S.RM.M.CT.M.
Tiruppani Trust Vs. The Commissioner of Income Tax [1998] INSC 64 (4 February 1998)
Sujata
V. Manohar, D.P. Wadhwa
ACT:
HEAD NOTE:
THE
4TH DAY OF FEBRUARY, 1998 Present:
Hon'ble
Mrs. Justice Sujata V. Manohar Hon'ble Mr. Justice D.P.Wadhwa Aman Hingorani,
Adv. for Hingorani & Associates, Advs. for the Respondent Harish Chandra,
C.V.S. Rao, Advs. for B.K. Prasad, Adv. for the Respondent
The
following Judgment of the Court was delivered:
This
appeal pertains to assessment year 1970-71. The following question was referred
to the High Court of Judicature at Madras by the Income-Tax Appellate Tribunal under Section 256(1) of the
Income-Tax Act, 1961:
"Whether,
on the facts and in the circumstances of the case, the income of the assessee
is exempt from tax under Section 11 of the Income-Tax Act for the assessment
year 1970-71?" The assessee is a Charitable Trust for carrying out Thiruppani
or repairs to old Hindu temples, building new ones, giving aid to or
establishing hostels, educational and industrial institutions etc. It is not in
dispute that the objects of the Trust are charitable. On March 1, 1963, the trustee resolved that the
income of the Trust should be accumulated for a period of ten years commencing
from April 13, 1961 for the various charitable purposes
which are set out in the Resolution. The assessee accordingly filed Form 10
with the Income-Tax Officer as required under Section 11(2) of the Income-Tax
Act, 1961. The income was accordingly being accumulated every year and invested
in Government securities.
For
the year ending April 12, 1970 which is the accounting year relevant to
assessment year 1970-71, the amount of Rs. 7,82,792.44 which was shown in the
earlier balance sheet (as on 1.4.1969) as advance to S. RM. M. CT. M. Firm, Rangoon on the "Assets" side was
substituted by "Building for Rs. 8 lakhs" on the Assets side. It was
the case of the assessee that during the assessment year 1970- 71, the advance
to the said firm at Rangoon was in effect realised and invested
in a building for the purpose of starting a hospital. The Trust had also earned
during that assessment year other income amounting to Rs. 1, 64,210.03.
The assessee
claimed exemption for the total income of Rs. 8 lakhs plus Rs. 1,64,210.03
under Section 11(1) of the Income-Tax Act, 1961. The Income-Tax Appellate
Tribunal by a majority of 2 : 1 held that the sum of Rs. 8 lakhs was to be
treated as income of the assessee for the purposes of Section 11. The Tribunal
gave the benefit of Section 11(1) to the assessee for the assessment year
1970-71 in respect of the entire income consisting of Rs. 8 lakhs plus Rs.1,64,210.03.
On a Reference to the High Court, the High Court has held that the sum of Rs. 8
lakhs was an asset acquired in realisation of an outstanding due and hence, sum
of Rs. 8 lakhs cannot be include in the income of the assessee for the purposes
of Section 11(1). Since the balance income of Rs.1,64,210.03 was not invested
by the assessee in accordance with the declaration filed by the assessee under
Section 11(2), the assessee could not claim exemption from tax in respect of
Rs.1,64,210.03.
The
material part of Section 11, at the relevant time, was as follows:
"11.
Income from property held for charitable or religious purposes:
(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;
(b)................................
......
(c)................................
......
(2)
Where the persons in receipt of the income have complied with the following
conditions, the restriction specified in clauses (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 income is to be accumulated
or set apart, which shall in n o 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 2 of the Public Debt Act, 1944 (18 of 1944),
or in any other security which may be approved by the Central Government in
this behalf.
(3)................................
..........
(4)................................
..........
