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Addl. Commissioner of Income-tax, Mysore and anr. Vs. A.L.N. Rao Charitable Trust - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberWrit Appeal No. 864 of 1974
Judge
Reported in[1976]103ITR44(KAR); [1976]103ITR44(Karn); 1976(1)KarLJ455
ActsIncome Tax Act, 1961 - Sections 11, 11(1), 11(2), 12, 36(1), 51, 60, 61, 62, 63, 139(1), 139(2) and 263
AppellantAddl. Commissioner of Income-tax, Mysore and anr.
RespondentA.L.N. Rao Charitable Trust
Appellant AdvocateS.R. Rajasekhara Murthy, Adv.
Respondent AdvocateG. Sarangan, Adv.
Excerpt:
.....to the learned counsel, the assessee is entitled to exemption from tax in respect of 25% of the accumulated income plus that portion of the accumulated income in respect of which the conditions prescribed under clauses (a) and (b) of section 11(2) have been satisfied. 10,000, whichever is higher, under section 11(1)(a), and it would be further entitled to exemption under section 11(2) provided the conditions laid down in that section are satisfied. 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 section 11(1)(a). in my opinion, where a statute, particularly a taxing statute confers a concession by one..........accumulation set out in section 11(2) are complied with. if accumulation in excess of 25% of the trust income is made for a purpose of the trust, to secure exemption for the excess amount a written notice should be given to the income-tax officer in the manner prescribed by rule 17 of the income-tax rules, 1962, and the accumulated income should be invested in government or other approved securities; but in no case is the income allowed to be accumulated for more than 10 years. according to the learned authors of the law and practice of income-tax by kanga and palkhivala, 6th edition, vol. i, page 245, where income is accumulated in excess of the allowable limit, it is only the excess amount accumulated and not the entire trust income, which becomes disentitled to exemption. according.....
Judgment:

Govinda Bhat, C.J.

1. This is an appeal brought on behalf of the Additional Commissioner of Income-tax, Karnataka, and the First Income-tax Officer, Mangalore Circle, Mangalore, against the order made in W.P. No. 597 of 1973 (A. L. N. Rao Charitable Trust v. Addl. Commissioner of Income-tax) by Venkataramiah J. by which the learned judge allowed the writ petition filed by the respondent herein and directed the Commissioner of Income-tax to dispose of the proceedings initiated by him under section 263 of the Income-tax Act, 1961, hereinafter called 'the Act', in the light of the interpretation of section 11 of the Act made in the said order.

The relevant facts in brief are :

Respondent, A. L N. Rao Charitable Trust, Mangalore, is a charitable trust. For the assessment year 1969-70, the respondent, hereinafter referred to as 'the assessee', submitted its return to the First Income-tax Officer, Mangalore Circle. In the said return, the assessee claimed that a sum of Rs. 85,262, which was the surplus income of the previous year, was exempt from tax under section 11(1)(a) and sub-section (2) of the said section. On the assessing authority holding that the assessee is not a genuine trust and, therefore, not entitled to claim the benefit of section 11, the assessee preferred an appeal before the Appellate Assistant Commissioner, which was dismissed. In the second appeal preferred by the assessee before the Income-tax Appellate Tribunal, it was held that the assessee was a charitable trust and, therefore, was entitled to claim exemption from tax under section 11 of the Act. In I.T.R.C. No. 31 of 1973 (Addl. Commissioner of Income-tax v. A. L. N. Rao Charitable Trust) which was a reference made at the instance of the department, this court by its judgment dated August 4, 1975, answered the question referred in favor of the assessee and against the department. Therefore, that the assessee is a charitable trust entitled to claim the benefits of section 11 is no longer in dispute.

2. The assessing authority took up the assessment to pass an order in accordance with the judgment of the Tribunal and made an order on January 21, 1972, by which it held that the assessee, after complying with the requirement of giving notice under section 11(2)(a), had invested 75% of the accumulated income intended to be applied for charitable purposes in future years as required by clause (b) of section 11(2) and, therefore, the entire surplus income was exempt from tax.

