Director Of Income-Tax (Exmp.) v. Girdharilal Shewnarain Tantia Trust

The Judgment of the Court was delivered by

Ajit K. Sengupta, J.:— this reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1981–82, the following question of law has been referred to this court:

“Whether, on the facts and in the circumstances of the case and in the light of the proper interpretation of section 11 of the Income-tax Act, 1961, the Tribunal is justified in holding that the capital gain amounting to Rs. 2,91,644 is eligible for deduction under section 80T of the Income-tax Act, 1961?”

2. The facts leading to this reference are that the assessee is a trust assessed to tax in respect of the capital gain of Rs. 2,91,644 on sale of shares. The Assessing Officer rejected the assessee's claim for deduction under section 80T of the Income-tax Act, 1961. The Commissioner of Income-tax (Appeals) declined to interfere in the matter. On an exami-nation of the facts and in the circumstances of the case and on interpre-tation of the relevant provisions of the Act, the Tribunal held that:

“The lower authorities were not justified in taking into account the entire long-term capital gain of Rs. 2,91,644. We further hold that the said sum of Rs. 2,91,644 is eligible to deduction of Rs. 1,19,658 (Rs. 5,000 plus Rs. 1,14,658) under section 80T of the Act; in the circumstances, therefore, we direct the Income-tax Officer to recompute the assessee's taxable income accordingly.”

3. Section 80T provides that where the gross total income of an assessee not being a company includes any income chargeable under the head “Capital gains” relating to capital assets other than short-term capital assets, a straight deduction to the extent of the prescribed percentage of such gains from the total income itself shall be allowed. The first Rs. 5,000 of the long-term capital gains is not liable to any tax and has to be excluded from the amount of long-term capital gains and, on the balance, the relief is allowable at the prescribed percentage. The question is whether a charitable or religious trust to which section 11 applies would be entitled to get the benefit of deduction in respect of the capital gains as mentioned in section 80T.

4. Section 11 of the Income-tax Act provides that the income from any property held under trust for charitable or religious purpose is exempt from tax to the extent to which such income is applied to such purposes in India. Over the years, the relevant provisions have been modified with a view to reducing the possibilities of misuse of the tax concession by persons connected with the affairs of the trust or institution.

5. One of the conditions for exemption in the case of a trust or insti-tution for charitable or religious purposes is that 75 per cent, of the income during any previous year shall be applied for its objects. In other words, income shall not be included in the total income of the previous year of the trust or religious institution to the extent to which the income accumulated or set apart is not in excess of 25% of the income from the property held for charitable or religious purposes. If the income is to be accumulated for application to the trust purposes in India, it may be accumulated to the extent of 25 per cent, of the income of the trust. The question is what does the word “income” connote in the context of the exemption under section 11 of the Act. The “income” contemplated by the provisions of section 11 is the real income and not the income as assessed or assessable. If the accounts of the trust are properly main-tained according to the principles of accountancy, the accumulation shall be up to 25 per cent, of the net income as per accounts and not as per assessment. On a reading of section 11(1)(a), it will be evident that the reference in that section is to “income” and not to “total income” as defined in section 2(45).

6. The question as to the nature of the income in the context of section 11 came up for consideration before a Division Bench of this court in CIT v. Jayashree Charity Trust, [1986] 159 ITR 280. There, one of the questions was whether the tax deducted at source on dividend may be treated as real income for the purpose of section 11. The Division Bench considered the scope and effect of section 11(1)(a) and observed as follows (at page 284):

“To resolve this controversy, regard must be had to the language that has been employed and also to the object of the statute. It is well-settled that, if possible, the words of a statute must be construed so as to give a sensible meaning to them. The words ought to be construed ut res magis valeat quam pereat. The entire object of section 11 is to grant immunity to the income of a charitable trust from income-tax. The immunity, however, is confined ‘to the extent to which such income is applied to such purposes in India’. The exemption will be denied if the income is not actually applied for charitable purpose. Only 25 per cent, of the income or Rs. 10,000, whichever is lower, can be accumulated for application to charitable purpose. If a portion of the income of a chari-table trust is not applied for charitable purposes or is accumulated beyond the permitted limit, that portion will not qualify for the immunity from taxation which has been granted by section 11. In other words, the income that has not been applied for charitable purpose or accumulated beyond the prescribed limit for charitable purpose will not enjoy the immunity from taxation. This exclusion from the immunity that has been granted by section 11 must be confined to the real income of the trust. The amount of income which is taken away by deduction at source under section 194 is not available to the trust for application to charitable purposes. Section 198 provides that the amounts deducted by way of income-tax shall be deemed to be ‘income received’. What is deemed to be income can neither be spent nor accumulated for charitable purpose. ‘Application’ or ‘accumulation’ can only be of real income which has actually been received by an assessee. If a portion of the income has been taken away by way of income-tax deducted at source, that portion is not available to the assessee for application or accumulation. Section 11 cannot be interpreted to mean that the amount which has been deducted at source by way of income-tax shall be included in the ‘total income’ of the trust and brought under taxation. It is true that section 198 provides that the sums deducted by way of income-tax shall be deemed to be income received. But, the deeming provisions of section 198 should not be con-strued in a way to frustrate the object of section 11. The entire income that has been actually received by the assessee has been applied for charitable purpose. The immunity from taxation that has been granted by section 11 cannot be denied to the assessee on the ground that the notional income remains unspent or unaccumulated for the purpose of charity. The ‘accumulation’ or ‘application’ in section 11(1)(a) must be of real income. In my judgment, the immunity from taxation that has been granted to the income of a charitable trust cannot be denied on the ground that the deemed income under section 198 has not been actually spent for the purpose of charity.

