COMMISSIONER OF INCOME-TAX VS P.S.G. & SONS CHARITIES
1999 PTD 79
[223 I T R 831]
[Madras High Court (India)]
Before Thanikkachalam and Jayarama Chouta, JJ
COMMISSIONER OF INCOME-TAX
Versus
P.S.G. & SONS CHARITIES
Tax Case No. 1307 and Reference No.458 of 1980, decided on 25/10/1995.
Income-tax---
----Exemptions---Charitable purposes---Charitable trust---Business held as trust for charitable purposes---Application of income for charitable purposes---Mode of computation of income from business---Accounts of trust alone must be taken into account---Matter remanded---Indian Income Tax Act, 1961, S.11.
Section 11(1) of the Income Tax Act, 1961, provides that income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the person, in receipt thereof to the extent to which such income is applied for such purposes in India. Section 11(4) of the Act consists of two parts. The first part merely explains that for the purposes of this section property held under trust "includes a business undertaking". The second part provides that where the property held under trust is a "business undertaking", the Income tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of the Act and where the income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.
It is not the total income as would be assessed by the Income-tax Officer that is relevant for the purpose of investing the funds of the trust or assessing the income of the trust. The mode of determination by the income -tax Officer under the provisions of the Income Tax Act is specifically restricted to the income over and above the income as shown in the accounts of the business undertaking held by a trust. It follows that with regard to the income of the trust as such, it is the accounts of the trust alone that have to be taken into consideration for the purposes of section 11(1)(a) of the Act.
Wherever Parliament considered that the computation of income should be in accordance with the provisions of the Income Tax Act, 1961, it introduced the concept by using appropriate language. In the absence of any such language in section 11(1) of the Act, the computation as envisaged by the other provisions of the Act cannot be imported into section 11(1). Section 11 contemplates application of the income for charitable purposes. The charity can accumulate 25 per cent of the income. Taking into account the purpose for which the conditions of section 11(1)(a) are imposed, it would be clear that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee, subject to an adjustment of any expenses extraneous to the trust. The application of income for charitable purposes will have to be excluded and it is only the balance that would require an examination for finding out whether the assessee had complied with- the rule of accumulation. Under section 11(1)(a) of the Act, 25 per cent. of the income from the property or Rs.10,000 whichever is higher shall be included in the total income of the previous year of the trust. Under subsection (2) of the section 11 of the Act, the restriction contained in clause (a) or clause (b) of subsection (1)'of section 11 shall not apply provided the conditions specified in clauses (a) and (b) of subsection (2) of section 11 are complied with. Subsection (2)(a) requires that a notice in writing shall be given to the Income-tax Officer in the prescribed manner specifying the purpose for which income is being accumulated or set apart, but the period for which the income was accumulated or set apart shall, in no case, exceed ten years. Under section 11(2)(b) of the Act, the money so accumulated or set apart is required to be invested in any Government security.
The assessee, an association of persons, was a charitable trust. It had several distinct lines of activities such as running educational institutions, technical trading centres, physical educational institutions, etc. It was carrying on its business in running workshops and setting the goods manufactured, etc. Holding the business undertakings run as above, as property held under trust for tine purpose of section 11 of the Act, the Income-tax Officer worked out the income of such undertaking in accordance with the Income Tax Act relating to assessment and in so doing he applied the provisions of section 11(4) of the Income Tax Act to assess the excess between the income so determined and the income as shown in the accounts of the undertaking. In making the assessment,' however, he computed the excess by only adding up the items of disallowances to the book income shown, by applying the provisions of the Income Tax Act. Thus, the Income tax Officer disallowed a sum of Rs.1,54,667 comprising several items. According to the Tribunal, the surplus income of the assessee according to the book income was Rs.3,91,020; and the Income-tax Officer had disallowed and added back specified amounts under the Act which came to Rs.1,54,667; the surplus, therefore, for the purpose of this assessment year would be not Rs.3,91,020 but Rs.3,91,020+ 1,54,667, i.e., Rs.5,45,687.
