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PETITIONER: THE ADDL. COMMISSIONER OFINCOME TAX & ANR.

       Vs.

RESPONDENT: THE A.L.N. RAO CHARITABLE TRUST

DATE OF JUDGMENT13/10/1995

BENCH: MAJMUDAR S.B. (J) BENCH: MAJMUDAR S.B. (J) JEEVAN REDDY, B.P. (J)

CITATION:  1996 AIR  344            1995 SCC  (6) 625  JT 1995 (7)   339        1995 SCALE  (5)742

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T S.B. Majmudar, J.      This appeal  by special  leave is  directed against the decision of  the Division  Bench of the Karnataka High Court in Writ Appeal No.864 of 1974 decided on 4th September 1975. The said  writ appeal,  moved on  behalf of  the Revenue  by Additional Commissioner  of Income  Tax,  Mysore  and  First Income Tax  Officer, Mangalore Circle, Mangalore against the order of  learned Single Judge Venkataramiah, J., as he then was, in  the  Writ  Petition  No.597  of  1973  came  to  be dismissed by the Appellate Bench of the High Court. In order to highlight  the grievance  of the Revenue in this appeal a few relevant introductory facts are required to be noted. Background Facts ----------------      Respondent A.L.N. Rao Charitable Trust, Mangalore, is a charitable trust.  For  the  assessment  year  1969-70,  the respondent,  hereinafter   referred  to  as  "the  assessee" submitted  its  Return  to  the  First  Income-Tax  Officer, Mangalore Circle.  In the  said Return, the assessee claimed that a  sum of  Rs.85,262/- which  was the surplus income of the  previous  year,  was  exempt  from  tax  under  Section 11(1)(a) and  sub-section (2)  of the  said Section.  On the Assessing Authority  holding that  the  assessee  is  not  a genuine Trust  and  therefore  not  entitled  to  claim  the benefit of  Section 11,  the assessee  preferred  an  appeal before  he   Appellate  Assistant  Commissioner,  which  was dismissed. In  the second  appeal preferred  by the assessee before the  Income Tax  Appellate Tribunal, it was held that the assessee  was  a  charitable  trust  and  therefore  was entitled to claim exemption from tax under Section 11 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). In I.T.R.C.  No.31 of 1973 which was a reference made at the instance of  the Department,  the High Court by its judgment dated 4.8.1975  answered the  question referred in favour of

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the assessee  and  against  the  Department.  That  judgment became final.  Consequently there  remained no dispute about the eligibility  of the assessee to claim benefit of Section 11.      The Assessing  Authority took up the assessment to pass an order in accordance with the judgment of the Tribunal and made an  order on  21.1.1972  by  which  it  held  that  the assessee, after  complying with  the requirement  of  giving notice under  Section 11(2)  (a), had  invested 75%  of  the accumulated income  intended to  be applied  for  charitable purposes in  future years  as  required  by  clause  (b)  of Section 11(2)  and therefore,  the entire surplus income was exempt from tax.      The Commissioner  of Income  Tax, on  looking into  the order dated  21.1.1972 passed by the Assessing Authority was of the  view that  the order  of the Assessing Authority was erroneous as  he had  not applied  his mind  to the question whether the  assessee had  complied with  the provisions  of Section 11(2)  and that  if he  had applied  his mind to the said provisions, he would have noticed that the assessee had not invested  the entire  surplus income,  viz., Rs.85,262/- (but only  Rs.70,975/-) and  therefore the  assessee was not entitled to  the exemption  provided under Section 11 of the Act. Thus,  in the opinion of the Commissioner, the order of the Income  Tax Officer  was erroneous  inasmuch as  it  was prejudicial to  the interests  of the  Revenue. He  issued a show-cause notice  under Section 263 of the Act on 18.1.1973 to the  assessee to  show cause as to why the entire surplus income of  Rs.85,262/- should  not be  brought to  tax.  The assessee, on receipt of the said notice, approached the High Court  for   relief  under  Articles  226  and  227  of  the Constitution and  prayed for  the issue  of a  Writ  in  the nature of  Certiorari to  quash the  Notice dated  18.1.1973 issued by  the Commissioner.  In that  writ  petition  (W.P. No.597 of  1973), Venkataramiah,  J. made an order directing the Commissioner  to dispose  of the  proceedings  initiated under Section  263 in  the light  of his  order  as  to  the interpretation of  Section 11(1)(a) and Section 11(2) of the Act.      Before the  learned Single Judge, the contention of the Department was  that  in  order  to  claim  exemption  under Section 11,  the assessee  should have  invested the  entire surplus income  in  one  or  the  other  of  the  securities mentioned in  Section 11(2)(b)  of the  Act and  it  is  not sufficient if  75% of  the surplus  income  alone  has  been invested by  the  assessee.  The  learned  counsel  for  the assessee urged  that the  assessee  had  complied  with  the requirements  of   Section  11;  according  to  the  learned counsel, the  assessee was entitled to exemption from tax in respect of  25% of  the accumulated  income  or  Rs.10,000/- whichever was  higher plus  that portion  of the accumulated income in  respect of  which the conditions prescribed under Clauses (a)  and (b)  of Section  11(2) had  been satisfied. According to the assessee, since it had deposited 75% of the accumulated income  in the  Securities mentioned  in Section 11(2) (b),  the entire  surplus income which had accumulated was not taxable.      The learned single Judge rejected the contention of the Revenue and  upheld he  contention of  the assessee  in part only. The  learned Judge held that the assessee was entitled to exemption  from tax only in respect of 75% of the surplus income which was accumulated for future use.      The Revenue  carried the  matter in  writ appeal  which came to  be decided  by the  impugned judgment. The Division Bench on interpretation of Section 11(1) (a) and sub-section

