P.N Bhagwati, C.J:— The assessee are the trustees of a trust called Shri Satya Vijay Patel Hindu Dharamshala Trust. The trust was created by a declaration of trust, dated 27th April, 1952, executed by one Mavji Jairam Patel and his wife, Bai Santokbai (hereinafter referred to as “the settlors”). By the declaration of trust the settlors settled on trust a certain immovable property known as Shri Satya Vijay Patel Hindu Dharamshala and the objects for which the trust property was to be held were set out as follows in clauses 2, 6, 7 and 8 of the declaration of trust:

“2. The object of the trust is—to use the trust property as a ‘dharamshala’ for Hindus and all Hindus shall have a right to use it as such on such terms and conditions as may be decided upon from time to time by the trustees.

6. After defraying all necessary expenses incurred in the realisation of the income of the subject-matter of trust and incurred in the maintenance of the trust property at the end of each Hindu year ending Asho Vad Amas, 75 per cent. of the balance of the income will be spent by the trustees as under:—

(a) The trustees shall use a maund and a quarter (a maund equal to 40 kacha seers) of the juwar daily in feeding the pigeons on the terrace of the trust property, but shall not use more than a maund and a quarter for the same purpose on a single day.

(b) If any balance remains out of the balance of the 75 per cent. of the balance net income after the amount spent in feeding the pigeons as above-mentioned, it will be spent by the trustees on Akhatrij and Ganesh Chauth and Ashadi Bij of every Kikram Samvat year, in distributing sweets to the children, in feeding cows and dogs.

2. The trustees shall decide as to the amount to be spent on each of the three days for each of the specific purpose mentioned in clause (b) but it will be decided upon by the trustees in such a way that the amount to be spent for specific purposes as mentioned in this paragraph (b) shall not exceed the total of the amount which is the balance remaining unspent after feeding the pigeons and forming 75 per cent. of the net balance of the yearly income.

7. The trustees shall deposit 25 per cent. of the balance of the net income in a scheduled bank or shall invest the same in a Government security as reserve fund to be utilised in the case of emergency in accordance with the unanimous opinion of the trustees expressed in the joint meeting of the trustees or as may be directed by the court.

8. The trustees shall not be entitled to sell or mortgage the trust property but shall be entitled to let out the portion of the trust property as may be decided from time to time by the trustees in a joint meeting or by a circular resolution on such terms and conditions as may be agreed by the trustees, but in such a way as not to frustrate the object of the trust. The trustees may enlarge the property by additional construction out of the reserve fund.”

