1. The assessee in this appeal, Indian National Theatre Trust, New Delhi, is aggrieved by the order passed by the Commissioner (Appeals) declining to grant exemption to its income under Section 11 of the Income-tax Act, 1961 ('the Act').
2. The assessee is a trust created on 15-2-1958 by the Indian National Theatre, a society registered under the Societies Registration Act, 1860, through Smt. Sheila Bharat Ram and Smt. Vidya Shah. The objects of the trust are : (1) to promote artistic and cultural expression through drama, music, conferences and cognate activities, (2) to purchase or acquire on lease, any real or personal or movable or immovable property and other assets, (3) to undertake all activities that may be conducive to the aforesaid objects and purposes. The trustees of the trust were late Shri T.T. Krishnamachari, Shri Bharat Ram, Shri G.L. Bansal, Smt. Sucheta Kripalani and Shri K.K. Birla. The preamble of the trust deed provided the circumstances under which this trust came to be created as an adjunct of the Indian National Theatre and how a plot of land was allotted to it by the Land and Development Officer, New Delhi, and how it was desired to utilise that land and other assets for the furtherance of the objects of the trust enumerated above. There are several other clauses in the trust deed, with which we are not directly concerned for our present purpose. This trust applied to the Commissioner for registration and we are told that registration as required under Section 12A of the Act was granted by the Commissioner vide Registration No. DLI/C/T-422.
3. For the year under appeal, as in the past, this trust was recognised as a charitable institution under Section 11 and there was no dispute over that aspect except insofar as the present assessment year is concerned. Although the income of the trust was being exempted from tax but for this year the exemption is sought: to be denied primarily for three reasons. One was that though the trust applied for accumulation of income, it did not accumulate the income in the manner required by the statute. We shall come to the details of this aspect a little later. Chiefly, the reason was that the deposit of Rs. 1 lakh made with the Grindlays Bank on 17-5-1976 was sought by the assessee to be treated as part of the accumulation of the income of the year in satisfaction of the requirement of Section 11(2) but the department denied it for the reason that the deposit must be made out of the income of the present year and a deposit made out of the income of an earlier year could not be accounted for as the deposit out of the income of the present year. In other words, the equation sought for by the assessee was not acceptable to the department. Secondly, a sum of Rs. 59,000 was lent to another trust called Shri Ram Centre for Art and Culture and this sum was claimed as application of income during the year but the department did not agree as, according to it, the said Shri Ram Centre for Art and Culture could not be considered to be a trust established having similar objects as that of the assessee-trust.
Thirdly, the assessee applied for accumulation of income, which, according to the department, was vague and unspecific and could not be considered as exercise of option for accumulation of income within the meaning of Section 11(2). For these reasons, the ITO rejected the assessee's contention and brought the income to tax in the following manner : From the total income of Rs. 10,66,004 the ITO considered only a sum of Rs. 2,87,744 as income applied for the objects of the trust and from the balance, of Rs. 7,78,260, he considered Rs. 2,80,000 as accumulation of income under Section 11(2) and of the balance of Rs. 4,98,260 he allowed the statutory limit of 25 per cent for accumulation of income and levied tax on the balance income, which came to Rs. 2,31,760. If the deposit of Rs. 1 lakh made with the Grindlays Bank is treated as accumulation of income, then the accumulation of income would go to Rs. 3,80,000. If the loan of Rs. 50,000 given to Shri Ram Centre for Art and Culture is regarded as application of income, the income applied would increase to Rs. 3,37,744. As a consequence of this, the income available for accumulation would be only Rs. 3,48,260 and if the statutory limit of accumulation for income of 25 per cent is deducted, there will only be income of Rs. 81,759 which should be regarded as the income in respect of which option was exercised to accumulate. If so worked out, there would not be any income for tax.