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(2) thereof  as they  stood at  the relevant  time, took the view that 25% of the accumulated income of the Trust arising in the  previous got  exempted from income tax under Section 11(1) (a).  That Section  11 (2) dealt with remaining 75% of the accumulated  income of the previous year and if such 75% of the  accumulated income  was invested as laid down by the said provision the Trust was entitled to get even the 75% of the accumulated  income exempted  from income tax payable on the income  arising to  the Trust  in the  previous year. In short  while  dismissing  the  appeal  of  the  Revenue  the Division Bench  of the  High Court  on interpretation of the Sections  took   a  view  which  was  wholly  in  favour  of respondent-Trust. For  taking the  said  view  the  Division Bench of  the High  Court referred  to similar view taken by the  High   Court  of   Jammu  &  Kashmir  in  the  case  of Commissioner of  Income Tax,  Patiala v.  Shri Krishen Chand Charitable Trust (1975) 98 ITR 387. Rival Contentions -----------------      Learned counsel appearing for the appellants vehemently contended that  the interpretation  placed by Division Bench of the  High Court  on the  relevant provisions  of  Section 11(1) (a)  and 11(2)  of the  Income Tax  Act, 1961  as they stood at the relevant time is not well sustained. That it is true that  under Section  11(1) (a)  25% of  the accumulated income of  the Trust  arising during  the previous  year  or Rs.10,000/- whichever  was higher  was exempted  from income tax. But  as laid  down by  Section 11(2)  at the  stage  of investment of such accumulated income unless cent percent of such  accumulated  income  was  invested  as  per  the  said provision the  assessee-Trust would  not be  entitled to the benefit of  exclusion of  such  accumulated  income  of  the previous year from the tax net of the Income Tax Act. It was further conented  that the  subsequent of  Section 11(2)  as brought on  the Statute  Book by  Taxation Laws  (Amendment) Act, 1975  clearly showed  a different legislative intention and was  not merely of a classificatory nature as assumed by the Division  Bench of  the High  Court. The learned counsel for the  Revenue, however,  fairly submitted  that  the  his submission are  based on  the express language of Section 11 (1)(a) read  with Section  11(2) of the Act as applicable at the relevant  time and  he is  not supported by any decision rendered by any of the High Courts on this point.      Learned counsel  for  the  respondent-assessee  on  the other hand  submitted that  the view  taken by  the Division Bench of  the High  Court on  the interpretation  of Section 11(1) (a)  and Section  11(2) of the Income Tax Act, 1961 as applicable at  the relevant  time is  the only  correct  and plausible view that the Division Bench of the High Court was justified in  agreeing with  the view on similar lines which appealed to  the Jammu  & Kashmir High Court in Commissioner of  Income  Tax  v.  Shri  Krishen  Chand  Charitable  Trust (supra). He  also submitted that similar view has been taken by the  High Courts of Kerala, Madhaya Pradesh,Madras,Bombay and Rajasthan in the following decisions:      1. Commissioner  of Income Tax, Kerala-I      v. Shree  Padmanabhaswami  temple  Trust      (1979) 120 ITR 42 (Ker.);      2. Commissioner of Income Tax, Kerala v.      H.H.  Marthanda   Verma   Elayaraja   of      Travancore Trust  and Others  (1981) 129      ITR 191 (Ker.);      3. Mohanlal  Trust  v.  Commissioner  of      Income  Tax,   M.P.(1980)  122  ITR  130      (M.P.);

