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SMT. GOMTI DEVI BANARSIDAS VAID CHARITABLE TRUST vs. INCOME TAX OFFICER
ITAT, ALLAHABAD 'A' BENCH
Prakash Narain, A.M. & Ram Swarup, J.M.
ITA Nos. 31/Alld/81 & 931/Alld/82; Asst. yrs. 1976-77 & 1979-80
14th January, 1986
(1987) 27 TTJ (ALL) 5
SECTION 145(1)
Counsel appeared
R.M. Lal, for the Appellant : G.N. Srivastava, for the Respondent
PRAKASH NARAIN, A.M.
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Since the above appeals relate to the same assessee and also involve a common contention, they are disposed of by
this consolidated order for the sake of convenience.
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The assessee is a trust. It held 275 shares of Rs. 1,000 each in Bhagwan Industries Ltd. The total value of those
shares was Rs. 2,75,000 (Rupees Two lac seventy-five thousand). The assessee sold these shares sometime in 1972
for a sum of Rs. 1,37,500 only. The assessee wanted to deposit this amount with a concern from which it could
expect handsome return and at the same time there was also full security as to the repayment of the deposit
together with the interest thereon. The amount after enquiry was deposited with the firm of Banarasidas Ramgopal
of Bombay. The deposit was to carry an interest at the rate of 15 per cent per annum. It was to carry a floating
charge on the assets of the above firm. Besides two of its partners, namely, Shri S.K. Vaid and Shri P.K. Vaid had
also executed personal bonds as security for the repayment of the principal and the interest thereon. These terms
are discernible from the assessee's letter dt. 30th Sept., 1972 addressed to M/s. Banarasidas Ramgopal, which were
accepted by the latter on 1st Oct., 1972 as per their endorsement on the letter itself.
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The assessee also maintained regular books of account. Besides deposit with Banarasidas Ramgopal the assessee
had also put funds in Fixed Deposit with the United Commercial Bank, Lucknow. In its income and expenditure
account, the assessee had accounted for the interest on the above deposits alongwith the interest on its savings
account with the bank. It did not, however, include or account for the interest receivable from Banarasidas
Ramgopal, on the other hand, credited the interest to the account of the assessee from the year to year. Copies of
the assessee's account in their books for different years has been filed before us. The interest was however paid by
the above firm to the assessee for the first time on 30th March, 1979. On that date, an amount of Rs. 22,348 was
paid by the demand draft. Subsequently, further payments were received which also included the repayment of
principal. The entire amount together with the interest was finally repaid by 26th March, 1980. The question,
which arose before the ITO was regarding the taxability of the interest from the above firm of Banarasidas
Ramgopal. There was no dispute about the interest on the fixed deposits and the interest on the savings bank
account as these had duly been shown in the assessee's income and expenditure account and were also offered for
tax. The above question, for the first time, arose before the ITO in 1973-74. It was stated before him that the
assessee had been following cash system of accounting and therefore, it had not accounted for any interest from
Banarasidas Ramgopal as no amount of interest had been received from them in cash. The ITO rejected this
contention. He was of the view that the assessee had actually been following mercantile system of accounting. This
view was based on the fact that the assessee admittedly had accounted for the interest from the fixed deposit, which
too had not been received in cash. This position was refuted by the assessee by contending that the interest on the
fixed deposit was deemed to have been received in cash. It was contended that the bank had standing instructions
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that the moment a Fixed deposit matured, the interest thereon should be converted into a fresh deposit. It was the
claim of the assessee that there was a constructive receipt in cash of the interest and only then it was converted into
a fresh deposit by the bank. It was submitted that the bank would not have converted the interest into a fresh fixed
deposit only on its interest into a fresh fixed deposit only on its accrual. These contentions were not accepted by
the ITO. His view was also upheld by the Tribunal in I.T.A. No. 2163 (Alld.) of 1977-78 dt. 20th Jan., 1979.
