The Judgment of the Court was delivered by

Ramanujam, J.:— The assessee in this case is a public charitable trust. For the assessment year 1964-65, the assessee had a book profit of Rs. 69,152. It claimed exemption from tax under s. 11 of the I.T Act, 1961, on the ground that it had spent during the year a sum of Rs. 8,859 for purchase of land, payment of income-tax to the extent of Rs. 1,21,540 and investment in the Tamil Nadu State Electricity Bond Loan to the extent of Rs. 15,000 and that the above three items should be taken as disbursal of its income for charitable purposes. The ITO did not accept the assessee's claim on the ground that the purchase of land, expenditure on income-tax and investment in the Tamil Nadu State Electricity Bond did not constitute application of the assessee's income for charitable purposes, relying on s. 11(4) of the Act. Then the assessee's taxable income was computed by the ITO at Rs. 69,152.

2. On appeal by the assessee, the AAC held that leaving out the amounts spent on construction of buildings and 25% permitted statutory accumulation, there was a balance of Rs. 37,448 to be spent on charity, that the sum of Rs. 1,21,540 paid towards income-tax as not being available for application during the assessment year, the trust must be regarded as having applied more than 75% of its income to charitable purposes. In this view, the AAC annulled the order of the ITO computing the taxable income of the assessee at Rs. 69,152.

3. The Revenue took the matter in appeal to the Income-tax Appellate Tribunal contending that the investment in the Electricity Bond and payment of income-tax could not be regarded as application of the trust's income for charitable purposes and that if the said expenditure had been, debited to the profit and loss account, they would have been disallowed, in working out the taxable income. On the other hand, for the assessee it was contended before the Tribunal that non-payment of tax would have threatened its very existence, that if amounts were not invested in electricity bonds, the assessee's business would have been jeopardised and that, therefore, these items of expenditure clearly advanced the charitable purpose of the assessee, and, therefore, they should be taken to have been applied for the purposes of the trust.

4. The Tribunal found that though the trust was created by a deed of trust on April 30, 1957, assessments were made on the trust for several years rejecting the assessee's claim for exemption, that the assessee's claim for exemption was accepted for the first time by the Tribunal in its order dated August 2, 1963, while dealing with the assessment for the assessment year 1959-60, that it was in such circumstances that the demand of tax had come to be made and paid by the assessee during the year of account, that up to the assessment year 1964-65 very little amounts had been spent on real charity and that during the years 1965-66, 1966-67 and 1967-68, substantial amounts had been given by way of donation to colleges and others all of which constituted charitable expenditure. On the facts found, the Accountant Member was not inclined to accept the claim of the assessee that the money has been applied for charitable purposes during the year by paying income-tax. He, however, held that there is nothing in s. 11 of the Act requiring the assessee to spend the income of any previous year during the very previous year, that if the assessee actually spends the income at the earliest opportunity he is able to spend it on charitable purposes, the requirement of s. 11(1) was satisfied. The Judicial Member had held that the amount of Rs. 1,21,540 had been paid during the relevant previous year as income-tax, that the payment of income-tax was necessary to preserve the property of the trust from a lawful demand, and that, therefore, the entire income having been applied for payment of tax, it should be treated as having been applied for charitable purposes. He, however, did not consider the question whether the income of the previous year should be spent: for charity during that year itself or even subsequently.

5. Aggrieved by the order of the Tribunal, the Revenue sought and obtained a reference to this court on the following question:

“Whether, on the facts and in the circumstances of the case, the income of the assessee-trust for the assessment year 1964-65 is exempt from tax?”

6. As already stated, the assessee is a public charitable trust which came into existence under a deed of trust dated April 30, 1957. The trust owned and carried on business under the name and style of “National Paper Caps Factory” at Sivaganga. For the assessment year 1964-65, a sum of Rs. 69,152 was returned as income but the entire amount was claimed as exempt under s. 11 on the ground that more than 75% of the income has been disbursed for charitable purposes during that year. In the letter accompanying the return the assessee has stated:

“As against the income of Rs. 69,152, the following expenses were incurred by the trust during the year and no funds were available for expenses under charity.

Rs. Land purchased 8,859 Income-tax 1,21,540 Madras State Electricity Bond Loan 15,000 ________ 1,45,399 ________

As stated in the grounds of appeal before the Appellate Assistant Commissioner in 1963-64 appeal, we hold that the sum spent should be considered as application of income for charitable purposes. Hence, the claim that the income of the trust should be exempted.”