3. It is surprising that in the year 1952 when social values had considerably changed and traditional beliefs had given way to rational and scientific approach based on social awareness and responsibility, the settlors should have provided that 75 per cent. of the net income of the trust should be mainly applied in feeding pigeons, cows and dogs. The settlors very probably did hot anticipate that there would be any large income from the trust property, 75 per cent. of which might be diverted for feeding pigeons, cows and dogs. The dominant object of the settlors in making the declaration of trust obviously was to establish a dharamshala for Hindus but since there might be surplus income from the trust property, subsidiary or ancillary provisions were made in clauses 6, 7 and 8 for application of such income. Now it appears that, by reason of proper management, the trust property yielded a fairly large amount of surplus income far exceeding what was perhaps anticipated by the settlors. The trustees were fortunately enlightened persons, conscious of their social responsibility and, therefore, instead of spending the entire 75 per cent. of the net income of the trust in such socially and economically futile activities as feeding pigeons, cows and dogs, they wisely and prudently expended only a part of the net income on these objects and accumulated the balance of the net income exceeding 25 per cent., and out of it, purchased certain immovable properties by way of investment. The trustees took ???he view that all these immovable properties including the dharamshala property originally settled upon trust were held under trust wholly for charitable purposes and the entire income of the trust was, therefore, exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922 (hereinafter referred to as “the old Act”), and they accordingly did not file any return of income for the assessment years 1955-56 to 1961-62. The Income-tax Officer while assessing the trustees for the assessment years 1962-63 and 1963-64 was, prima facie, of the view that the income from the immovable properties purchased by the trustees was not exempt from tax since “that income is not from the use of the trust property for carrying out the objects of the trust” and, in any event, 25 per cent. of the income of the trust which was to be accumulated as forming part of reserve fund under clause 7, was not eligible for exemption since there was no legal obligation on the trustees to utilise it for charitable purposes. The Income-tax Officer, on this view, entertained the belief that the income of the trust had escaped assessment by reason of failure on the part of the trustees to file a return of income for the assessment years 1955-56 to 1961-62 and he accordingly initiated proceedings for assessment of the trustees under section 147, clause (a), of the Income-tax Act, 1961 (hereinafter referred to as “the new Act”), for the assessment years 1955-56 to 1961-62. The trustees contested the proceedings and contended that the immovable properties purchased by the trustees formed as much the subject-matter of the trust as the dharamshala property originally settled by the settlors and the trustees were under a legal obligation to apply the whole of the income of these immovable properties for charitable purposes in the same manner as the income from the dharamshala property. The trustees also urged that the purposes set out in clause 7 for application of the reserve fund consisting of accumulation of 25 per cent. of the net income of the trust were charitable purposes and there was clearly legal obligation on the t???ustees to apply 25 per cent. of the net income of the trust for charitable purposes. These contentions of the trustees did not find favour with the In???ome-tax Officer who took the view that the income from the immovable ???operties purchased by the trustees was not exempt from tax and 25 per cent. of the income from the dharamshala property was also not eligible to exemption from tax. The trustees appealed against this decision of the Income-tax Officer to the Appellate Assistant Commissioner, there being a separate appeal in respect of each assessment year, but the appeals were unsuccessful. The trustees thereupon carried the matter in further appeal to the Tribunal. The same two contentions were urged on behalf of the trustees before the Tribunal. The Tribunal was impressed by these contentions and held that the income from the immovable properties purchased by the trustees was as much income from “property held under trust” as the income from the dharamshala property Which was originally settled on trust and it was, therefore, entitled to exemption under section 4(3)(i) and so far as 25 per cent. of the income from the dharamshala property was concerned, it was also exempt from tax under the same provision, since, under clause 7, fit could be spent only for a purpose consistent with the object of the trust and such purpose would be clearly a charitable purpose. The Tribunal accordingly upheld the claim for exemption made by the trustees in respect of both categories of income for the assessment years 1955-56 to 1961-62. The Commissioner was obviously dissatisfied with this decision of the Tribunal and he accordingly applied for a reference and on his application, the Tribunal referred the following question of law for the opinion of this court:

“(1) Whether the income from property other than the original dharamshala property and 25% of trust property in general qualified for exemption under section 4(3)(i) of the Income-tax Act of 1922 so far as the assessment years 1955-56 to 1961-62 are concerned?”

4. This was the controversy between the parties in regard to the assessments for the assessment years 1955-56 to 1961-62. But there was also another controversy between the parties and that related to the assessments for the assessment years 1962-63 and 1963-64. These assessments were governed by the provisions of the new Act. Section 11 of the new Act exempts from tax income from property held for charitable or religious purposes. We are concerned in this reference only with clause (a) of subsection (1) of section 11, which reads as follows:

“11. (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;….”