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    4. Commissioner  of  Income  Tax,  Tamil      Nadu-IV,   Madras    v.   C.M.   Kothari      Charitable  Trust  (1984)  149  ITR  573      (Mad.);      5.  Commissioner   of  Income   Tax   v.      Trustees  of   Bhat  Family     Resaerch      Foundation (1990)  185 ITR  532  (Bom.);      and      6. Commissioner of Income Tax v. Anjuman      Moinia  Fakharia   (1994)  208  ITR  568      (Raj.). Consideration of the Rival Conentions -------------------------------------      Before we  proceed to  deal with  the rival contentions centering round he true scope and ambit of Section 11(1) (a) and Section  11(2) of the Income Tax Act, 1961 as applicable to the assessment year in question, namely, 1969-70 it would be apposite  to refer  to these  provisions at  the  outset. These provisions  as they stood at the relevant time read as under:      "11 (1).  Subject to  the provisions  of      sections 60  to 63,  he following income      shall  not  be  included  in  the  total      income of  he previous year of he 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 25% of the income from the      property   or   rupees   ten   thousand,      whichever is higher, ....      (2) Where  the persons  in recip  of the      income have  complied with the following      conditions, the restriction specified in      clause (a)  or clause  (b) of subsection      (1) as  respects accumulation or setting      apart shall  not apply  for  the  period      during which  the said conditions remain      complied with:-      (a) such  persons  have,  by  notice  in      writing to  the Income-tax Officer in he      prescribed   manner,    specified    the      purposes 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  in  any  Government      security as  defined in  clause  (2)  of      section 12  of the Public Debt Act, 1944      (XVIII  OF   1944),  or   in  any  other      security which  may be  approved by  the      Central Government in this behalf."      Section 11  underwent an  amendment  by  Taxation  Laws (Amendment) Act,  1975. As  we are  not concerned with these amended provisions  in the  present case, we need not dilate on them.      A mere  look a  Section 11(1)  (a) as  it stood  at the relevant  time  clearly  shows  that  out  of  total  income

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accruing to  a trust in the previous year from property held by i  wholly for  charitable or  religious purpose,  to  the extent the  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 will also get exempted from the tax me. 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  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 11  apart from the procedure laid   down  by clause (a) of Section 11 (2) being followed by  the assessee-trust. If Rs.1,00,000/- are earned as the  total income  of he  previous year by the trust from property held  by i  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 he income of Rs.20,000/- will be exempted from being  considered for  the purpose  of income tax under par 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 leas  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,  hat is,  Rs.25,000/- will  thus get excluded from  the extent  net. Thus out of the total income of Rs.1,00,000/-  which has  accrued to the rust Rs.25,000/- will earn  exemption from  payment of income tax per Section 11(1)(a) second  part. Then  follows sub-section  (2)  which states that  ceiling or  the limit  or  the  restriction  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  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 by  sub-section (2) of Section 11 will also be excluded from the  tax net.  But for  such investment  and if Section 11(1) alone  had applied  Rs.55,000/- being  he  balance  of accumulated income  would have  been covered  by he 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 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 in concerned it will no earn  such exemption.  It is difficult to appreciate this contention. The  reason is  obvious. Section  11, subsection (1) (a)  operates on  its own. By its operation two types of income earned  by the trust during he previous year from its properties are  given exemption from income tax, (i) the par 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

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higher can  be permitted  to be  accumulated by  the  Trust, remarked for  such charitable  or religious purposes. 25% of the income  Rs.10,000/- whichever  is higher  will also  get exempted from  income tax.  That exhausts  he  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  cam  earn exemption from  income tax  meaning   thereby the ceiling or the limit  of exemption of accumulated income tax as imposed by sub-section (1) (a) of Section 11 would get if additional accumulated income  beyond 25%  or Rs.10,000/-  whichever is higher, as he case may be, is invested as laid by Section 11 (2)  after   following  the  procedure  laid  down  therein. Therefore, sub-section  (2) only will have to operate qua he balance of  75% of  he total  of the previous year or income beyond Rs.10,000/-  whichever is  higher which  has butt 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  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 rust o earn exemption from income tax as laid by Section 11 (1) (a) would be rendered redundant and the said exemption provision would become  otiose. It  has to  be kept in view the out of the accumulated  income of  the previous  year an  amount of Rs.10,000/- of  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  an absolute  exemption.   If  subsection  (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 he 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  obstacle   clause   like   " notwithstanding  the   provisions   of   sub-section   (1)". Consequently it  mus be held that Section 11(1) (a) has full play and if still accumulated income of the previous year is left to  be dealt  with and  to  be  consideration  for  the purpose   for the  income tax  exemption, sub-section (2) of Section 11  can be  pressed in 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  on compliance which 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 is to be invested. But on a conjoint reading of he 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 the under the earlier Income Tax Act of 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 of 1961. Under the present  Act, any income accumulated in excess of 25% or Rs.10,000/- whichever  is higher,  is axable  under  Section 11(1) (a) of the Act, unless he special conditions regarding accumulated as laid down in Section 11(2) are complied with.

