Commissioner of Income Tax vs G. R. Govindarajulu and Sons Charities

P. D. Dinakaran, J.

Heard learned counsel appearing for the appellant/revenue.

These appeals are directed against the order dated 28-1-2004 made in I.T.A. No. 1575/Mds of 1997 and order dated 16-4-2004, made in

I.T.A. No. 1925/MDS of 1998 reversing the order of the Assistant Commissioner, Income Tax Department, Central Circle II, Coimbatore, by

granting exemption to the respondent/assessee u/s 11(1)(a) of the Income Tax Act (hereinafter referred to as ""the Act"").

The appellant/revenue raised the following substantial questions of law for our consideration :

(i) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that mere mentioning in the

adjusted total income statement that the amount has been set apart for utilizing for charitable purposes in the subsequent year, will amount to

exercising option under Explanation 2(i) or (ii) to section 11(1)(a) and such amount can be taken as amount set apart for application u/s 11(1)(a)

of the Act ?

(ii) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that in respect of the amount

shown as set apart for use in the following year, was not necessary to give notice of accumulation by complying with the statutory requirements of

section 11(2) of the Income Tax Act read with section 17 of the Income Tax Rules ?

In brief, the assessee claims to be a public charitable trust engaged in promotion of educational activities. For the assessment year 1994-95, the

assessee trust filed its return declaring nil income. The assessment u/s 143(3) was completed on 21-10-1997. According to the assessing officer,

the assessee did not apply 75 per cent of his income for charitable purposes and, therefore, it was liable to tax. The assessing officer, taking note

of the fact that the assessee exceeded the 25 per cent limit for accumulation and so the assessee ought to have sent a notice of accumulation in

Form No. 10, the assessing officer treated the entire amount as taxable income.

On appeal at the instance of the assessee, it was contended before the Commissioner (Appeals), that section 11(1) of the Act provides that

income from the trust to the extent to which it is applied to charitable purpose or if it is accumulated or set apart for such purposes, to the extent to

which it is so accumulated shall not be included in the total income if the amount so accumulated or set apart is not in excess of 25 per cent of the

income. But as per Explanation (2)(ii)(b) u/s 11(1) of the Act, if the income applied for charitable purposes falls short of 75 per cent of the income

derived during the relevant year by any amount, i.e., if the amount accumulated exceeds 25 per cent of the income at the option of the assessee,

then it would be deemed to be income applied to such purposes during the previous year in which it was derived. The Commissioner (Appeals)

after giving elaborate discussion on this issue, came to the conclusion that the disputed amount should be deemed to have been spent for charitable

purposes as per section 11(1B)(b) of the Act. As the assessee exercised the option as per the Explanation to section 11(1) of the Act furnished

along with the return and statements for the assessment year, the Commissioner (Appeals) was of the view that the total amount shall be deemed to

have been spent for charitable purposes during the year. He further noted that the amount accumulated or set apart for future application is less

than 25 per cent of the income. Hence, the Commissioner (Appeals) rejected the applicability of section 11(2) of the Act and the same was

confirmed by the Tribunal and gave the benefit of section 11(1)(a) of the Act to the assessee.

According to the Tribunal, section 11(2) of the Act stipulates two conditions, namely, (i) that the assessee specifies, by notice in writing, the

purpose for which the income may be accumulated or set apart. However, it should not exceed ten years, and (ii) the money so accumulated or set

apart is invested or deposited in the forms or modes specified in sub-section (5). Since the case of the assessee falls u/s 11(1) of the Act and not

u/s 11(2) of the Act, the assessee is entitled for the benefit of section 11(1) of the Act.

Assailing the said order of the Tribunal dated 28-1-2004, the revenue has preferred the above appeals contending that the case of the assessee

falls u/s 11(2) of the Act but not u/s 11(1) of the Act.

We heard learned counsel appearing for the revenue in detail, however, we are not convinced with the arguments advanced on behalf of the

revenue.

The Division Bench of this court interpreting the provisions u/s 11(1)(a) of the Act in the case of Commissioner of Income Tax, Tamil Nadu-IV,

Madras Vs. C.M. Kothari Charitable Trust, held that the income of the assessee was completely exempt on a combined application of sections

11(1)(a) and 11(2) for all the assessment years.