The Tribunal held that even if this were regarded as the income of the undertaking on which the assessee had claimed exemption from tax, the entire amount of Rs.5,45,687 would be exempt, because the assessee had spent on charitable and religious purposes a sum of Rs.7,98,081. Therefore, the assessee was entitled to exemption under section 11(1). On reference:
Held, that without clarifications on whether the surplus of Rs.7,98,081 included the surplus of Rs.3,91,020 and where this Rs.7,98,081 came from and whether it included accumulated surplus of preceding years, and whether the said amount had been applied for charitable purposes accordance with the provisions contained in section 11(1). The reference could not be answered. The Tribunal was to verify these aspects and dispose of the matter in accordance with section 11.
N.V. Balasubramaniam for the Commissioner.
P.P.S. Janarthana Raja for Subbaraya Aiyar, Padmanabhan and Ramamani for the Assessee.
JUDGMENT
THANIKKACHALAM, J.---At the instance of the Department, under section 256(1) of the Income Tax Act, 1961, the Tribunal referred the following two questions for the opinion of this Court:
"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal's view that the provisions of subsection (4) of section 11 of the Income Tax Act, 1961, cannot operate as a charging section for bringing to tax the 'excess' referred to therein is sustainable in law?
(2) Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 11(4), the Appellate Tribunal is correct in law in deleting the items of disallowances totalling Rs.1,54,667 for the assessment year 1972-73?"
The assessee is an association of persons, which has been granted exemption under the provisions of section 11 of the Income Tax Act, 1961. The assessee is a charitable trust, engaged in charitable activities. There were several distinct lines of activities such as running educational institutions, technical training centres, physical educational institutions, etc. The Income tax Officer looked into the income and expenditure statement filed by the assessee. The assessee was carrying on its business in running workshops and selling the goods manufactured, etc. Holding the business undertakings run as above, as property held under trust for the purpose of section 11 of the Act, the Income Tax Officer worked out the income of such undertaking in accordance with the Income-tax Act relating to assessment and so doing he applied the provisions of section 11(4) of the Income-tax Act to assess the excess between the income so determined and the income as shown in the accounts of the undertaking. In making the assessment, however, he computed the excess by only adding up the items of disallowances to the book income shown by applying the provisions of the Income-tax Act. Thus, the Income-tax Officer disallowed a sum of Rs.1,54,667 comprising several items. Applying the provisions of section 11(1) of the Act and holding that the above amounts were deemed not to have been applied for charitable purposes in terms of section 11(4), the Income-tax Officer brought the sum of Rs.1,54,667 to tax under each head, the Income-tax Officer gave the reasons as to why he considered the disallowance as warranted by the provisions of the Act.
The assessee appealed to the Appellate Assistant Commissioner, objecting to the assessment of Rs.1,54,667 by applying the provisions of section 11(4), as if they were a separate charging provisions of the Act. According to the assessee, the provisions of section 11(1) of the Act were initially attracted. Section 11(4) of the Act being carved out of section 11(1) of the Act, the Income-tax Officer had only to see whether the income earned has been applied to charitable and religious purposes. Section 11(4) of the Act could not be a separate charging section. Alternatively, it was submitted that in respect of each of the items of disallowance, the disallowance itself was challenged. The appellate Assistant Commissioner held against the assessee on the first ground though in respect of individual items of disallowance comprised in the figure of Rs.1,54,667, he gave certain quantum of Reductions. As against the order passed by the Appellate Assistant Commissioner, the assessee preferred an appeal before the appellate Tribunal. The Tribunal pointed out that in the present case, the surplus income of the assessee as per books came to Rs.3,91,020. The assessee has applied a sum of Rs.7,98,081 for charitable purposes, According to the Tribunal, when the assessee has spent Rs.7,98,081 for charitable purposes, it is clear that the sum of Rs.3,91,020 has been applied towards charitable purposes. The Tribunal, however, held that when once the assessee has got only one source of income such as the business undertaking and the income there from has been exhausted for the purposes of taxation by the application of the provisions of section 4 and section 11(1) of the Act, there remains absolutely nothing of the assessee's income which could be brought to tax. Accordingly, the additional sum of Rs.1,54,667 was deleted. This conclusion was arrived at by the learned Accountant Member and the learned Judicial Member by separate, but concurrent orders.