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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 butt  if there is a saving, i.e. to say an  accumulated  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 clearly show that Section 11(2) while enlarging he scope  of exemption  removes the  restriction imposed  by Section 11(1)  (a) but  it does  not take  away he exemption allowed by  Section 11(1)(a).  On the  express  language  of Sections 11(1)  and (2) as they stood on the Statute Book at the relevant time no other view is possible.      In the light of the aforesaid discussion and keeping in view the  illustration  which  we  have  given  earlier  the combined operation  of Section 11(1)(a) and Section 11(2) as applicable at  the relevant  time would  yield the following result:      (i)  If the income derived from property           held   under   trust   wholly   for           charitable or  religious during the           previous year  is Rs.1,00,000/- and           if   Rs.20,000/-    therefrom   are           actually applied  to such  purposes           in  India  then  those  Rs.20,000/-           will get  exempted from  payment of           income tax  as per the firs part of           Section 11(1)(a).      (ii)  Out  of the  remaining accumulated           income  of   Rs.80,000/-  for   the           previous year,  a  further  sum  of           RS.25,000/- will  get exempted from           payment of income tax as per second           part of  Section 11(1)(a). Thus out           of the  total income  derived  from           property   as    aforesaid   during           previous     year,     that     is,           Rs.1,00,000/-, Rs.45,000/-  in  all           will get  excluded from the tax net           on a  combined operation  of  first           and   second    part   of   Section           11(1)(a).      (iii)The    aforesaid     ceiling     of           Rs.25,000/- of  accumulated  income           property of previous year, will get           c under Section 11(2) to the extent           the  balance  of  such  accumulated           income is  invested as laid down by           Section    11(2).To     take     an           illustration if, say, an additional           amount of  Rs.20,000/- out  of  the           balance of  accumulated  income  of           Rs.55,000/-  is   invested  as  per           Section 11(2)  then this additional           amount    of     Rs.20,000/-     of           accumulated   income    will    get           excluded from  he extent net as per           Section 11(2).      (iv) The  remaining   balance   of   the           accumulated    income     out    of           RS.55,000/-, that  is,  Rs.35,000/-           if not  invested as per sub-section           (2) of  Section 11 will be added to           he taxable  income of the trust and           will  not  get  exempted  from  the

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         extent net.      (v)  If of  the other  hand  the  entire           remaining      accumulated       of           Rs.55,000/- is  wholly invested  as           per Section  11(2) the  said entire           amount  of   Rs.55,000/-  will  get           exempted from the net.      We may  also at  this stage  mention that  High  Courts Kerala  in   Commissioner  of  Income-Tax,  Kerala  v.  H.H. Mathanda Varma  Elayaraja of  Travancore Trust & Ors. [1981] 129 ITR  191; M.P.in  Mohanlal Hargovindas Public Charitable Trust v. Commissioner of Income-Tax, m.p. [1980 122 ITR 130; Bombay in  Commissioner of  Income-Tax.  Trustees  of  Bhatt Family Research Foundation [1990] 185 ITR 532; and Madras in Commissioner of  Income Tax,  Tamil Nadu-IV,  Madras v. C.M. Kothari Charitable  Trust [1984]  149 ITR  573 have akin the same view  as Karnataka  High Court  in the present case. We approve the  view akin  in the  aforesaid decisions. We also approve the  similar view  taken by the Jammu & Kashmir High Court in  Shri Krishan  Chand Charitable  Trust (supra). The learned counsel  for the Revenue, therefore, has made out no case for  our interference with the decision rendered by the Division Bench of Karnataka High Court.      In he  result ,  this appeal  fails and  is  dismissed. However, in  the facts  and circumstances  of the  case here will be no order as to costs.