Whether this is as per law in short the controversy. What we have got now to decide in this appeal is, therefore, (a) whether the amount of Rs. 1 lakh deposited with Grindlays Bank in yester years could be regarded as income accumulated out of the current income, i.e., can it be regarded as accumulation out of current year's income, and (b) whether, the option has been properly exercised within the meaning of Section 11(2) or whether it was vague and whether the loan of Rs. 50,000 to Shri Ram Centre for Art and Culture is application of income or not. Same calculations have been given to us by the assessee's learned Counsel, Shri G.C. Sharma, on page 1 of the paper book and we have arrived at the same figure in the above manner but basically there are three questions that fall for our decision in this appeal.
4. We have already mentioned the views of the ITO on these questions although there was nothing specific in his order about the vagueness of the exercise of the option. The order of the ITO shows that he was concentrating more upon the investment in the Government securities and whether that would satisfy the requirement of Section 11(2) but the order of the Commissioner (Appeals) made this point specific.
5. When the matter went before the Commissioner (Appeals) on appeal, the same points were reiterated but in vain. The Commissioner (Appeals) was of the opinion that the deposit made with Grindlays Bank on 17-5-1976 is not available for being reckoned against the deposits to be invested in the year and, therefore, that deposit should be excluded. The reason that prevailed with the Commissioner (Appeals) in coming to this conclusion is that the requirement of Section 11(2)(b) is that the deposit must be made out of the income of the previous year for the purpose of being counted as accumulation and a deposit made in an earlier year out of earlier years' income could not be so reckoned.
For this purpose, he relied mainly upon the language of Section 11(2)(b). Once Rs. 1 lakh is excluded then the deposit made in the accounting year would come to Rs. 2,80,000 and that fell short of the requirement. As regards the loan to Shri Ram Centre for Art and Culture, the Commissioner (Appeals) was not prepared to accept it as application of income. According to him, the sole activity of Shri Ram Centre for Art and Culture was not merely to promote artistic expression through drama, music and conferences but also to maintain reading rooms and libraries, which activity could not give rise to artistic and cultural expression or promotion. Though the maintenance of reading rooms and libraries could lead to better education but that was not the purpose for which the trust was created. Perceiving this as dissimilarity in the objects, the Commissioner (Appeals) came to the conclusion that this advance of loan could not be said to be application of income for the purpose of the assessee-trust nor did he see any clause in the trust deed of the assessee empowering the assessee-trust to have its objects attained through another trust. He, therefore, justified the action of the ITO insofar as this point is concerned. Then came the discussion regarding the clarity or lack of it of the option exercised by the assessee. By quoting the letter written by the assessee-trust to the ITO, he interpreted it as saying that neither in law nor in effect that letter amounted to an exercise of option. According to him, the chief deficiency in that letter was non-disclosure of any conscious application of mind by the assessee-trust to accumulate any specific sum for any specific purpose nor does it give any justification for the shortfall in the expenditure during the accounting year. Because of this, which he saw as lacuna, he described the option as vague and indefinite and in no way creating a binding force. He, therefore, held that the requirements of Explanation 2 to Sub-section (1) of Section 11 were not satisfied.
6. Arguing for the assessee, Shri G.C. Sharma, the learned senior advocate submitted that none of the reasons shown by the department for rejecting the claim of the assessee are either valid or relevant.
Commenting upon about the deposit made with the Grindlays Bank of Rs. 1 lakh, he submitted that the letter of the law, according to the department, would have been satisfied if the assessee had withdrawn that money and again deposited. The department does not have any quarrel if this procedure is adopted and it would have readily agreed that the said deposit was made out of the current year's income. The same result is achieved by treating this deposit by earmarking it as deposit made out of the year's income, the legal requirement is not only satisfied in spirit but also in law and practice. If the assessee is forced to take a loan from the deposit and again deposit it, that would mean some loss of income to the assessee-trust. The trustees avoided this loss to the trust by treating that deposit as the deposit made out of the current year's income for the purpose of accumulation.
