The Judgment of the Court was delivered by

Balasubrahmanyan, J.:— The assessee in this tax case is a charitable trust. It holds certain Government securities and shares from out of which income is derived. For some years past, the trust had not been applying any part of its income towards any of the charitable purposes of the trust. However, during the three accounting years relevant to the assessment years 1968-69 to 1970-71, the trust invested something more than 75 per cent, of its income in Government securities under the procedure prescribed under rule 17 of the I.T Rules. Having done so, the trust claimed during these three assessment years that it was entitled to exemption from tax in respect of its entire income for these years. The ITO rejected this contention. The consequential assessments he made, however, were not uniform. In the assessment for 1968-69, for instance, having rejected the claim of the trust for a full exemption of the entire income, the ITO brought to assessment 75 per cent, of the total income, granting to the trust exemption relating to the balance of 25 per cent. For the next two assessment years 1969-70 and 1970-71, the ITO having rejected the claim for total exemption, brought to tax the entire income as assessable in the relevant years.

2. The trust appealed against these assessments before the AAC, but without success. On further appeal before the Tribunal, the trust contended that it was eligible for exemption from tax under s. 11(2) of the I.T Act, in respect of that part of the total income which had been set apart for the other purposes and which had been invested in Government securities under s. 11(2) of the Act, in accordance with the procedure prescribed in rule 17. As for the balance of the income which had not been so invested, the trust contended that it was eligible for exemption even though not even a portion thereof was immediately applied to any object of charity. This claim was made on the ground that the non-application and accumulation of this balance would come under s. 11(1)(a) of the Act and would be eligible for exemption under that provision. The Tribunal accepted these contentions on a construction and application of the provisions of ss. 11(1)(a) and 11(2) which were in force during the relevant assessment years. In doing so, they relied on a decision of the Jammu and Kashmir High Court in CIT v. Shri Krishen Chanel Charitable Trust, [1975] 98 ITR 387. In that view, they set aside the assessments made by the ITO for all the three assessment years and declared that the assessee's income was not liable to tax, to any extent, in any of these years. In this reference brought at the instance of the Commissioner, the correctness in law of the orders of the Tribunal is challenged.

3. Mr. A.N Rangaswami, learned standing counsel for the Department, represented that so far as this court is concerned, there is no decision on this point. We, however, found that apart from the judgment of the Jammu & Kashmir High Court, referred to in the Tribunal's order, there are decisions of other High Courts on the subject, which took the same view and adopted the same line of reasoning. They are (1) Addl. CIT v. A.L.N Rao Charitable Trust, [1976] 103 ITR 44, judgment of a Division Bench of the Karnataka High Court, (2) the decision of the Madhya Pradesh High Court in Mohanlal Hargovinddas Public Charitable Trust v. CIT, [1980] 122 ITR 130 and (3) the decision of the Kerala High Court in CIT v. H.H Marthanda Varma Elayaraja, [1981] 129 ITR 191.

4. Section 11(1)(a) of the Act lays down that subject to the provisions of ss. 60 to 63, the income derived from property held under trust wholly for charitable or religious purposes, shall not be included in the total income of the previous year of the person in receipt of the income, to the extent to which such income is applied to such purposes in India. The section further lays down that where any such income is accumulated for application to such purposes in India, then the income shall not be included for purposes of assessment to the extent to which the income so accumulated is not in excess of 25 per cent, of the income from the property, or Rs. 10,000, whichever is higher.

5. This provision has a history behind it. During the infancy of income-tax in this country, charitable trusts which held property for various charitable purposes and which were in receipt of income from property so held in trust, were exempted from payment of income-tax. At that time, the income was per se exempt from income-tax because it was income from trust property for charity. There is no statutory pre-condition under the early taxing enactment that the income of a charity has got to be applied for the avowed charitable purposes or at least accumulated and distinctly set apart for future application. The exemption of charitable income, without any strings, so far as it went, was beneficial for advancing the objects of charitable trusts in the country. But, it was also productive of abuses, because in the name of charity income was earned, but not actually used for charitable objects. Even where no income was properly applied to any charitable purpose, yet tax exemption was being obtained on the mere fact that the income was derived from property held under charitable trust. In order to remedy this mischief, opportunity was availed of by Parliament when the I.T Act was remodelled in 1961. For the first time, the principle was incorporated into the Act that the exemption from tax of charitable trusts must be dependent upon the application of the trust to the charitable purposes and must be limited to the income actually so applied during the year in which the income was earned or at least it must be ensured that the income was specifically accumulated for such application. Section 11(1)(a) is the relative provision which has secured this legislative purpose, by enacting that the exemption from tax is eligible to the extent that the income is applied to charitable purposes or to the extent that the income is accumulated for application to such purposes. If the income is accumulated and not immediately applied, the exemption will apply to the accumulation only up to a maximum ceiling of 25 per cent, of the income of the trust.

