1. The assessee is a public charitable trust created by the late Nizam by an indenture dated June 14, 1954, and is called "H. E. H. The Nizam's Charitable Trust". The objects of the Trust are charitable in nature and the Trust is a public charitable trust.

2. The procedure adopted in making disbursements to several donees is as follows : The trustees pass resolutions sanctioning payments to various donees. As soon as the resolutions are passed, the money is earmarked specifically for a particular purpose and for a particular donee. But it often happens that it takes some time before the actual disbursements are made and though the resolutions are passed during the accounting year, the amount is disbursed after the accounting year (which is the financial year) and as soon as the resolutions are passed, they are debited to the income and expenditure account and credited to the outstanding payment account which contains the amounts due to the various donees as per the resolutions passed by the board. The amounts debited to the income and expenditure account but which are not actually disbursed, are shown as liabilities in the balance-sheet. At the time when the payment is made, the outstanding payment account is debited.

3. Under s. 11(1)(a) of the I.T. Act (hereinafter called "the Act"), the 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, shall not be included in the total income of the previous year of the person in receipt of the income. 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, shall also not be included in the total income of the person in receipt of the income.

4. For the assessment year 1969-70, it was claimed by the assessee that sums to the tune of Rs. 25,33,102 were spent on charitable purposes and since this amount was more than 75% of the total income, it was claimed that the provision of s. 11 of the Act are satisfied. The ITO accepted the claim and came to the conclusion that the assessee was entitled to a refund of Rs. 6,87,700. The Addl. Commissioner examined the record of the proceedings in exercise of his powers vested under s. 263 of the Act. He found that the sum of Rs. 25,33,102 said to have been applied for charitable purposes was not actually spent in full in he relevant year. The trustees were only providing for the expenditure for charitable purpose by passing necessary resolutions and debiting the same to the income and expenditure account without actually paying the said amount for the purposes for which they were earmarked. The amount actually spent was only Rs. 21,06,432 out of a total sum, of Rs. 25, 33,102. he also found that during the accounting year, the trustees had realised capital gains to the tune of Rs. 9,66,664 on sale of certain shares but the same was not taken into account in the income and expenditure statement filed by the trustees. If this was taken into account, the income actually spent for charitable purposes would be less than 75% of the income of the Trust and would not be exempt under s. 11 of the Act. Accordingly, he considered that the order passed by the ITO, allowing exemption for the whole income of the Trust and, consequently, granting refund of the entire amount of tax deducted at source, was erroneous. on this basis, he found that the shortfall in expenditure or unauthorised accumulation was Rs. 7,26,624. He, therefore, set aside the ITO's order granting refund of Rs. 6,87,700 and directed him to pass a fresh order according to law. Against the said order, the assessee preferred an appeal, I.T.A. No. 1584 [Hyderabad] 1973-74.

5. The ITO while making the assessments for the assessment years 1970-71 and 1971-72, adopted the reasoning of the Addl. Commissioner and consequently held in his assessment order for those two years that in all cases where only resolutions were passed during the accounting year and the disbursements were made to the donees subsequent to the accounting year, the assessee did not apply the income for charitable purposes within the meaning of s. 11(1)(a) of the Act. As against the said order, the appellant preferred an appeal to the AAC who held that the word "applied" should be understood in a practical sense and should not be equated with the word "spent". As against the orders of the AAC, the revenue preferred appeals, I.T.A. Nos. 383 and 384/1974-75, to the Income-tax Appellate Tribunal. All the three appeals were heard together and disposed of by a common order. The question for consideration by the Tribunal common to all the appeals was whether the expression "applied" in s. 11(1)(a) of the Act should be understood as contended by the assessee or as contended by the revenue. They came to the conclusion that in all cases where resolutions were passed during the accounting year earmarking the amounts for the particular donees, the amount should be said to to have bee applied within the meaning of s. 11(1)(a) even though the amounts were actually paid a little later. in the case of one item, viz., Rs. 1,00,000, allocated to Jamia Nizamia, however, the Tribunal found that the institution failed to fulfil the conditions attached to the donation and the amount was sanctioned to another institution and hence this amount should be held not to have been applied in the accounting year relevant to the assessment year 1969-70. The balance of Rs. 3,21, 469 should be held to have been applied for charitable purposes in the assessment year 1969-70. Similarly, they held that a sum of Rs. 6,90,710 and Rs. 8,10,470 must be held to have been applied in the assessment years 1970-71 and 1971-72. In the result, the appeals filed by the revenue for the assessment years 1970-71 and 1971-72 were dismissed and the appeal by the assessee for the assessment year 1969-70 was allowed in part.