Learned standing f counsel for the Department submitted as under:
A plain reading of the provisions of section 11(4) of the Act shows that the excess amount between the income so determined and the income as shown in the account books of the undertaking' should be deemed to be the income applied for the purposes other than charities. Section 11(4), of the Act, according to learned standing counsel, is an extension of section 11(1), but even though it has to be read on the terms obtaining therein and determined. Read in this manner, it was clear that the difference between the income worked out for income-tax purposes and the income as per the books maintained should be regarded as income not applied for charitable and religious purposes. Income not so applied being not exempted from tax, they have been correctly brought to tax. According to learned standing counsel, it cannot be disputed that business income has to be computed in a particular way and the method laid down in the Income Tax Act can be only method for working out the income. When once so working out the income, an excess under section 11(4) is computed, that excess cases to be income applied for charitable purposes and has to be taxed not being exempted under section 11(1) of the Act. Learned standing counsel further submitted that if the trust does not come within the terms of "exemption claimed", taxability under section 11 (4) of the Act automatically arises. According to learned standing counsel, the reasons given by the Tribunal was that the surplus for the purpose of this assessment would be Rs.5,45,687 (Rs.3,91,020 + Rs.1,54,667) and even if this is regarded as the income of the undertaking on which the assessee has claimed exemption from tax, the entire amount of Rs.5,45,687 would be exempted because the assessee has spent Rs.7,98,081 on charitable and religious purposes. Learned standing counsel submitted that it is not known as to wherefrom this sum of Rs.7,98,081 came. According to learned standing counsel, if this amount of Rs.7,98,081 is accumulated income of the earlier years then the assessee should have followed the provisions contained in section 11(2) of the Act, viz., after obtaining permission from the Income-tax Officer, the assessee can spend the whole accumulated income for religious and charitable purposes and then claim exemption under section 11(1) of the Act. Learned standing counsel submitted that from which unit out of the assessee's undertakings the sum of Rs.7,98,081 has come and how the sum of Rs.7,98,081 was arrived at as the difference between the assessed income, according to the provisions of the Act, and the book income are not known. Therefore, according to learned standing counsel the Tribunal was not correct in deleting the addition of Rs.1,54,667.
Learned counsel appearing for the assessee submitted as under:
The provisions of section 11(4) of the Act are not applicable to the assessee's case. No claim under section 11(4) having been made, that section should not be applied. The expression "income" used in section 11(4) has a special meaning, but the disallowance cannot be treated as income of the assessee. Section 11(4) consists of two parts ---(i) it is applicable only where section 11(l) applies, and (ii) the assessee must take a claim for non-inclusion of the income from the business undertaking in its total income. The assessee in the present case having spent more on charitable purposes than its income, it was unreasonable to hold that any part of the income has been spent on non-charitable purposes. The provisions of section 11(4) exempting the income under certain conditions stipulates as one such condition, the application of income for charitable purposes. The provisions of section 11(4) only relate to non-application of certain items of income for charitable or religious purposes and does not by itself or through a fiction create a different type of income.
We have heard the rival submissions.
The assessee submitted that even in a case where a business is held under trust, the income there from is to be computed in accordance with the provisions of the Income Tax Act, 1961, and so much of the income as has been applied for charitable and religious purpose, as the case may be, is to be exempted from tax. The assessee further contended that section 11(4) of the Act only creates a fiction in so far as it provides that the excess of income as determined in accordance with the provisions of the Act over the income as per books shall be deemed to have been applied for purposes other than the charitable or religious purposes and that the same cannot apply in the present case, since the assessee has actually spent on charitable and religious purposes much more than the income derived in the relevant accounting year. According to the Department, the provisions of section 11(4) of the Act are mandatory and when on a perusal of particulars of income it is found that there is a difference between the income determined and the income as per book, the fiction would operate. The Department contended that otherwise the provisions of section 11(4) of the Act would be rendered nugatory. According to the Department, the fact that the assessee had applied much more than the income derived in the relevant accounting year, for charitable purposes can be of no avail at all.
Section 11(1) provides that income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the person in receipt thereof to the extent to which such income is applied for such purposes in India. Section 11(4) of the Act consists of two parts. The first part merely explains that for the purposes of this section property held under trust "includes a business undertaking". The second part provides that where the property held under trust is a "business undertaking", the Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of the said Act and where the income so determined is in excess of the income as shown in the accounts of the undertaking such excess shall deemed to be applied to purposes other than the charitable or religious purposes.
