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PETITIONER: S.RM.M.CT.M. TIRUPPANI TRUST

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       04/02/1998

BENCH: SUJATA V. MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:                THE 4TH DAY OF FEBRUARY, 1998 Present:                Hon’ble Mrs. Justice Sujata V. Manohar                Hon’ble Mr. Justice D.P.Wadhwa Aman Hingorani,  Adv. for  Hingorani & Associates, Advs. for the Respondent Harish Chandra,  C.V.S. Rao, Advs. for B.K. Prasad, Adv. for the Respondent                       J U D G M E N T      The following Judgment of the Court was delivered:      This appeal  pertains to  assessment year  1970-71. The following  question  was  referred  to  the  High  Court  of Judicature at  Madras by  the Income-Tax  Appellate Tribunal under Section 256(1) of the Income-Tax Act, 1961:      "Whether, on  the facts  and in the      circumstances  of   the  case,  the      income of  the assessee  is  exempt      from tax  under Section  11 of  the      Income-Tax Act  for the  assessment      year 1970-71?"      The assessee  is a  Charitable Trust  for carrying  out Thiruppani or  repairs to  old Hindu  temples, building  new ones, giving aid to or establishing hostels, educational and industrial institutions  etc. It  is not in dispute that the objects of  the Trust  are charitable. On March 1, 1963, the trustee resolved  that the  income of  the Trust  should  be accumulated for  a period of ten years commencing from April 13, 1961  for the  various charitable purposes which are set out in  the Resolution.  The assessee accordingly filed Form 10 with  the Income-Tax  Officer as  required under  Section 11(2)  of   the  Income-Tax   Act,  1961.   The  income  was accordingly being  accumulated every  year and  invested  in Government securities.      For the  year  ending  April  12,  1970  which  is  the accounting year  relevant to  assessment year  1970-71,  the amount of  Rs. 7,82,792.44  which was  shown in  the earlier balance sheet  (as on  1.4.1969) as advance to S. RM. M. CT. M. Firm,  Rangoon on  the "Assets"  side was  substituted by "Building for  Rs. 8  lakhs" on  the Assets side. It was the case of  the assessee  that during the assessment year 1970-

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71, the  advance to  the said  firm at Rangoon was in effect realised and  invested in  a building  for  the  purpose  of starting a  hospital. The  Trust had also earned during that assessment year other income amounting to Rs. 1, 64,210.03.      The assessee  claimed exemption for the total income of Rs. 8  lakhs plus Rs. 1,64,210.03 under Section 11(1) of the Income-Tax Act, 1961. The Income-Tax Appellate Tribunal by a majority of  2 :  1 held  that the sum of Rs. 8 lakhs was to be treated  as income  of the  assessee for  the purposes of Section 11.  The Tribunal  gave the benefit of Section 11(1) to the  assessee for  the assessment year 1970-71 in respect of the  entire income  consisting of  Rs. 8  lakhs plus  Rs. 1,64,210.03. On  a Reference  to the  High Court,  the  High Court has  held that  the sum  of Rs.  8 lakhs  was an asset acquired in realisation of an outstanding due and hence, sum of Rs.  8 lakhs  cannot be  include in  the  income  of  the assessee for  the  purposes  of  Section  11(1).  Since  the balance income  of Rs.  1,64,210.03 was  not invested by the assessee in  accordance with  the declaration  filed by  the assessee under  Section 11(2),  the assessee could not claim exemption from tax in respect of Rs. 1,64,210.03.      The material  part of Section 11, at the relevant time, was as follows:      "11. Income from  property held for      charitable or  religious  purposes:      (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;      (b)................................      ......      (c)................................      ......      (2)  Where the  persons in  receipt      of the  income have  complied  with      the   following   conditions,   the      restriction  specified  in  clauses      (a) or  clause (b)  of  sub-section      (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  given  to  the  Income-tax      Officer in  the prescribed  manner,      specified the purpose for which the      income is  being accumulated or set      apart  and  the  period  for  which      income is  to be accumulated or set      apart, which  shall  in  n  o  case