5. Now, during the previous years corresponding to the assessment years 1962-63 and 1963-64, the trustees constructed a new dharamshala and they spent Rs. 78,090.92 in Samvat year 2017 being the relevant previous year for the assessment year 1962-63 and Rs. 61,141.53 in Samvat year 2018 being the relevant previous year for the assessment year 1963-64, in carrying out this work of construction. The amount spent by the trustees in each of these two Samvat years in constructing the new dharamshala was not debited by them in the profit and loss account but the surplus of income over expenditure in the profit and loss account in each Samvat year was carried to the “liabilities” column of the balance-sheet and the amount spent on construction was shown in the “assets” column in the balance-sheet. The trustees contended before the Income-tax Officer in the course of assessment for the assessment years 1962-63 and 1963-64 that the entire surplus of income over expenditure in each of the two Samvat years was utilised by the trustees in constructing the new dharamshala and since the establishment of dharamshala was the dominant charitable purpose for which the trust was created, the whole of the income of the trust must be held to have been applied to the charitable purposes for which the trust properties were held by the trustees and it must accordingly be regarded as exempted from tax under section 11, sub-section (1), clause (a). This contention was negatived by the Income-tax Officer and, in appeal, also by the Appellate Assistant Commissioner. The trustees carried the matter in second appeal to the Tribunal but the Tribunal also rejected this contention. The Tribunal gave a three-fold reason for refusing to accept the claim of exemption made on behalf of the trustees. The Tribunal held that it was clear from the income and expenditure accounts for Samvat years 2017 and 2018 that the income of the trust for the two Samvat years was not utilised for construction of the new dharamshala but it was constructed from accumulations of past income and, the condition of section 11, sub-section (1), clause (a), which requires that income in respect of which exemption from tax is claimed should have been applied t??? the charitable purposes for which the trust property is held under trust was not satisfied. The Tribunal also pointed out, and that was the second reason given by the Tribunal, that even if the income of the trust for Samvat years 2017 and 2018 was utilised for the construction of the new dharamshala, it represented merely an investment of the trust funds and could not be said to be application of the income to the charitable purposes for which the trust properties were held by the trustees. The last reason given by the Tribunal was that, on a proper reading of clauses 7 and 8, only 25 per cent. of the net income of the trust could be utilised for construction of the new dharamshala and the remaining 75 per cent. could not be utilised for that purpose and, therefore, the net income of the trust to the extent of 75 per cent. could not be said to have been applied to the charitable purposes contemplated under the declaration of trust and was accordingly not entitled to exemption from tax under section 11, sub-section (1), clause (a). The Tribunal accordingly held that “the net income of the trust which is not actually applied for charitable purposes in the years of account in excess of 25 per cent. of the income from property or Rs. 10,000, whichever is higher, will be liable to tax for both the years” and directed the Income-tax Officer to determine the amounts liable to tax for the assessment years 1962-63 and 1963-64 bearing in mind “the directions” given by the Tribunal. The trustees, being aggrieved by this decision of the Tribunal made an application for a reference and the Tribunal accordingly, while referring the first question at the instance of the Commissioner, also referred the following two questions as questions Nos. (2) and (3) for the opinion of this court:

“(2) So far as the assessment years 1962-63 and 1963-64 are concerned, whether the use of trust money in construction of new dharamshala is an investment of trust fund or its expenditure in furtherance of the trust objective?

(3) Whether, looking to the facts and circumstances of the case, the assessee is entitled to any exemption under section 11 of its income earned during the accounting period relevant to assessment years 1962-63 and 1963-64?”

6. We shall proceed to consider these questions in the order in which they have been referred to us.

Question No. (1):