3. The commissioner of Income-tax, hereinafter referred to as 'the Commissioner', on looking into the order dated January 21, 1972, passed by the assessing authority, was of the view that the order of the assessing authority was erroneous as he had not applied his mind to the question whether the assessee had complied with the provisions of section 11(2) and that if he had applied his mind to the said provision, he would have noticed that the assessee had not invested the entire surplus income, viz., Rs. 85,262 (but only Rs. 70,975), and, therefore, the assessee was not entitled to the exemption provided under section 11 of the Act. Thus, in the opinion of the Commissioner, the order of the Income-tax Officer was erroneous inasmuch as it was prejudicial to the interests of the revenue. He issued a show-cause notice under section 263 of the Act on January 18, 1973, to the assessee to show cause as to why the entire surplus income of said notice, approached this court for relief under articles 226 and 227 of the Constitution and prayed for the issue of a writ in the nature of certiorari to quash the notice dated January 18, 1973, issued by the Commissioner. In that writ petition (W.P. No. 597 of 1973), Venkataramiah J. made an order directing the Commissioner to dispose of the proceedings initiated under section 263 in the light of his order as to interpretation of section 11(1)(a) and section 11(2) of the Act.

4. Before the learned single judge, the contention of the department was that in order to claim exemption under section 11, the assessee should have invested the entire surplus income in one or the other of the securities mentioned in section 11(2)(b) of the Act and it is not sufficient if 75% of the surplus income alone has been invested by the assessee. The learned counsel for the assessee urged that the assessee had complied with the requirements of section 11; according to the learned counsel, the assessee is entitled to exemption from tax in respect of 25% of the accumulated income plus that portion of the accumulated income in respect of which the conditions prescribed under clauses (a) and (b) of section 11(2) have been satisfied. According to the assessee, since it has deposited 75% of the accumulated income in the securities mentioned in section 11(2)(b), the entire surplus income which has accumulated was not taxable.

5. The learned single judge rejected the contention of the revenue and upheld the contention of the assessee in part only. The learned judge held that the assessee is entitled to exemption from tax only in respect of 75% of the surplus income which was accumulated for future use. The learned single judge explained the scope of section 11(1)(a) and sub-section (2) of the said section thus :

'A reading of the provisions of section 11(1)(a) extracted above shows that ordinarily any amount spent by the charitable trust from out of its income during the previous year on charitable purposes would be exempt from taxation and in so far as the income that is allowed to be accumulated for application to charitable purposes in India is concerned, to the extent to which the income so accumulated is not in excess of 25% of the income from the property or Rs. 10,000, whichever is higher, would be exempt from taxation. To illustrate, let me assume that the income of a charitable trust is Rs. 1,00,000 during any year and a sum of Rs. 40,000 is spent on charitable purposes and the remaining Rs. 60,000 is allowed to be accumulated for application to charitable purposes in India. Under section 11(1)(a) a sum of Rs. 40,000 spent on the charitable purposes and a sum of Rs. 25,000 (which is 25% of the total income) out of the balance of Rs. 60,000 which is allowed to be accumulated would be exempt from taxation. The remaining Rs. 35,000 would be subject to taxation. Sub-section (2) provides that in the event of the trust complying with the requirements of clauses (a) and (b) thereto, it would be entitled to claim exemption in respect of any amount that is allowed to be accumulated for application to charitable purposes in India even though it may be in excess of 25% of the income or Rs. 10,000 whichever is higher. I am of the view that the words' the restriction specified in clause (a), of sub-section (1) as respects accumulation..... shall not apply for the period during which the said conditions remain complied with' mean that as respects the amount allowed to be accumulated in respect of which clauses (a) and (b) of sub-section (2) have been complied with, the assessee would be entitled to exemption even though it may be in excess of the 25% of the total income or Rs. 10,000, whichever is higher. If Parliament intended that the entire surplus income had to be invested to earn the exemption in sub-section (2) it would have said so. The very fact that there is no reference to the extent of the income that has to be invested in sub-section (2) suggests that the intention of Parliament was that any amount which is allowed to be accumulated even though it may be in excess of 25% or Rs. 10,000, whichever is higher, in respect of which clauses (a) and (b) of sub-section (2) of section 11 are complied with, shall be exempted from the payment of income-tax...... I am of the view that section 11(2) is only an alternative to section 11(1)(a) and it is open to the assessee to adopt the more favorable one having regard to the facts of the case. The assessee is not, however, entitled to claim exemption in respect of 25% under section 11(1)(a) and also claim exemption in respect of the surplus amount invested under section 11(2). In the facts and circumstances of this case, because admittedly the assessee has invested 75% of the surplus income as provided under clause (b) of section 11(2) and has also given the required notice under section 11(2)(a) he is entitled to claim exemption from payment of income-tax only in respect of 75% of the surplus income.'

