The
Addl. Commissioner of Income Tax & Anr Vs. The A.L.N. Rao Charitable Trust
[1995] INSC 556 (13
October 1995)
Majmudar
S.B. (J) Majmudar S.B. (J) Jeevan Reddy, B.P. (J) S.B. Majmudar, J.
CITATION:
1996 AIR 344 1995 SCC (6) 625 JT 1995 (7) 339 1995 SCALE (5)742
ACT:
HEAD NOTE:
This
appeal by special leave is directed against the decision of the Division Bench
of the Karnataka High Court in Writ Appeal No.864 of 1974 decided on 4th September 1975.
The
said writ appeal, moved on behalf of the Revenue by Additional Commissioner of
Income Tax, Mysore and First Income Tax Officer, Mangalore Circle, Mangalore
against the order of learned Single Judge Venkataramiah, J., as he then was, in
the Writ Petition No.597 of 1973 came to be dismissed by the Appellate Bench of
the High Court. In order to highlight the grievance of the Revenue in this
appeal a few relevant introductory facts are required to be noted.
Background
Facts ---------------- Respondent A.L.N. Rao Charitable Trust, Mangalore, is a
charitable trust. For the assessment year 1969-70, the respondent, hereinafter
referred to as "the assessee" submitted its Return to the First
Income-Tax Officer, Mangalore
Circle. In the said
Return, the assessee claimed that a sum of Rs.85,262/- which was the surplus
income of the previous year, was exempt from tax under Section 11(1)(a) and
sub-section (2) of the said Section. On the Assessing Authority holding that
the assessee is not a genuine Trust and therefore not entitled to claim the
benefit of Section 11, the assessee preferred an appeal before he Appellate
Assistant Commissioner, which was dismissed. In the second appeal preferred by
the assessee before the Income Tax Appellate Tribunal, it was held that the assessee
was a charitable trust and therefore was entitled to claim exemption from tax
under Section 11 of the Income Tax Act, 1961 (hereinafter referred to as `the
Act').
In
I.T.R.C. No.31 of 1973 which was a reference made at the instance of the
Department, the High Court by its judgment dated 4.8.1975 answered the question
referred in favour of the assessee and against the Department. That judgment
became final. Consequently there remained no dispute about the eligibility of
the assessee to claim benefit of Section 11.
The
Assessing Authority took up the assessment to pass an order in accordance with
the judgment of the Tribunal and made an order on 21.1.1972 by which it held
that the assessee, after complying with the requirement of giving notice under
Section 11(2) (a), had invested 75% of the accumulated income intended to be
applied for charitable purposes in future years as required by clause (b) of
Section 11(2) and therefore, the entire surplus income was exempt from tax.
The
Commissioner of Income Tax, on looking into the order dated 21.1.1972 passed by
the Assessing Authority was of the view that the order of the Assessing
Authority was erroneous as he had not applied his mind to the question whether
the assessee had complied with the provisions of Section 11(2) and that if he
had applied his mind to the said provisions, he would have noticed that the assessee
had not invested the entire surplus income, viz., Rs.85,262/- (but only
Rs.70,975/-) and therefore the assessee was not entitled to the exemption
provided under Section 11 of the Act. Thus, in the opinion of the Commissioner,
the order of the Income Tax Officer was erroneous inasmuch as it was
prejudicial to the interests of the Revenue. He issued a show-cause notice
under Section 263 of the Act on 18.1.1973 to the assessee to show cause as to
why the entire surplus income of Rs.85,262/- should not be brought to tax. The assessee,
on receipt of the said notice, approached the High Court for relief under
Articles 226 and 227 of the Constitution and prayed for the issue of a Writ in
the nature of Certiorari to quash the Notice dated 18.1.1973 issued by the
Commissioner. In that writ petition (W.P. No.597 of 1973), Venkataramiah, J.
made an order directing the Commissioner to dispose of the proceedings
initiated under Section 263 in the light of his order as to the interpretation
of Section 11(1)(a) and Section 11(2) of the Act.
