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Commissioner of Income Tax-i Vs. G.R. Govindarajulu and Sons Charities - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation;Trusts and Societies
CourtChennai High Court
Decided On
Case NumberTax Case (Appeal) Nos. 540 and 561 of 2004
Judge
Reported in(2005)193CTR(Mad)323
ActsIncome Tax Act, 1961 - Sections 260A
AppellantCommissioner of Income Tax-i
RespondentG.R. Govindarajulu and Sons Charities
Advocates:K. Subramaniam, Adv.
DispositionAppeal dismissed
Cases ReferredCommissioner of Income Tax v. Trustees of Bhat Family Research Foundation
Excerpt:
direct taxation - assessment - sections 11 (1) (a) and 260a of income tax act, 1961 - assessee mentioned in his income statement that certain amount was set apart for charitable purposes in subsequent year - whether aforesaid mention amounts to exercising option under section 11 (1) (a) - under section 11 (1) income from trust to extent it was applied to charitable purpose not to be included in total income if the same not in excess of 25% of income - facts revealed amount set apart was less than 25% of income - assessee entitled to benefit of section 11(1) (a). - .....income. there was a change in this respect under the present act 1961. under the present act, any income accumulated in excess of 25% or rs.10,000 whichever is higher, is taxable under section 11(1)(a) of the act, unless the special conditions regarding accumulation as laid down in section 11(2) are complied with. it is clear, therefore, that if the entire income received by a trust is spent for charitable purposes in india, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25% or rs.10,000 whichever is higher, it will not be included in the taxable income. section 11(2) quoted above further liberalizes and enlarges the exemption. a combined reading of both the provisions quoted above would clearly show that section 11(2) while enlarging the scope of.....
Judgment:

P.D. Dinakaran, J.

1. Heard the learned counsel appearing for the Appellant/revenue.

2. These appeals are directed against the order dated 28.01.2004 made in ITA No.1575/ Mds/97 and order dated 16.4.2004 made in ITA No.1925/MDS/1998 reversing the order of the Assistant Commissioner, Income Tax Department, Central Circle II, Coimbatore by granting exemption to the respondent/assessee under Section 11(1)(a) of the Income Tax Act (hereinafter referred to as ACT) .

3. The appellant/revenue raised the following substantial questions of law for our consideration:

'i. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that mere mentioning in the adjusted total income statement that the amount has been set apart for utilizing for charitable purposes in the subsequent year, will amount to exercising option under Explanation (2)(i) or (ii) to section 11(1)(a) and such amount can be taken as amount set apart for application under Section 11(1)(a) of the Act?

ii. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that in respect of the amount shown as set apart for use in following year, was not necessary to give notice of accumulation by complying with the statutory requirements of Section 11(2) of the Income tax Act read with Section 17 of Income Tax Rules?'

4.1. In brief, the assessee claims to be a Public Charitable Trust engaged in promotion of educational activities. For the assessment year 1994-95, the assessee trust filed its return declaring NIL income. The assessment under Section 143(3) was completed on 21.10.1997. According to the assessing officer, the assessee did not apply 75% of his income for charitable purpose and therefore, it was liable to tax. The assessing officer, taking note of the fact that the assessee exceeded the 25% limit for accumulation and so the assessee ought to have sent a notice of accumulation in Form No.10, the assessing officer treated the entire amount as taxable income.

4.2. On appeal at the instance of the assessee, it was contended before the Commissioner of Income Tax (Appeals), that Section 11(1) of the Act provides that income from the Trust to the extent to which it is applied to charitable purpose or if it is accumulated or set apart for such purposes, to the extent to which it is so accumulated shall not be included in the total income if the amount so accumulated or set apart is not in excess of 25% of the income. But as per the explanation 2(ii)(b) under Section 11(1) of the Act, if the income applied for charitable purposes falls short of 75% of the income derived during the relevant year by any amount i.e., if the amount accumulated exceeds 25% of the income at the option of the assessee, then it would be deemed to be the income applied to such purposes during the previous year in which it was derived. The Commissioner of Income-Tax (Appeals) after giving elaborate discussion on this issue, came to the conclusion that the disputed amount should be deemed to have been spent for charitable purposes as per Section 11(1B)(b) of the Act. As the assesee exercised the option as per the explanation to Section 11(1) of the Act furnished along with the return and statements for the assessment year, the Commissioner of Appeals was of the view that the total amount shall be deemed to have been spent for charitable purposes during the year. He further noted that the amount accumulated or set apart for future application is less than 25% of the income. Hence, the Commissioner of Appeals rejected the applicability of Section 11(2) of the Act and the same was confirmed by the Tribunal and gave the benefit of Section 11(1)(a) of the Act to the assessee.