A similar view was expressed by the Bombay High Court in the case of Commissioner of Income Tax Vs. Trustees of Bhat Family Research

Foundation, , held as follows (headnote) :

It is clear from clause (a) of sub-section (1) of section 11 of the Income Tax Act, 1961, that income derived from property held under trust

wholly for charitable or religious purposes shall not be included in the total income to the extent to which it is applied for such purposes in India

and, where it is accumulated for such application, to the extent that the accumulation is not in excess of 25 per cent of the income or Rs. 10,000,

whichever is higher. The exemption of accumulated income to the extent of 25 per cent or Rs. 10,000, whichever is higher, is unqualified and

unconditional. Sub-section (2) of section 11 provides the conditions, the satisfaction of which removes the restriction placed by sub-section (1) in

regard to accumulation. The conditions relate to the giving of a notice to the Income Tax Officer and investment in Government securities. In the

context of the removal of the restriction placed by sub-section (1), the phrase the money so accumulated in clause (b) of sub-section (2) must be

read as referring only to the accumulation that is made in excess of the already exempted 25 per cent It is only the excess over 25 per cent of the

income which is required to be invested in Government securities!

The Karnataka High Court has also taken a similar view in the case of Addl. Commissioner of Income Tax, Mysore and Another Vs. A.L.N. Rao

Charitable Trust, .

The view taken in the above decisions were confirmed by the Apex Court in an appeal preferred against the decision of the Karnataka High

Court in the case of Addl. Commissioner of Income Tax, Mysore and Another Vs. A.L.N. Rao Charitable Trust, referred to above. Accordingly,

the Apex Court in the case of Addl. Commissioner of Income Tax and Another Vs. A.L.N. Rao Charitable Trust, held that the exemption

available u/s 11(2) of the Act is in addition to that available u/s 11(1)(a) of the Act. The Supreme Court thus interpreting the scope and

applicability of section 11(1)(a) and section 11(2) of the Act, held as follows (page 703) :

A mere look at section 11(1)(a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from

property held by it wholly for charitable or religious purposes, to the extent the income is applied for such religious or charitable purposes, the

same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25 per cent of such

income or Rs. 10,000, whichever is higher, will be permitted to be accumulated for charitable or religious purpose and it will also get exempted

from the tax net. Then follows sub-section (2) which seeks to lift the restriction or the ceiling imposed on such exempted accumulated income

during the previous year and also brings such further accumulated income out of the tax net if the conditions laid down by sub-section (2) of section

11 are fulfilled meaning thereby the money so accumulated is set apart to be invested in the Government securities, etc., as laid down by clause (b)

of sub-section (2) of section 11 apart from the procedure laid down by clause (a) of section 11(2) being followed by the assessee-trust. To

highlight this point we may take an illustration. If Rs. 1,00,000 are earned as the total income of the previous year by the trust from property held

by it wholly for charitable and religious purposes and if Rs. 20,000 are actually applied during the previous year by the said trust to such charitable

or religious purposes the income of Rs. 20,000 will get exempted from being considered for the purpose of Income Tax under first part of section

11(1). So far as the remaining Rs. 80,000 are concerned if they could not be actually applied for such religious or charitable purposes during the

previous year then as per section 11(1)(a) at least 25 per cent of such total income from property or Rs. 10,000, whichever is higher will also earn

exemption, from being considered as income for the purpose of income tax, that is, Rs. 25,000 will thus get excluded from the tax net. Thus out of

the total income of Rs. 1,00,000 which has accrued to the trust Rs. 25,000 will earn exemption from payment of Income Tax as per section 11(1)

(a), second part. Then follows sub-section (2) which states that the ceiling or the limit or the restriction of accumulation of income to the extent of

25 per cent of the income or Rs. 10,000, whichever is higher, for earning Income Tax exemption as engrafted u/s 11(1)(a) will get lifted if the

money so accumulated is invested as laid down by section 11(2)(b) meaning thereby out of the total accumulated income of Rs. 80,000 accruing

during the previous year and which could not be spent for charitable or religious purposes by the trust, the balance of Rs. 55,000 if invested as laid

down by sub-section (2) of section 11 will also get excluded from the tax net. But for such investment and if section 11(1) alone had applied Rs.