7. It is evident on a plain reading of the various clauses of the declaration of trust and particularly clauses 2 and 8, that the dominant object of the settlors in creating the trust was to establish dharamshala for the benefit of Hindus. The dharamshala property was, therefore, settled on trust with a direction that Hindus shall be entitled to use it as dharamshala on such terms and conditions as may be decided upon from time to time by the trustees. It was anticipated that there would be income from “the subject-matter of the trust” and the settlors, therefore, made provision in clauses 6, 7 and 8 for application of such income. The net income of the trust, after defraying necessary expenses, is to be applied as to 75 per cent. in the purposes set out in clause 6 and as to 25 per cent. in the purposes set out in clauses 7 and 8. Clause 6 consists of two sub-clauses (a) and (b). Sub-clause (a) of clause 6 provides that the trustees shall use one and a quarter maunds of juwar daily in feeding pigeons but at the same time carries an injunction that on no account more than a maund and a quarter shall be used on a single day. It would, therefore, be apparent that if the net income arising from “the subject-matter of the trust” is fairly large, 75 per cent. of the net income would not be exhausted in carrying out the charitable purpose set out in sub-clause (a) of clause 6 and a large part of it would remain for being utilised for carrying out the charitable purpose set out in sub-clause (b) of clause 6. Now the charitable purpose specified in sub-clause (b) of clause 6 is distributing sweets to the children and feeding cows and dogs on three festival days, namely, Akhatrij, Ganesh Chauth and Ashadi Bij. This charitable purpose also may not, having regard to its limited scope, be sufficient to exhaust the balance of 75 per cent. of the net income and some part of it may still remain unutilised. This situation is in fact so cited in the last sub-clause of clause 6. That sub-clause contemplates that the trustees may not spend the entire balance of 75 per cent. of the net income in carrying out the charitable purposes mentioned in sub-clause (b) of clause 6. It merely fixes an upper limit and says that the expenditure to be incurred on the charitable purpose set out in subclause (b) of clause 6 shall not exceed the balance of 75 per cent. of the net income. It is, therefore, clear that under the terms of the declaration of trust, the whole of the 75 per cent. of the net income of the “subject-matter of the trust” need not be utilised in carrying out the charitable purposes specified in sub-clauses (a) and (b) of clause 6; some part of it may remain unutilised and may be accumulated. In fact, we find from the record that every year the trustees wisely and prudently did not utilise the whole of the 75 per cent. of the net income of the trust in carrying out the charitable purposes specified in sub-clauses (a) and (b) of clause 6 but saved considerable part of such income and accumulated it. This accumulation of income having grown out of the corpus would become part of “the subject matter of the trust” particularly having regard to the general overriding charitable intention manifest in the declaration of trust. Vide Halsbury's Laws of England, third edition, volume 38, page 857, article 1443: Hunter v. Attorney-General [1899] A.C 309, 324 H.L.. The trustees may invest it in any manner authorized by law. Here the trustees invested it in purchase of immovable properties during the relevant years of account. These immovable properties when purchased became as much “the subject-matter of the trust” as the dharamshala property originally settled on trust and the trustees were clearly under a legal obligation to apply the net income of those immovable properties in the manner set out in clauses 6, 7 and 8 as in the case of income from the dharamshala property. It must, therefore, follow as a necessary corollary that if the dharamshala property was held on trust wholly for charitable purposes, these immovable properties must also likewise be regarded as held on trust wholly for charitable purposes and the income arising from them must be held to be exempt from tax under section 4(3)(i) of the old Act.

8. That takes us to the next question whether clause 7 imposes any legal obligation on the trustees to apply 25 per cent. of the net income of the trust properties to charitable purposes. Now what is enjoined by clause 7 is that 25 per cent. of the net income. of the trust properties shall be deposited in a scheduled bank or invested in a Government security “as reserve fund to be utilised in case of emergency in accordance with the unanimous opinion of the trustees expressed in the joint meeting of the trustees or as may be directed by the court”. The argument of the revenue was that the purpose specified in clause 7 is vague and indefinite and it permits the trustees to utilise 25 per cent. of the net income of the trust properties for non-charitable purpose; there is nothing in clause 7 or in any other clause of the declaration of trust to show precisely as to what is the kind of emergency contemplated in clause 7 for which 25 per cent. of the net income of the trust properties may be utilised by the trustees. The description of the purpose by using the word “emergency” is so shadowy and indefinite that the trustees can, without committing a breach of their obligation under clause 7, apply 25 per cent. of the net income of the trust properties to a non-charitable purpose. The trust properties cannot, therefore, contended the revenue, be said to be held on trust for charitable purposes so far as 25 per cent. of the net income of the trust is concerned. This contention of the revenue, plausible though it may seem at first sight, is, in our opinion, without force and must be rejected.

