1. The first appeal is by the assessee and the second by the department.
2. The assessee is a company registered under the Indian Companies Act representing manufacturers and exporters of cotton cloth and yarn.
Clause 3 of the Memorandum of Association details the objects 'for which the Company is established and which shall extend to every country in the world'. Sub-clause (1) of Clause 3 which is as under: (1) to promote, support, protect, maintain and increase the export of cloth and yarn as defined in the Cotton Textiles Fund Ordinance (Ordinance XXXIV of 1944) viz., cloth and yarn of any description manufactured either wholly from cotton or partly from cotton and partly from any other substance and containing not less than 10 per cent of cotton by weight as also the export of any articles made out of cloth and yarn, either wholly or partially, from textile fibres, whether natural or artificial, including articles such as tents and tent material, cotton apparel, cotton tape, imitation leather cloth, stockinette cloth, hosiery of all kinds, readymade garments of all sorts, whether made out of knitted fabrics or not, bindings, ribbon, cotton waste, strings, ropes and all types and varieties of cotton manufactures and to carry on such activities by such methods as may be necessary or expedient and without prejudice to the generality of the above by ...
and the subsequent sub-clauses explain the scan of the objects. The income-tax authorities accepted the object of the council as a charitable purpose entitled to the exemption under Sections 11 to 13 of the Income-tax Act, 1961 ('the Act'), in the light of the Supreme Court decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association  121 ITR 1.
3. The assessee furnished a notice under Section 11(2) of the Act on 29-6-1978 along with a resolution in Form No. 10 seeking accumulation of its surplus fund to the extent of Rs. 50 lakhs till the period ending 31-3-1980 Council apparently for the purpose of carrying out the primary purpose of the viz., promotion of exports. The ITO held that the purpose for which the income was sought to be accumulated was not a specific purpose as required under Section 11(2), but was merely repetition of its objects for which the assessee has to spend 75 per cent of its income during the year itself. According to him, it was, therefore, only a postponement of its application beyond one year. He, therefore, did not permit the income to be accumulated as per notice under Section 11(2). He, however, held that the assessee complied with the provisions of Section 11(2)(b). On appeal, the Commissioner (Appeals) confirmed the order of the ITO on this point. According to the Commissioner (Appeals), the accumulation was to be allowed under Section 11(2) for specific purposes and in the present case the assessee had merely repeated its objects viz., promotion of exports, as a specific object for which it wanted to accumulate the surplus amount.
According to the Commissioner (Appeals), the assessee was merely postponing the application of the income beyond one year and the purpose for which the income was to be accumulated was nebulous, vague and unspecific.
4. The learned Counsel for the assessee has pointed out that the company being incorporated in 1954 for encouraging the export of cotton textiles, etc., has been held by the ITO to be exempt under the provisions of Section 11 read with Section 2(15) of the Act. For the assessment years 1967-68, 1968-69, 1969-70 and thereafter, for the assessment years 1972-73 1973-74, 1981-82 and 1982-83 the assessee had a deficit in its income and expenditure accounts. For the assessment years 1970-71, 1971-72, 1976-77 and 1979-80 there was a surplus income.
For the assessment years 1974-75 and 1975-76 there was nil income. For the assessment year 1977-78, there is a surplus of Rs. 23,46,455.
According to the learned Counsel, this view of the fortunes of the assessee-company from year to year indicated an uncertain position of its finances from year to year with the result that devoted as the company was to a high national purpose like export promotion which has been accepted as charitable, the company could not spend adequate amounts on charities every year. It was on account of this that the company was constrained to accumulate the income of some of the years for fulfilling its purpose. For the assessment year 1977-78, where, there was a surplus of Rs. 23,46,455 the trustees gave notice for accumulation of the surplus on 30-6-1977 and complied with the provisions of Section 11(2)(b). This was noticed and regarded as proper compliance with the law by the ITO who allowed the accumulation. The position for subsequent year was the same.