4.3. According to the Tribunal, Section 11(2) of the Act stipulates two conditions, namely, i) that the assessee specifies, by notice in writing, the purpose for which the income may be accumulated or set apart. However, it should not exceed ten years and (ii) the money so accumulated or set apart is vested or deposited to the forms or modes specified in sub-section (5). Since the case of the assessee falls under Section 11(1) of the Act and not under Section 11(2) of the Act, the assessee is entitled for the benefit of Section 11(1) of the Act.

5. Assailing the said order of Tribunal dated 28.01.2004, the revenue has preferred the above appeals contending that the case of the assessee falls under Section 11(2) of the Act but not under Section 11(1) of the Act.

6. We heard the learned counsel appearing for revenue in detail, however we are not convinced with the arguments advanced on behalf of the Revenue.

7.1. The Division Bench of this Court interpreting the provisions under Section 11(1)(a) of the Income Tax Act in the case of Commissioner of Income Tax, Tamilnadu v. C.M.Kothari Charitable Trust : [1984]149ITR573(Mad) held that the income of the assessee was completely exempt on a combined application of Sections 11(1)(a) and 11(2) of all the assessment years.

7.2. A similar view was expressed by the Bombay High Court in the case of Commissioner of Income Tax v. Trustees of Bhat Family Research Foundation : [1990]185ITR532(Bom) , held as follows:

'It is clear from clause (a) of sub-section (1) of Section 11 of the Income-tax Act, 1961, that income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income to the extent to which it is applied for such purposes in India and, where it is accumulated for such application, to the extent that the accumulation is not in excess of 25 per cent of the income or Rs.10,000, whichever is higher. The exemption of accumulated income to the extent of 25 per cent or Rs.10,000, whichever is higher, is unqualified and unconditional. Sub-section (2) of Section 11 provides the conditions, the satisfaction of which removes the restriction placed by sub-section (1) in regard to accumulation. The conditions relate to the giving of a notice to the Income-tax Officer and investment in Government securities. In the context of the removal of the restriction placed by sub-section (1), the phrase 'the money so accumulated' in clause (b) of sub-section (2) must be read as referring only to the accumulation that is made in excess of the already exempted 25 per cent. It is only the excess over 25 per cent of the income which is required to be invested in Government securities.'

7.3. The Karnataka High Court has also taken a similar view in the case of Additional Commissioner of Income-tax v. A.L.N.RAO Charitable Trust reported in : [1976]103ITR44(KAR) .

7.4. The view taken in the above decisions were confirmed by the Apex Court in an appeal preferred against the decision of the Karnataka High Court in the case of A.L.N.Rao Charitable Trust referred to above. Accordingly, the Apex Court in the case of Additional Commissioner of Income-tax and another v. A.L.N.Rao Charitable Trust : [1995]216ITR697(SC) held that the exemption available under Section 11(2) of the Act is in addition to that available under Section 11(1)(a) of the Act. The Supreme Court thus interpreting the scope and applicability of Section 11(1)(a) and Section 11(2) of the Act, held as follows:

'... para 11. A mere look at Section 11(1)(a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25% of such income or Rs.10,000 whichever is higher, will be permitted to be accumulated for charitable or religious purpose and it will also get exempted from the tax net. Then follows sub-section (2) which seeks to lift the restriction or the ceiling imposed on such exempted accumulated income during the previous year and also brings such further accumulated income out of the tax net if the conditions laid down by sub-section (2) of Section 11 are fulfilled meaning thereby the money so accumulated is set apart to be invested in the government securities etc. as laid down by clause (b) of sub-section (2) of Section 11 apart from the procedure laid down by clause (a) of Section 11(2) being followed by the assessee-Trust. To highlight this point we may take an illustration. If Rs.1,00,000 are earned as the total income of the previous year by the Trust from property held by it wholly for charitable and religious purposes and if Rs.20,000 are actually applied during the previous year by the said Trust to such charitable or religious purposes the income of Rs.20,000 will get exempted from being considered for the purpose of income tax under first part of Section 11(1). So far as the remaining Rs.80,000 are concerned if they could not be actually applied for such religious or charitable purposes during the previous year then as per Section 11(1)(a) at least 25% of such total income from property or Rs.10,000, whichever is higher will also earn exemption from being considered as income for the purpose of income tax, that is, Rs.25,000 will thus get excluded from the tax net. Thus out of the total income of Rs.1,00,000 which has accrued to the Trust Rs.25,000 will earn exemption from payment of income tax as per Section 11(1)(a) second part. Then follows sub-section (2) which states that the ceiling or the limit or the restriction of accumulation of income to the extent of 25% of the income or Rs.10,000 whichever is higher for earning income tax exemption as engrafted under Section 11(1)(a) will get lifted if the money so accumulated is invested as laid down by Section 11(2)(b) meaning thereby out of the total accumulated income of Rs.80,000 accruing during the previous year and which could not be spent for charitable or religious purposes by the Trust balance of Rs.55,000 if invested as laid down by sub-Section (2) of Section 11 will also get excluded from the tax net. But for such investment and if Section 11(1) alone had applied Rs.55,000 being the balance of accumulated income would have been covered by the tax net. Learned counsel for the Revenue submitted that the investment as contemplated by sub-section (2)(b) of Section 11 must be investment of all accumulated income in government securities etc., namely 100% of the accumulated income and not only 75% thereof. And if that is not done then only the invested accumulated income to the extent of 75% will get excluded from income tax assessment. But so far the remaining 25% of the accumulated income is concerned it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious. Section 11, sub-section (1)(a) operates on its own. By its operation two types of income earned by the Trust during the previous year from its properties are given exemption from income-tax, (i) that part of the income of previous year which is actually spent for charitable or religious purposes in that year, and (ii) out of the unspent accumulated income of the previous year 25% of such total property income or Rs.10,000 whichever is higher can be permitted to be accumulated by the trust, earmarked for such charitable or religious purposes. Such 25% of the income or Rs.10,000 whichever is higher will also get exempted from income-tax. That exhausts the operation of Section 11(1)(a). Then follows sub-section(2) which naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under sub-section (1)(a). So far as that balance of accumulated income is concerned, that also can earn exemption from income-tax meaning thereby ceiling or the limit of exemption of accumulated income from income-tax as imposed by sub-section (1)(a) of Section 11 would get lifted if additional accumulated income beyond 25% of Rs.10,000, whichever is higher, as the case may be, is invested as laid down by Section 11(2) after following the procedure laid down therein. Therefore, sub-section (2) only will have to operate qua the balance of 75% of the total income of the previous year or income beyond Rs.10,000 whichever is higher which has not got the benefit of tax exemption under sub-section (1)(a) of Section 11. If learned counsel for the Revenue is right and if 100% of the accumulated income of the previous year is to be invested under Sub-section (2) of Section 11 to get exemption from income-tax then the ceiling of 25% or Rs.10,000 whichever is higher, which is available for accumulation of income of the previous year for the Trust to earn to exemption from income-tax as laid down by Section 11(1)(a) would be rendered redundant and the said exemption provision would become otiose. It has to be kept in view that out of the accumulated income of the previous year an amount of Rs.10,000 or 25% of the total income from property, whichever is higher, is given exemption from income-tax by Section 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words it is a absolute exemption. If sub-section (2) is so read as suggested by the learned counsel for the Revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by Section 11(1)(a) would become a restricted exemption as laid down by Section 11(2). Section 11(2) does not operate to whittle down or to cut across the exemption provisions contained in Section 11(1)(a) so far as such accumulated income of the previous year is concerned. It has also to be appreciated that sub-section (2) of Section 11 does not contain any non-obstante clause like 'notwithstanding the provisions of sub-section(1)' . Consequently it must be held that after Section 11(1)(a) was full play and if still any accumulated income of the previous year is left to be dealt with and to be considered for the purpose of income-tax exemption, sub-section(2) of Section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 25% or Rs.10,000, whichever is higher, can also earn exemption from income-tax in compliance with the conditions laid down by sub-section(2) of Section 11. It is true that sub-section(2) of Section 11 has not clearly mentioned the extent of the accumulated income which is to be invested. But on a conjoint reading for the aforesaid two provisions of Sections 11(1) and 11(2) this is the only result which can follow. It is also to be kept in view that under the earlier Income-Tax Act 1922 exemption was available to charitable trusts without any restriction upon the accumulated income. There was a change in this respect under the present Act 1961. Under the present Act, any income accumulated in excess of 25% or Rs.10,000 whichever is higher, is taxable under Section 11(1)(a) of the Act, unless the special conditions regarding accumulation as laid down in Section 11(2) are complied with. It is clear, therefore, that if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25% or Rs.10,000 whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that Section 11(2) while enlarging the scope of exemption removes the restriction imposed by Section 11(1)(a) but it does not take away the exemption allowed by Section 11(1)(a) on the express language of Sections 11(1) and 11(2) as they stood on the statute book at the relevant time no other view is possible.'

8. The other contention raised by the learned counsel for the appellant is that the assessee failed to exercise the option as contemplated under Section 11(2) of the Act in a prescribed form, namely, Form No.10. But the said contention was rightly rejected by both the Commissioner of Appeals and the Tribunal. There is no mandatory requirement under Section 11(1) of the Act requiring the assessee to exercise the option when he seeks relief under Section 11(1) of the Act, as it is enough for the assesee to submit a statement along with the return to exercise such option.

9. In view of the above well settled principles of law, we do not find any substance in the questions of law raised by the appellant/revenue and therefore finding no substantial question of law in these appeals, the same are dismissed.


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