6. The Tribunal has referred the following questions of law for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the word 'income' occurring in section 11(1)(a) of the Income-tax Act, 1961, is to be taken as total income computed under the Act ?

2. Whether, on the facts and in the circumstances of the case, the amounts of Rs. 4,21,469, Rs. 6,96,710 and Rs. 8,10,470 were applied by the assessee for charitable purposes ?"

7. We shall first consider the second question referred to us for decision. From the facts set out earlier, it is clear that the donees concerned make a request for a grant from the trust and the trustees after considering the request, sanction certain amounts in deserving cases. As soon as the resolution is passed, the secretary informs the institution that such and such amounts have been sanctioned by the trustees at a meeting held on a particular date and also intimates the purposes for which they are sanctioned. In cases where the amounts are not disbursed during the accounting year, the amounts are debited to the income and expenditure account and credited to the outstanding payment account, which contains the amount due to the various donees as per the resolutions passed by the board. When the payment is made, this amount is debited. The amounts debited to the income and expenditure account but which are not actually disbursed are shown as liabilities in the balance-sheet. In our view, these facts and circumstances would constitute application of the funds for charitable purposes within the meaning of s. 11(1)(a) of the Act. We agree with the Tribunal that it is not correct to equate the word "applied" with the word "spent". If the Legislature intended that the amounts should actually be spent, there was nothing preventing it from using that word. There cannot be any doubt that the money which was sanctioned was applied for a specific purpose as there was nothing else to be done except the actual payment. The Tribunal was right in holding that the actual payment is irrelevant for purposes of finding out whether there has been an application of the funds. In this connection, we may refer to the observations in CIT v. Radhaswami Satsang Sabha [1954] 25 ITR 472 (All). Dealing with the word "applied" in the Indian I.T. Act, 1922, the learned judges observed as follows (p. 522) :

"The word 'applied' in this clause means actually spent and it was pointed out that while in clause (i) of sub-s. (3) of s. 4 of the Act, the words used are 'income applied or finally set apart', the words 'finally set apart' have not been repeated in clause (ia) of that sub-section. We do not think that the word 'applied' necessarily means 'spent'. Even if it has been earmarked and allocated for the purposes of the institution, it might, to our minds, be deemed to have been applied for the purpose."

8. In H. E. H. Nizam's Religious Endowment Trust v. CIT , under a trust deed executed by the Nizam of Hyderabad, the trust fund was to be accumulated during his lifetime and after his death, the trustees were to hold the fund upon trust to spend the income therefrom, in their absolute discretion, for one or more of four specified religious and charitable objects, two of which were for purposes within, and the other two for purposes outside the taxable territories. The trustees could not, during the lifetime of the settlor, set apart and allocate the accumulated income or part of it for any one or more of the objects : they could do so only after his death. The settlor was still alive. The trustees claimed that the income of the trust during the relevant previous years was exempt from tax under s. 4(3)(i) of the Indian I.T. Act, 1922. It was held that the words "applied or finally set apart for application" indicated that unless the income from the property was applied or finally set apart for religious or charitable purposes within the taxable territories, it did not earn the exemption. The words "applied" and "accumulated" meant "applied or finally set apart". "Applied" meant that the income was actually applied for charitable or religious purposes in the taxable territories; and "accumulated" meant that the income was set apart during the year for future spending on such purposes. The expression "accumulated" for a purpose involved a conscious act in presenting and posited a clear indication on the part of the trustees to sesr apart the income for that purpose. It was held that until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories it could not be said that they were for purposes within the taxable territories. The facts in the above case are distinguishable. It was pointed out by the Supreme Court that at best the amount were kept under a suspense account with an option to the trustees to set apart at a later date for purposes within or without the taxable territories, and the option is exercised at a later stage. in the present case, however, the resolutions clearly earmarked the funds for the particular donee. Considerable reliance was placed by the counsel for the I.T. Dept. on Nachimuthu Industrial Association v. CIT . In that case, a esolution was passed on February 16, 1965, in the following terms (p. 615) :

"Resolved that the profits of the association for the year ending March 31, 1965, so permitting, a sum of Rs. 2,50,000 be given as donation to Nachimuthu Polytechnic from out of the profits of the aforesaid year."