Before
the learned Single Judge, the contention of the Department was that in order to
claim exemption under Section 11, the assessee should have invested the entire
surplus income in one or the other of the securities mentioned in Section 11(2)(b)
of the Act and it is not sufficient if 75% of the surplus income alone has been
invested by the assessee. The learned counsel for the assessee urged that the assessee
had complied with the requirements of Section 11; according to the learned
counsel, the assessee was entitled to exemption from tax in respect of 25% of
the accumulated income or Rs.10,000/- whichever was higher plus that portion of
the accumulated income in respect of which the conditions prescribed under
Clauses (a) and (b) of Section 11(2) had been satisfied.
According
to the assessee, since it had deposited 75% of the accumulated income in the
Securities mentioned in Section 11(2) (b), the entire surplus income which had
accumulated was not taxable.
The
learned single Judge rejected the contention of the Revenue and upheld he
contention of the assessee in part only. The learned Judge held that the assessee
was entitled to exemption from tax only in respect of 75% of the surplus income
which was accumulated for future use.
The
Revenue carried the matter in writ appeal which came to be decided by the
impugned judgment. The Division Bench on interpretation of Section 11(1) (a)
and sub-section (2) thereof as they stood at the relevant time, took the view
that 25% of the accumulated income of the Trust arising in the previous got
exempted from income tax under Section 11(1) (a). That Section 11 (2) dealt
with remaining 75% of the accumulated income of the previous year and if such
75% of the accumulated income was invested as laid down by the said provision
the Trust was entitled to get even the 75% of the accumulated income exempted
from income tax payable on the income arising to the Trust in the previous
year. In short while dismissing the appeal of the Revenue the Division Bench of
the High Court on interpretation of the Sections took a view which was wholly
in favour of respondent-Trust. For taking the said view the Division Bench of
the High Court referred to similar view taken by the High Court of Jammu &
Kashmir in the case of Commissioner of Income Tax, Patiala v. Shri Krishen Chand
Charitable Trust (1975) 98 ITR 387.
Rival
Contentions ----------------- Learned counsel appearing for the appellants
vehemently contended that the interpretation placed by Division Bench of the
High Court on the relevant provisions of Section 11(1) (a) and 11(2) of the
Income Tax Act, 1961 as they stood at the relevant time is not well sustained.
That it is true that under Section 11(1) (a) 25% of the accumulated income of
the Trust arising during the previous year or Rs.10,000/- whichever was higher
was exempted from income tax. But as laid down by Section 11(2) at the stage of
investment of such accumulated income unless cent percent of such accumulated
income was invested as per the said provision the assessee-Trust would not be
entitled to the benefit of exclusion of such accumulated income of the previous
year from the tax net of the Income Tax Act. It was further conented that the
subsequent of Section 11(2) as brought on the Statute Book by Taxation Laws
(Amendment) Act, 1975 clearly showed a different legislative intention and was
not merely of a classificatory nature as assumed by the Division Bench of the
High Court. The learned counsel for the Revenue, however, fairly submitted that
the his submission are based on the express language of Section 11 (1)(a) read
with Section 11(2) of the Act as applicable at the relevant time and he is not
supported by any decision rendered by any of the High Courts on this point.
Learned
counsel for the respondent-assessee on the other hand submitted that the view
taken by the Division Bench of the High Court on the interpretation of Section
11(1) (a) and Section 11(2) of the Income Tax Act, 1961 as applicable at the
relevant time is the only correct and plausible view that the Division Bench of
the High Court was justified in agreeing with the view on similar lines which
appealed to the Jammu & Kashmir High Court in Commissioner of Income Tax v.
Shri Krishen Chand Charitable Trust (supra). He also submitted that similar
view has been taken by the High Courts of Kerala, Madhaya Pradesh,Madras,Bombay and Rajasthan in the following decisions:
1.
Commissioner of Income Tax, Kerala-I v. Shree Padmanabhaswami temple Trust
(1979) 120 ITR 42 (Ker.);
2.
Commissioner of Income Tax, Kerala v. H.H. Marthanda Verma Elayaraja of Travancore
Trust and Others (1981) 129 ITR 191 (Ker.);
3. Mohanlal
Trust v. Commissioner of Income Tax, M.P.(1980) 122 ITR 130 (M.P.);
4.