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    exceed ten years;      (b) the money so accumulated or set      apart is invested in any Government      security as  defined in  clause (2)      of Section  2 of  the  Public  Debt      Act, 1944  (18 of  1944), or in any      other   security   which   may   be      approved by  the Central Government      in this behalf.      (3)................................      ..........      (4)................................      ..........      Under Section  11(1)(a), income  derived from  property held under Trust for charity, to the extent that such income is applied  for charitable  or religious  purposes  will  be exempt from  income-tax. Where  the  income  or  the  entire income is not so spent, but is accumulated it will be exempt to the  extent of  25% of  its total income or Rs. 10,000/-, whichever is  higher. Under  Section  11(2),  if  the  trust desires to  accumulate more than 25% of its income and wants to claim  exemption from  income-tax, it  has to comply with the conditions  which are  laid down  in Section  11(2)(1) & (b). The  first condition is that a notice in writing should be given  to the Income-Tax Officer in the prescribed manner specifying  the  purpose  for  which  the  income  is  being accumulated and  the period  for which  the income  is to be accumulated. The period should not exceed ten years. Rule 17 of the  Income-Tax Rules  1362 prescribes  that  the  notice which is  required to be given under Section 11(2)(a) should be in Form No.10. The second condition is that the amount so accumulated has  to   be invested in any Government security as specified  in  Section  11(2)(b).  The  assessee  in  the present case had given notice in 1963 in Form No. 10 setting out he  purposes for  which the  accumulation was being made and the  period, which  was 10  years. Before  the expiry of this period,  the assessee  utilised a  sum of Rs.8 lakhs in accounting year  relevant to  Assessment  Year  1970-71,  in purchasing a  building  meant  for  a  hospital  instead  of investing the  amount in Government securities. According to the department, because of this investment which constitutes a breach of the conditions under Section 11(2), the assessee cannot claim any benefit of exemption under Section 11(1).      Before we  consider this  submission, we  would like to make it  clear that  the department  has not addressed to us any argument  on the question whether Rs. 8 lakhs constitute the income  of the  assessee for  assessment year 1970-71 or not. Before  the Income-Tax  Appellate  Tribunal,  elaborate arguments   had been  advanced on  this issue,  and the  two members of  the Tribunal differed, necessitating a reference to a  third member.  The  High  Court  did  not  accept  the majority view  that the  amount should  be treated as income for the  purpose of  Section 11. Mr. Harish Chandra, learned counsel; appearing  for the  Department has, however, stated before us the at the sum of Rs. 8 lakhs does constitute that income of  the assessee-Trust.  But this income was required to be  invested in  Government securities  in  view  of  the declaration filed by the assessee under Section 11(2). Since the amount  is not so invested, the benefit of Section 11(1) cannot be  extended  to  the  assessee.  This  is  the  only submission we have to consider.      A more  look at  Section 11(1) an d 11(2) is sufficient to  dispel   this  argument.   Under  Section  11(1),  every Charitable or  Religious Trust,  irrespective of  whether it has filed  a declaration  under Section  11(2)  or  not,  is

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entitled to  deduction of  certain  income  from  its  total income of  the previous  year. The  income so  exempt is the income which is applied by the Charitable or Religious Trust to its  charitable or  religious purposes  in India.  If the entire income  is so  applied, the  entire income  would  be exempted. If  the entire  income is  not applied  b ut  some income is  accumulated by  such a  Trust,  then  also  under Section 11(1)(a),  such accumulated  income to the extent of 25% of  the total  income (or  Rs.  10,000/-.  whichever  is higher) would  be exempted form income-tax. Section11(2), in turn provides  that t  he restriction  which is specified in clause (a) of sub-section (1) as regards accumulation, shall not apply  if the  assessee gives notice as prescribed under Section 11(2)(a)  and  invests  the  amount  accumulated  in Government  securities   as  per   Section   11(2)(b).   The restriction specified  in clause  (a)of  sub-section  (1)/is clearly the restriction of 25% of the accumulated income (or Rs, 10,000/-,  whichever is  higher) being  exempt. If  more than 25%  (or Rs.  10,000/-) is  to  be  exempted  then  the assessee has  to comply with the conditions prescribed under Section 11(2).  In the  case of  Additional Commissioner  of Income-Tax &  Anr. vs.  A.L.N. Rao Charitable Trust reported in (1995)  216 ITR 697, this Court considered the provisions of Section  11(1)(a) in  the light of Section 11(2) and held that Section  11(2) dose  not in  any  manner  restrict  the operation of  Section 11(1). The accumulated income which is exempt under  Section  11(1)(a)  need  not  be  invested  in Government  securities.   It  is  only  in  respect  of  any additional  accumulated  income  beyond  25%  that,  if  the assessee wants  exemption  of  this  additional  accumulated income  also,   the  assessee  is  required  to  invest  the additional accumulated  income in  the manner  laid down  in Section  11(2)  after  following  the  procedure  laid  down therein.      In the  present case  the assessee  is not claiming any benefit under Section 11(2) as it cannot; because in respect of this  assessment year, the assessee has not complied with the conditions  laid down  in Section  11(2). The  assessee, however,  is  entitled  to  claim  the  benefit  of  Section 11(1)(a). In  the present case, the assessee has applied Rs. 8 lakhs  for charitable  purposes in  India by  purchasing a building which is to be utilised as a hospital. This income, therefore, is  entitled to an exemption under Section 11(1). In  addition,  under  Section  11(1)(a),  the  assessee  can accumulate 25%  of  tits  total  income  pertaining  to  the relevant assessment  year and  claim  exemption  in  respect thereof. Section  11(1)(a) does  not require  investment  of this limited  accumulation  in  Government  securities.  The balance income  of Rs. 1,64,210.03 constitutes lass than 255 of the  income for  assessment year  1970-71. Therefore, the assessee is  entitled to  accumulate this  income and  claim exemption from income-tax under Section 11(1)(a).      In the premises, the question which was referred to the High Court,  is required  to be  answered in the affirmative and in favour of the assessee.      The appeal is accordingly allowed with costs.