9. It suffers from two major defects. In the first place, it seeks to read clause 7 in isolation as if it were the only clause in the declaration of trust. This is a wholly erroneous approach in construing a clause of a settlement. It is now a well-settled rule of interpretation of a settlement that the intention of the settlor must be collected from the settlement as a whole and no one clause should be construed in isolation, for the intention of the author of the settlement is to be found not in one part of the settlement or in the other but in the entire settlement and that intention can best be gathered by viewing a particular part of the settlement, not detached from its context in the settlement, but in connection with its whole context. We must, therefore, look at the declaration of trust as a whole in order to see what is the true meaning and import of the word “emergency” as used in clause 7. Now, viewing the declaration of trust as a whole, it is clear that the main object of the trust is to establish dharamshala for the use of Hindu public and it is in the context of this main object of the trust that we have to determine what is the true meaning and connotation of the word “emergency” as used in clause 7. Does it mean any kind of emergency which would also include a non-charitable purpose or is it confined only to emergency vis-a-vis carrying out the main purpose of the trust which is admittedly charitable? It is true that clause 7 does not specify in so many terms what is the emergency for which 25 per cent. of the net income may be spent by the trustees but it is clear on reading the declaration of trust as a whole that the emergency that is contemplated in this clause is emergency in relation to carrying out the main object of the trust. If an emergent situation arises which would impede or frustrate the carrying out of the main object of the trust, it would be an emergency within the meaning of clause 7. Take, for example, a case where the dharmashala collapses and it is not possible to use it as a dharmashala without carrying out extensive repairs to it. The trustees may, in such a case, utilise 25 per cent. of the net income to meet the situation arising out of this emergency, in order to enable the trustees to properly and effectually carry out the main object of the trust. Clause 7 contains an ancillary or subsidiary provision intended to be utilised in furtherance of the main object of the trust and it does not, therefore, contemplate any and every kind of emergency but merely emergency which has some connection or relation to the carrying out of the main object of the trust. The words “as may be directed by the court” are also very significant. These words indicate that the emergency contemplated in clause 7 is not something shadowy or indefinite but it is a concept recognizable and identifiable by the court as emergency and in the context this can mean only emergency haying connection or relation to the carrying out of the main object of the trust. Moreover, even if the words “emergency” were vague or indefinite, the court must construe it in a sense which would include only charitable purpose and exclude what is non-charitable. It is a well-settled principle of law that where there is general overriding trust for charitable purposes but some of the particular purposes to which the trust fund may be applied are not strictly charitable or one of two alternative modes of application is invalid in law, the trust would be held to be good, but the trustees would be restricted from applying the trust fund to the purpose or in the manner which is objectionable. Vide the third class of cases set out by Lord Davey, at page 324, in Hunter v. Attorney-General. Here there is clearly a general overriding charitable intention manifest in the declaration of trust and, therefore, on an application of this principle, it must be held that even if the word “emergency” were vague and indefinite, the trustees would be bound to apply 25 per cent. of the net income only where the emergency relates to fulfilment of a charitable purpose and not where the purpose is an objectionable purpose. The Tribunal was, therefore, clearly right in taking the view that, even under clause 7, the trustees were under a legal obligation to apply 25 per cent. of the net income of the trust properties to charitable purposes and this income was exempted from tax under section 4(3)(i) of the old Act.

Question No. (2):