7. The Madras High Court in the case of CIT v. Rao Bahadur Calavala Cunnan Chetty Chanties, [1982] 135 ITR 485, held that taking into account the purposes for which the conditions of section 11(1)(a) were imposed, it would be clear that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. It was held that the income from properties held under trust would have to be calculated in the commercial manner. It was observed that section 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent, of the income. The application as well as the accumulation has necessarily to be of the income as accounted for in the accounts and not as computed under the Income-tax Act, subject, of course, to what is provided in sub-section (4) of section 11.

8. We are in respectful agreement with the view expressed by the Madras High Court. This judgment is also in consonance with the view taken by the Andhra Pradesh High Court in the case of CIT v. Trustee of H.E.H The Nizam's Supplemental Religious Endowment Trust, [1981] 127 ITR 378.”

9. There, the Division Bench also considered a circular of the Central Board of Direct Taxes dated June 19, 1968 (see [1969] Indian Tax Laws, Appx. II, p. lxxxv). It was stated in the said circular, inter alia, as follows (at page 285 of 159 ITR):

“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)…

4. Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word ‘income’ should be understood in its commercial sense, i.e, book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent, of the latter, if the trust is to get the full benefit of the exemption under section 11(1).

5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed as above, will be the ‘income’ of the trust for purposes of section 11(1). Further, the trust must spend at least 75 per cent, of this income and not accumulate more than 25 per cent, thereof. The excess accumulation, if any, will become taxable under section 11(1).”

10. The Division Bench thereupon proceeded to hold as follows (at page 286):

“This circular makes it clear that the word ‘income’ in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny, the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.”

11. In our view, therefore, it is the real income which is to be taken into account. The question of deduction which is otherwise allowable in computing the income in a case not covered by section 11 cannot arise while deciding the percentage of application or accumulation. The question of deduction comes only when the income is otherwise chargeable to tax under the provisions of the Income-tax Act, 1961. It cannot be disputed that section 11 has given benefit to an assessee-trust, which applies its income for charitable or religious purposes. If the entire income is applied for charitable purpose, the question of payment of any tax would not arise. If a trust desires to accumulate income in excess of the limits laid down in section 11(1), the conditions specified in section 11(2) of the Act 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. Further, if the trust does not comply with the conditions laid down in section 11(2), the amount which becomes liable to assessment under section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in section 11(1) of the Income-tax Act, 1961. In other words, such an assessee loses the benefit of the accumulation permitted under section 11(1). The question of chargeability of a part of income to tax which is not exempt arises only when the accumulation is more than the permissible limit. While making assessment of that part of the income which is in excess of the specified percentage, such taxable income of a trust cannot be classified under different heads. It is only when any income is assessed under a particular head, that the question of allowing deduction under that head arises for consideration. In a case where an assessee-trust has income from different sources and has applied such income and a part of such income comes within the ambit of taxation, it will not be possible for earmarking any part of such an income to a particular head. The head of income is irrelevant unless the entire income comes from one specific head. Since the income from property held under trust has to be arrived at in a normal commercial manner and when the income from property held under trust as such is excluded, there is no scope of computing the income from property by applying the provisions of section 14 of the Act. The provision of section 14 cannot be pressed into service in such a case. Therefore, the question of allowing any statutory deductions as contem-plated by the different provisions of the Act dealing with different heads of income in computing the income accumulated does not arise when the trust loses the benefit of accumulation.

12. Our attention has been drawn to the decision of this court in Jayashree Charity Trust, [1986] 159 ITR 280, 286 (Cal), where relief under section 80K was allowed. There, the court proceeded on the footing that section 80K would be applicable. It was recorded that “there is no dispute that the assessee is entitled to deduction in respect of dividends attrib-utable to profits and gains from industrial undertakings” (emphasis* supplied). The Division Bench of this court had no occasion to consider the controversy raised before us as regards allowability of deduction under section 80T. In our view, the decision in Jayashree Charity Trust's case, [1986] 159 ITR 280 (Cal) is not an authority for the proposition that even if a part of the income is taxable because the benefit of accumulation is lost, all the statutory deductions allowable under the different heads of income would apply in dealing with such income. It has been specifi-cally made clear that the income from the property held for charitable or religious purposes would be exempt subject to the provisions of sections 60 to 63. The question is whether deduction can be allowed under section 80T on the capital gains derived by the assessee-trust.

13. There is another aspect of the matter. Sub-section (1A) has been inserted in section 11 by the Finance (No. 2) Act, 1971, with retrospective effect from April 1, 1962. It is necessary to consider the provision for appreciating the contentions raised on behalf of the parties. Under section 11 of the Income-tax Act, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within the three months next following. As “income” includes “capital gains”, a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. By sub-section (1A), it has been pro-vided that, in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e, full value of consi-deration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious pur-poses while, in a case where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gains as is equal to the amount, if any, by which the amount so utilised exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes.

14. From a combined reading of sections 11(1)(a), 11(1)(b) and section 11(1A), it is clear that the income of a trust including capital gains is treated on a separate footing and the assessee-trust has to fulfil the conditions laid therein for the purpose of availing of exemptions from taxation. The income from property held for charitable or religious purposes cannot, therefore, be equated with the income which is com-puted under the general provisions of the Act in respect of other assessees who are not entitled to the benefit of the aforesaid provisions.

15. For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the Revenue. There will be no order as to costs.

Shyamal Kumar Sen, J.:— I agree.