Aggrieved by the said order, the department has preferred the above appeal.

6. Before us, Sri S. R. Rajasekhara Murthy, learned counsel for the appellants, urged the same contention that was urged before Venkataramiah J. He argued that the interpretation of section 11 by the learned judge is erroneous and that we should hold that the assessee is not entitled to exemption in respect of the entire surplus income accumulated, as it has not invested the entire amount in the securities specified in section 11(2)(b) of the Act. Sri Sarangan, learned counsel for the respondent-assessee, submitted that on a true and correct interpretation of section 11, we should hold that the assessee, if it is a charitable trust contemplated under the Act, is entitled to exemption of 25% of the income from the property or Rs. 10,000, whichever is higher, independent of the provisions of sub-section (2); and that the exemption is not taken away if the assessee invests part of the accumulated amount in the securities specified in clause (b) of sub-section (2) of section 11. In support of the said contention, he relied on the decision in Commissioner of Income-tax, Patiala v. Shri Krishen Chand Charitable Trust. The department did not bring to our notice any authority taking a contrary view. Syed Wasi-ud-Din J., who delivered the judgment in the above cited case, held that it has been undisputed that the assessee in that case is a charitable trust and it would be entitled to exemption of the income accumulated to the extent of 25% or Rs. 10,000, whichever is higher, under section 11(1)(a), and it would be further entitled to exemption under section 11(2) provided the conditions laid down in that section are satisfied. After setting out the relevant provisions of sections 11(1)(a) and 11(2), the decision states thus :

'It may be noted that under the old act of 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 of 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 compiled with. An examination of section 11(1)(a) shows that this section comprises of two parts : (1) which excludes that part of the income to the extent to which such income is applied for charitable purposes in India; (2) where there is accumulation of the income, then to the extent to which the income so accumulated is not in excess of 25% or Rs. 10,000, whichever is higher. 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 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 section 11(1)(a). In my opinion, where a statute, particularly a taxing statute confers a concession by one particular provision in the statute and then further liberalizes and enlarges that concession by another provision in that statute, then the concession granted by the earlier provision cannot be deemed to be taken away. Section 11(2) of course lays down the conditions, the compliance of which is necessary to avail of the exemption but they are merely for the purpose of availing of the further exemption and not for depriving or taking away the exemption granted under section 11(1)(a).'

7. The judgment of the Jammu and Kashmir high court in Shri Krishen Chand Charitable trust case was delivered on June 17, 1974. The learned counsel for the department did not bring to our notice any decision taking a contrary view. We asked Sri Rajasekhara Murthy whether the department has preferred any appeal to the supreme court against the said judgment. The learned counsel submitted that he has no information of any appeal to the supreme court having been preferred by the department against the decision of the High court of Jammu and Kashmir.

8. We are in respectful agreement with the interpretation of section 11 as laid down in Shri Krishen Chand Charitable Trust case by the high court of Jammu and Kashmir. We are unable to accept the interpretation of section 11 as urged by Sri Rajesekhara Murthy, learned counsel for the department. The interpretation given by Venkataramiah J., in this court is also not correct. The learned Judge has stated that, in his view, section 11(2) is alternative to section 11(1)(a) and it is open to the assessee to adopt the more favorable one, but he cannot have the benefit of both section 11(1)(a) and section 11(2). Section 11(1) and section 11(2) as they stood at the relevant time read thus :

'(1) Subject to the provisions of section 60 to 63, the following incomes 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 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 percent. 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 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 the income is to be accumulated or set apart, which shall in no case exceed ten years;

(b) the money so accumulated or set apart is invested in any government security as a defined in clause (2) of section 2 of the Public Debt Act, 1944 (XVIII of 1944), or in any other security which may be approved by the Central Government in this behalf.'