10. This question becomes relevant because under section 11, sub-section (1), clause (a), of the new Act, exemption can be claimed in respect of income of the trust utilised in constructing the new dharamshala and, for the purpose of this question, we will assume that the new dharamshala was constructed out of income of the trust for Samvat Years 2017 and 2018 being the relevant previous years for the assessment years 1962-63 and 1963-64, though there is a contrary finding by the Tribunal only if it can be shown that the utilisation of such income was not by way of investment of surplus trust funds but it represented application of income to the charitable purposes for which the trust properties were held by the trustees. The contention of the revenue was, and this contention appears to have found favour with the Tribunal, that the construction of the new dharamshala represented investment of surplus trust funds because the new dharmashala was a capital asset, and expenditure incurred by the trustees in acquiring a capital asset could not be regarded as expenditure for carrying out the charitable objects of the trust. But this contention is wholly unsustainable and must be rejected. It seeks to limit the scope and ambit of the exempting provision contained in section 11, sub-section (1), clause (a), by reading words which are not there. The only requirement of section 11, sub-section (1), clause (a), is that the income of the trust must be applied to the charitable purposes for which the properties are held on trust by the trustees. It does not say that the application of the income should be such that it necessarily results in revenue expenditure. The charitable purpose may, in a given case, require for its fulfilment, purchase of a capital asset and where income is applied for purchase of such a capital asset, it would still be application of income to the charitable purpose. Take, for example, a case where there is a trust for maintenance of a hospital and the trustees are bound to apply the net income of the trust properties for maintaining the hospital. The trustees of such a trust may, for the purpose of making the hospital a well-equipped medical unit and improving the efficiency of medical service at the hospital, purchase costly X-ray equipment or order medical or surgical appliances out of the income of the trust properties. Can it be suggested for a moment, in such a case, that merely because income of the trust properties is applied for purchasing a capital asset, it represents investment of the income of the trust properties and not application of such income for carrying out the objects of the trust? The answer is obviously “No”. The same reasoning must apply in the present case. Here, as is evident from clause (2), the dominant object of the settlors was to establish dharamshala for the use of the Hindu public and clause 8 contemplated that the trustees may enlarge the dharamshala by additional construction. The establishment of additional dharamshala was, therefore, clearly a charitable purpose which fell within the objects of the trust. It was in order to carry out this charitable object that the trustees utilised the income of the trust properties and the amounts spent by the trustees in the construction of the new dharamshala were, therefore, clearly by way of application of income of the trust properties for carrying out a charitable purpose of the trust. The Tribunal was, in our view, wrong in holding that the use of moneys in the construction of the new dharamshala was an investment of the trust funds and not its expenditure.

Question No. (3)

11. It is clear on a plain reading of the language of section 11, sub-section (1), clause (a), that income to be exempt under this statutory provision must be “income derived from property held under trust wholly for charitable or religious purposes.”. But even where this condition is satisfied, the whole of the income would not be exempted but only that part of it which is applied to the charitable or religious purposes as provided in the trust. The second part of the clause, however, enacts an exception to the general rule. It provides that even if such income is not applied to the charitable or religious purposes, but is accumulated for application to such purposes, it would still be exempt but only to the extent to which it is not in excess of 25 per cent. of the income of the trust properties or rupees ten thousand, whichever is higher. The trustees may, therefore, choose not to spend up to 25 per cent. of the income from the trust properties and accumulate it for application to the charitable or religious purposes of the trust at a later date, without incurring forfeiture of the benefit of the exemption given under this statutory provision. Now the case of the trustees was that out of the net income of the trust properties, they expended moneys for carrying out the charitable purposes set out in clause 6 and whatever surplus remained—which was carried to the “liabilities” side of the balance-sheet—was spent by them in the construction of the new dharamshala and, therefore, the whole of the income of the trust properties was applied to the charitable purposes for which the trust properties were held by the trustees and it was accordingly exempt from tax under section 11, sub-section (1), clause (a). The revenue sought to repel the applicability of section 11, sub-section (1), clause (a), by putting forward a two-fold contention. One contention was that no part of the income of the trust properties for the relevant previous years was applied in the construction of the new dharamshala and the other was that, in any event, only twenty-five per cent of the net income of the trust properties could be spent under the trust for construction of the new dharamshala and the remaining seventy-five per cent. of the net income, to the extent to which it was applied in construction of the new dharamshala, did not qualify for exemption under the section. These rival contentions we shall now proceed to consider.