55,000 being the balance of accumulated income would have been covered by the tax net. Learned counsel for the revenue submitted that the

investment as contemplated by sub-section (2)(b) of section 11 must be investment of all accumulated income in Government securities, etc.,

namely, 100 per cent of the accumulated income and not only 75 per cent thereof. And if that is not done, then only the invested accumulated

income to the extent of 75 per cent will get excluded from Income Tax assessment. But so far as the remaining 25 per cent of the accumulated

income is concerned it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious. Section 11, sub-section (1)

(a) operates on its own. By its operation two types of income earned by the trust during the previous year from its properties are given exemption

from Income Tax, (i) that part of the income of the previous year which is actually spent for charitable or religious purposes in that year, and (ii) out

of the unspent accumulated income of the previous year 25 per cent of such total property income or Rs. 10,000, whichever is higher, can be

permitted to be accumulated by the trust, earmarked for such charitable or religious purposes. Such 25 per cent of the income or Rs. 10,000,

whichever is higher, will also get exempted from Income Tax. That exhausts the operation of section 11(1)(a). Then follows sub-section (2) which

naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under sub-section (1)(a).

So far as that balance of accumulated income is concerned, that also can earn exemption from Income Tax meaning thereby ceiling or the limit of

exemption of accumulated income from Income Tax as imposed by sub-section (1)(a) of section 11 would get lifted if additional accumulated

income beyond 25 per cent of Rs.10,000, whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the

procedure laid down therein. Therefore, sub-section (2) only will have to operate qua the balance of 75 per cent of the total income of the

previous year or income beyond Rs. 10,000, whichever is higher which has not got the benefit of tax exemption under sub-section (1)(a) of section

If learned counsel for the revenue is right and if 100 per cent of the accumulated income of the previous year is to be invested under sub-

section (2) of section 11 to get exemption from Income Tax, then the ceiling of 25 per cent or Rs. 10,000, whichever is higher, which is available

for accumulation of income of the previous year for the trust to earn to exemption from Income Tax as laid down by section 11(1)(a) would be

rendered redundant and the said exemption provision would become otiose. It has to be kept in view that out of the accumulated income of the

previous year an amount of Rs. 10,000 or 25 per cent of the total income from property, whichever is higher, is given exemption from Income Tax

by section 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words it is an absolute exemption, If sub-section

(2) is so read as suggested by learned counsel for the revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed

by section 11(1)(a) would become a restricted exemption as laid down by section 11(2). Section 11(2) does not operate to whittle down or to cut

across the exemption provisions contained in section 11(1)(a) so far as such accumulated income of the previous year is concerned. It has also to

be appreciated that sub-section (2) of section 11 does not contain any non-obstante clause like ""notwithstanding the provisions of sub-section (1)"".

Consequently it must be held that after section 11(1)(a) was full play and if still any accumulated income of the previous year is left to be dealt with,

and to be considered for the purpose of Income Tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with

then such additional accumulated income beyond 25 per cent or Rs. 10,000, whichever is higher, can also earn exemption from Income Tax on

compliance with the conditions laid down by sub-section (2) of section 11. It is true that sub-section (2) of section 11 has not clearly mentioned

the extent of the accumulated income which is to be invested. But on a conjoint reading of the aforesaid two provisions of sections 11(1) and 11(2)

this is the only result which can follow. It is also to be kept in view that under the earlier Income Tax Act of 1922, exemption was available to

charitable trusts without any restriction upon the accumulated income. There was a change in this respect under the present Act of 1961. Under the

present Act, any income accumulated in excess of 25 per cent or Rs. 10,000, whichever is higher, is taxable u/s 11(1)(a) of the Act, unless the

special conditions regarding accumulation as laid down in section 11(2) are complied with. It is clear, therefore, that if the entire income received

by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say, an accumulation of 25 per cent or

Rs. 10,000 whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalises and enlarges the

exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2), while enlarging the scope of

exemption, removes the restriction imposed by section 11(1)(a), but it does not take away the exemption allowed by section 11(1)(a). On the

express language of sections 11(1) and 11(2) as they stood on the statute book at the relevant time no other view is possible.

The other contention raised by learned counsel for the appellant is that the assessee failed to exercise the option as contemplated u/s 11(2) of

the Act in a prescribed form, namely, Form No. 10. But the said contention was rightly rejected by both the Commissioner (Appeals) and the

Tribunal. There is no mandatory requirement u/s 11(1) of the Act requiring the assessee to exercise the option when he seeks relief u/s 11(1) of the

Act, as it is enough for the assessee to submit a statement along with the return to exercise such option.

In view of the above well settled principles of law, we do not find any substance in the questions of law raised by the appellant/revenue and,

therefore, finding no substantial question of law in these appeals, the same are dismissed.

OPEN