(a) Income-tax---tax---

----Reference---Charitable purposes---Finding that income of trust had been accumulated and that balance had been applied for charitable purposes---Tribunal was justified in granting exemption to charitable trust---No question of law arose---Indian Income Tax Act. 1961 Ss. 11 & 256 (2) .

----Reference---Charitable purposes---Accumulation of income of charitable trust---Investment or` income beyond ceiling imposed by law in accordance with S. 11(2)---Tribunal justified in granting exemption in respect of such amount---Tribunal's decision in accordance with Supreme Court decision-- No question of law arose---Indian Income Tax Act, 1961, Ss. 11 & 256(2).

Held, dismissing the application for reference, (i) that the Tribunal had held that as regards Rs. 42,243, it should be taken as part of the investment over and above Rs. 6 lakhs invested in approved securities, as according to the Tribunal, the amount opted to be accumulated should be taken as Rs. 6.5 lakhs as mentioned in Form No. 10 and not Rs. 6 lakhs as taken by the Income-tax Officer, and that if the amount to be accumulated was taken as Rs. 6.5 lakhs; there was no violation of the undertaking given in Form No 10, since the balance amount after considering the investment in securities under section 11(2) of the Income Tax Act, 1961, amounting to Rs. 6 lakhs was utilised for the charitable purposes, before the expiry of six months, being the time allowed by law for investment and that even if there was such a failure in respect of Rs. 50,000 any income could be brought to tax in the succeeding year. The Tribunal held that, as the requirement as to investment was to ensure that the funds were not misused, and as a portion of the funds has been actually utilised for charitable purposes, there could be no inference that there was no accumulation. This finding was arrived at by the Tribunal on the basis of facts. Accordingly, no question of law arose from its order.

(ii) that the Tribunal had held that the sum of Rs. 42,243 should be considered as having been applied within the meaning of section 11(1) of the Act. This finding of the Tribunal had not been questioned by 'the Department. The Tribunal's decision was in accordance with the judgment of the Supreme Court in Additional CIT v. A.L.N. Rao Charitable Trust (1995) 216 ITR 697, wherein it was held that out of the unspent accumulated income of the previous year, 25 percent 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 percent of the income or Rs. 10,000, whichever is higher, will also get exempted from income-tax. Then follows subsection (2) which deals with the question of investment of the balance of accumulated income, which has still not earned exemption under subsection (1)(a). So far as that balance of accumulated income is concerned, that also can earn exemption from income -tax, meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by subsection (1)(a) of section 11 would get lifted, it' the additional accumulated income beyond 25 per cent or Rs 10,000 whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the procedure laid down No question of law arose from order of the Tribunal.

CIT (Addl.) v. A.L.N. Rao Charitable Trust (1995) 216 ITR 697 (SC) and CIT (Addl.) v. A.L.N. Rao Charitable Trust (1976) 103 ITR 44 (Kar.) ref.

C.V. Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee.

JUDGMENT

K.A. THANIKKACHALAM, J.---Mr. P.P.S. Janatthana Raja took notice for the respondent and undertook to file vakalatnamah.

In this tax case petition, the Department requests this Court to direct the Tribunal to refer the following questions said to arise out of the order of the Tribunal, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in construing the amount of Rs. 42,243 as being part of the amount of Rs. 6,50,000 which the assessee had mentioned in Form No. 10 under rule 17 of the Income-tax Rules, 1962, as being accumulated or set apart under section 11(2) of the Income Tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has not erred in holding that the accumulated income in respect of which the conditions under subsection (2) of section 11 are satisfied will be entitled to exemption over and above 25 percent of the income which is allowed to be accumulated under subsection (1) of that section without losing exemption?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in stating that there is no reason why the sum of Rs. 25,099 should not be treated as coming under the Explanation to section 11(2)?

(4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in treating a loan of employee as an application for charitable purpose?"

The assessee is a charitable trust. For the assessment year 1975-76, it submitted a return of income showing an income of Rs. 10,85,329. Exemption under section 11 of the Income Tax Act, 1961, was claimed to the extent of Rs. 11,08,550, computed by the assessee as under:

While completing the assessment for the assessment year 1975-76, the Income-tax Officer deducted a sum of Rs. 2,000 being the loan advanced to an employee of the assessee-trust from the sum of Rs. 4,66,307 shown against Item No. (2) above on the ground that the loan advanced to an employee could not be treated as an application of income for charitable purposes. The Income-tax Officer further negatived the plea of the assessee with regard to the deduction of Rs. 42,243 shown in Item No. (3) on the ground that the assessee-trust had not exercised its option under the Explanation to section 11(1) of the Income-tax Act, 1961, in writing as prescribed in that provision. He, however, under the mistaken impression that this amount was also included in the sum of Rs. 4,66,307 shown against Item No. (2), deducted the said amount therefrom erroneously. The total income was determined as Rs. 69,342 in this manner.