Under
Section 11(1)(a), income derived from property held under Trust for charity, to
the extent that such income is applied for charitable or religious purposes
will be exempt from income-tax. Where the income or the entire income is not so
spent, but is accumulated it will be exempt to the extent of 25% of its total
income or Rs. 10,000/-, whichever is higher. Under Section 11(2), if the trust
desires to accumulate more than 25% of its income and wants to claim exemption
from income-tax, it has to comply with the conditions which are laid down in
Section 11(2)(1) & (b). The first condition is that a notice in writing
should be given to the Income-Tax Officer in the prescribed manner specifying
the purpose for which the income is being accumulated and the period for which
the income is to be accumulated. The period should not exceed ten years. Rule
17 of the Income-Tax Rules 1362 prescribes that the notice which is required to
be given under Section 11(2)(a) should be in Form No.10. The second condition
is that the amount so accumulated has to be invested in any Government security
as specified in Section 11(2)(b). The assessee in the present case had given
notice in 1963 in Form No. 10 setting out he purposes for which the
accumulation was being made and the period, which was 10 years. Before the
expiry of this period, the assessee utilised a sum of Rs.8 lakhs in accounting
year relevant to Assessment Year 1970-71, in purchasing a building meant for a
hospital instead of investing the amount in Government securities. According to
the department, because of this investment which constitutes a breach of the
conditions under Section 11(2), the assessee cannot claim any benefit of
exemption under Section 11(1).
Before
we consider this submission, we would like to make it clear that the department
has not addressed to us any argument on the question whether Rs. 8 lakhs
constitute the income of the assessee for assessment year 1970-71 or not.
Before the Income-Tax Appellate Tribunal, elaborate arguments had been advanced
on this issue, and the two members of the Tribunal differed, necessitating a
reference to a third member. The High Court did not accept the majority view
that the amount should be treated as income for the purpose of Section 11. Mr. Harish
Chandra, learned counsel; appearing for the Department has, however, stated
before us the at the sum of Rs. 8 lakhs does constitute that income of the assessee-Trust.
But this income was required to be invested in Government securities in view of
the declaration filed by the assessee under Section 11(2). Since the amount is
not so invested, the benefit of Section 11(1) cannot be extended to the assessee.
This is the only submission we have to consider.
A more
look at Section 11(1) an d 11(2) is sufficient to dispel this argument. Under
Section 11(1), every Charitable or Religious Trust, irrespective of whether it
has filed a declaration under Section 11(2) or not, is entitled to deduction of
certain income from its total income of the previous year. The income so exempt
is the income which is applied by the Charitable or Religious Trust to its
charitable or religious purposes in India. If the entire income is so applied, the entire income would be
exempted. If the entire income is not applied b ut some income is accumulated
by such a Trust, then also under Section 11(1)(a), such accumulated income to
the extent of 25% of the total income (or Rs. 10,000/-. whichever is higher)
would be exempted form income-tax. Section11(2), in turn provides that t he
restriction which is specified in clause (a) of sub-section (1) as regards
accumulation, shall not apply if the assessee gives notice as prescribed under
Section 11(2)(a) and invests the amount accumulated in Government securities as
per Section 11(2)(b). The restriction specified in clause (a)of sub-section
(1)/is clearly the restriction of 25% of the accumulated income (or Rs,
10,000/-, whichever is higher) being exempt. If more than 25% (or Rs. 10,000/-)
is to be exempted then the assessee has to comply with the conditions
prescribed under Section 11(2).
In the
case of Additional Commissioner of Income-Tax & Anr. vs. A.L.N. Rao
Charitable Trust reported in (1995) 216 ITR 697, this Court considered the
provisions of Section 11(1)(a) in the light of Section 11(2) and held that
Section 11(2) dose not in any manner restrict the operation of Section 11(1).
The accumulated income which is exempt under Section 11(1)(a) need not be
invested in Government securities. It is only in respect of any additional
accumulated income beyond 25% that, if the assessee wants exemption of this
additional accumulated income also, the assessee is required to invest the
additional accumulated income in the manner laid down in Section 11(2) after
following the procedure laid down therein.
In the
present case the assessee is not claiming any benefit under Section 11(2) as it
cannot; because in respect of this assessment year, the assessee has not
complied with the conditions laid down in Section 11(2). The assessee, however,
is entitled to claim the benefit of Section 11(1)(a). In the present case, the assessee
has applied Rs.8 lakhs for charitable purposes in India by purchasing a building which is
to be utilised as a hospital. This income, therefore, is entitled to an
exemption under Section 11(1).
In
addition, under Section 11(1)(a), the assessee can accumulate 25% of tits total
income pertaining to the relevant assessment year and claim exemption in
respect thereof. Section 11(1)(a) does not require investment of this limited
accumulation in Government securities. The balance income of Rs. 1,64,210.03
constitutes lass than 255 of the income for assessment year 1970-71. Therefore,
the assessee is entitled to accumulate this income and claim exemption from
income-tax under Section 11(1)(a).
In the
premises, the question which was referred to the High Court, is required to be
answered in the affirmative and in favour of the assessee.
The
appeal is accordingly allowed with costs.
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