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5. The above matter again came up for the consideration of the Tribunal in the asst. yrs. 1974-75 and 1975-76. The
lower authorities following their earlier findings held that the assessee had been following mercantile system of
accounting on the ground that it had accounted for the interest from fixed deposits, and, therefore, the interest even
from Banarasidas Ramgopal was taxable on accrual basis. In the course of the hearing before the Tribunal, it was
submitted that the issuing of a fresh fixed deposit receipt for the interest amounted to actual payment of the interest
to the assessee and, therefore, inclusion of such interest in its income and expenditure account did not amount to
maintenance of the books on mercantile system, but that the assessee had been following cash system of
accounting. The division Bench of the Tribunal referred the question to a Larger Bench. While referring the matter,
the Division Bench observed as under : "In our view the view of the Tribunal in the asst. yr. 1973-74 requires
reconsideration. The slender evidence on the basis of which the Tribunal came to the conclusion that the assessee
had been following mercantile system of accounting was the conversion of interest from the bank and Fixed
Deposits in fresh deposits. It was claimed before us that issuing of a fresh Fixed Deposit Receipt for the interest
amounted to actual payment of interest to the assessee and therefore, the conclusion was that the assessee had been
following cash system of accounting and had been crediting the interest in its books of the account on their receipt.
According to the assessee, conversion of interest into a new Fixed Deposit Receipt amounted to its actual payment
to the assessee. In our opinion, there is considerable force in this argument requiring re-consideration of the view
taken in the assessee's own case in the asst. yr. 1973-74."
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6. The matter came up for the consideration of the larger Bench. The larger Bench, however, did not take a view
different than that taken by the Tribunal in the asst. yr. 1973-74 in the ground that the counsel for the assessee did
not have the vital facts in its possession, like the agreement between the assessee trust and the firm, Banarasidas
Ramgopal. The larger Bench however, made the following pertinent observations : "While deciding these appeals,
we are conscious that the principle of res judicata is not applicable. We do not have to cite any authority to say that
each assessment year being independent, if there are additional features, which have not been noticed earlier the
same may be pressed into service to ask the Revenue to accept a particular contention and claim, which have been
earlier rejected. Therefore, our decision on these years shall not be taken as a precedent and it shall be open to the
assessee in future assessment years to contest its claim that it followed a particular accounting system."
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7. The same issue is now in appeal before us, in the asst. yrs. 1976-77 and 1979-80. In view of the finding of the
larger Bench that it was open to the assessee in future assessment years to contest its claim that it had been
following a particular system of accounting, the matter has been reheard by us. The contention of the ld. Counsel
for the assessee again before us was that it had been following cash system of accounting and, therefore, the
interest which was only due and accrued from Banarasidas Ramgopal could not be brought to tax, unless it was
actually received. It was of course, admitted that an amount of Rs. 22,343 was reviewed in the asst. yrs. 1979-80
and that it was taxable in its hands. About the objection of the Department that the assessee could be treated to
have been following mercantile system of accounting as it had accounted for the interest on Fixed Deposit, the
answer of the counsel was the same namely, the interest on a fixed Deposit, on conversion, was deemed to have
been received by the assessee in cash and, therefore, its inclusion in the income and expenditure account was
justified even on cash basis.
We have carefully considered the submissions placed before us. The facts are not in dispute. The assessee had
advanced a sum of Rs. 1,37,500 to Banarasidas Ramgopal. The latter had been crediting the assessee's account
with the interest due from year to year. There was no receipt of any such interest upto the asst. yr. 1978-79. For the
first time, an amount of Rs. 22,343 was received in the asst. yr. 1979-80. Subsequently there were further receipts
and the entire amount including the principal had been cleared off by the end of the asst. yr. 1980-81. The interest
from the Banarasidas Ramgopal can, therefore, be assessed in the hands of the assessee only. If the latter has been
following mercantile system of accounting, a decision cannot be taken against the assessee only because
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Banarasidas Ramgopal had been claiming deduction of the interest in their own assessment. That might be because
they have been following mercantile system of accounting.