6. Section 11 also contains a further provision which was aimed at facilitating the working of the charitable trusts and, at the same time, granting them the benefit of tax exemption. It might well be that in the interests of advancing charitable purposes themselves, it might be necessary for the trusts not to spend the income then and there but to accumulate them for being used on long-term projects connected with the charitable purposes. In such cases, it would be compulsive for the charitable trusts to accumulate their income. Since, however, projects such as these take a long time to bring about, the income accumulated would, till the duration, be kept idle. Parliament has accordingly provided in s. 11(2) that where, apart from the provisions of s. 11(1)(a) relating to accumulations, it is decided by any charitable trust that any part of its income should be accumulated or set apart for future application, then such accumulation would be entitled to tax exemption where the trust, by notice in writing, informs the ITO of the specific purpose for which the accumulation is being made and the period for which the accumulation will last, up to a maximum of ten years, and also if the trust undertakes to invest the accumulated income in Government securities falling under the Public Debt Act, 1944. If these conditions are fulfilled, then under s. 11(2) of the Act, the income accumulated and invested in Government securities would also be eligible for tax exemption.

7. The real point in controversy in the present case is whether a charitable trust can obtain concurrent exemption both under s. 11(1)(a) and under s. 11(2) of the Act, or whether the trust in such cases will have to fulfil all the terms of s. 11(2) in respect of its entire total income in order to enable it to obtain the exemption. The case of the assessee, which was accepted by the Tribunal on the basis of the decision of the Jammu and Kashmir High Court earlier cited, was that to the extent that there was compliance by a charitable trust with the provisions of s. 11(2) of the Act, the income covered by the investment will be exempt from tax. Nevertheless, it will be open to the trust to fall back upon the provisions of s. 11(1)(a) with reference to the balance of the income to the extent that such exemption could be granted under that provision.

8. In the present case, as earlier observed, the assessee had made investments up to 75 per cent, or more of its income and claimed exemption under s. 11(2) of the Act. The assessee had complied with all the terms and conditions of the said provision and also the prescribed conditions under r. 17 of the I.T Rules. That being so, there was nothing to prevent the assessee from obtaining the exemption under the sub-section. It left less than 25 per cent, of the income which was not covered by any investment, but which was simply accumulated without any application whatever during the account years in question. The question was whether there was anything in s. 11(1)(a) against the grant of exemption with reference to the balance of the accumulated income, which remained after the investment under s. 11(2) of the Act. As a matter of construction, it was urged by Mr. Rangaswami, on behalf of the Commissioner, that the opening words of s. 11(2) would stand in the way of the assessee resorting to the provision of s. 11(2) for the balance of income which remained accumulated which was not covered by any investments made under s. 11(2) of the Act. Learned counsel referred to the following words occurring in s. 11(2) of the Act:

“Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (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………”

9. According to Mr. Rangaswami, the effect of these words was to totally exclude the application of the provisions of sub-s. (1)(a) or (1)(b) of s. 11, in cases which fell within s. 11(2).

10. We do not, however, accept this construction as well founded. The words “the restrictions specified in clause (a) or clause (b) of sub-section (1) as respects accumulations or setting apart shall not apply” do not mean that s. 11(2) is an overriding provision. On the contrary, what these words signify is that the restrictions attendant upon the application of s. 11(1)(a) will not apply for that part of the accumulations to which s. 11(2) applies. The words do not mean that s. 11(1)(a) itself must be ruled out altogether in cases where s. 11(2) applies.