12. So far as the first contention is concerned, we have a finding by the Tribunal that the income of the trust properties for the relevant previous years was not applied in the construction of the dharamshala: a new dharamshala was constructed from the accumulations of the past income. The revenue contended that this finding is a finding of fact and since it has not been challenged on behalf of the trustees by raising a specific question in the reference, it is not open to this court to go behind it, even if it is defective in law. The argument of the revenue was that the court must accept the finding as it is and proceed to decide the reference on the basis that the new dharamshala was constructed out of the accumulations of past income and no part of the income of the relevant previous years was applied in constructing the new dharamshala. Now if this contention is correct, the trustees must obviously fail for, in that event, their case would not fall within the plain language of section 11, sub-section (1), clause (a). But we do not think this contention is well founded. The third question which is submitted for our opinion is wide enough to include the controversy whether the net income of the trust properties for the relevant previous years after meeting the expenditure incurred in carrying out the charitable purpose set out in clause (6) shall apply in construction of the new dharamshala or the new dharamshala was constructed out of the accumulations of past income. If this controversy were not comprised in the third question, it is difficult to understand why the third question should have been at all referred to us. It would have been futile to refer the third question because the answer would have been self-evident. If the finding of the Tribunal in regard to this controversy were intended to be immune from scrutiny because no specific question challenging its validity was sought by the trustees, the trustees could in no case have been held to be entitled to exemption under section 11, sub-section (1), clause (a), in respect of any part of the trust income and the reference of the third question would have been an empty formality. The Tribunal could never have intended to make a reference which was futile. The reference of the third question assumes meaning and significance only on the hypothesis that it comprises the controversy in regard to the question whether the surplus income of the trust properties for the relevant previous years was applied in constructing the new dharamshala. This question must, therefore, be held to be implicit in the broad framework of the third question. It may also be noted that the language in which the third question is framed is of sufficient width and amplitude to cover all questions bearing on the applicability of section 11, sub-section (1), clause (a). It is, therefore, open to us to consider whether the surplus net income of the trust properties for the relevant previous years was applied in constructing the new dharamshala or the new dharamshala was constructed out of accumulations of past income.

13. The finding reached by the Tribunal was that no part of the surplus net income of the trust properties for the relevant previous years was utilised in constructing the new dharamshala and the new dharamshala was constructed out of the accumulations of past income. This finding was challenged on behalf of the trustees and their contention was that it was based on an erroneous inference drawn from the accounts maintained by the trustees. Now, it is clear from the judgment of the Tribunal that what strongly impressed the Tribunal in taking a view against the trustees was that the expenditure incurred by the trustees in constructing the new dharamshala was not debited to the profit and loss account, The argument which found favour with the Tribunal was that if the expenditure incurred by the trustees in constructing the new dharamshala had come out of the surplus net income of the trust properties for the relevant previous years, such expenditure could have been debited by the trustees to the profit and loss account, but that was not done in the present case and this circumstance went to show that no part of the surplus net income of the trust properties for the relevant previous years was utilised for the purpose of meeting such expenditure but it was paid out of the accumulations of past income. We cannot give our assent to this line of argument which found acceptance with the Tribunal. We fail to see how the Tribunal could draw an adverse inference against the trustees from the mere fact that expenditure on the construction of the new dharamshala was not debited in the profit and loss account. The expenditure incurred in constructing the new dharamshala, though undoubtedly expenditure for carrying out the dominant charitable purpose for which the trust properties were held by the trustees, was not revenue expenditure: it was expenditure for bringing into existence a capital asset: it did not go out of the books of account but was substituted by a capital asset. Such expenditure, obviously, could not be debited to the profit and loss account according to any recognised method of book-keeping even if it was made out of the net income of the trust properties for the relevant previous years. The only way in which such expenditure could be accounted for in the books of account was by showing it on the assets side of the balance-sheet and that is precisely what was done in the present case. The Tribunal was, therefore, clearly in error in taking the view that because the expenditure incurred in constructing the new dharamshala was not debited to the profit and loss account, it could not have come out of the net income of the trust properties for the relevant previous years. We think that, in the absence of any strong and cogent circumstance indicating that the new dharamshala was constructed out of the accumulations of past income, the normal presumption would be that the expenditure on the construction of the new dharamshala was made out of the net income of the relevant previous years except of course to the extent to which such expenditure was in excess of the net income. The revenue has not been able to point out any countervailing circumstance which would offset the weight of this presumption. The balance-sheets of the trust in fact show that the expenditure on the construction of the new dharamshala in Samvat years 2017 and 2018, being the relevant previous years, could not have come wholly out of the accumulations of past income and that the entire net surplus income of the trust properties for those Samvat years was utilised in constructing the new dharamshala. Take, for example, the expenditure incurred in constructing the new dharamshala in Samvat year 2018. The amount expended by the trustees was Rs. 61,141.53. The balance-sheet of the trust for Samvat year 2018 shows that at the ???ommencement of the year there was a balance of Rs. 2,34,132.14 to the credit of the income and expenditure account. That was the accumulation of past income but all of it was invested in the assets shown on the assets side of the balance-sheet for Samvat year 2017. Barring outstanding loans to the extent of Rs. 8,000 which seem to have been realised in Samvat year 2018, none of the other assets in which the accumulation of past income stood invested at the beginning of Samvat year 2018 was liquidated for the purpose of meeting the expenditure incurred in constructing the new dharamshala in Samvat year 2018. The balance-sheet for Samvat year 2018 shows that the trustees in fact borrowed an aggregate sum of Rs. 17,000 on interest-free loan in order to meet the expenditure of constructing the new dharamshala. The expenditure on constructing the new dharamshala thus came out of the net surplus income of Rs. 31,541.26, borrowing of Rs. 17,000, realisation of outstanding loans of Rs. 8,000 and recovery of some outstanding rent and part of cash and bank balance. The whole of the net surplus income of Rs. 31,541.26 was thus utilised in constructing the new dharamshala in Samvat year 2018. Similarly, a comparison of the balance-sheets for Samvat years 2016 and 2017 would show that the whole of the net surplus income of Rs. 35,298 was utilised in constructing the new dharamshala in Samvat year 2017. We must, therefore, reach the conclusion that the net surplus income of the trust properties for the relevant previous years was applied wholly in constructing the new dharamshala and the finding of the Tribunal to the contrary must be rejected.