9. Under the 1922 Act exemption was available to charitable and religious trusts without any restrictions upon the accumulation of income. Under the Act, 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 is wholly exempt; where the whole or part of the income is accumulated for application for such purposes in India, then, if the income accumulated is 25% of the income from the property or Rs 10,000, whichever is higher, is also exempt; income accumulated in excess of 25% of the total income of the trust or Rs. 10,000, whichever is higher, is taxable under section 11(1)(a) unless the conditions regarding the accumulation set out in section 11(2) are complied with. If accumulation in excess of 25% of the trust income is made for a purpose of the trust, to secure exemption for the excess amount a written notice should be given to the Income-tax Officer in the manner prescribed by rule 17 of the Income-tax rules, 1962, and the accumulated income should be invested in government or other approved securities; but in no case is the income allowed to be accumulated for more than 10 years. According to the learned authors of the law and Practice of Income-tax by Kanga and Palkhivala, 6th edition, vol. I, page 245, where income is accumulated in excess of the allowable limit, it is only the excess amount accumulated and not the entire trust income, which becomes disentitled to exemption. According to the learned authors, an assessee does not forfeit the benefit conferred by section 11(1)(a) if the assessee takes the benefit of section 11(2) by complying with the conditions laid down therein. The interpretation put by Sri Rajasekhara Murthy for the department has the result, namely, that whereas as an assessee entitled to the benefit of section 11 accumulates the income in excess of 25% of the income from property or Rs. 10,000, whichever is higher and does not make any investment in the approved securities, he will be entitled to the exemption provided under clause (a) of sub-section (1) of section 11; but where he invests part of the accumulated income in the approved securities, he forfeits the benefit conferred by section 11(1)(a).

10. One of the canons of interpretation of statutes is that if the language in an Act is capable of more than one interpretation, we ought to discard the more natural meaning if it leads to an unreasonable result and adopt that interpretation which leads to a reasonably practicable result. In the words of Romer L.J., 'the court... when faced with two possible constructions of legislative language, is entitled to look to the results of adopting each of the alternatives respectively in its quest for the true intention of Parliament' : Vide Maxwell on the Interpretation of Statutes, 12th edition, pages 105 and 106. In Simms v. Registrar of Probates, Lord Hobhouse, giving the advice of the Judicial Committee, said :

'Where there are two meanings, each adequately satisfying the meaning (of a statute), and great harshness is produced by one of them, that has a legitimate influence in inclining the mind to the other...... it is more probable that the legislature should have used the word ('evade') in that interpretation which least offends our sense of justice' : Vide Craies on Statute Law, 7th edition, page 87.

'In construing a law of doubtful meaning or application, the policy which induced its enactment, or which was designed to be promoted thereby, is a proper subject for consideration, where such policy is clearly apparent or can be legitimately ascertained. Indeed, the proper course in all cases is to adopt that sense of the words which promotes in the fullest manner the policy of the legislature in the enactment of the law, and to avoid a construction which would alter or defeat that policy, where the construction in harmony with the policy is reasonably consistent with the language used.' (Vide 50 American Jurisprudence, pages 279 and 280, paragraph 298).

11. As stated earlier, the 1922 Act had wholly exempted the income derived from property held in trust and there was no restriction upon the accumulation of the income. The 1961 Act with which we are concerned for the first time imposed restrictions upon the accumulation of income. While imposing restrictions upon accumulation, section 11(1)(a) provided for exemption of income not exceeding 25% of the total income of the trust or Rs. 10,000, whichever is higher. The restriction, however, relates to 75% of the total income of the properties; but that restriction in respect of the income in excess of 25% of the trust income is lifted if the assessee complies with the conditions laid down in clauses (a) and (b) of sub-section (2) of section 11. One condition is that the assessee should give a written notice to the assessing authority in the manner prescribed by rule 17 of the Income-tax Rules, 1962; the second condition is that the accumulated income should be invested in Government or other approved securities; the third condition is that in no case the income should be allowed to be accumulated for more than 10 years.

Section 11 has been amended more than once. The Taxation Laws (Amendment) Act, 1975, has further amended section 11. After the amendment, the relevant provisions of section 11 read thus :

'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 respect 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 or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty five percent of the income from such property;..... Explanations. - For the purposes of clauses (a) and (b) -

(1) in computing the twenty-five per cent. of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of seventy-five per cent. of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount -

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason, then, -

(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount; and

(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expire of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.....

(2) Where seventy-five per cent. of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely :-

(a) such person specifies, by notice in writing given to the Income-tax Officer in the prescribed manner, 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 moneys so accumulated or set apart is -


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