Commissioner of Income Tax vs Shri Krishen Chand Charitable Trust

Syed Wasi-Ud-Din, J.—This is a reference u/s 256(1) of the Income Tax Act of 1961 by the Income Tax Appellate Tribunal (Chandigarh

Bench), on an application made before the Tribunal for reference by the Commissioner of Income Tax, Patiala. The question which has been

referred by the Tribunal to this court is to the following effect:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the accumulated income of the

assessee was entitled to exemption under Sub-section (1)(a) and/or (2)(b) of Section 11 of the Income Tax Act, 1961 ?

The relevant facts which have given rise to this reference briefly stated are as follows:

The assessee in this case is a charitable trust as contemplated by the Income Tax Act. The assessee's net profit as per the profit and loss account

was Rs. 1,89,640. The assessee wrote to the manager of the Reserve Bank of India on July 23, 1965, making a request to the effect that the

assessee wants to invest a sum of Rs. 2,00,000 in Government securities in terms of Section 11 of the Income Tax Act, 1961 (hereinafter referred

to as ""the Act""). Thereafter, on July 24, 1965, the assessee wrote a letter to the manager, Punjab National Bank, requesting them to purchase

Central or State securities whichever be available but maturing in 1970, 1971 or 1972, at best market rates in the account of the assessee. A draft

of Rs. 2,00,000 dated July 23, 1965, drawn by the Jammu and Kashmir Bank Ltd. on the United Commercial Bank Ltd., Delhi, was also

attached and duly endorsed thereon for the purchase of the above securities. A request was also made in that letter that the information about the

purchase of the securities must be furnished to the assessee before or on July 29, 1965, failing which the securities will not be accepted. The

Punjab National Bank/Parliament Street branch, wrote a letter to the assessee on September 28, 1965, in which they said that due to abnormal

postal service created by the grave political conditions obtaining in the country, it had not been advisable to send the securities earlier. Hence, the

delay. They also further said that under insured cover the upper halves of 41/2% Madhya Pradesh Govt. Securities maturing 1972, were being

despatched. The distinctive number of the securities were also given in that letter and this letter showed that Rs. 2,00,000 worth of securities had

been purchased. It was also stated that on receipt .of the acknowledgement of the upper halves the lower halves of the securities shall be sent to

the assessee. It appeared, from the account that instead of investing the sum of Rs. 1,89,640, being the net profit of the trust in Govt. securities, the

assessee came to invest only Rs. 1,87,778.62 whereas, as stated above, the assessee had remitted a sum of Rs. 2,00,000 by bank draft for the

purchase of the securities. The Punjab National Bank purchased the securities to the extent of Rs. 1,87,778.62 as per statement given in the

statement of the case and the balance amount of Rs. 12,221.38 was sent back to the assessee. There was thus a shortfall in the quantum of

investment to the extent of Rs. 1,861.67. Before the Income Tax Officer the question came up for consideration whether in the circumstances

when there was a shortfall in the investment as stated above, the assessee was entitled to the exemption as contemplated by Section 11 of the Act.

The Income Tax Officer did not allow the exemption to the assessee because he was of the view that the investment, as detailed above, fell short

of the statutory investment. The assessee then preferred an appeal before the Appellate Assistant Commissioner who allowed the appeal of the

assessee and was of the view that the provisions of Section 11(2) and the rules made with reference thereto appear to be silent about cases where

a shortfall occurs, more so where a shortfall occurs in the circumstances beyond the assessee's control as the facts in this case appear to indicate.

He also took into consideration the bona fides of the trust and the provisions of law because the trust actually remitted rupees two lakhs in the first

instance, and it made up the unintentional shortfall in the very next year.

The department thereafter approached the Income Tax Tribunal and the main contention of the department was that even if the investment fell

short by a paltry sum of Rs. 1,861.67, the conditions of Section 11(2)(b) of the Act still remain unsatisfied whereas the learned counsel for the

respondent raised two contentions before the Tribunal and urged that the interpretation sought to be given by the learned departmental

representative is farfetched because the purpose of Section 11(2)(b) of the Act is not what the departmental representative has contended. It was

further contended that there was no restriction on the accumulation up to 25% or Rs. 10,000, whichever is higher, and the only question to be seen

is whether the balance of 75% has been invested in the Govt. securities within the meaning of Section 11(2)(b) of the Act or not and the shortfall in

investment being only less than 1% the assessee would be deemed to have satisfied the conditions laid down in the section. The learned Judicial