The stand of the assessee is also supported by the language of s. 145(1) of IT Act, 1961. It states that income from
other sources shall be computed in accordance with the method of accounting regularly employed by the assessee.
The interest, in the present case, is income from other sources. It is therefore, taxable in the hands of the assessee
in accordance with the method of accounting regularly, followed by it.
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We have, therefore, to see what is the method followed by the assessee. A perusal of its income and expenditure
account clearly goes to show that it has been accounting for the donations and the expenditure purely on cash basis.
It has of course, also accounted for interest on fixed deposit with the United Commercial Bank. We have,
therefore, to analyse the nature of the interest on a fixed deposit. When a person makes a deposit with the bank, it
becomes its creditor and the bank becomes its debtor. When the interest falls due, it cannot immediately be said
that it should also be treated as received in cash. However, the positions becomes different if there are any standing
instructions given to the bank. It is on record, as we have already stated above that the assessee had given standing
instructions to the bank to the effect that the moment a fixed deposit matured, the interest thereon should be
converted into a fresh deposit. On the basis of these instructions, the accrual of the interest on a fixed deposit and
its re-investment passes through two different stages. The first stage is that the interest is deemed to have been
received by the assessee or at least there is constructive receipt of the interest in cash. The second stage is that it is
again advanced to the bank for which a fresh Fixed Deposit is obtained. There is no difference whether this new
Fixed Deposit receipt is only for the amount of the interest or also for both the interest and the old deposit. During
the intervening period. If there is any, i.e. between the accrual of the interest and its re investment (in the light of
the standing instructions to the bank), the bank will be treated as agent of the depositor or the creditor. The
relationship of the creditor and the debtor will come to an end. This relationship will be revived as soon as a fresh
deposit receipt is issued. During this intervening period, therefore, the assessee will be deemed to have received the
amount of interest. Although the interest will continue to remain with the bank, but the latter will be acting as an
Agent for the depositor of the creditor and not as its debtor. We are therefore, driven to the inevitable conclusion
that the showing of the interest as receipt in the assessee's income and expenditure account fits in with the method
of accounting i.e. cash system followed by it. does not, in any way, show that the assessee had been following
mercantile system of accounting. A perusal of its accounts is also indicative of the same. We have already pointed
out above that the other activities of the assessee relating to the donations and the expenses have been accounted
for in the accounts on strictly cash basis. Once we have come to the conclusion that the assessee had been
following cash system of accounting, we have no option, but to hold that the interest from Banarasidas Ramgopal
cannot be taxed on accrual basis. It has to be taxed only on the receipt basis. Since there was no such receipt in the
asst. yr. 1976-77, the entire interest of Rs. 20,625 is excluded from the assessment. For the asst. yr. 1979-80 the
ITO is directed to include the amount of actual receipt from the above firm in place of Rs. 42,795 included in the
assessment.
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12. We will now deal with the second contention in those appeals. There is no dispute that the assessee which is a
trust, was created on 2nd Sept., 1959 by Smt. Gomati Devi, mother of Shri S.K. Vaid. Shri S.K. Vaid is also one of
its trustees. He is also a partner in the firm are of Banarsidas Ramgopal. The other partners in the firm Shri P.K.
Vaid, S/o Shri S.K. Vaid and the HUF of Shri S.K. Vaid we do not know who is representing the HUF. There is
also no dispute that the assessee had been registered as a charitable trust under s. 12A(a) with the CIT on 6th Jan.,
1975. Apparently, therefore, the provisions of s. 11 of the Act were applicable to it.
13. The assessee in both the above assessment years claimed exemption under s. 11 of the Act or its income. The
ITO rejected the claim. He was of view that the income, though attracting s. 11 of the Act, was not exempt in view
of s. 13(1)(c) of the Act, which was applicable to the case. This section states that nothing contained in s. 11 shall
operate so as to exclude from the total income of the previous year of the person in receipt thereof in the case of a
trust for a charitable or religious purposes, any income thereof if any part of such income or any property of the
trust is during the previous year used or applied, directly of indirectly for the benefit of any person referred to in
sub s. (3) of s. 13 of the Act. The ITO was of the view that the funds of the trust to the extent of Rs. 1,37,500 were
used for the benefit of Shri S.K. Vaid and, therefore, the assessee was not entitled to the benefit of exemption
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under s. 11 of the Act. His view was accepted by the AAC. In other words both the authorities below denied the
benefit of exemption to the assessee under s. 11 of the Act.