When the effect is same, merely because a particular procedure was not followed, could it be said, he asked, that the law was not satisfied so as to deny the exemption. Would it not be a hyper-technical view that the department is taking in the case of a trust which has nothing but the satisfaction of the requirement of law at its heart and no personal gain was derived by anyone whatsoever. This way Shri Sharma submitted that there was substantial compliance with law if not a strict compliance and that should not be held against the assessee. He then submitted that the loan of Rs. 50,000 to Shri Ram Centre for Art and Culture has been misappreciated in the sense that the objects of these two trusts were dissimilar. By pointing out to us the objects of these two trusts and making a comparative study, the learned senior advocate submitted that the objects of both the trusts are similar and both have the object of promoting drama, music and other cognate activities and nothing else. If a reading room is maintained for the benefit of the student, if a library is maintained for the benefit of the students or professors, it would only subserve the main object of the trust of promotion of dance, drama and music and its education by dissemination and it is unfortunate that the learned Commissioner (Appeals) has not seen this aspect in the proper perspective and in the proper light but counted maintenance of a library or a reading room as if it is a different object from the spread of education for dance, drama and music. This should not have been, therefore, made a reason to bring the income of the trust to tax. Finally, turning his attention to the option exercised and by taking us through the letter written by the assessee-trust to the ITO and also the provisions of Explanation 2 to Section 11(1) he submitted that there was nothing wrong in the wording of this letter. The option was so clear, so unambiguous and so definite that all it said was that so much of the income of the subsequent year as does not exceed the shortfall in application of income, would be deemed to be so applied, which, if carefully read, would only mean that all the income which does not exceed the shortfall in the application of income would be deemed to have been applied for the purpose of the trust. The option was couched in the language used in Section 11(1) and it made a pointed reference to Explanation 2 to Section 11(1) and there could be nothing wrong with it and even if it is read as vague, indefinite, since reference to Explanation 2 to Sub-section (1) of Section 11 was made, all the provisions of that Explanation must be read into this option which would then mean that the accumulation sought for is in order. The department is, therefore, not justified in not giving proper meaning to the words used in the letter exercising the option. Lastly, Shri Sharma submitted that since the remaining income is deemed to have been accumulated in respect of which a request was made to the ITO by the exercise of this option, if the deposit of Rs. 1 lakh made with the Grindlays Bank was not regarded as accumulation of income out of current year's income, then that amount should be added to the income accumulated and the whole of it should be deemed to have been accumulated for being used in future for the furtherance of the objects of the trust and consequently, there was nothing that could be said against the assessee and no portion of the income of the trust should have been brought to tax.
7. The learned departmental representative, Shri Kapila, while countering the arguments advanced on behalf of the assessee-trust, mainly relied upon the observations made by Chaturvedi and Pithisaria in Income-tax Law Vol. 2, third edn., at p. 2070 to emphasise the point that the deposit must be out of the current year's income chargeable to tax in the year under appeal and neither in spirit nor in contemplation the deposit was never meant to be made in the earlier years out of earlier years' income. The whole object of permitting an assassee to accumulate the income is to secure that the income of the trust is not frittered away otherwise than for the purpose of the trust at the same time ensuring that the amount so accumulated for the furtherance of the objects of the trust is made available for public purpose. That was why the requirement of deposit was enacted. If the funds required for accumulation are not required to be deposited in the manner provided for in the Act, those funds could be used for business purposes or for any other purpose of the author of the trust and in the ultimate analysis the funds may not be available for the purpose of the trust when the need arises. This object of the trust cannot be said to have been fulfilled if a deposit made in one year is to be regarded as deposit to be made for another year. When the whole object is to freeze the funds by compelling it to deposit in a particular manner thereby preventing its abuse, that object is frustrated if the deposit made of one year is regarded as deposit of another year. According to the departmental representative, this is the very negation of the purpose for which Sub-section (2) of Section 11 was enacted. He, therefore, submitted that deposit of Rs. 1 lakh made with the Grindlays Bank on 17-5-1976 could by no stretch of imagination be considered as deposit made out of the current year's income so as to be called as accumulation. Insofar as the loan to Shri Ram Centre for Art and Culture is concerned, he preferred to rely on the order of the Commissioner (Appeals). Dealing with the question of exercise of option, he submitted that the wording used was very confused and is capable of more than one meaning and any document giving rise to more than one meaning cannot but be said to be vague and it is implicit in it and when the Commissioner (Appeals) says that the option exercised was vague for want of clarity, he was not wrong at all as he was emphasising the obvious. He, therefore, justified that conclusion of the Commissioner (Appeals).