7. The ITO found that out of the total income of Rs. 69,152, only a sum of Rs. 58 had been applied for charitable purposes as against the statutory 75% required for granting exemption, that the total expenditure of Rs. 1,45,399 having been incurred for the purchase of the land, for payment of income-tax and for purchase of electricity bonds, no funds were available for spending on charity and so the assessee cannot be treated as having disbursed the statutory percentage of the income for charitable purposes to base a claim for exemption under s. 11. On appeal by the assessee, the AAC held that the entire income of the trust is exempt from tax on the ground that the entire sum of Rs. 1,21,540 cannot be taken as being available for purposes of application of the income of the trust and the trust cannot, therefore, be held to have failed to apply 75% of income for charitable purposes. The Revenue took the matter in appeal to the Income-tax Appellate Tribunal. Before the Tribunal, the finding of the appellate authority that the sum of Rs. 8,859 spent for the purchase of the land amounts to application of the fund for the trust had not been questioned, and the objection was raised only against the AAC's treating the sum of Rs. 1,21,540-being income-tax paid and Rs. 15,000 invested in the Tamil Nadu State Electricity Bonds as application of the trust's income. Before the Tribunal, it was contended by the Revenue that a correct application of s. 11(4) justified the conclusion that expenses which would have been normally added back, if claimed, should, when incurred, be not treated as application of the trust's income for charitable purposes and that payment of income-tax and investment in electricity bonds, if it had been debited to the profit and loss account, would have been clearly disallowed in the books of the assessee and application of s. 11(4) to this would show that payments of income-tax and investment in bonds would consequently amount to the application of income to a non-charitable purpose. For the assessee, it was contended that without the payment of tax, the very existence of the trust would have been in danger, that amounts had to be invested in electricity bonds for getting the necessary amount of electricity for running the assessee's business and that, therefore, these amounts should be taken to constitute application of income for charitable purposes.

8. The Accountant Member found that the sum of Rs. 1,21,540 has been collected as income-tax from the assessee in the year of account though it related to the previous years and this along with the other expenditure came to Rs. 1,45,000. On the above findings, he held that though the investment in bonds and payment of income-tax cannot constitute charity, the assessee cannot claim the income of the year as having been spent on charity. In determining the total income of the assessee, the income-tax paid should not have been added, but should have been debited to the profit and loss account and that in any event-since the assessee has spent the amounts on charitable purposes without accumulating the same, in the subsequent years, he should be taken to have fulfilled the requirements of s. 11(1)(a) as he has not spent any amount on non-charitable purposes, and, therefore, would be entitled for exemption. He did not, however, give any finding as to the amounts invested in electricity bonds as he was of the view that the facts necessary for ascertaining whether the investment was within or beyond the control of the assessee are not available.

9. The Judicial Member found that the sum of Rs. 1,21,540 was paid as tax for the assessment year 1961-62 and by way of advance tax for the year 1963-64 and that the assessee's claim for exemption for the above-mentioned assessment years having been accepted during the previous assessment years, the aforesaid sum was refunded and was later on spent for charitable purposes, namely, by way of donation to college. According to him, payment of tax is necessary to preserve the property of the trust when once a lawful demand is made and, therefore, the expenditure incurred by way of payment of tax out of the current year's income has to be considered as application for charitable purposes. Thus, he concurred with the view taken by the Accountant Member but on a different ground. Thus, the only question is whether the payment of Rs. 1,21,540 as income-tax during the assessment year can be taken to be an application for charitable purposes so as to attract the exemption under s. 11(1)(a) of the Act.

10. The sum of Rs. 1,21,540 represented income-tax paid for the assessment year 1961-62 and by way of advance tax for the assessment year 1963-64 and the assessee's claim for exemption for the abovementioned assessment years having been accepted in appeal, the sum was ultimately refunded and was later on spent for charitable purposes, namely, by way of donation to college. The claim for exemption under s. 11 is thus based on two grounds: (1) in view of the aforesaid expenditure by way of income-tax, there was physically no income of the relevant previous year available for being spent on charities; and (2) as the said amount has been paid as income-tax because of the demand made by the Department for the purpose of protecting the trust property, it should be taken to have been spent for charitable purposes.