9. Another resolution was passed on September 1, 1965, in the following terms (p. 615) :

"Resolved that the net profits for the year ending March 31, 1965, amounting to Rs. 3,04,994.72 be added to the surplus of Rs. 528.46 carried forward from the previous year and the total surplus of Rs. 3,05,523.18 be and is hereby disposed of as follows"

Rs.

10. It was held by the Madras High Court that the resolution of February 16, 1965, was conditional on the profits being earned for the year ending March 31, 1965, and if there were no profits, the resolution could not have been given effect to. It was, therefore, merely a pious expression of opinion that if and when there were profits a sum of Rs. 2,50,000 should be given to the polytechnic. The learned judges observed that there are four requisited for a trust, viz., the author, the beneficiary, the trust property and a divesting of the ownership by the author of the trust in favour of the beneficiary or trustee. In this case, as the property itself did not exist, there was no question of any trust coming into existence. We are of the view that there is no similarity at all between the facts in the above decision and the facts with which we are concerned. As pointed out by the learned judges in the Madras case, the assessee had in its books a folio for Nachimuthu Polytechnic and in the account of the assessee, several entries were made showing the payments made to the polytechnic but the amounts debited to the Nachimuthu Polytechnic in the assessee's books were given as and by way of loans or advances to the polytechnic and not as donations. No communication was sent to the polytechnic showing that any sum had been set apart in its favour. The learned judges pointed out that if at least that had been done and if there had been any reciprocal entries in the books of the polytechnic, there could be some justification in the contention that the amount was set apart or applied for charitable purposes. They also observed that the entries in the assessee's own books could have been reserved if and when the assessee chose to do so. In the present case, setting apart of the funds was not conditional upon making profits as in the Madras case. There was immediate debiting, even during the accounting year, to the income and expenditure account and crediting to the outstanding payment account, whereas in the Madras case, there was no entry at all before the end of the accounting year. In the madras case, the amount was shown as loans or advances, whereas in the present case, even in the balance-sheet, it was shown as a liability to the donee. We, therefore, think that the decision in Nachimuthu Industrial Association v. CIT [1980] 23 ITR 611 (Mad) is of no assistance to the revenue.

11. Reference was made by the counsel for the I.T. Dept. and for the assessee to certain decisions rendered under the Gift-tax Act. The counsel for the assessee drew our attention to Srinath Das v. I.T. Appellate Tribunal , Smt. B. Muniyamma v. CGT and K. P. Brothers v. CIT [1961] 42 ITR 650 (Raj) and other decisions to the same effect. In Srinath Das v. I.T. Appellate Tribunal , it was held that in order to sustain a gift, it is not necessary that there should be a physical delivery of the amount gifted by the donor to the donee, and that a transfer can be effected by making a debit entry in the account of the donor and making a corresponding credit entry in the account of the donee in the books of the firm in which both had accounts and that so long as the entries made in the respective accounts put the gifted amount beyond the control of the donor and resulted in the ownership of the donee being replaced, there is no reason why a valid gift cannot be effected through such book entries. In Smt B. Muniyamma v. CIT , the assessee was a partner in her individual capacity in a firm along with her husband representing the joint family of which he was the karta. The amount standing to the assessee's credit in the firm was transferred to the account of the husband. It was held that the amount was placed beyond the control of the assessee, and there was a gift in favour of her husband.

12. In K. P. Brothers v. CIT [1961] 42 ITR 650 (Raj), the donor and the donees and accounts in a banking firm. On instructions from the donor an amount of Rs. 1,00,000 was debited to his account and the amount was credited to the accounts of the donees. Even though the cash balance in the account books was not sufficient to cover the amount transferred, it was held that the entries made would operate as a valid gift. On the other hand, Sri P. Rama Rao relied upon Sukhlal Sheo Narain v. CWT and other decisions on the same lines. In this case, the gift was purported to be made by debiting the assessee's own account. It was held that no valid gift had been made by such entries alone. It was pointed out that a distinction must be drawn between cases where the entries are made in the accounts of the donor and the donee in the books of a third party holding money to the credit of the donor and a case here the donor purports to effect the transfer by making entries in the his own account books. We do not think that the above decisions in connection with the G. T. Act are relevant, while dealing with the meaning of he expression "applied" in s. 11(1)(a) of the I.T. Act. For the reasons stated earlier, we answer the second question in the affirmative.