8. In our considered opinion, we will not say for the present that there is no merit in the department's argument insofar as the treatment to be accorded to the deposit made with the Grindlays Bank is considered but if it is considered a lacuna, that is more than made up by the exercise of the option by the assessee to accumulate income.
That particular circumstance should not, therefore, come in the way of the assessee in getting the benefit provided the option exercised is read as definite, clear and not giving rise to any ambiguity. We, therefore, think that it would be better to approach the problem posed before us from the point of view of option and then try to resolve the other points raised from that standpoint. Now we will have to notice Section 11 and Explanation 2. Section 11(1) provides that the income of a person shall not be included for the purpose of taxation if it is 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 25 per cent of the income from such property. An analysis of Section 11(1)(a) would show that for the exemption provided for therein to be available, (i) the income should be derived from property held under trust and (ii) the trust shall be wholly for a charitable or religious purpose. Now the Legislature envisaged possibilities of the whole of the income not being or capable of being spent and also simultaneously the need to accumulate income or set apart the income for application to such purposes. The Legislature then intervened and said that the exemption is available to the extent to which such income is applied to charitable or religious purposes in India and in the eventuality of the entire income not being spent to the extent of so much of the income as is accumulated or set apart for application to such purposes in India.
Then a question would arise, could the entire income be accumulated or set apart for application of income. If the entire income is allowed to be accumulated or set apart, then nothing would be spent for charitable or religious purposes and this possibility could be used for evasion of tax and may even frustrate the very purpose of the trust. It, therefore, imposed a restriction that the income so accumulated or set apart should not be in excess of 25 per cent of the income from such property, i.e., 75 per cent of the income must be spent.
Simultaneously, it also provided for the maximum period of accumulation which is 10 years. Since the rule that at least 75 per cent of the income of the previous year should be applied for the specified purposes during the previous year is likely to work hardship in practice (as it is conceivable that many trusts may not be able to do so for genuine reasons) relaxations were provided in Explanations 1 and 2. We are concerned here with Explanation 2 which provided for an option to be exercised by the trustees. This Explanation analyses the possible reasons as to why the assessee could not spend the income in the previous year of its accrual; maybe, the assessee did not receive a part of it during the previous year, there having been no cash realisation or may be for some other reason. In case where the assessee could not comply because of non-receipt of income, the Explanation provides that 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 sum would be regarded as application of income. This concession is available to the assessee only if he exercised the option given to him by the Explanation before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 of the Act whether fixed originally or on extension for furnishing the return of income.
The natural consequence of such option is that the said amount will be treated as having been applied for the specified purpose in the year of receipt and will not be again available to the assessee in respect of the assessment year relevant to the previous year in which it was actually applied for specified purposes. Thus, as per the provisions of Section 11(2), no portion of the income need be spent and the entire income may be kept unspent without losing the right to exclusion provided the trustees give notice in writing in the manner prescribed by the rules informing the ITO of their intention to set apart the income and to accumulate it for the particular charitable or religious purpose or purposes to spend on which the money is being accumulated or set apart and the period for which it is proposed to be accumulated, and the money so accumulated or set apart is invested in the Government security as defined in Clause (2) of Section 2 of the Act and trust is registered under Section 12A.9. In this case the assessee wrote to the ITO exercising option in the following manner in the notice given to the ITO in Form No. 10 prescribed under Rule 17 of the Income-tax Rules, 1962 ('the Rules') read with Section 11(2): I, Vinay Bharat Ram, on behalf of Indian National Theatre Trust (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 1980-1981 and subsequent previous year(s), an amount of Rs. 3,78,397 should be accumulated or set apart till the previous year(s) ending 30-9-1989 in order to enable the trustees to accumulate sufficient funds for carrying out the following purposes of the trust : (2) Acquisition of other movable/immovable assets for the objects of the trust.
