1. We shall first deal with T.C. Nos. 461/75 and 231 and 232/76 before we go into the other group of references. In this group of references, the following' is the question that has been referred to this court at the instance of the Commissioner of Income-tax, Tamil Nadu-1, Madras, under Section 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in directing that in the fresh assessments to be made for each of the assessment years 1965-66, 1966-67 and 1967-68, capital expenditure on improving the property of the trust or maintaining such property, which would result in the income of the trust being maintained or increased would constitute application of amounts for charitable purposes within the meaning of Section 11 of the Income-tax Act, 1961 ?'
2. The assessee is a charitable trust founded about two centuries ago. Unfortunately, we do not have before us any idea of the objects for which the trust had been established. It appears to be governed by a scheme sanctioned by this, court in C.S. No. 222 of 1895 dated 5th October, 1896, as modified by the judgment dated December 13, 1929, in C.S. No. 528 of 1927, and the judgment dated December 7, 1932, in O.S.A. No. 34 of 1930. Even these judgments have not been annexed to the statement of the case, nor is there any discussion of what those judgments contain.
3. The assessments under consideration, for the assessment years 1965-66, 1966-67 and 1967-68, were made in the status of ' association of persons '. The assessee claimed full exemption under Section 11 with reference to the income earned by it. The ITO brought to tax Rs. 14,831, Rs. 36,522 and Rs. 30,664 as income assessable in the three years respectively. The assessee appealed to the AAC and contended that the trust should have been assessed under the head ' Business ', since the assets held by it were commercial assets which were being exploited. The asset exploited is the Kothwal Market in George Town, Madras. The maintenance of the market required a licence from the Corporation and the assets of the market comprised of buildings, shops, stalls, etc. The assessee had to maintain the roads in good condition. The receipts from the market were shown under the head ' Rents ', 'Casual collections ' ' Flower shed collection', ' Cycle stand ', ' Toll gate ', etc. The AAC held that the income derived was only by letting out the property and was rightly assessed under the head ' Other sources ', and not under the head ' Business'. The assessee claimed in the alternative that depreciation should have been allowed even with reference to the assessed income under the head ' Other sources '. Depreciation was disallowed for 1965-66, and for the other twoyears, the assessee had not made any claim therefor before the ITO. The AAC did not accept the contention of the assessee relating to the depreciation.
4. The assesses appealed to the Tribunal. It was contended before it that the computation of accumulation of profits and determination of the income for the purpose of taxation, were in any event wrong and that with reference to the assessment years 1966-67 and 1967-68, certain amounts spent for the improvement of the Kothwal Market, etc., should have been considered as income applied for the purpose of the trust. The Tribunal, after obtaining a report from the AAC, considered the matter, and ultimately came to the conclusion that the assessments required to be set aside and it, therefore, directed fresh assessments to be made in accordance with law. In the course of the order, the Tribunal observed:
' Expenditure on improving the property of the trust or maintaining it which would result in the income of the trust being maintained or even increased and which income in turn will be available for charitable purposes alone would, in our view, constitute application of amounts for charitable purposes. '
5. In the same paragraph, viz., para. 5 of its order, the Tribunal further pointed out :
'We would make it clear that except on the point that capital expenditure of the nature set out had also to be taken into consideration in determining the surplus, we have not given any final finding on any other aspect. '
6. The first of the two passages extracted from the order of the Tribunal thas given rise to the question referred to in T.C. Nos. 461/75 and 231 and 232/76. The second of the passages extracted above from the Tribunal's order has given rise to one of the questions referred to in the other batch.
7. The provision (Section 11 of the I.T. Act, 1961), as in force in the years under reference, to the extent relevant ran as follws :
'(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 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 such 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 per cent. of the income from the property or rupees ten thousand, whichever is higher.'
8. Sub-section (4) of Section 11 runs as follows:
'For the purposes of this section 'property held under trust' includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment ; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.....'
9. The above provision grants exemption from the levy of income-tax with respect to the income from property held for charitable or religious purposes. The section contemplates the computation of the income, in order to find out whether the income has been applied for charitable purposes to the required extent. It is, therefore, necessary for the ITO to find out first what the property held in trust is. He will then have to ascertain, the income derived from the said properties of the trust and after ascertaining the income, he will have to examine whether any part of the said income has been accumulated for application. Such accumulation could be only up to a maximum of 25 per cent. of the income from the property or Rs. 10,000, whichever is higher. This provision itself shows that to the extent of 75 per cent. of the income, there has to be an application of the income for charitable purposes. It is in the context of the application of the income that the Tribunal has observed in para. 5 of its order that the expenditure in improving the property of the trust or maintaining it resulting in the income of the trust being maintained or even increased would have to be taken as application for charitable purposes. In coming to this conclusion, the Tribunal has mixed up two things relevant under the section. The section requires consideration of the objects of the trust and also of the income derived from the property held in trust. . The income from the trust properties has to be applied on the objects of the trust. As far as the objects of the trust are concerned, the application of the amount can be for revenue or capital purposes.