5. Apart from the above, it is pointed out that the object clauses contained a clear distribution between the purposes of the trust, i.e., its objects and the ways and methods of fulfilling such purposes. The purpose refers to the charitable purpose, which has been clearly identified and accepted as eligible for exemption by the department.
The modes or the ways and means of fulfilling the purpose need not in fact be set out by the assessee but have to be followed in fulfilling the purpose. The learned Counsel referred, in this connection, to certain portions of the report of the council for the years 1977-78, particularly at pages 18 to 27, which detailed the activities undertaken by the assessee in fulfilment of its charitable purpose.
Certain agreements had to be entered into with different foreign countries such as USA, UK, Austria, Sweden, Norway, Finland, Australia, etc. Elaborate statistical and market study had to be made on the basis of statistics, etc., of the export possibilities and have to be complied. For the purposes of publicity and propaganda the assessee had to hold fairs, exhibitions, etc., or partake of them all of which required planning, etc. It is in this context that the assessee had accumulated the amounts of the surplus available during the year. The company had passed a resolution setting apart the amounts for accumulation up to 31-3-1988 covering the 10 year period permitted by Section 11(2). The company also had deposited the amounts in securities, financial institutions, etc., as required by law. According to the learned Counsel, the purpos'e for which the institution exists and which is identified in Section 11(2)(c) is the same as in Section 2(15). The purpose for which, therefore, the income is accumulated is the same for which the institution exists and is a charitable purpose.
It was not correct to say that the purposes are not specific. The same words have to be given the same meaning in all the contexts. Moreover, this is an exemption provision. It is settled law that exemption provisions should be given a liberal interpretation to make the provisions effective. It is also pointed out that even the rules do not alter the generality of the provisions of the Act. Reference is made to the decisions in the case of CIT v. Shri Krishen Chand Charitable Trust  98 ITR 387 (J & K) and Second ITO v. M.C.T. Trust  102 ITR 138 (Mad.).
6. For the department stress is laid on the orders of the authorities below. It is specifically pointed out that accumulation cannot be the same as expenditure on a charitable purpose and that was the reason why special provisions are incorporated in the Act for the purpose. In the present case the assessee has accumulated the money for the very same purposes for which he has to spend the money during the year to obtain the relief. Apart from this, the purpose of accumulation is only stated to be promoting exports which is a very vague and not a specific object. What should be done for the purpose is not clear. This is, according to the learned Counsel for the department, a very general term which does not convey what the accumulation was ultimately intended for.
7. Section 11 exempts income from property held for charitable or religious purposes to the extent to which the income is applied for such purposes or where it is accumulated or set apart for such accumulation to the extent of such accumulation where it is not in excess of 25 per cent of the income. In effect, therefore, up to 25 per cent of the income there is a clear exemption whereas to the balance the exemption would be available only if it is 'accumulated'. Section 11(2) deals with the accumulation and is as under: 11. (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 subsection 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:-- Sub-section (3) of Section 11 refers to certain consequences for default in connection with Section 11(2). Rule 17 provides that a notice for accumulation of income by charitable and religious trust is to be given to the ITO in Form No. 10. Paragraph 1 of the above-mentioned Form is as under: I, . . ., on behalf of . . . (name of the trust), hereby bring to your notice that it has been decided by a resolution passed by the trustees on... (date) (copy enclosed) that, out of the income of the trust for the previous year(s), relevant to the assessment year 19...--19... and subsequent . . . previous year(s), an amount of Rs, . . per cent of the income of the trust/such sum as is available at the end of the previous year(s) should be accumulated or set apart till the previous year(s) ending . . . in order to enable the trustees to accumulate sufficient funds for carrying out the following purposes of the trust:-- 8. A perusal of the above indicates that the exemption as to the 75 per cent of the income if accumulated or set apart shall not be included in the total income if primarily two conditions are satisfied: (i) The purpose for accumulation is specified in a notice given to the ITO, and (ii) such notice should be 'in the prescribed manner'.