2. Before the expiry of six months commencing from the end of each year, the amount so accumulated or set apart has been-- (i) invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944, or in any other security which may be approved by the Central Government in this behalf; (ii) deposited in any account with the Post Office Savings Bank (including) deposits made under the Post Office (Time Deposits) Rules, 1970 or a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in Section 51 of that Act) or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgaged bank or a co-operative land development bank ; or (iii) deposited in an account with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purposes of Clause (viii) of Sub-section (1) of Section 36.
3. Copies of the annual accounts of the trust along with details of investments (including deposits) and utilisation, if any, of the money so accumulated or set apart will be furnished to you before the expiry of six months commencing from the end of each relevant previous year or before the 30th day of June immediately following such previous year, whichever is later.
4. It is requested that in view of our complying with the conditions laid down in Section 11(2) of the Income-tax Act, 1961, the benefit of that section may be given in the assessments of the trust in respect of the income accumulated or set apart as mentioned above.
Now the question is whether the sum of Rs. 3,78,397 has been invested in the manner required under the Act. By a resolution passed on 29-12-1979 it was decided that the fixed deposit with the Grindlays Bank dated 17-5-1976 will be treated as deposit for the purpose of accumulation. It made a further deposit of Rs. 80,000 with the Grindlays Bank and another deposit of Rs. 2 lakhs with State Bank of Bikaner and Jaipur. As we have mentioned earlier, the controversy was whether the fixed deposit of Rs, 1 lakh made with the Grindlays Bank earlier could be treated as deposit for the purpose of accumulation.
The Commissioner (Appeals) also referred to a copy of the letter written by the assessee to the ITO exercising the option which was in the following terms; which he describes as vague and indefinite : Option is hereby exercised under the Explanation to Sub-section 1 of Section 11 of the Income-tax Act, 1961, in respect of so much of the income applied for the purposes of the foundation in the subsequent year immediately following the accounting year ended June 30, 1979 as does not exceed the shortfall in application of income during the aforesaid year and will be deemed to be so applied.
This clearly postulates application of income in the immediately following accounting year ending 30-6-1979 to make it for the shortfall as provided for in Explanation 2, sub-item (a). The purpose of this option is to treat the expenditure incurred in the next year as having come out of the unapplied surplus of the year under appeal. That is why it says that so much of the income applied for the purpose of the foundation in subsequent year, i.e., 1981-82, as does not exceed the shortfall in application of the income during that year, will be deemed to be the income applied for the purpose of the trust. There is nothing ambiguous or imprecise about this resolution exercising the option. In any case no indefiniteness or impreciseness is present of our mind, while reading the exercise of the option. This option is to be read in juxtaposition with the language of item (ii) of Explanation 2. That Explanation provided that if, in the previous year, the income applied to a charitable or religious purpose in India falls short of 75 per cent of the income derived during that year from property held under trust for the reason that whole or any part of the income has not been received during that year or for any other reason, then in the case of non-receipt of income so much of the income applied to such purposes in India during the next previous year, which does not exceed the said amount would be deemed to be the application of the income. The precise language used in the letter written to the ITO is the language used in the statute of the Act. If the language used in the Act is indefinite and imprecise, then it can be said that the language in the letter exercising the option is also imprecise and vague. We cannot attribute indefiniteness or impreciseness to the Legislature. Therefore, the Commissioner (Appeals), in our opinion, fell into error in reading into this letter vagueness and indefiniteness. All this means that the next year's income would be utilised to meet the shortfall of this year.