14. The assessee is now in appeal before us. The learned counsel for the assessee also referred to s. 13(2)(a) of the
Act. This sections reads as under :— "s. 13(2) (a) without prejudice to the generality of the provisions of cl. (c) of
sub-s. (1), the income of the property of the trust or institution or any part of such income or property shall, for the
purposes of that clause be deemed to have been used or applied for the benefit of a person referred to in sub-s.
(3)— (a) if any part of income or property of the trust or institution is, or continues to be lent to any person referred
to in sub-s. (3), for any period during the previous year without either adequate security or adequate interest or
both." He submitted that the ITO actually meant to apply the above section for holding that the funds of the
assessee trust had been used for the benefit of Shri S.K. Vaid. He, however, submitted that the above a section was
not applicable to the facts of the present case. The first contention of the counsel for the assessee was that the sum
of Rs.1,37,500 had actually been deposited by the assessee with Banarasidas Ramgopal and that it had not been
Banarsidas Ramgopal and that it had not been advanced as a loan or had been lent to it. He argued that there was a
difference between a loan and a deposit. According to him, in the case of a loan, it is ordinarily the duty of the
debtor to seek out the creditor and to have the money according to the agreement. On the other hand, in the case of
a deposit it is the duty of the depositor to go to the deposit and to make a demand for it (Gurcharan Das vs. Ram
Rakha AIR 1937 Lah. 81). Referring to the facts of the case as contained in the assessee's letter dt. 30th Sept., 1972
addressed to Banarasidas Ramgopal, argued that it was the assessee who had gone to Banarasidas Ramgopal for
making deposit with a view to earn handsome return.
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The ld. Departmental representative, on the other hand, submitted that cl. (a) of sub-s. (2) of s. 13 of the Act
envisaged all types of loans. It would comprehend loans described as such as well as what one euphemistically
called "deposits. He submitted that the section did not use the term "loan" but employed the term "lent". In this
connection, he relied on the observations contained in : "Taxation of Charity" by M.P. Agarwal. He further relied
on the observations in Mitra's Legal and Commercial Dictionary, second Edition, pages 214 and 455 as also on the
law of Lexicon by Mukerjee at page 467. We quote below these observations— "Extract from Mitra's Legal and
Commercial Dictionary—Second Edition—Page 214 : Deposit : Whether a transaction is a loan or deposit does not
depend merely on the terms of the document, but has got to be judged from the intention of the parties and all the
circumstances of the case Annamalai vs. Veerappa AIR 1956 SC 1 In a sense a deposit is also a loan with this
difference that it is a loan with something more. Both are debts repayable. But when the repayment is to be
furnished the real point of distinction between the two. A loan is repayable the minute it is incurred. But in the case
of a deposit it is payable according to the terms of the agreement Abdul Hamid vs. Rahamat Bi, AIR 1965 Mad.
427 (1965) 2 Mad. L.J. 368. Page 455. Loan : Loan means a loan whether of money or in kind and includes any
transaction which is, in the opinion of the Court in substance a loan. Usurious Loans Act 1918 s. 2(2) The
distinction between a loan and a deposit is that in the case of a loan, it is ordinarily the duty of the debtor to seek
out the creditor and to pay the money according to the agreement. In the case of a deposit, it is the duty of the
depositor to go to the depositee and to make a demand for it. Gurucharan Das vs. Ram Rakha, AIR 1937 Lah. 81.