The stand of the learned Counsel for the assessee in the present case for availing of the exemption is that Section 11(2) does not provide any other condition than issue of a notice to the ITO and the investment of the money in the prescribed securities, deposits, etc.
Impliedly the assessee's case is that the ITO has no power to enquire into the purpose for which the accumulation is made instead of spending the money on charitable purposes during the very year of earning it. In the present case the purpose of accumulation is stated to be the 'promotion of the export'. There is no dispute that promotion of export is a primordial object of the trust and the trust has been recognised for exemption under Section 11 read with Section 2(75) only in view of this object. The ITO has held that this is a repetition of the objects in the first place and secondly that it is vague.
9. In our view the exact obligation of the assessee under the provisions of Section 11(2) has to be gathered from the section itself, the rules and the forms made thereunder. More important than that is that the sub-section would not be regarded as redundant or serving no purpose. The provisions of Section 11(1) grant exemption to the income earned by a person from property held under trust for charitable or religious purposes (except to the extent of 25 per cent of such income) only if that income is spent actually on those charitable purposes.
Each year being for assessment purposes, a separate period, normally the income of any year should be spent during that year itself unless of course a case could be made out for outstanding liabilities towards charity of the earlier years being met with current year's income. It is evident that the primary purpose of Section 11(1) restricting the exemption to the incomes spent on charity, is to prevent moneys earned being entitled to the exemption without the charity getting the benefit of such expenditure. That this is so, is clear also from the provisions of Sub-clause (3) of Section 11 which provides for the manner in which the amounts are to be treated after accumulation is made. It is against the above background that the provisions with regard to the accumulation have to be read and understood.
10. For the purposes of availing of the exemption different criteria have to be applied with regard to the 25 per cent of the income and the balance of 75 per cent of the income. The former part without being utilised for the object of the trust would not attract liability to tax. As regards the latter part, it would primafacie be taxable unless it is spent on charitable purposes during the previous year or is accumulated up to a period of 10 years to be utilised for charitable purposes thereafter. During the interim period these amounts should remain invested in the particular manner specified in the section.
These two are distinct and alternative conditions. There is no reason, therefore, for regarding these two conditions as similar or much less the same. In other words the section prescribes the immediate spending of the amounts on charitable purposes during the previous year as a clear alternative to the accumulation of the same up to 10 years with the obligation to spend it on the same charitable purposes subsequently. If these two criteria are distinct and since the section makes specific provision separately for this, we have to regard it as distinct; the same criteria of application for charitable purposes should not apply to both. In other words, it is not proper to understand the two conditions as referring to the mere expenditure of the amounts on the same charitable purposes, one during the previous year and the other during the 10 years thereafter. If that were not to be so understood instead of going through the elaborate provisions comprised in Sub-sections (1), (2) and (3) of Section 11, the Legislature could have provided in a single section or even a sub-section that the exemption is available if the entire amount is spent on charities during the previous year and the succeeding 10 previous years. Perhaps a dichotomy as to 25 per cent and 75 per cent for the purpose could also be maintained.
The fact that instead of providing in one sub-section this mode of spending the income of the trust, the section has provided 3 sub-sections with elaborate provisions of investment, etc., indicates that this was not a primary purpose of the legislation. In order to give effect to the provisions of Sub-section (2) of Section 11, therefore, we have to find out the purpose and the scope of the requirements of the sub-section.
11. Inherent in the argument of the learned Counsel for the assessee is the point that when once an application is made to the ITO as required by Section 11(2)(a) and money is invested as required by Section 11(2)(b), the exemption automatically applies. In other words, the ITO has neither the power nor the discretion to accept or reject the application in order to go into the merits of the accumulation itself.