11. The income determined for the assessment year was Rs. 69,152. During that year a sum of Rs. 1,21,540 has been paid as income-tax. As the income was not sufficient to pay the tax, it should have come from the corpus or by borrowings from the bank, etc. We are not here concerned with the powers of the trustee as regards the corpus. There is no prohibition in law for a trustee spending the entire current year's income for payment of tax. Payment of tax is necessary to preserve the property of the trust when a demand is lawfully made. Even though the trust may not accept the demand and challenges the same on appeal, that is not relevant for considering the question whether payment has to be made to preserve the trust property. The expenditure incurred by way of payment of tax out of the current year's income has to be considered as application for charitable purposes. This is because payment is made to preserve the corpus, the existence of which is absolutely necessary for the trust. Therefore, as the entire income during the assessment year has been applied for payment of tax, it should be treated as having been applied for charitable purposes and the assessee's claim should be taken to be well-founded, as has been held by the Tribunal.

12. We also hold that in any event there was no income in the relevant year for being spent on charities. In CIT v. Gangadhar Bauerjee [1965] 57 ITR 176 (SC), it was held that for the purpose of ascertaining the net commercial profits, the tax assessed shall have to be deducted and the relevant observations of the Supreme Court are as follows (p. 183):

“Another incidental question is whether for the purpose of ascertaining the net commercial profits the tax estimated or the tax actually assessed shall be deducted. In a case where an Income-tax Officer takes action under section 23A of the Act before the tax for the relevant period is assessed, only the estimated tax can be deducted; but, there is no reason why, when the tax had already been assessed before he takes action under this section, the estimated tax and not the real tax shall be deducted therefrom. In this view, in the present case, to ascertain the commercial profits, what should be deducted is not the tax shown in the balance-sheet but the actual tax assessed on the income of the company”

13. In CIT v. Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378, the Andhra Pradesh High Court, while dealing with the scope of s. 11(4) of the Act, had expressed the view that only such of the income which is left after deducting the expenditure or such of the money which is left with the trust after meeting all the expenditure, that the surplus income can be arrived at in the case of a business undertaking held under trust, that the income that has to be computed with regard to the trust is one based on the accounts of the trust, and that the monies that could be applied to charities could be only such monies as are arrived by deducting the actual expenditure as borne out by the accounts of the trust. In that case, wealth-tax and income-tax had been paid during the relevant years, though the payments are for preceding assessment years. It was held that they constitute expenditure of the year in which they are paid, that such payments will constitute expenditure incurred for carrying out the purposes of the trust, and that such payments cannot be excluded from exemption and are to be excluded from the income of the trust. We are in entire agreement with the said view. In this case, the amount of income-tax paid should be taken into account in the determination of the commercial profits and the available surplus in the hands of the trust for application for trust purposes and the said payment should be taken to be an outgoing of the year in which it was paid and, as such, constitute the actual expenditure which has to be deducted before the surplus income is arrived at for the purpose of s. 11(4). In Calavala Cumian Chetty Chanties [1982] 135 ITR 485, this court also has taken the view that taking into account the purpose for which the conditions of s. 11(1)(a) are imposed, it would be clear that the income to be considered will be that which is available in the hands of the assessee subject to any adjustment for any expenses extraneous to the trust, that it is only the balance that would require an examination for finding out whether the assessee has complied with the rule of accumulation, that the income from the properties held under trust will have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by s. 14, and 25 per cent, thereof will have to be ascertained, and that if the assessee has accumulated more than 25 per cent., the consequences contemplated in s. 11 will have to follow. In that case, the court expressed the view that having regard to the language in s. 11(1) the computation of the total income under s. 14 cannot be imported into s. 11(1), to find out what the income derived from the property held under trust is, for the purpose of the exemption under Chapter III.

14. Circular No. 5 dated 19th June, 1968, of the Central Board of Direct Taxes also throws light on this question. The relevant portion of the Circular is extracted below:

“2. Section 11(1) provides that subject to the provisions of sections 60 to 63, ‘the following income shall not be included in the total income of the previous year………………’ The reference in sub-section (1)(a) is invariably to ‘income’ and not to ‘total income’. The expression ‘total income’ has been specifically defined in section 2(45) of the Act as ‘the total amount of income computed in the manner laid down in this Act.’ It would, accordingly be incorrect to assign to the word ‘income’, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression ‘total income’, vide section 2(45).

3. In the case of a business undertaking held under trust, its ‘income’ will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Income-tax Officer, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible for exemption under section 11(1), the permitted accumulation of 25% will also be calculated with reference to this income.”

15. In the view we have taken that the income of the trust has to be determined for purposes of the section only after giving deduction for the income-tax paid, there may not be any surplus for the purpose of allocation.

16. We have to, therefore, agree with the view taken by the Tribunal in this case and answer the question in the affirmative and against the Revenue. The Revenue will pay the costs of the assessee. Counsel's fee Rs. 500.