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Commissioner of Income-tax Vs. Estate of V.L. Ethiraj (by Official Trustee) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 373 of 1975 (Reference No. 270 of 1975)
Judge
Reported in(1980)16CTR(Mad)165; [1982]136ITR12(Mad)
ActsIncome Tax Act, 1961 - Sections 11, 11(1), 11(2) and 14
AppellantCommissioner of Income-tax
RespondentEstate of V.L. Ethiraj (by Official Trustee)
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateS.V. Subramaniam, Adv. for Subbaraya Aiyar, ;Padmanabhan and ;Ramamani, Advs.
Excerpt:
.....scholarship to students - whether for purpose of computing accumulation in excess of 25% of total income as laid down in section 11 (1) (a) total income should be computed under appropriate head of income - under section 11 (1) (a) income derived from property held under trust wholly for charitable and religious purpose to extent to which such income is applied for such purpose is excluded - held, computation of income under different heads with relevance to statutory deduction for purpose of determining income under section 11 (1) not required. - - consequently, following the judgment of this court referred to above as well as the language of section 11(l)(a), we hold that the tribunal is in error in giving the directions which it did, and, accordingly, answer the first..........of this court:' 1. whether, for the purpose of computing the accumulation in excess of 25% of the total income as laid down in section 11(l)(a) of the income-tax act; 1961, the total income should be computed under the appropriate heads of income of the said act ? 2. whether, for the purpose of computing the accumulations in excess of 25% of the total income, outgoings by way of expenditure other than statutory deductions should also be considered having due regard to their nature ?' 2. for the purpose of appreciating these two questions, it is necessary to set out the relevant facts. the assessee is the estate of shri v. l. ethiraj, represented by the official trustee, high court, madras. shri v. l. ethiraj executed a will on april 21, 1952, by which he created a trust of all his.....
Judgment:

M.M. Ismail, C.J.

1. In this reference the Income-tax Appellate Tribunal, Madras Bench 'B', has referred the following two questions for the opinion of this court:

' 1. Whether, for the purpose of computing the accumulation in excess of 25% of the total income as laid down in Section 11(l)(a) of the Income-tax Act; 1961, the total income should be computed under the appropriate heads of income of the said Act ?

2. Whether, for the purpose of computing the accumulations in excess of 25% of the total income, outgoings by way of expenditure other than statutory deductions should also be considered having due regard to their nature ?'

2. For the purpose of appreciating these two questions, it is necessary to set out the relevant facts. The assessee is the estate of Shri V. L. Ethiraj, represented by the Official Trustee, High Court, Madras. Shri V. L. Ethiraj executed a will on April 21, 1952, by which he created a trust of all his properties, movable and immovable, appointing the Official Trustee, High Court, Madras, as the sole executor and trustee. Certain annual payments to some of his relations, including his wife, were directed to be made out of the income of the trust; certain religious charities were also directed to be performed; and the balance of the income was to be spent in awarding scholarships to students studying in the Ethiraj College for Women for which he endowed a large sum money, while alive. Before the Tribunal, there was no dispute that the provisions of Section 11 of the I.T. Act, 1961, were applicable. However, according to the ITO, in the previous year relevant to the assessment year, namely, 1968-69, the entire income had not been applied for charitable purposes and the accumulation exceeded 25% and, therefore, he brought the said excess to tax. Aggrieved by such assessment, the assessee preferred an appeal to the AAC. The AAC held that Rs. 3,247, being the tax deducted from out of disbursements made to Mrs. V. L. Ethiraj, and Rs. 15,260, being the estate duty paid by the Official Trustee, should be considered as outgoings in arriving at the income of the trust. Still aggrieved, the assessee preferred an appeal to the I.T. Appellate Tribunal. The ground taken for the assessment year 1968-69 before the Tribunal was that the AAC should have directed the ITO to allow the income-tax paid during that year as an outgoing in computing the income under Section 11(2). That appeared to be the only point urged before the Tribunal with regard to the said assessment year 1968-69. The Tribunal pointed out that with regard to that assessment year, the assessee's learned counsel contended that Rs. 526 paid as income-tax on July 3, 1967, and Rs. 1,88,267 paid on March 27, 1968, as income-tax should have been considered as outgoings and, if so considered, the entire income should have been wiped out and there was no question of bringing to tax any accumulation in excess of 25% mentioned in Section 11(1). The case for the assessee was that for the purpose of determining whether there was accumulation of income or not, the commercial surplus alone should be considered and, hence, the income-tax paid should have been excluded in computing such commercial surplus. As against this contention of the assessee the contention advanced on behalf of the revenue was that the income-tax can never be considered as an outgoing in computing the income, whatever may be the purpose of such computation, since income-tax in particular is attracted only after the 'net income' is determined, and, therefore, it cannot fall for consideration as a deduction from the gross incomings to determine whether there was accumulated income or not. The Tribunal by its order dated 11th November, 1974, allowed the appeal preferred by the assessee for statistical purposes.