On appeal, the Commissioner of Income-tax (Appeals) noticed the mistake referred to in the earlier paragraph, allowed the appeal to that extent; confirming the order findings of the Income-tax Officer. In the result, the total income was reduced to Rs. 27;099 from Rs. 69,342: Thereafter the assessee filed an appeal before the Appellate Tribunal. The Appellate Tribunal allowed the assessee's appeal holding as under:

"(i)that the advance of Rs. 2,000 made by the assessee to an employee as a loan should be taken as application of income for the purpose of administration of the institution.

(ii)As regards Rs.42,243, it should be taken as part of the investment over and above Rs. 6 lakhs invested in approved securities as according to the Tribunal, the amount opted to be accumulated should be taken as Rs. 6.5 lakhs as mentioned in Form No. , and not Rs. 6 lakhs,, as taken by the Income-tax Officer and that if the amount to be accumulated was taken as Rs. 6.5 lakhs, there was no violation of the undertaking given in Form No. 10, since the balance amount after considering the investment in securities under section 11(2) amounting to Rs. 6 lakhs was utilised for charitable purpose, before the expiry of six months, being the time allowed by law for investment and that even if there was such a failure m respect of Rs..50,000 the income could be brought to tax in the succeeding year.

(iii) Even if the authorities were right in assuming that only Rs. 6 lakhs were permitted to be accumulated, there would be no liability because the balance of income as computed was much less than 25 percent and that the accumulated income in respect of which the conditions of subsection (2) of section 11 were satisfied, was entitled to exemption over and above the 25 percent of income which was allowed to be accumulated under subsection (1) of section 11 without losing exemption, following the decision of the Karnataka High Court in the case of Addl. CIT v. A.L.N. Rao Charitable Trust (1976) 103 ITR 44, 51.

(iv) The option to be exercised under the Explanation to section 11(1) need not be in the form of a separate letter and that Rs. 25,099 alongwith Rs. 2,000 spent in the three succeeding months after the end of the previous year for charitable purposes should be considered as application of income within the meaning of the Explanation to section 11(1) of the Income Tax Act, 1961. "

We have heard learned junior standing counsel appearing for the Department as well as learned counsel Mr. P.P.S. Janarthana Raja, who took notice on behalf of the assessee and undertook to file vakalatnamah.

In so far as Question No. (1) is concerned, the Tribunal held that as the requirement as to investment was to ensure that the funds were not misused, and as a portion of the funds has been actually utilised for charitable purposes, there can be no inference that there was no accumulation. This finding was arrived at by the Tribunal on the basis of facts. Accordingly, no question of law arises out of the order of the Tribunal as framed and suggested by the Department as Question No. (1).

In so far as Question No. (2) is concerned, the Tribunal held that the sum of Rs. 42,243 should be considered as having been applied within the meaning of section 11(1) of the Act. This finding of the Tribunal has not been questioned by the Department. In Addl. CIT v. A.L.N. Rao Charitable Trust (1995) 216 ITR 697, the Supreme Court, while affirming the decision of the Karnataka High Court in Addl. CIT v. A.L.N. Rao Charitable Trust (1975) 103 ITR 44 held (page 705): "out of the unspent accumulated income of the previous year, 25 percent 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 percent of the income or Rs. 10,000 whichever is higher, will also get exempted from income-tax. Then follows subsection (2), which naturally deals with the question investment of the balance of accumulated income, which has still not earned exemption under subsection (1)(a). So far as that balance of accumulated income is concerned, that also can earn exemption from income- tax, meaning thereby the ceiling or the limit or exemption of accumulated income from income-tax as imposed by subsection (1)(a) of section 11 would get lifted, if the additional accumulated income beyond 25 percent or Rs. 10,000, whichever is higher, as the case may be, is invested as laid down by section 11(2) after following the procedure laid down therein." So far as the order relating to Question No. (2) is concerned, it is in accordance with the judgment of the Supreme Court cited supra. Therefore, no referable question of law as framed and suggested as question No. (2) would arise out of the order of the Tribunal.

In so far as Questions Nos. (3) and (4) are concerned, when Rs.42,243 came out of the accumulated income of Rs. 6,50,000 and Rs. 2,000 also forms part of the same which is exempted under section 11(2) of the Income Tax Act, 1961, no further answer need be given. Accordingly, Questions Nos. (3) and (4) also do not arise out of the order of the Tribunal. Accordingly, no referable question of law arises out of the order of the Tribunal as framed and suggested by the Department as Question Nos.(1) to (4).

In the result, this tax case petition is dismissed.

M.B.A./598/FC Petition dismissed.