Commissioner of Income Tax, Tamil Nadu-IV, Madras v. C.M. Kothari Charitable Trust (1984) 149 ITR 573 (Mad.);
5.
Commissioner of Income Tax v. Trustees of Bhat Family Resaerch Foundation
(1990) 185 ITR 532 (Bom.); and
6.
Commissioner of Income Tax v. Anjuman Moinia Fakharia (1994) 208 ITR 568 (Raj.).
Consideration
of the Rival Conentions ------------------------------------- Before we proceed
to deal with the rival contentions centering round he true scope and ambit of
Section 11(1) (a) and Section 11(2) of the Income Tax Act, 1961 as applicable
to the assessment year in question, namely, 1969-70 it would be apposite to
refer to these provisions at the outset.
These
provisions as they stood at the relevant time read as under:
"11
(1). Subject to the provisions of sections 60 to 63, he following income shall
not be included in the total income of he previous year of he 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 25% of the income from the property or rupees
ten thousand, whichever is higher, ....
(2)
Where the persons in recip of the income have complied with the following
conditions, the restriction specified in clause (a) or clause (b) of subsection
(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 to the Income-tax Officer in he prescribed manner,
specified the purposes 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 in 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." Section 11 underwent an amendment by Taxation Laws
(Amendment) Act, 1975. As we are not concerned with these amended provisions in
the present case, we need not dilate on them.
A mere
look a 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 i wholly for charitable or religious purpose, to the extent the is applied
for such religious or charitable purpose, 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% of such income or Rs.10,000/- whichever is higher, will
be permitted to be accumulated for charitable or religious purpose and will
also get exempted from the tax me. 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
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 11
apart from the procedure laid down by clause (a) of Section 11 (2) being
followed by the assessee-trust. If Rs.1,00,000/- are earned as the total income
of he previous year by the trust from property held by i 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 he
income of Rs.20,000/- will be exempted from being considered for the purpose of
income tax under par 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
leas 25% 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, hat is, Rs.25,000/- will thus get excluded from the extent net.
Thus out of the total income of Rs.1,00,000/- which has accrued to the rust
Rs.25,000/- will earn exemption from payment of income tax per Section 11(1)(a)
second part. Then follows sub-section (2) which states that ceiling or the
limit or the restriction of income to the extent of 25% of the income or
Rs.10,000/-, whichever is higher for earning income tax exemption as engrafted
under Section 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 previous year and which could not be
spent for charitable or religious purposes by the Trust balance of Rs.55,000/-
if invested as laid by sub-section (2) of Section 11 will also be excluded from
the tax net. But for such investment and if Section 11(1) alone had applied
Rs.55,000/- being he balance of accumulated income would have been covered by
he 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% of the accumulated income and not
only 75% thereof. And if that is not then only the invested accumulated income
to the extent of 75% will get excluded from income tax assessment. But so far the
remaining 25% of the accumulated income in concerned it will no earn such
exemption. It is difficult to appreciate this contention. The reason is
obvious. Section 11, subsection (1) (a) operates on its own. By its operation
two types of income earned by the trust during he previous year from its
properties are given exemption from income tax, (i) the par of the income of
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% of such total property income or Rs.10,000/- whichever is higher can be
permitted to be accumulated by the Trust, remarked for such charitable or
religious purposes. 25% of the income Rs.10,000/- whichever is higher will also
get exempted from income tax. That exhausts he 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 cam earn exemption from income tax meaning
thereby the ceiling or the limit of exemption of accumulated income tax as
imposed by sub-section (1) (a) of Section 11 would get if additional
accumulated income beyond 25% or Rs.10,000/- whichever is higher, as he case
may be, is invested as laid by Section 11 (2) after following the procedure
laid down therein.
Therefore,
sub-section (2) only will have to operate qua he balance of 75% of he total of
the previous year or income beyond Rs.10,000/- whichever is higher which has
butt not got the benefit of tax exemption under sub-section (1) (a) of Section
11. If learned counsel for the Revenue is right and if 100% of the accumulated
income of the previous year is to be invested sub-section (2) of Section 11 to
get exemption from income tax then the ceiling of 25% or Rs.10,000/- whichever
is higher, which is available for accumulation of income of the previous year
for the rust o earn exemption from income tax as laid by Section 11 (1) (a)
would be rendered redundant and the said exemption provision would become
otiose. It has to be kept in view the out of the accumulated income of the
previous year an amount of Rs.10,000/- of 25% 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 subsection (2) is so
read as suggested by the 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 he 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 obstacle clause like " notwithstanding
the provisions of sub-section (1)".
