IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 07/09/2004
CORAM
THE HONOURABLE Mr. JUSTICE P.D.DINAKARAN
AND
THE HONOURABLE Mr. JUSTICE K.RAVIRAJA PANDIAN
Tax Case (Appeal) No.561 of 2004
and
T.C.(Appeal) No.540 of 2004
Commissioner of Income Tax-I
Coimbatore.
.... Appellant in both the appeals
-Vs-
M/s. G.R.Govindarajulu & Sons Charities
Coimbatore
.... Respondent in both the appeals
Appeals filed under Section 260A of the Income Tax Act 1961 against
the order dated 28.01.2004 made in I.T.A.No.1575/Mds/97 on the file of the
Income Tax Appellate Tribunal Madras 'B' Bench, and order dated 16.4.2004 made
in ITA No.1925/MDS/1998 on the file of the Income Tax Appellate Tribunal
Madras 'A' Bench.
!For Appellant : Mr. K.Subramaniam
^For Respondent: .. Nil ...
:ORDER
(Order of the Court was made by P.D.DINAKARAN,J)
Heard the learned counsel appearing for the Appellant/revenue.
2. These appeals are directed against the order dated 28.01.2004 made
in ITA No.1575/ Mds/97 and order dated 16.4.2004 made in ITA No.1 925/MDS/1998
reversing the order of the Assistant Commissioner, Income Tax Department,
Central Circle II, Coimbatore by granting exemption to the respondent/assessee
under Section 11(1)(a) of the Income Tax Act (hereinafter referred to as ACT)
.
3. 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 under Section
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 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 Income Tax Rules?”
4.1. 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 under Section 143(3) was completed on 21.10.1997. According to the
assessing officer, the assessee did not apply 75% of his income for charitable
purpose and therefore, it was liable to tax. The assessing officer, taking
note of the fact that the assessee exceeded the 25% 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.
4.2. On appeal at the instance of the assessee, it was contended
before the Commissioner of Income Tax (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% of
the income. But as per the explanation 2(ii)(b) under Section 11(1) of the
Act, if the income applied for charitable purposes falls short of 75% of the
income derived during the relevant year by any amount i.e., if the amount
accumulated exceeds 25% of the income at the option of the assessee, then it
would be deemed to be the income applied to such purposes during the previous
year in which it was derived. The Commissioner of Income-Tax (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 assesee 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 of 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% of the income. Hence, the
Commissioner of 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.
4.3. 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
vested or deposited to the forms or modes specified in sub-section (5). Since
the case of the assessee falls under Section 11(1) of the Act and not under
Section 11(2) of the Act, the assessee is entitled for the benefit of Section
11(1) of the Act.
5. Assailing the said order of Tribunal dated 28.01.2004, the revenue
has preferred the above appeals contending that the case of the assessee falls
under Section 11(2) of the Act but not under Section11(1 ) of the Act.
6. We heard the learned counsel appearing for revenue in detail,
however we are not convinced with the arguments advanced on behalf of the
Revenue.
7.1. The Division Bench of this Court interpreting the provisions
under Section 11(1) (a) of the Income Tax Act in the case of Commissioner of
Income Tax, Tamilnadu v. C.M.Kothari Charitable Trust ((1984) vol.149 ITR
573) held that the income of the assessee was completely exempt on a combined
application of Sections 11(1)(a) and 11(2) of all the assessment years.
7.2. A similar view was expressed by the Bombay High Court in the
case of Commissioner of Income Tax v. Trustees of Bhat Family Research
Foundation ((1990) 185 ITR 532), held as follows:
“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.”
7.3. The Karnataka High Court has also taken a similar view in the
case of Additional Commissioner of Income-tax v. A.L.N.RAO Charitable Trust
reported in (1976) 103 ITR 44.
7.4. 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 A.L.N.Rao Charitable Trust referred to above. Accordingly, the
Apex Court in the case of Additional Commissioner of Income-tax and another v.
A.L.N.Rao Charitable Trust ((1995) 6 SCC 625) held that the exemption
available under Section 11(2) of the Act is in addition to that available
under Section 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:
“… para 11. 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
purpose, to the extent the income 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 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.2 0,000
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% 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 Section11(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% of the income or
Rs.10,000 whichever is higher for earning income tax exemption as engrafted
under Section11(1)(a) will get lifted if the money so accumulated is invested
as laid down by Section11(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 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 Section11 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
done 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 is concerned it will not 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 the previous year from its properties are given
exemption from income-tax, (i) that part 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, earmarked for such charitable or religious purposes.
Such 25% 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% of Rs.10,00 0, 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% 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 Section11. If learned counsel for
the Revenue is right and if 100% 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% 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% 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 a absolute exemption. If sub-section (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 Section11(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 Section11 can be
pressed into 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-tax in compliance with the conditions laid down by
sub-section(2) of Section 11. It is true that subsection(2) of Section 11 has
not clearly mentioned the extent of the accumulated income which is to be
invested. But on a conjoint reading for 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 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 1961. Under
the present Act, any income accumulated in excess of 25% or Rs.10,000
whichever is higher, is taxable under Section 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% 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
Section11(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.”(emphasis Supplied)
8. The other contention raised by the learned counsel for the
appellant is that the assessee failed to exercise the option as
contemplated under Section 11(2) of the Act in a prescribed form, namely, Form
No.10. But the said contention was rightly rejected by both the Commissioner
of Appeals and the Tribunal. There is no mandatory requirement under Section
11(1) of the Act requiring the assessee to exercise the option when he seeks
relief under Section 11(1) of the Act, as it is enough for the assesee to
submit a statement along with the return to exercise such option.
9. 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.
Index :Yes
Internet: Yes
sl
To
1.The Assistant Registrar,Income Tax Appellate Tribunal
Madras Bench “B”, Rajaji Bhavan III Floor, Besant Nagar, Chennai-90.
2.The Assistant Registrar,Income Tax Appellate Tribunal
Madras Bench “A”, Rajaji Bhavan III Floor, Besant Nagar, Chennai-90.
3.The Secretary, Central Board of Direct Taxes, New Delhi.
4.The Commissioner of Income Tax (Appeals), Coimbatore.
5.The Assistant Commissioner, Income-Tax Department,
Central Circle-II, Coimbatore.