It is not the total income as would be assessed by the Income-tax Officer that is relevant for the purpose of investing the funds of the trust or assessing the income of the trust. The mode of determination by the Income tax Officer as per the provisions of the Income Tax Act is specifically restricted to the income over and above the income as shown in the accounts of the business undertaking held by a trust. It follows that with regard to the income of the trust as such, it is the account of the trust alone that have to be taken into consideration for the purposes of section 11(1)(a) of the Act.
For the purposes of section 11(4) of the Income Tax Act 1961, property held under trust includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the person in receipt thereof, the Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment and where any income so determined is in excess of the income as shown in. the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than the charitable or religious purposes and, accordingly, chargeable to tax within the meaning of subsection (3).
Wherever Parliament considered the computation of income should be in accordance with the provisions of the Income Tax Act, 1961, it introduced the concept by using appropriate language. In the absence of any such language in section 11(1) of the Act, the computation as envisaged by the other provisions of the Act cannot be imported into section 11(1). Section 11 contemplates application of the income for charitable purposes. The charity can accumulate 25 per cent. of the income. Taking into account the purpose for which the conditions of section 11(1)(a) are imposed it would be clear that income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. The application of income for charitable purposes will have to be excluded and it is only the balance that would require an examination for finding out whether the assessee has complied with the rule of accumulation. Under section 11(1)(a) of the Act 25 per cent of the income from the property or Rs.10,000 whichever is higher shall be included in the total income of the previous year of the trust. Under subsection (2) of section 11 of the Act, the restriction contained in clause (a) or clause (b) of subsection (1) of section 11 shall not apply, provided the conditions specified in clauses (a) and (b) of subsection (2) of section 11 are complied with. Subsection (2)(a) requires that a notice in writing shall be given to the Income-tax Officer in the prescribed manner specifying the purpose for which income is being accumulated or set apart, but the period for which the income was accumulated or set apart shall, in no case exceed ten years. Under section 11(2)(b) of the Act, the money so accumulated or set apart is required to be invested in any Government security.
The assessee in the present case contended that it has spent more than its income for charitable purposes which was Rs.46,071 from the part of the trust known as P.S. Govindaswamy Naidu & Sons Charities, equal to its income and Rs.7,52,011 from P.S.G. Industrial Institute against the net surplus shown of Rs.3,44,950. The utilisation in this manner totalled to Rs.7,98,081. Thus, out of the net surplus as per books, the assessee has spent by way of excess appropriation a sum of Rs.4,07,062. It was contended by the assessee that since its income was far below the amount of appropriation for charitable purposes, the entire income should be exempted under section 11(1) of the Act.
According to the Tribunal, the surplus income of the assessee as per book income is Rs.3,91,020. The Income-tax Officer disallowed and added back specified amounts for reasons specified in the Act. In the present case, such addition came to Rs.11,54,667. The surplus, therefore, for the purpose of this assessment year would be not Rs.3,91,020 but Rs.3,91,020 + Rs.1,54,667, i.e., Rs.5,45,687. The Tribunal held that even if this is regarded as the income of the undertaking on which the assessee has claimed exemption from tax, the entire amount of Rs.5,45,687 would be exempt because the assessee has spent on charitable and religious purposes a sum of Rs.7,98,081. Therefore, the assessee is entitled to exemption under section 11(1) of the Act.
According to the Tribunal, the surplus for the purpose of this assessment year would be Rs.3,91,020 + Rs.1,54,666, i.e., Rs.5,45,687. If that is so, where did the surplus income of Rs.7,98,081 come from? Whether it is an accumulated surplus of the previous years or whether it includes the surplus of Rs.3,91,020. If it is accumulated surplus of the previous years, it is not known whether the assessee has followed the procedure as contemplated under section 11(2) of the Act. The Tribunal is, therefore, directed to verify as to whether the surplus of Rs.7,98,081 included the surplus of Rs.3,91,020 and where this Rs.7,98,081 came from, and whether the said amount has been applied for charitable purpose in accordance with the provisions contained in section 11(1) of the Act. Without getting clarifications on these aspects, it is not possible to answer the question referred to us. After ascertaining these facts, the Tribunal is directed to dispose of this matter in accordance with the provisions contained in section 11 of the Act. We, accordingly, return the question referred to us unanswered.
M.B.A./1644/FCOrder accordingly.