Member of the Tribunal accepted the contention raised by the assessee in view of the circumstances, viz., that the assessee had already sent a sum

of Rs. 2,00,000 but the bankers chose to invest only a sum of Rs. 1,87,778 and remitted the balance to the assessee and the assessee cannot be

blamed for this and further that the subsequent conduct of the assessee also shows that in the-'subsequent year as against the statutory investment

of Rs. 20,608, the assessee made an actual investment of Rs. 36,000. The learned Judicial Member was also of the opinion that the lapse on the

part of the assessee is to the tune of Rs. 1,862 and the tax burden is more than Rs. 86,000 and that too on a charitable trust which had all intention

of investing over and above its profits as indicated by the profit and loss account.

The learned Accountant Member of the Tribunal also agreed with the view taken by the learned Judicial Member. The department thereafter, as

stated above, filed an application for reference of the aforesaid question for decision to this court.

The facts which I have stated above would clearly show that the undisputed position is that the assessee is a charitable trust and would be

entitled to exemption u/s 11(2)(a). He would also be further entitled to exemption u/s 11(2) of the Act provided the conditions laid down in that

section are complied with. Admittedly, the assessee invested the amount in Govt. securities in terms of Section 11(2) of the Act but there was a

shortfall. This shortfall was, in the circumstances as stated above, viz., firstly, that the assessee had placed a sum of Rs. 2 lakhs which was more

than the accumulated amount at the disposal of his bankers with a clear direction that the entire sum should be invested in Govt. securities but the

bankers presumably under some mistaken notion invested a lesser amount and refunded the balance with the result that there was a shortfall. It also

appears from the facts which I have stated above that this shortfall was made up in a way when in the very next year the assessee instead of

investing Rs. 20,600, as required by the statute, invested a larger sum, viz., Rs. 36,000. It may also be mentioned here that at one stage of the

proceedings there was a controversy between the parties whether the investment of Rs. 1,87,000 odd was within the time as required by the

relevant Rules framed under the Act, This controversy was resolved when the Appellate Assistant Commissioner made an enquiry from the bank

and this fact has also been clearly mentioned in the Tribunal's order where it has been stated that regarding the date of investment the controversy

has been set at rest by the Appellate Assistant Commissioner and both the assessee and the departmental representative agreed that the investment

was made on July 26, 1965, which was within four months of the close of the accounting period. The main question which, therefore, arises is

whether, in spite of the shortfall in the circumstances and on an interpretation of the relevant provisions of the Act, could the assesses be entitled to

an exemption as contemplated by Section 11(2) of the Act. It is necessary, therefore, first of all to refer here to the relevant provisions in this

connection. The relevant provision is Section 11 of the Act. This section is under Chapter III which deals with incomes not included in total

income, Section 11 deals with charitable trusts and we are concerned here primarily with the two provisions, viz., Section 11(i)(a) and Section

11(2) which run as under :

(1) Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person

in receipt of the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such

purposes in India ; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so

accumulated is not in excess of twenty five per cent. of the income from the property or rupees ten thousand, whichever is higher.......

(2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in Clause (a) or Clause (b) of

Sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with-

(a) such persons have, by notice in writing given to the Income Tax Officer in the prescribed manner, specified 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 invested in any Government security as defined is Clause (2) of Section 12 of the Public Debt Act,

1944 (XVIII of 1944), or in any other security which may be approved by the Central Government in this behalf.

It may be noted that under the old 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% 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. An examination of Section 11(1)(a) shows that this section comprises of two parts : (1) which excludes that part of the

income to the extent to which such income is applied for charitable purposes in India; (2) where there is accumulation of the income, then to the

extent to which the income so accumulated is not in excess of 25% or Rs. 10,000, whichever is higher. 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% or Rs. 10,000, whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalizes 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). In my

opinion, where a statute, particularly a taxing statute, confers a concession by one particular provision in the statute and then further liberalizes and

enlarges that concession by another provision in that statute, then the concession granted by the earlier provision cannot be deemed to be taken

away. Section 11(2) of course lays down the conditions, the compliance of which is necessary to avail of the exemption but they are merely for the

purpose of availing of the further exemption and not for depriving or taking away the exemption granted u/s 11(1)(a).