3. It is necessary to extract what the Tribunal has observed in paras. 9 and 10 of its order for the purpose of appreciating the context in which the two questions have been referred to this court :

'9. It is seen from the assessment order that the Income-tax Officer has taken the entire gross incomings of Rs. 67,784 and has proceeded to arrive at the taxable income by deducting from such gross income the amounts spent on payment of legacies, performing annual ceremony of the testator, scholarships and charities. In all income-tax assessments the first stop necessarily is to determine the total income after determining separately the income under each of the distinct heads of income in the manner prescribed under the Act, i.e., by allowing from the gross receipts under each head of income deductions which the statute expressly permits or enjoins. After the total income according to the Act is determined in cases where Section 11 applies, as it had been held to apply in this case, it has to be determined whether there is any accumulation and if so, whether the accumulation exceeds the statutory limit. For this purpose, the outgoings which may have to be taken into consideration may not invariably fall to be restricted to the statutory deductions. The outgoings can cover other expenditure also depending upon the nature thereof, as also the particular source of funds from which the said expenditure has been met i.e., whether out of past profits or current income, etc.

In the present case, the total income has not been determined in the manner indicated by us. This should first be done. If the total income, computed in accordance with the Act, is above the taxable limit, the Income-tax Officer will proceed to determine, with reference to the gross receipts, having due regard to each individual claim of deduction of outgoing, whether there has been any accumulation and, if so, will determine the extent thereof and levy the tax, if any, thereafter, in accordance with law. We, accordingly, set aside the assessment for the assessment year 1968-69 and direct the Income-tax Officer to redo it in accordance with our above observations.'

4. From the above observations, it is clear that the Tribunal has not stated whether the claim of the assessee that the income-tax paid should be deducted from the income arrived at was accepted by it or not. On the other hand, it has proceeded to state that the income has to be determined on the basis of the separate heads of income being arrived at after allowing the relevant statutory deductions and, thereafter, finding out whether any other outgoings can be deducted depending upon the nature of the particular outgoing. It is these observations that have given rise to the above two questions.

5. The manner in which the income has to be computed for the purpose of Section 11 of the I.T. Act, 1961, has come up for consideration before this court in T.C. Nos. 643 and 644 of 1975 (CIT v. Rao Bahadur Calavala Cunnan Chelty Charities--since reported in : [1982]135ITR485(Mad) . The first question that had to be considered by this court in that case was :

'Whether, for the purpose of computing accumulation in excess of 25 per cent. as laid down under Section 11(l)(a) of the Income-tax Act, 1961, 'income' has to be taken to represent ' total income ' and had to be computed under the various heads as enumerated under the Income-tax Act ?'

6. With reference to that question, the Bench, after a discussion of the statutory provisions and certain other decisions, held as follows 135 ITR 495:

'The result is that the first question (the question extracted by us above) is answered as follows. The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by Section 14. Twenty-five per cent. thereof will have to be ascertained and if the assessee had accumulated more than 25%, then the consequences contemplated by Section 11 will follow.'

7. For coming to the above conclusion, the Bench referred to the decision of the Supreme Court in CIT v. Bipinchandra Maganlal and Co. Ltd. : [1961]41ITR290(SC) and stated (See p. 492 of 135 ITR):

'Applying the same reasoning, the expression 'income' has to be understood in the popular or general sense and not in the sense in which the income is arrived at for the purpose of assessment to tax by the application of some artificial provisions either giving or denying deduction. That income cannot be understood in the sense of what is arrived at for the purpose of income-tax would be clear if we pay some attention to Section 10. For instance, Section 10(1) exempts agricultural income. It is not necessary to find out what the agricultural income is. It is enough if the agricultural income as a category is excluded. There is no need or scope to arrive at the income in the manner contemplated by the Income-tax Act.'

8. As far as the present case is concerned, the language of Section 11(l)(a) makes it clear that the income derived from the property held under trust wholly for charitable and religious purposes, to the extent to which such income is applied to such purposes in India, is excluded. When once the income from the property as such is excluded, there is no question of computing the income from the property by applying the provisions of Section 14 of the Act. Therefore, it is clear that the Tribunal has committed an error in holding that as a first step the ITO has to determine the different heads of income, with reference to the statutory deductions provided for in the relevant sections and, thereafter, should arrive at the total income. Consequently, following the judgment of this court referred to above as well as the language of Section 11(l)(a), we hold that the Tribunal is in error in giving the directions which it did, and, accordingly, answer the first question referred to the court in the negative.

9. As far as the second question is concerned, it contemplates, whether there can be any outgoing in addition to the deductions contemplated by the respective sections dealing with different heads of income Since we have held that there is no question of computing the income under the different heads with reference to the relevant statutory deduction fur the purpose of determining the income under Section 11(1), the question of allowing any other outgoing by way of expenditure in addition to the statutory deductions as contemplated by the second question does not arise and, therefore, we do not answer the second question.

10. The result is, the Tribunal will have, now, to dispose of the appeal afresh in the light of our decision as well as the decision of this court referred to already, namely, T.C. Nos. 643 and 644 of 1975, decided on August 9, 1979 (Commissioner of Income-tax v. Rao Bahadur Calavala Cunnan Chetty Chanties--since reported in : [1982]135ITR485(Mad) and it will expressly go into the claim of the assessee that the income-tax paid during the year in question should be allowed as a deduction for the purpose of determining the income under Section 11(l)(a) of the Act and render a finding thereon. There will be no order as to costs.


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