Consequently
it mus be held that Section 11(1) (a) has full play and if still accumulated
income of the previous year is left to be dealt with and to be consideration
for the purpose for the income tax exemption, sub-section (2) of Section 11 can
be pressed in service and if it is complied with then such additional
accumulated income beyond 25% or Rs.10,000/-, whichever is higher, can also
earn exemption from income on compliance which 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 is to be
invested. But on a conjoint reading of he 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 the 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% or Rs.10,000/- whichever is
higher, is axable under Section 11(1) (a) of the Act, unless he special
conditions regarding accumulated 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 butt
if there is a saving, i.e. to say an accumulated 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 clearly show that Section 11(2)
while enlarging he scope of exemption removes the restriction imposed by
Section 11(1) (a) but it does not take away he exemption allowed by Section
11(1)(a). On the express language of Sections 11(1) and (2) as they stood on
the Statute Book at the relevant time no other view is possible.
In the
light of the aforesaid discussion and keeping in view the illustration which we
have given earlier the combined operation of Section 11(1)(a) and Section 11(2)
as applicable at the relevant time would yield the following result:
(i) If
the income derived from property held under trust wholly for charitable or
religious during the previous year is Rs.1,00,000/- and if Rs.20,000/- therefrom
are actually applied to such purposes in India then those Rs.20,000/- will get
exempted from payment of income tax as per the firs part of Section 11(1)(a).
(ii)
Out of the remaining accumulated income of Rs.80,000/- for the previous year, a
further sum of RS.25,000/- will get exempted from payment of income tax as per
second part of Section 11(1)(a). Thus out of the total income derived from
property as aforesaid during previous year, that is, Rs.1,00,000/-, Rs.45,000/-
in all will get excluded from the tax net on a combined operation of first and
second part of Section 11(1)(a).
(iii)The
aforesaid ceiling of Rs.25,000/- of accumulated income property of previous
year, will get c under Section 11(2) to the extent the balance of such
accumulated income is invested as laid down by Section 11(2).To take an
illustration if, say, an additional amount of Rs.20,000/- out of the balance of
accumulated income of Rs.55,000/- is invested as per Section 11(2) then this
additional amount of Rs.20,000/- of accumulated income will get excluded from
he extent net as per Section 11(2).
(iv)
The remaining balance of the accumulated income out of RS.55,000/-, that is,
Rs.35,000/- if not invested as per sub-section (2) of Section 11 will be added
to he taxable income of the trust and will not get exempted from the extent
net.
(v) If
of the other hand the entire remaining accumulated of Rs.55,000/- is wholly
invested as per Section 11(2) the said entire amount of Rs.55,000/- will get
exempted from the net.
We may
also at this stage mention that High Courts Kerala in Commissioner of
Income-Tax, Kerala v. H.H. Mathanda Varma Elayaraja of Travancore Trust &
Ors. [1981] 129 ITR 191; M.P.in Mohanlal Hargovindas Public Charitable Trust v.
Commissioner of Income-Tax, m.p. [1980 122 ITR 130; Bombay in Commissioner of Income-Tax. Trustees
of Bhatt Family Research Foundation [1990] 185 ITR 532; and Madras in Commissioner of Income Tax,
Tamil Nadu-IV, Madras v. C.M. Kothari Charitable Trust
[1984] 149 ITR 573 have akin the same view as Karnataka High Court in the
present case. We approve the view akin in the aforesaid decisions. We also
approve the similar view taken by the Jammu & Kashmir High Court in Shri Krishan
Chand Charitable Trust (supra). The learned counsel for the Revenue, therefore,
has made out no case for our interference with the decision rendered by the
Division Bench of Karnataka High Court.
In he result
, this appeal fails and is dismissed.
However,
in the facts and circumstances of the case here will be no order as to costs.
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