When the Legislature goes through an elaborate procedure covered by several sub-sections of the Act, it certainly must have done it tor some purpose. Merely filing with the ITO a notice about accumulation with no authority for the officer to do anything about the application such as accepting or rejecting it, would be a futile exercise. Added to this is the prescription of Rule 17, a prescription of a form, Form No.10, etc., all of which show that the Legislature did expect the ITO to go through the notice wherein certain details are furnished and make some decision. What we want to emphasise is that in view of the elaborate procedure laid down in Section 11(2) and (3) read with rules and the Form, it would be illogical to conclude that the ITO has no power to reject or accept the form and that when the Form is filed by an assessee it has to get automatically accepted by the ITO. We, therefore, have to hold that the purpose of filing the notice in the prescribed form is not merely to intimate the ITO about the intention to accumulate the funds and also to indicate that they have been invested in particular securities, etc., but also to weigh his decision, based on a discretion as to the acceptability or otherwise of the accumulation. Even though, therefore, the section does not provide specifically that the ITO after receiving the notice, looking into it, etc., should decided upon the matter either accepting or rejecting the proposal to accumulate after which only the accumulation will become effective, it must be regarded as implied therein. We have on the history of the legislation the purpose for which the provision is enacted, etc., to come to the conclusion that the ITO must consider the form and accept or reject it. Only after that does any accumulation made by the assessee become eligible for the exemption.
12. There are decisions to the effect in connection with Section 11(2) that the time-limit provided for furnishing the notice or making the investment is not authorised by the section, the rules being ultra vires to that extent; also that a small deficiency in the quantum of investment or delay in investment does not take away the accumulation, etc.
13. In M.C.T. Trust (supra), the Madras High Court held that Section 11 does not prescribe any time-limit for the investment of the accumulations of a charitable trust in Government securities.
Therefore, paragraph 2 of Form No. 10 issued in pursuance of Rule 17, which has prescribed a time-limit of 4 months for making such investment, is invalid. The Madras High Court also struck down paragraph 4 of the said Form as ultra vires as the prayer contained therein is conditional on the assessee complying with the time-limit prescribed in paragraph 2. In CIT v. Trustee of H.E.H. The Nizam's Supplemental Religious Endowment Trust  127 ITR 378, their Lordships of the Andhra Pradesh High Court held that as at the relevant time for the assessment year 1966-67, the rules did not stipulate any time-limit for the purpose of service of a notice under Section 11(2)(b), the notice delivered to the ITO by the Secretary of the trust in that case was not hit by any time factor. In the same case their Lordships impliedly affirmed the requirement that the full available amount should be invested in securities. The same was the decision in Shri Krishen Chand Charitable Trust's case (supra), where their Lordships of J & K High Court held that the full accumulated income can be invested in the prescribed securities at any time before the assessment is made because in the statute itself there is no prescribed time-limit within which it should be made.
14. Rule 17 and Form No. 10 are prescribed under Section 11(2) and there is no dispute that the notice has to be given to the ITO in the prescribed manner. Paragraph 1 of Form No. 10 specifies that the amounts are accumulated: ... in order to enable the trustees to accumulate sufficient funds for carrying out the following purposes of the trust:-- This form itself requires the assessee to indicate the purposes which necessitate the accumulation of sufficient funds. There is nothing in this portion of Form No. 10 which could be regarded as repugnant to the provisions of the main section or ultra vires of the same for any reason as was held by the Madras and the Andhra Pradesh High Courts in respect of a limitation superimposed. In M.C.T. Trust case (supra) their Lordships pointed out that: ... the reasonableness of the rules can, in appropriate cases, be considered by the court. It is true that the reasonableness is not to be determined on any subjective standard, but the rule, to be valid, has to withstand any objective test. In the present case, there must be some basis or reason for fixing this four month limit, if that limit is to be accepted as valid. No such basis or reason is available.
Dealing with the several instances where time-limits are prescribed under the Act, their Lordships observed: . . . the legislature does not part with the power to prescribe limitations, which it jealously retains to itself unless it intends to do so in clear and unambiguous terms or by necessary intendment.
. .. the whole idea behind Section 11 is to confer the exemption, subject to certain safeguards in the interests of proper application of the trust monies and appropriate investment of the trust fund ...