13. The first question arises only out of the order relating to he assessment year 1969-70. As stated earlier, the appeal, I. T. A. 1584/Hyd/1973-74 in regard to the assessment year 1969-70 was filed against the order of the Addl. Commissioner and it was heard along with the appeals in regards to the assessment years 1970-71 and 1971-72. One of the points which arose in regard to the assessment year 1969-70 was whether the capital gains should be included for the purpose of finding out the income under s. 11(1)(a) of the Act, be it in the commercial sense or in the income-tax sense. The Tribunal felt that in the view it took as regards the scope of s. 11(1)(a), the contention regarding capital gains need not be gone into. As has been noted earlier, the Tribunal held that the assessee was entitled to the exclusion of Rs. 3,21,469 as having been applied for charitable purposes. If that amount coupled with the exclusion of Rs. 4,77,946 being the refund of tax deducted at source and the inclusion of only Rs. 3,33,091 as capital gain is considered, the provisions of s. 11(1)(a) would not be violated for the assessment year 1969-70. Though the Tribunal held that the requirements of s. 11(1)(a) had been fully complied with, in the operative portion it was mentioned that the appeal by the assessee was allowed in part. The assessee, therefore, file an application Miscellaneous Petition No. 87 [Hyd.] 1974-75, stating that on the findings of the Tribunal in the appeal, the appeal should have been allowed in its entirety and not merely in part. While hearing this petition, the Tribunal found that there would be a shortfall of Rs. 94,772 for the assessment year 1969-70, and hence the question regarding the includibility of capital gains fell to be decided. It, therefore, considered the contention of the assessee that no capital gains should be taken into account while making the computation for purposes of s. 11(1)(a) which had been left open by the Tribunal in its order in the appeal. The counsel for the assessee referred in this connection to the circular of the Board dated May 16, 1963, which stated that where a religious or charitable trust transfers a capital asset solely with a view to acquire another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction for acquiring the new capital asset, the amount of capital gains should be regarded as having been applied for the religious or charitable purposes of the trust within the meaning of s. 11(1)(a). This was reiterated in a circular date June 19, 1968. As the sale of the capital asset, viz., sale of shares, was invested in the shape of deposits in banks, it was held that the assessee came within the meaning of the circular of the Board. The Tribunal, therefore, held that the capital gains should be excluded from the computation of the income. Ultimately they found that there would be no shortfall and the conditions of s. 11(1)(a) of the Act had been fulfilled. In the result, the appeal was allowed in full.

14. The circular referred to by the Tribunal received statutory force by the insertion of s. 11(1A) of the Act in 1971 with retrospective effect from 1962. A clarification was issued by the Commissioner in proceedings dated March 25, 1976, stating that if the net consideration received on the sale of shares involving capital gains is invested in fixed deposits in banks for a period of six months, it would be regarded that the net consideration is utilised for acquiring another capital asset within the meaning of s. 11(1A) of the Act. In view of he clarification it is admitted on both sides that the capital gains of Rs. 9,56,659 included by the Addl. CIT as income has to be excluded from the income and if this is excluded, there will be no shortfall in expenditure for the purposes of s. 11 of the Act even according to the computation of the Addl. Commissioner. In view of this is follows and it is also admitted that question No. 1 need not be answered.

15. The Commissioner filed an application before the Tribunal to refer the three questions of law, viz. :

"(1) Whether, on the facts and in the circumstances of the case, the order of the Appellate Tribunal passed on June 9, 1975, in the Miscellaneous Petition No. 87 [Hyd.] 1974-75 is devoid of jurisdiction and violative of the principles of natural justice ?

(2) Whether the Appellate Tribunal's order dated June 9, 1975, amounts to review of its earlier order dated January 3, 1975 ?

(3) Whether, on the facts and in the circumstances of the case, the excess or shortfall in the income applied to charitable purposes over the permitted sum for purposes of section 11(1) is correctly arrived at in annexure IV to the order dated June 9, 1975 ?"

16. The Tribunal declined to refer the questions to this court. I.T.C. No. 80 of 1979 has been filed by the Commissioner with a prayer to this court to direct the Tribunal to refer the same questions.

17. As stated above, the order in M. P. No. 87 [Hyd.] 1974-75 was passed by the Tribunal as the issue regarding the inclusion of capital gains was left open at the time of passing the original order. In view of s. 11(1)(a) in conjunction with the clarification issued by the Commissioner, the order of the Tribunal was justified. As the issue was expressly left open, the Tribunal had jurisdiction to pass this order deciding the issue not decided in the original order. Hence I.T.C. No. 80/79 is dismissed.

18. In the result in R. C. No. 142 of 1977, the second question is answered in the affirmative, and question No. 1 need not be answered I.T.C. No. 80/1979 is dismissed. No costs.