Since this Explanation provided that once the option is exercised the amount so applied in the next year would be deemed to be the income applied to such purposes, i.e., charitable or religious purposes during the previous year in which the income was derived, it means that the ITO has first of all to compute the shortfall and whatever shortfall that is computed would have to be made good in the next year. According to the assessee, the shortfall computed was as we have observed a short while ago, Rs. 81,509. The assessee by the exercise of this option postpones the spending of the income to next year for the purpose of being counted as application of income. Without going into the merits whether the fixed deposit of Rs. 1 lakh could be regarded as having accumulated out of the present year's income or not, if that amount of Rs. 1 lakh also is regarded as a shortfall, then the total amount of Rs. 1,81,509 should be deemed to be the amount in respect of which the option was exercised. Except for the fact that the option exercised was said to be vague and imprecise, it was not the contention of the revenue that any other requirement of law was not satisfied. There is another aspect we would like to touch upon here as it is very relevant, i.e., the loan advanced to Shri Ram Centre for Art and Culture. On a careful examination of the objects of the assessee-trust as well as Shri Ram Centre for Art and Culture, we found that the objects are similar if not in identical terms. Both of them stand and are established for the promotion of music, dance and drama and the spread of education relating to music, dance and drama. The dissemination of information relating to the promotion of these arts cannot but be achieved by providing for libraries and reading rooms. The provision of library or a reading room and stocking the library with books on these subjects and reading rooms with the magazines concerning these subjects cannot be said to be an object different from the main object. This is one of the means, if not more perfected and better means, to achieve the main objects. There was, thus, confusion in the mind of the Commissioner (Appeals) when he says that the objects were dissimilar.
The departmental representative, though he took great pains, could not point out the dissimilarities. Therefore, the loan advanced to Shri Ram Centre for Art and Culture cannot but be said to be application of income. Therefore, the reading rooms and libraries sought to be established by Shri Ram Centre for Art and Culture is only in furtherance of the objects of the trust. That amount of Rs. 50,000 also must be held to have been applied for the purposes of the trust. Once Rs. 50,000 is held to have been applied for the purposes of the trust, the amount available for which option would become relevant, as we have said earlier, is Rs. 81,509 plus Rs. 1 lakh, i.e., Rs. 1,81,509. The option exercised by the assessee should, therefore, be regarded to have been with reference to this sum of Rs. 1,81,509 even though it was said in the letter that it was only with regard to Rs. 81,509. The figure of Rs. 81,509 was mentioned in the letter because the trustees felt bonafide that the fixed deposit with the Grindlays Bank of Rs. 1 lakh could be regarded as investment made for the purpose of accumulation out of the present year's income. It was with that genuine reason that they excluded that sum. If not, then that is to be regarded as amount accumulated in respect of which the option is exercised. The point to be noted here is that there was no dispute between the assessee and the department and that there was no option exercised nor the requirements of law in regard to exercise of option were satisfied except that the wordings of the option were vague and imprecise for which reason the option was ignored. Since we found that the language used in the letter was the same as the language used in the Act, we cannot say that there is any impreciseness in the option. The purpose of the option is very clear that the shortfall would be met out of the income of the subsequent years. Therefore, the option exercised cannot be said to be improper nor the loan advanced to Shri Ram Centre for Art and Culture could be said to be non-application of income. Once these two reasons are taken away then there is nothing else in the way of the assessee from getting the exemption from tax that it claimed. In the view that we are taking, we first thought it unnecessary to express any definite opinion about the main question on which Shri Sharma argued, i.e., about the fixed deposit. But for the purpose of completeness, now we may refer to that argument also. Before we deal with the argument it is necessary to notice the relevant provision : 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 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 money so accumulated or set apart is invested or deposited in the forms or modes specified in Sub-section (5).