14. That takes us to the second contention whether the whole of the net surplus income of the trust properties applied in constructing the new dharamshala would be exempt from tax or only such part of it as was equivalent to twenty-five per cent. of the net income of the trust properties would be exempt and the balance would be liable to suffer tax. The argument of the revenue was that under clauses 7 and 8 of the declaration of trust only twenty-five per cent. of the net income of the trust properties could be spent for construction of the new dharamshala and, therefore, the net surplus income of the trust properties utilised in constructing the new dharamshala, to the extent to which it exceeded twenty-five per cent. of the net income of the trust properties, could not be said to be applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly not exempt from tax under section 11, subsection (1), clause (a). We do not think this argument is well founded. It is no doubt true that clauses 7 and 8 of the declaration of trust contemplate application of only twenty-five per cent. of the net income of the trust properties in the construction of a new dharamshala but it must be remembered, and we have already adverted to this fact earlier, that the dominant object of the settlors in creating the trust was to establish dharamshala for the benefit of Hindus and that being the overriding charitable intention manifest in the declaration of trust, the utilisation of net surplus income of the trust properties in the construction of the new dharamshala, even if it exceeded twenty-five per cent. of the net income of the trust properties, could not be said to be application to purposes other than the charitable purposes of the trust. Even apart from clauses 7 and 8 of the declaration of trust, the trustees were entitled to spend the net surplus income of the trust properties for constructing the new dharamshala. So long as the application of the net surplus income of the trust properties to the construction of the new dharamshala could not be said to be outside the purposes of the trust, and indeed it could not be, for, otherwise, it would amount to breach of trust which it was clearly not, and which even the revenue did not allege, it must be held that the application was to the charitable purposes of the trust. The whole of the net surplus income of the trust properties was, therefore, clearly applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly exempt from tax under section 11, sub-section (1), clause (a).

15. We, therefore, answer the questions referred to us as follows: Question No. 1, in the affirmative. Question No. 2: the use of the trust money in the construction of the new dharamshala was not an investment of trust fund but it was expenditure in furtherance of the trust objective, and Question No. 3, in the affirmative. The Commissioner will pay the costs of the reference to the assessee.