management with regard to dealing with labourers, finance etc., The labourers have no say in the management of the appellate trust. Therefore, assessee functions like employer dealing with employees to safeguard its interest and occasionally does some welfare activity for its workers. v) Assessee has been functioning for the last 10 years and accumulated huge surplus funds but not taken up any public charity works. Therefore, it cannot be said that the appellant trust is formed for charitable purpose to ....
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....Gymkhana (2008) (300 ITR 214), the Hon'ble Supreme Court has affirmed the decision of Hon'ble 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 done is a fait accompli and the Assessing Officer cannot thereafter 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 supra: "The registration of a trust under section 12A of the Income-tax Act, 1961, once done is a fait accompli and the Assessing Officer cannot thereafter make further probe into the objects of the trust. The decision of the High Court in the Hiralal Bhagwati v.CIT (2000) 246 ITR 188 (Guj) attained finality on this point also since that decision also covered this point and the Department had not challenged that decision before the Supreme Court" We notice that the assessing officer has dealt in detail to state that the objects of the trust are not charitable in nature. In view of the decision of the Hon'ble Apex Court, the Assessing Officer is not right in law in probing into the objects of the Trust during....
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....remises. Hence the activities of the assessee trust 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 opinion, it cannot be treated as business activity for the detailed reasons discussed supra. 11. The next two issues are inter connected. They 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 said section. According to section 13(1)(d), a charitable trust will lose exemption u/s 11 or section 12, if any funds of trust are invested 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....
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....ion in the context of the set up and synonymity is ruled out. In commercial parlance, lending is associated with advancing money for an agreed rate of interest returnable 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 institution 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 sufficient to indicate prominent modes to convey the width of the expression "invest". Investment involves laying out the amount in partnership firms, shares in joint stock companies, real estate business and such other 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 of capital itself is not an abnormal feature. 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 connotation of the expression "investment" in section 23A and whether "....
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.... as such is not prohibited if adequate interest and security are taken care of. Section 13(2) (h) interdicts investment and the act of investment alone is sufficient to deny the exemption. In view of this seminal distinction, the Revenue endeavoured to bracket the transaction under investment so as to attract the denial of exemption under clause (h). The amount is advanced on an agreed rate of interest and, therefore, the transaction is within the fold of lending and it cannot be considered as an investment. The lending in clause (a) should be supported by adequate interest or security. The Appellant Assistant Commissioner found that the rate of interest at 12% is normal and adequate and the firm is financially sound and the Appellant Tribunal confirmed the finding. Therefore, the assessee is entitled to exemption under Section 11 and the conditions under Section 13(2) are satisfied and Section 13 (2) (h) is not applicable". The Ld AR also submitted that for the purpose of computing the income u/s 11 to 13 of the Income Tax Act, the assessee is following the cash system of accounting. The interest collected from the impugned two loans has been offered to tax in the year of....
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.... of receipt. Though initially the assessee trust did not charge interest, later it has fully collected the due interest. According to the cash system, the interest has been offered to tax in the year of receipt which is also in accordance with the provisions of the Income tax Act. 11.4 It is necessary here to consider a peculiar feature attached to the assessee trust. Generally the trusts are founded by natural persons or commercial legal persons. However, in the instant case, the assessee trust was founded by two trade associations, which are non-commercial legal persons. The concept of personal interest is attached to natural persons only. It is very much settled that there cannot be any personal element in the case legal persons. The authors of the assessee trust are trade associations, i.e. non-commercial legal persons. Its office bearers are precluded from enjoying 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 section 13 is stated in Sampath Iyengar's Law of Income tax, 10th edition, page 1807) as ....