(Appeal from the judgment and order, dated November 13, 1979, of the Madras High Court in T.C. No.993 of 1977).

Income-tax---

----Charitable purposes---Charitable trust---Exemption---Accumulation of income--- Condition that amount should be invested in Government securities---Condition applies only if more than 25 % of income (or Rs.10,000) is to be exempted---Trust utilising an amount of eight lakhs of rupees in purchasing building to be used as a hospital---Trust having additional income of Rs.1,64,210---Trust entitled to exemption of Rs.8 lakhs and also Rs.1,64,2)0---Indian Income Tax Act, 1961, S.11---[CIT v. S.RM. CT. M. Thiruppani Trust (1982) 134 ITR 555 reversed].

Under section 11(l)(a) of the Income Tax Act, 1961, 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 per cent. of its total income or Rs.10,000, whichever is higher. Under section 11(2), if the trust desires to accumulate more than 25 per cent. 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)(a) and (b). The first condition is that a notice in writing should be given to the Income-tax Officer 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.

The second condition is that the amount so accumulated has to be invested in any Government security as specified in section 11(2)(b) of the Act. 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 a 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 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 but some income is accumulated by such a trust, then also under section 11(1)(a), such accumulated income to the extent of 25 per cent. of the total income (or Rs.10,000, whichever is higher) would be exempted from income-tax. If more than 25 per cent. (or Rs.10,000) is to be exempted then the assessee has to comply with the conditions prescribed under section 11(2) of the Act. Section 11(2) does 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 per cent. 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.

The assessee was a charitable trust. Its objects were to carry out Thiruppani or repairs to old Hindu temples, building, new ones, giving aid to or establishing hostels, educational and industrial institutions, etc. It was not in dispute that the objects of the trust were charitable. On March 1, 1963, the trustees resolved that the income of the trust should be accumulated for a period of ten years commencing from April 13, 1961, for various charitable purposes which were set out in its resolution. The assessee accordingly filed Form No.10 with the Income-tax Officer as required under section 11(2) of the Income Tax Act, 1961. The income was being accumulated every year and invested in Government securities. For the year ending April 12, 1970 which was the accounting year relevant to the assessment year 1970-71, the amount of Rs.7,82,792.44 which was shown in the earlier balance-sheet (as on April 1, 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 Tribunal 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, the High Court held that the sum of Rs.8 lakhs was an asset acquired in realisation of an outstanding due and hence, the sum of Rs.8 lakhs could not be included in the income of the assessee for the purposes of section 11(1), and that 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. On appeal by the assessee to the Supreme Court:

Held, that the assessee had applied Rs.8 lakhs for charitable purposes in India by purchasing a building which was to be utilised as a hospital. This income, therefore, was entitled to exemption under section 11(1). In addition, under section 11(1)(a), the assessee could accumulate 25 per cent. of its 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 constituted less than 25 per cent. of the income for the assessment year 1970-71. Therefore, the assessee was entitled to accumulate this income and claim exemption from income-tax under section 11(1)(a).

CIT v. S. RM. CT. M. Thiruppani Trust (1982) 134 ITR 555 reversed.

CIT (Addl.) v. A.L.N. Rao Charitable, Trust (1995) 216 ITR 697 (SC) ref.

Aman Hingorani, Advocate for Hingorani and Associates, Advocates for Appellant.

Harish Chandra and C.V.S. Rao, Advocates for B.K. Prasad, Advocate for Respondent.

JUDGMENT

This appeal pertains to the assessment year 1970-71. The following question was referred to the High Court of Judicature at Madras (see (1982) 134 ITR 555) by the Income Tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961 (page 557):

"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 trustees 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 No. 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 the assessment year 1970-71, the amount of Rs.7,82,792.44 which was shown in the earlier balance-sheet (as on April 1, 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, the sum of Rs.8 lakhs cannot be included 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 at the relevant time, was as follow:

"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;...

(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 subsection (1) as respects accumulation or starting 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 in 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 asset 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..."

??????????? 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 per cent. of its total income or Rs.10,000, whichever is higher. Under section 11(2), if the trust desires to accumulate more than 25 per cent. 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)(a) and (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 of which the income is to be accumulated. The prior should not exceed ten years. Rule 17 of the Income Tax Rules, 1962, 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 the 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 the accounting year relevant to the 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 the 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 that the sum of Rs.8 lakhs does constitute the 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 mere look at sections 11(i) and 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 but some income is accumulated by such a trust, then also under section 11(1)(a), such accumulated income to the extent of 25 per cent. of the total income (or Rs.10,000, whichever is higher) would be exempted from income-tax. Section 11(2), in turn, provides that the restriction which is specified in clause (a) of subsection (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 subsection (1) is clearly the restriction of 25 per cent. of the accumulated income (or Rs.10,000, whichever, is higher) being exempt. If more than 25 per cent. (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 Addl. CIT v. A.L.N. Rao Charitable Trust (1995) 216 ITR 697, this Court considered the provisions of section 11(l)(a) in the light of section 11(2) and held that section 11(2) does 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. 1t is only in respect of any additional accumulated income beyond 25 per cent. 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 l1(2). The assessee, however, is entitled to claim the benefit of section 1l(1)(a). In the present case, the assessee had 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 per cent. of its 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 less than 25 per cent. of the income for the assessment year 1970-71. Therefore, the assessee is entitled to accumulate his income and claim exemption from income-tax under section 11(1)(a).

In the premises, the question which was referred to the High Court, id required to be answered in the affirmative and in favour of the assessee.

The appeal is accordingly allowed with costs.

M.B.A./1826/FC ??????????????????????????????????????????????????????????????????????????????? Appeal allowed.