The important words which require our consideration are 'the money so accumulated or set apart'. The money so accumulated . referred to in Clause (b) relates to the income accumulated or set apart referred to in sub-item (ii) of Explanation 2 to Section 11(2). If 75 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 but is accumulated or set apart either in whole or in part for application to such purposes in India, such income so accumulated shall not be included in the total income. The requirements to be satisfied for availing this exemption are : (i) the ITO must be given notice in the prescribed manner, (ii) the purposes for which the income is being accumulated and the money so accumulated should be invested in the manner provided in the Act. What is that income that is to be invested or deposited Is it the income of the year or the surplus of the income of the earlier years As we have already quoted above, the money to be invested or deposited is the money so accumulated. Then we must see what is the money that could be accumulated and what are those circumstances under which the money could be so accumulated under the provisions of Section 11. If there are more than one kind of income, that should be accumulated, then all the moneys so accumulated by all those methods should be available for investment irrespective of the fact whether that money related to the income of the year under appeal or it came out of the income of the earlier years. For the purpose of accumulation, therefore, we have got to go again to Section 11(1)(a) and the Explanation. Section 11(1)(a), as we have noticed earlier, grants exemption not only to the income applied for charitable or religious purposes but also to income accumulated or set apart for application subject to certain limits. Now Explanation 1 says that for the purposes of Clauses (a) and (b), in computing the 25 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. There is no difficulty insofar as understanding this Explanation is concerned because it only speaks of what would constitute income for the purpose of computation of the statutory percentage. Then comes Explanation 2 which says if in the previous year the income applied to charitable or religious purposes falls short of 75 per cent of the income, either for the reason that whole or any part of the income has not been received during the year or for any other reason, then 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 would be deemed to be the income applied to charitable or religious purposes during the previous year in which the income was derived, i.e., if out of an income of Rs. 1 lakh, Rs. 40,000 was not received, the person in receipt of the income could obviously not apply 75 per cent of Rs. 1 lakh, i.e., Rs. 75,000, for religious or charitable purposes. In such a case if an amount not less than Rs. 60,000 has actually been applied to such purposes in the year in which the income of Rs. 1 lakh was derived, the deficiency could be made up in the year in which the balance of income is received or in the previous year next following. This benefit can be availed of by exercising the option in writing under item (ii) of the Explanation within the time allowed under Sub-section (1) or Sub-section (2) of Section 139. The income applied to such purposes would also be taken to have been applied for religious purposes. But if the option is not made during the extended period, then such income would be deemed to be the income of the later previous year. In other words, the Act took notice of the complication that it is not always possible to receive all the income in cash and that some income would be left unrealised in the shape of receivables. That was the reason why provision was made to deem the receivable income as the income of the previous year in which it was received or of the year following. The second alternative is for another reason also, the income could be received in the next year. Now take the case of an assessee who exercised the option to accumulate the income. How will that assessee invest that money which was not received though he exercised the option. He can invest the money as required by Section 11(2)(b) only when the money was received. So in the example we have given above, if out of Rs. 1 lakh only Rs. 40,000 was not received and if that Rs. 40,000 was received subsequently, the requirement of investment to satisfy the requirement of accumulation can be made only in the year in which that money was received. Otherwise the requirement of accumulation of income by compelling the assessee to invest it in a prescribed manner will become well-nigh impossible. The Legislature cannot be expected to require an assessee to do the impossible.
Impossibility of a performance in strictly applying the provisions of Section 11(2) insofar as they relate to investment in the manner prescribed under the Act should, therefore, suggest that the requirement of investment can be deemed to have been satisfied if the investment was made in the year in which the income was received, which means that the money required to be deposited need not necessarily relate to or be out of the income of the previous year but it can relate to the earlier years also. If we are right in our thinking that it can be out of earlier years' income also, then an investment made out of surplus income of earlier years can also be converted into or can be reckoned as investment required for the purpose of accumulation.
The whole argument of the department is based on the theory that the investment made must be made necessarily out of current year's income and once it is seen from the scheme of Section 11 that this is impossible of performance and execution and it permits investment out of earlier years' income, there is no reason why an investment made not out of accumulation of income of that year but out of surplus income remaining as such without being earmarked for accumulation of that year be not available. We are, therefore, of the opinion that the argument of the revenue that the investment of the income to satisfy the requirement of accumulation under Section 11(2)(b) must essentially come out of the current year's income, is difficult to accept. It is not the case of the revenue that the fixed deposit made with Grindlays Bank on 17-5-1976 is not an investment made by way of accumulation of income of that year. In other words, that amount was free and available for being invested. Therefore, there is nothing wrong in treating that deposit, which was lying as a deposit simpliciter without being earmarked as a deposit to be made for the purpose of the option exercised for this year. Therefore, the argument advanced on behalf of the assessee by the learned senior advocate, Shri G.C. Sharma, can be accepted though for a slightly different reason. In view of our conclusion as above, we do not think it necessary to discuss the example given by the learned senior advocate for the assessee though that example set us on thinking.
10. For these reasons, we hold the view taken by the authorities below does not seem proper and just. We accept the assessee's appeal and allow its claim. The ITO is directed to modify the assessment in accordance with the above conclusions.