15. The above clearly indicates that the entire scheme of Sub-sections (2) and (3) of Section 11 has been devised with the specific purpose to effectuate the expenditure of the trust income on the purposes of the trust held to be a charitable or religious one. While provision is made to meet contingencies where the entire income cannot be spent during the previous year by allowing a non-expenditure limit of 25 per cent, adequate safeguards had to be made for the balance so as not to be frittered away. There are also circumstances when the income of the year--even regarding the commercially available income for this purpose--would not be sufficient for fulfilling the purpose of a trust.
For instance, if the object of the trust is running a hospital or a school and this necessitates the construction, of a building, requiring the investment of not merely the income of one year of the trust but of several years, this object should not be frustrated by prescribing the expenditure of the entire income of the trust during the previous year.
Provision is, therefore, made for accumulation of the income for as long a period as 10 years so that the accumulated amount will be available for this major investment purpose of the object of the trust.
Even here safeguards against frittering away the funds are provided by means of limiting the period of accumulation to 10 years and also by prescribing investment of the accumulated surplus in Government securities, fixed deposits of bank, etc. Where an assessee can fulfil the purpose of the trust in one year, there is no logic or justification for permitting that amount to be accumulated and carried over for a subsequent year. For instance, if there is a trust for feeding the poor and the trust income instead of being used for feeding the poor during the previous year is accumulated and used for feeding them in a subsequent year, that would be a remarkable case of driving the hungry to death and trying to feed them either at the time of or immediately after the death. Certainly, this could not have been the idea of feeding the poor conceived in Section 11 read with Section 2(75) and the scheme for accumulation. If the object of the trust is to feed the poor and it can be done with the income of the previous year during the year, in our view, subject to the free limit of 25 per cent of the income, it should be done in the previous year. If on the contrary feeding the poor necessitates construction of a building for the purpose and the income of the previous year is not sufficient for the purpose, certainly accumulation could be made subject to the rules and the object achieved through the same. We have, therefore, no hesitation in holding that the purpose of serving the notice on the ITO in the prescribed manner is not merely to intimate him about what the assessee intends to do but also to obtain from him a permission and authority for accumulating amounts and using it for the specified objects in the subsequent years. It is also open to the ITO, in this view of the matter, to look to the purpose for which the accumulation is ostensibly made and if he comes to the conclusion that the accumulation is unreasonable he could reject the proposal for accumulation and bring the income to tax.
16. Applying the above principles to the facts of the present case, the object of the trust as has been laid down in Clause 3 of the Memorandum of Association primarily is to promote exports. Whatever the assessee can do for the purposes of promoting exports during the previous year with the income or surplus of the previous year should, therefore, subject to the free limit of 25 per cent be done during the previous year alone. It is open to the assessee to seek accumulation if he has some clear project or proposal which requires the use of more than one year's income. In such a case he should clearly specify in Form No. 10 what such proposal is, how it requires the accumulation of the income of more than one year, etc., so that the ITO can go through the proposal and be satisfied that the accumulation sought for is not a mere excuse for any other form of dealing with the money. In the present case, the reason given for accumulation is the same as export promotion. The learned Counsel for the assessee has taken objection to the characterisation of this purpose by the authorities below as vague and ambiguous. He has not made clear before us how the phrase 'promotion of exports' lays down any clear project, proposal or even purpose. What are the methods for such promotion of exports, how it is to be achieved and how that achievement is to be advanced by the accumulation sought for are not clear before us. Apparently, the assessee has no clear and well marked out ideas of using the accumulated money for the purpose of promoting exports. If after the money is accumulated, at some future time, the assessee were to dig out a project or purpose for the utilisation of the accumulated funds, even if that were to help promotion of exports, in our opinion, it would not satisfy the provisions of Section 11(2) read with the rule and forms.
To this extent the characterisation of the purpose as vague and non-specific has to be accepted as correct. If, for instance, the assessee were to point out certain specific lines of activity requiring the investment of Rs. 50 lakhs set apart for accumulation and the manner in which that amount is to be spent on the project, that could be called a specific purpose. No such purpose has been expounded before the ITO or even before us. We, therefore, hold that the assessee is not entitled to the benefits of accumulation in the present case.