10. This was the conclusion arrived at by the Gujarat High Court in Satya Vijay Patel Hindu Dharamshala Trust v. CIT : 86ITR683(Guj) . In that case, a trust was created and certain immovable properties were transferred to it to be administered as a Hindu Dharamshala. During the relevant years, the trustees spent the entire surplus income in the construction of a new dharamshala. The I.T. Dept. held that the expenditure of the income of the trust in the accounting years relevant to assessment years 1962-63 and 1963-64, on the construction of a new dharamshala, will not qualify for exemption in view of Section 11 of the I.T. Act, 1961. The matter was taken on reference to the Gujarat High Court, and it was held that even capital expenditure with reference to the objects of the trust would be application of the income for charitable purposes. The amount spent on the construction of a new dharamshala was, therefore, considered to be a proper application of the income in that particular case. This case itself demonstrates the distinction between the objects of the trust and the application of the income of the charitable trust. So long as the expenditure had to be incurred out of the income earned by the trust, even if such expenditure is for capital purposes on the objects of the trust, the income would be exempt. The Tribunal is, therefore, wrong in proceeding on the basis that improvement of a property held under trust would by itself come within the scope of the application of the income for charitable purposes.
11. However, facts will have to be investigated to find out whether the assessee had, in incurring the expenditure of a capital nature, promoted the objects of the trust by applying the income to those objects. The ITO will have to go into this question, as the assessment itself has been set aside by the Tribunal and restored to his file. The result is that the question referred to us would have to be answered as follows: So long as the income derived from the property held under trust had been expended on the objects of the trust, the income would be exempt under Section 11 of the Act. If this was not done, then the income would not be exempt. The matter will have to be considered only by the ITO in reassessment proceedings arising from the setting aside of the assessment by the Appellate Tribunal.
12. We shall now turn to T.C. Nos. 350 to 355 of 1977. The reference appears to have arisen out of the six reference applications made to the Tribunal, viz., R. A. Nos. 946 to 951 (Mds) of 1974-75. R. A. Nos. 946 to 948 (Mds) 1974-75, related to the question of penalty. R. A. Nos. 949 to 951 (Mds)/74-75 related to the manner in which the income of the trust would have to be computed. We shall, therefore, take up the tax case appropriate to R. A. Nos. 949 to 951 (Mds) of 1974-75. As a result of the direction made by this court in T.C.P. Nos. 92 to 94 and 96 to 98 of 1976 dated 5th. July, 1976 (CIT v. Kannikaparameswari Devasthanam, Madras) the reference has been made. The question referred in the T.C.s appropriate to R.A. Nos. 949 to 951 (Mds) of 1974-75 runs as follows :
' Whether, on the facts and ii the circumstances of the case, the Appellate. Tribunal was right in holding that for the purpose of computing accumulation in excess of 25%, as laid down under the provisions of section 11(1)(a) of the Income-tax Act; 1961, 'income' of the assessee-institution should be computed under the appropriate heads of income of the Income-tax Act, 1961 '
13. This question appears to have been referred only because of the view that the Tribunal has given some final finding as to the nature of the computation to be made in the assessment to be re-made by the ITO. We have already extracted the passage from the Tribunal's order, which shows that except on the point as to the capital expenditure aspect disposed of already, the Tribunal had not given any final finding on any other aspect. The question, therefore, does not arise out of the order of the Tribunal. The ITO will have in complying with the Tribunal's directions in the order under reference to go into the computation of the income in the light of the appropriate provisions of the Act applicable to the income derived from the property held under trust. We do not, therefore, think it proper to answer this question as it does not arise out of the Tribunal's order.
14. In the reference in pursuance of the direction against R.A. Nos. 946 to 948 (Mds) 74-75, the following question has, been referred :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty imposed under the provisions of Section 271(1)(a) of the Income-tax Act, 1961, in this case? '
15. The Tribunal, in cancelling the penalty, has observed in its order as follows:
'As the assessments in question have been set aside the penalties as imposed at present cannot stand. The orders imposing penalty are also accordingly set aside...'
16. In view of the fact that the assessments no longer hold the field, the penalty already levied under Section 271(1)(a) of the I.T. Act, 1961, cannot stand. Therefore, the Tribunal was right in setting aside the penalty imposed. However, whether any penalty can be levied in the course of the proceedings to be finalised as a result of the remand by the Tribunal will have to be considered by the ITO. Hence, we answer this question in the Affirmative and in favour of the assessee. This answer does not in any way prevent the ITO from considering the question of penalty in the assessment proceedings now before him, if he can do so under the law.
17. There will be no order as to costs.