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Judgment
S. V. MARUTHI, J.
The following two questions are referred at the instance of the Revenue
"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under s. 11 of the IT Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the entire interest of Rs. 1,38,368 was not liable to be taxed in the assessment of 1971-72 ?
The facts in brief are as follows :
The assessee is a waqf. The assessment year is 1971-72 for which the previous year ended by 31st March, 1971. The claim of the assessee is that it is running an educational institution and it derived income therefrom in the accounting year relevant to the asst. yr. 1971-72 and the said income was exempt from Income Tax under s. 10(22) of the IT Act. This contention was not accepted in the original assessment. The assessee filed an appeal against the said assessment before the AAC. The AAC by his order dt. 31st Jan., 1977, set aside the original assessment with a direction to redo the same. During the fresh assessment proceedings, the assessee by its letter dt. 20th Jan., 1979, gave up its claim for exemption under s. 10(22) of the Act but pressed its claim for exemption under s. 11 of the IT Act. It was contended that by its letter dt. 17th Oct., 1978, the surplus income of each year had been set apart, accumulated and invested in banks in the year in which they were surplus, that the members of the trust had already passed a resolution ratifying the accumulation which has been invested in banks and that the trustee had also given notice under s. 11(2) in the prescribed manner indicating tile purpose or purposes for which the income was accumulated. The attention of the ITO was also invited to the provisions of s. 11(2) of the IT Act which did not lay down any time limit to give notice on accumulation. It was argued before the ITO that r. 17 of the IT Rules was ultra vires s. 11(2) and the rule-making authority exceeded its limit while prescribing the time limit under r. 17 of the IT Rules. The ITO rejected the contention of the assessee. On appeal, the CIT (A) held against the assessee on the ground that in the absence of notice under s. 11(2) within the prescribed time limit the surplus income must be brought to tax in accordance with the Act. On further appeal to the Tribunal, it held that the income accrued is not includible in the income of the assessee for the asst. yr. 1971-72. At the instance of the Revenue, the first question was referred by the Tribunal for the opinion of this Court.
From the facts narrated above, the following position emerges. The due date for the purpose of filing the return is 30th Sept., 1971. On 30th May, 1975, the return was filed. On 17th Oct., 1978, Form No. 10 was filed. On 20th Jan., 1979, the assessment was completed. The original assessment dt. 31st Jan., 1971, was set aside.
The question, therefore, is whether the notice issued on 17th Oct., 1978, in Form No. 10 will ensure to the benefit of the assessee so as to enable him to claim the exemption under s. 11 of the IT Act.
Sec. 11(2) of the Act reads as follows :
"(2) Where seventy-five per cent. of the income referred to in cl. (a) or cl. (b) of sub-s. (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application 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 complied with, namely :
(a) such person specifies, by notice in writing given to the ITO in the prescribed manner, the purpose for which the income is being accumulated or set apart and the 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 . . .
Rule 17 of the Rules which prescribes the time limit reads as follows "17. Notice for accumulation of income by charitable or religious trusts.-The notice to be given to the ITO under sub-s. (2) of s. 11 shall be in Form No. 10 and shall be delivered to him before the expiry of the time allowed under sub-s. (1), or sub-s. (2), of s. 139, whether fixed originally or on extension, for furnishing the return of income."
From the reading of r. 17 of the IT Rules, it is clear that the notice contemplated under s. 11(2)(a) is to be issued within the time limit prescribed under s. 139(1) and (2).
Admittedly, in this case the notice was not issued within the time limit prescribed under s. 139(1) and (2) of the IT Act. The question, therefore, is whether the assessee is entitled to the benefit of s. 11 of the IT Act.
As pointed out in the earlier para., r. 17 prescribes the time limit within
which the notice is to be issued under s. 110(a) of the Act and not the section.
It is not necessary for us to consider whether the said rule is ultra Vires the provisions of the Act or whether it is valid, in the light of the view which we propose to take. In our view, s. 11 of the IT Act gives exemption from the payment of tax on the income accumulated over a period of ten years provided it is set apart for a charitable or religious purpose. The period prescribed under r. 17, in our view, is directory and not a mandatory provision. As long as the assessee issues the notice under r. 17 before the assessment is made he would CIA be entitled to the benefit of s. 11. Rule 17 is only a procedural provision and, therefore, it cannot be said that it is mandatory. If it is construed as a mandatory provision it would result in penal consequences depriving the assessee of the benefit conferred under a substantive provision of this Act which is not the intention of the legislature. Had the intention of the legislature been to make r. 17 mandatory, it would have prescribed it in the section itself. Since the period of limitation is not prescribed in the section the intention of the legislature is that the rule should be treated as directory and not mandatory. If it is so, then even if the notice is not issued within the period prescribed under r. 17 the assessee would be entitled to the benefit of s. 11 of the IT Act provided the notice is issued before the assessment is made. The reason why we are saying that the notice should be issued before the assessment is made is that the ITO should be posted with the knowledge that the assessee is claiming the benefit under s. 11(2) of the IT Act.
On the facts of the present case it is not disputed that the notice was issued under s. 110(a) r/w r. 17 before the assessment is made. Therefore, as long as the notice was issued before the assessment is made the assessee is entitled to the benefit of s. 11 of the IT Act and the income itself accumulated is exempted from the payment of tax. In the light of the above, we answer the first question in the affirmative and against the Revenue.
As regards the second question a sum of Rs. 1,38,368 which is the interest on enhanced compensation awarded by the Court to the assessee, the ITO brought the entire amount to tax in the year of assessment. The CIT relying on the judgment of this Court in Commissioner of Income Tax Vs. Smt. Sankari Manickyamma, held against the assessee. On an appeal to the Tribunal, the Tribunal held in favour of the assessee. Aggrieved by the same, the Revenue sought the reference of question No. 2 as referred to above.
The second issue is covered by a judgment of the Supreme Court in Rama Bai and Others Vs. Commissioner of Income Tax, Andhra Pradesh Hyderabad and Others, , in which it was held as follows (headnote) :
''Interest on enhanced compensation for land compulsorily acquired under the Land Acquisition Act, 1894, awarded by the Court on a reference under s. 18 of the Act or on further appeal has to be taken to have accrued not on the date of the order of the Court granting enhanced compensation but as having accrued year after year from the date of delivery of possession of the land till the date of such order, and such interest cannot be assessed to Income Tax in one lump sum in the year in which the order is made."
Following the above, we answer question No. 2 against the Revenue and in. the affirmative.
The above two questions are answered accordingly.