17. It was pointed out before us that an exemption provision should be liberally construed. We agree with this proposition, but Section 11(2) while liberalising the exemption provisions has in-built in the same certain procedural safeguards to thwart the misuse of the funds. With no time-limit for investment, with no time-limit even for issue of a notice, if the income of the assessee were to be exempt for the year on the ground of a charitable purpose and the assessee were free to deal with it as it likes, it would be a poor consolation for the revenue to be told that it has to interpret certain exemption provisions liberally. A person who seeks a relief on the contrary should be more vigilant in fulfilling the conditions laid down and satisfy the authorities about his eligibility to claim the relief. The assessee's appeal on this point is dismissed.
18. There are two other grounds relating to the issue of a notice under Section 271(1)(a) and notice under Section 274 of the Act. The claim is that the Commissioner ought to have held that there was no case for issuing the notice. Issuing a show cause notice prior to the levy of penalty is a favour done to the assessee to meet the requisites of natural justice before levying a penalty. This cannot give rise to any grievance.
If and when a penalty is levied, it is certainly open to the assessee to challenge the same according to law.
19. In the department's appeal two points are raised, one relating to the foreign expenses totalling up to Rs. 9,71,597 and the allowance of depreciation on the assets of the trust.
20. The assessee incurred an expenditure of Rs. 9,71,597 on account of establishment expenses, rent, travelling, electricity, stationery, etc., abroad and claimed this as allowable expenditure being relevant for the fulfilment of the objects of the council. The ITO treating this as an application of the income did not allow the expenditure. On appeal, the Commissioner held that the trust has incurred the expenditure for administration and management with a view to achieving its objects, viz., promotion of export of Indian textiles, etc. The expenses themselves were not, according to the Commissioner, objects of charity. The assessee's claim in this regard was accepted.
21. Before us the learned Counsel for the department stressed the point made out in the order of the ITO. Section 11 is categorical in excluding from exemption moneys spent on charitable purposes abroad.
Since the business of the assessee is the promotion of export, any money incurred for this abroad could only be regarded as a fulfilment of the objects of the trust, naturally the income of the trust should be regarded as spent abroad to the above extent, thus disentitling the assessee to the claim.
22. Having heard the learned Counsel for the assessee, we see no reason to interfere with the decision of the Commissioner on this point. The object of the assessee-trust is promotion of exports. Certainly, it is not the maintenance of an office abroad which is considered even by the department as an object of the trust. Promotion of exports naturally involves activities abroad. For this purpose maintenance of an office, incurring of incidental expenses and also other expenses on travelling, etc., has to be done sometimes abroad. It is a natural corollary and incident to the fulfilment of the Indian charitable object in the present case. Maintenance of the office itself abroad is certainly not an object of the assessee-trust. If the fulfilment of the charitable object, therefore, requires activities and expenditure abroad, this cannot be regarded as a separate expenditure of the income of the assessee for charitable or other purposes abroad. In fact these expenditures should be regarded as requiring to be deducted even before the income of the assessee is to by computed. Section 11 refers to the expenditure of the income of the assessee on charitable purposes in India. The disputed amount in the present case would get deducted even before arriving at the 'income' of the assessee. Apart from what the Commissioner mentioned, in our view, one cannot even hold that there has been factually an expenditure of the assessee's income abroad. The Commissioner's order on this point is upheld.23. The other point relates to the allowance of depreciation in respect of the assets of the trust. The ITO disallowed the same, but the Commissioner allowed it on the ground that as the income of the trust is to be computed in the commercial sense depreciation has to be allowed in accordance with the Act. Apart from the merits of the case, this point is covered by the decision of the Tribunal in IT Appeal Nos.
2440 to 2444 of 1976 dated 17-9-1977 and IT Appeal No. 1387 of 1977 dated 17-5-1978. Following these decisions the Commissioner's order is upheld on this point. The departmental appeal is dismissed.