Extract from Mukherjee's—The Law Lexicon—1(A-K) page 467 The terms "loans" and "deposits" are not
mutually exclusive terms. There are common features between the two. In a sense a deposit is also a loan with this
difference that it is loan with something more. Both are debts repayable. But, when the repayment is to be made
furnishes the real point of distinction between the two concepts. A loan is repayable the minute it is incurred. But
this is not so with the deposit. Dither the repayment will depend upon the maturity date fixed there fore or the
terms of the agreement relating to the demand, on making of which the deposit will become repayable. In other
words, unlike a loan there is no immediate obligation to repay in the case of a deposit. That is the essence of the
distinction between a loan and deposit. The observation of the Privy Council in Mohammed Akbar Khan vs. Attar
Singh, 63 Ind. Appl. 279, AIR 1936 PC 171 were : "The distinction which is perhaps the most obvious is that the
deposit not for a fixed term does not seem to impose an immediate obligation on the depositee to seek out the
depositor and repay him. He is to keep the money till asked for it. A demand by the depositor would, therefore,
seem to be a nominal condition of the obligation of the depositee to repay." Earlier the Board pointed out that in
effect a deposit is a loan under conditions. Although that is the distinction between a loan and a deposit, the
question in a given case whether a debt is a deposit or a loan will be one of the fact which will have to be decided
on the facts and circumstances in each case. The use of the term : "loan" of "deposit" may not in itself be
conclusive though, of course, it is a circumstances which would be taken into account. What should be regarded is
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the cumulative effect of the evidence which bears on the character of the debt as a loan or a deposit.— Abdul
Hamid vs. Rahamat Bi, AIR 1965 Mad. 427 at 429 : 78 Mad. LW 179 (1965) 2 Mad. LJ 368."
We have given our careful thought to the entire matter. It is no doubt correct that in the present case, it was the
assessee who had approached Banarasidas Ramgopal. However, much significance cannot be attached to this form
of approach. Shri S.K. Vaid, the trustee of the assessee, was admittedly a partner of the above firm. In any case, it
cannot be denied that the money continued to be lent to the above firm by the assessee. That in our opinion, is
enough to bring it within the scope of cl. (a) of sub-s. (2) of s. 13 of the Act, particularly in the light of the
authorities relied on by the ld. Departmental representative. The next contention of the ld. Counsel for the assessee
was that even if it could be held that the sum of Rs. 1,37,500 continued to be lent to the concern in which Shri S.K.
Vaid was interested the lending was with adequate security and adequate interest. He also submitted that only one
of these conditions was sufficient to take the case out of the ambit of s. 13(2)(a) of the Act. These submissions
were controverted by the ld. Departmental representative by relying on certain decided authorities. We will refer to
these authorities subsequently.
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In our opinion, there is no merit in either of the above contentions of the learned counsel for the assessee. In terms
of the security, there was only a floating charge on the assets of the firm of Banaridas Ramgopal and further it was
supported by the personal bonds of Shri S.K. Vaid and Shri P.K. Vaid, the two partners of that firm. It was
contended by the ld. Departmental representative that those bonds were not produced before the lower authorities.