To explain the view which I have expressed above, I may give different illustrations. Supposing a trust spends the entire income for charitable

purpose, then such income will not be taxable. Supposing the trust does not spend any income for charitable purpose, then even in such

circumstances the 25% of the unspent income or Rs. 10,000, whichever is higher, will not be included in the taxable income. For the purpose of

further illustration supposing the trust spends 75% on charitable purpose, the remaining 25% will be exempted u/s 11(1)(a). In such a case, the

entire income will not be taxable. Now, supposing the trust spends only 30% of the income and accumulates 70% of the income, it will still be

entitled to the exemption to the extent of 25% meaning thereby that 45% only will be included in the taxable income. There is another aspect of the

matter in the light of which the position can be examined. Supposing a trust, as in the present case, makes an investment but there is a shortfall and

this shortfall is for no fault of the trust, then will it be not even entitled to the exemption u/s 11(1)(a) of the Act? If it is entitled to exemption under

this section then the reasonable interpretation can be that for the purpose of Section 11(2) only 75% of the accumulated income has to be invested.

If a too narrow and technical interpretation is put, then it would mean that if the trust does not invest in Government securities, it gets a relief of

25% u/s 11(1)(a) but if it makes an investment u/s 11(2) but unfortunately there is a shortfall of a paltry amount, then it will not get any exemption

at all. The legislature, unless the meaning be very clear in this respect, cannot have intended to penalize the assessee in such a manner. Section

11(2), as stated above, is for enlarging the extent of exemption and not for penalizing. It is also important to note the words occurring in Section

11(2), "" restriction ..... as respects accumulation "". Mr. Bhan appearing for the department on the other hand, has emphasized on the words "" the

money so accumulated "" occurring in Section 11(2)(b) and has contended that these words are indicative ox the fact that the entire accumulated

income should be invested but in my opinion these words have not to be read in isolation but in the context of the words "" money so accumulated

in respect of restrictions u/s 11(1)(a) "". It is also well established that if a taxing statute is either ambiguous or reasonably capable .of more than one

interpretation then the interpretation which is beneficial to the subject should be accepted. In this connection, see the case of Controller of Estate

Duty Vs. R. Kanakasabai and Others, and the case of The Commissioner of Income Tax, West Bengal II, Calcutta Vs. Naga Hills Tea Co. Ltd.,

It also appears to me that the object of enacting the provisions like Section 11 of the Act is to promote the laudable purpose, viz., charity and

afford relief to the trust. In this light of the matter also the provisions referred to above cannot be interpreted in such a manner as to effect a

deprivation of such a relief.

It has also been rightly urged that supposing the interpretation be that 100% of accumulated income and not 75% should be invested, then this

can be done at any time before the assessment is made because in the statute itself there is no prescribed time limit within which it should be made.

It has also been urged that the relevant rule in this connection which lays down a time limit of four months would be ultra vires of the Act. The

words used in Section 11(2)(a) of the Act are that the notice has to be given in writing in the prescribed manner. The words "" prescribed manner

used therein cannot confer the authority to lay down a period of limitation also. This view of mine finds support also in the case of M. CT. Muthiah

Chettiar Family Trust Vs. Income Tax Officer, City Circle VI, Madras 34, and Others, . The words ""prescribed manner"" (though occurring in

another statute) were also interpreted as not to mean to confer a power to lay down a period of limitation. See the case of Sales Tax Officer Vs.

K.I. Abraham, .

It was strenuously argued on behalf of the department by Mr. Bhan that the exemption is claimed by the assessee and when such an exemption

is claimed the onus is always on the assessee. True that this content on is correct to a great extent but here the facts show that there was an

investment as required by Section 11(2) but there was a shortfall and the question is not pi onus but a question of interpreting the relevant

provisions of the section to see whether the interpretation can be such that it will deprive the assessee of the exemption enlarged and liberalized by

Section 11(2) of the Act. Mr. Bhan has also relied on two decisions of the Supreme Court: first, in the case of Commissioner of Income Tax v. R.

Venkataswami Naidu [1956] 29 ITR 529 and the second in the case of The Commissioner of Income Tax, Bihar and Orissa Vs. Sri Ramakrishna

Deo, , but the facts of those cases and the circumstances there are quite distinguishable from the facts of the present case and the points which

arise there were completely of a different nature.

On a consideration of all these facts and circumstances, I am of opinion that the assessee was entitled to the exemption which was allowed by

the Appellate Tribunal and, therefore, the question which has been referred to this court is answered in the affirmative accordingly.

S.M.F. Ali, C.J.

I agree.