11. It is this construction, which finds favour with us, a construction which has been adopted earlier by the Jammu and Kashmir High Court as well as by the High Courts of Karnataka and Kerala in the decisions to which we have earlier referred. It is unnecessary for us to go into the details of all the cases. But, we do think it necessary to extract the following passage from the judgment of Syed Wasi-Ud-Din J. of the Jammu and Kashmir High Court, in CIT v. Shri Krishen Chand Charitable Trust, [1975] 98 ITR 387, as a succinct summary of the statutory provisions and also as an enunciation of the inter-relation between s. 11(1)(a) on the one hand, and s. 11(2) on the other (p. 392):

“It may be noted that under the old 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 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. An examination of section 11(1)(a) shows that this section comprises of two parts: (1) which excludes that part of the income to the extent to which such income is applied for charitable purposes in India; (2) where there is accumulation of the income, then to the extent to which the income so accumulated is not in excess of 25% or Rs. 10,000, whichever is higher. 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 liberalises 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). In my opinion, where a statute, particularly a taxing statute, confers a concession by one particular provision in the statute and then further liberalises and enlarges that concession by another provision in that statute, then the concession granted by the earlier provision cannot be deemed to be taken away. Section 11(2) of course lays down the conditions, the compliance of which is necessary to avail of the exemption but they are merely for the purpose of availing of the further exemption and not for depriving or taking away the exemption granted under section 11(1)(a).”

12. That both the exemptions, the one under s. 11(1)(a) and the other under s. 11(2), are complementary to each other and not mutually exclusive, would seem to be the view of the Government, as would appear from the fact that when the section was sought to be amended and an opportunity presented itself to explain the objects and reasons of the amendment, that opportunity was at the same time taken by the Government to restate the position under the section. The Central Board of Direct Taxes issued Circular No. 45, dated September 2, 1970, (See [1971] 79 ITR (St.) 33), explaining the changes brought about in the I.T Act by the amendments made under the Finance Act, 1970. Section 11 was amongst the provisions which were radically altered by the Finance Act, 1970. While explaining the changes brought about by the amended section 11, the Board Circular referred to what was the law before in the following terms:

“Under the provisions of the Income-tax Act before the amendments made by the Finance Act, 1970, income from property held under trust wholly for charitable or religious purposes is exempt from income-tax to the extent such income is applied to the purposes of the trust in India in the same year. The balance of the income which is accumulated for application to such purposes in India is also exempt from tax so long as such accumulation does not exceed 25 per cent, of the income of the trust or Rs. 10,000, whichever is higher. Any accumulation of income in excess of this limit is alone subject to tax…………In both these types of trusts, accumulation of income beyond the limit of 25 per cent, of the income of the trust or Rs. 10,000, whichever is higher, is allowed to be made without attracting tax liability on the excess, if the trust complies with certain procedural formalities (of giving notice to the Income-tax Officer specifying the purpose for which the income is desired to be accumulated, and the period for which the accumulation is proposed to be made) and subject the requirement that the income so accumulated is invested in Govern ment securities or any other approved securities………”

(the underlining* is ours).

13. This passage from the Board's Circular shows that the accepted view even of the highest revenue authority of ss. 11(1)(a) and 11(2) was that while up to a limit of 25% accumulations were free of tax, the balance of the income would also be exempt from tax if the formalities connected with the accumulation and the actual investment of that balance were carried out in accordance with sub-s. (2). Mr. Rangaswami, however, brought to our notice an earlier Board's Circular dated September 6, 1968, in which a different opinion had earlier been expressed in the following words:

“It is hereby clarified that the correct position in this regard is that if a person desires to accumulate income in excess of the limit laid down in section 11(1), the conditions specified in section 11(2) have to be fulfilled in respect of the entire accumulation and not merely in respect of the accumulation in excess of 25 per cent, of the income.”

14. Apparently, it was this circular which had been responsible for the assessments being made in the first instance in the manner in which they had been done. But, as we have mentioned earlier, the ITO has not been consistent in his orders. The Board's Circulars have not been followed uniformly by the ITO for every assessment. In any case, the matter having been raised and argued, as a matter of construction, has to be determinedly us. The stand taken by the Central Board of Revenue in their circular is a matter of no moment, when it comes to a question of statutory interpretation. We only refer to the later circular of the Board, just to show that recently, at any rate, the Board seems to have come to accept the position in law as laid down in the various judgments of the High Courts.

15. For the reasons we have earlier expressed and following with respect the consensus of judicial opinion amongst the other High Courts in India, we hold that the Tribunal was right in holding that the income of the assessee was exempt in its entirety on a combined application of ss. 11(1)(a) and 11(2) of the I.T Act, for all the three assessment years in question, 1968-69 to 1970-71. The question of law referred to us is, accordingly, answered in the affirmative and against the Department. Since the Department has failed in this reference, it has got to bear the costs of the assessee. Counsel's fee Rs. 500.