Apart from that, in our opinion, neither of the above can be called adequate security. There is a clear distinction
between "good security" and "adequate security". This distinction has been brought out very clearly in "Taxation of
Charity" by M.P, Agarwal. We quote below from para 11.55 of his book as under— "Personal guarantee : A
personal guarantee, by itself, would not be equivalent to the adequate security even on the plain meaning of the
words. Adequate security is a very powerful expression. Even "good" security may not tantamount to 'adequate:
security. It postulates adequacy of value. The decision of the Supreme Court in Tulsidas Kilachand vs. CIT (1961)
42 ITR 1 (SC) shows that there is a well recognised distinction between the expression "good consideration" and
"adequate consideration" The decision of the Calcutta High Court in P.J.P. Thomas vs. CIT (1962) 44 ITR 897
(Cal) lays down that "adequate consideration" implies valuable consideration and the word "adequate" postulates
an objective measure for assessing the adequacy of the valuable consideration. The Andhra Pradesh High Court, in
Potti Veerayya Sresty vs. CIT (1972) 85 ITR (AP) has pointed out that there must be some means to measure the
adequacy of the consideration. "Adequate consideration'...... must, in our judgement, be constructed as valuable
consideration capable of being compared and measured with money or moneys worth"— CWT vs. Khan Saheb
Dost Mohd. Dlladin (1973) 91 ITR 179 (AP). This view is reiterated in CIT vs. Vivian Bose (1979) 118 ITR 989
(Bom) wherein it is stated that there is no decision of any other High Court where a different meaning has been
assigned to the expression "adequate consideration". Even the connotation of the term "security" implies tangible
security. A personal guarantee may be categorised as surety. It would not be security. However, a personal
guarantee coupled with the tangible security may serve the purpose. But, in that case, it is the security which would
count, the guarantee being superfluous. The Act, however has not indicated the nature of the security. It would
depend on the general law." The Bombay High Court in CIT vs. Vivian Bose (1979) 118 ITR 989 (Bom) had held
that since the law insist that the consideration for transfer must be adequate, there must be some means to measure
the adequacy of the consideration. That is to say the consideration that supports the transfer should be one the
value of which can be measured in terms of money or moneys worth. In the present case, a floating charge over the
assets cannot be measured in terms of money or money's worth.
20. The nature of a floating security has also been dealt with in "the law Lexicon" by T.P. Mukherhjee in the
following words : a floating security is not a future security, it is a present security, which presently affects all the
assets of the company expressed to be included in it. On the other hand, it is not a specific security, the holder
cannot affirm that the assets are specifically mortgaged to him. The assets are mortgaged in such a way that the
mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific
mortgage of the assets plus a licence to the mortgagor to despise of them in the course of his business but is a
floating mortgage applying to every item comprised in the security but not specifically affecting any item until
some event occurs or some action the part off the mortgage is done which cause it to crystallize in to a fixed
security. Bank of Baroda vs. Shivadasani, A.I.R. 1926 Bom 427 at 430 : 50 Bom. 517 : 28 Bom L.R. 689 : 96 Ind
Cas 417." From the above it is very clear that a floating charge cannot be treated as a security for future Because of
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this and because of its very nature. It also cannot be treated a adequate security. Similar position is in regard to a
personal security or a personal bond. The Bombay Bench of the Tribunal in Patel Bhogilal Hargovindas Charitable
Trust vs. ITO(1983) 2 SOT 88 (Bom) had held that personal security is no security in the eyes of law, because in
the event of dissolution of the firm, the debt due to the assessee could only be regarded a unsecured.
It was next submitted that, in any case, the rate of interest at 15 percent was adequate interest. We agree with this
submission we are dealing with the asst. yr. 1976-77 and 1979-80. In those years it could not be said that the rate
of 15 percent was not adequate compensation.
It was next submitted that the transaction went out of the scope of s. 13(2)(a) of the Act if the landing was either
for adequate security or at adequate interest. The learned departmental representative, on the other hand, submitted
that it was necessary that not only the lending should be with adequate security but also that it should be adequate
rate of interest. In other words, it was necessary that both these conditions should be satisfied before the transaction
could be taken out of s. 13(2) (a) of the Act.
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In our opinion, here also the view of the departmental must prevail. M.P. Agarwal in this book, referred to above,
has observed that the law not only required that the loan should be against interest as well as security, it further
insists that both should be adequate the word "both' has been used by way of abundant caution in the section lest it
should be claimed that cl. (a) of s. 13(2) of the Act would not apply if the loan is without both adequate security
and adequate interest. The interpretation of the section can only be that both the above conditions should be
satisfied, namely, that the lending of the money should not only be against adequate security, but it should also
carry adequate interest or both of them. Either of them will not suffice.
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26. In the result, both the appeals are partly allowed.
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In the present case, we find that there is only adequate interest without adequate security. The provisions of s.
13(2) (a) of the Act are therefore, applicable to the case. In other words, the case falls under s. 13(1)(c) (ii) of the
Act. The assessee will, therefore, not be entitled to exemption under s. 11 of the Act. This issue is, therefore,
decided against the assessee.
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