Mohanlal Hargovinddas Public Charitable Trust v. Commissioner Of Income Tax

1. The Tribunal has referred for our answer the following questions of law ;

"(1) Whether, on the facts and in the circumstances of the case, the rejection of the assessee's claim to exemption from tax in respect of the sum of Rs. 37,018 under Section 11(1)(a) of the Income-tax Act is valid in law ?

(2) Whether, on the facts and in the circumstances of the case, the exemption from tax granted under Section 11(2) of the Income-tax Act, 1961, in respect of the sum of Rs. 2,20,000 is valid in law ?"

2. The assessee in this case is Mohanlal Hargovinddas Public Charitable Trust. There is no dispute that the trust is a public charitable trust and that the charitable activities of the trust are limited to charities within India. The relevant assessment year is 1966-67 for which the previous year ended on 31st December, 1965. In the return, the assessee claimed that the entire "total income" of Rs. 3,62,242 was derived from property held under trust for a charitable or religious purpose and that it was either applied for such purposes or was accumulated for application to such pur-poses under Section 11(1)(a) and Section 11(2) of the I.T. Act, 1961, and was, therefore, wholly exempt from tax. Out of the income, the assessee had applied Rs. 1,03,686 for charitable purposes, invested Rs. 2,20,000 in Government of India National Defence Loans, 1968, creating a specific reserve for a Cancer Hospital, and carried the balance of Rs. 37,018 as surplus to the balance-sheet. The ITO held that Rs. 37,018 could not be said to be accu-mulated for the purposes of the trust as it was not set apart for future expenditure for such purposes and so the amount did not satisfy the requirement of section 11(1)(a) for exemption. The ITO further rejected the assessee's claim to exemption under section 11(2) in respect of the amount of Rs. 2,20,000 invested in Government securities on the ground that such investment as prescribed in section 11(2) had to be made not only in respect of the excess amount chargeable under section 11(1)(a) but of the entire unspent balance including the exempted portion and since the assessee had not invested the entire surplus of Rs. 2,57,018 in Government securities, the conditions of section 11(2) for exemption were not fulfilled. The. ITO thus brought to charge the entire sum of Rs. 2,57,018 as liable to tax in the hands of the assessee. The AAC held that the entire amount of Rs. 2,57,018 was exempt from tax as the conditions of Section 11(1)(a) and Section 11(2) were satisfied. The Tribunal held that section 11(2) did not mean that it allowed exemption in respect of accumulations over and above 25% exempted under Section 11(1)(a) and that Section 11(2) referred to the entire accumulation inclusive of those referred to in section 11(1)(a). The Tribunal held that out of the total accumulations of Rs. 2,57,018,- only a sum of Rs. 2,20,000 which was invested in Government securities was exempt while the balance of Rs. 37,018 which was not so invested and was not earmarked for any specific public charitable purpose was not exempt either under section 11(1)(a) or under section 11(2). The Tribunal on this reasoning allowed the department's appeal in part by holding that the sum of Rs. 37,018 had to be assessed as taxable income of the assessee.

3. Section 11, as in force at the relevant time, read as follows :

"(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 charit-able 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;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from the property held under trust in part;.....

Explanation.--For the purposes of Clauses (a) and (b), in computing twenty-five per cent. of the income from any such property as is referred to in the said clauses for any previous year, the income from such property for the year immediately preceding the previous year may be adopted, if that income is higher than the income for the previous year.

(2) 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-

(a) such persons have, by notice in writing given to the Income-tax Officer in the prescribed manner, specified the purpose for which the income is being accumulated or set apart, and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

(b) the money so accumulated or set apart is invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944 (XVIII of 1944), or in any other security which may be approved by the Central Government in this behalf....."

4. A reading of Sub-section (1)(a) would show that it deals with two categories of exemptions of income from property held under trust wholly for charitable or religious purposes which are not to be included in the total income. Under the first category falls that income which is applied to such purposes in India. This category is wholly exempt. By the word "applied" is meant actually applied or actually expended. The second category comprises of that income which is accumulated for application for charitable or religious purposes in India. The restriction, however, of the second category of exemption is that the extent to which the income so accumulated is not in excess of 25% of the income or Rs. 10,000, whichever is higher, is alone exempt. Sub-section (2) of Section 11 removes this restriction if the conditions mentioned in Clauses (a) and (b) of that sub-section are satisfied. The first condition is that notice in the prescribed form specifying the purpose for which the income is being accumulated or set apart which shall in no case exceed ten years, has to be given to the ITO. The second condition is that the money so accumulated or set apart is invested in a Government security or in any other security which may be approved by the Central Government. Now, the Section is not happily worded but a reading of sub-Sections (1)(a) and (2), in our opinion, leads to the inference that Sub-section (2) deals with the accumulations which are in excess of 25% and not covered by Sub-section (1)(a). In so far as the income is actually applied or expended in India for haritable purposes there can be no dispute that it is wholly exempt. As regards accumulations, the scheme is that if the accumulations are in excess of 25% of the income or Rs. 10,000, whichever is higher, they are covered by Sub-section (1)(a) but for the excess accumulations, the assessee cannot be given any exemption or benefit unless he complies with the requirements of Sub-section (2)(a) and (b). Sub-section (2), in our opinion, does not cover the accumulations which are not included in the total income under Sub-section (1)(a). The words "the restriction specified in Clause (a).....

of Sub-section (1) as respects accumulation.....shall not apply" as used in Sub-section (2), in our opinion, cover only that part of the accumulations which is beyond the restriction mentioned in Sub-section (1)(a), i.e., beyond 25% of the income or Rs. 10,000, whichever is higher. In respect of such accumulations, if the assessee wants exemption from tax he has to comply with the conditions mentioned in Clauses (a) and (b) of Sub-section (2). Indeed, this is how the section was understood by the Central Board of Revenue in its Circular No. 45 dated 2nd September, 1970 [See Taxmann's Direct Taxes Circulars, Vol.2, p. 328; [1971] 79 ITR (St.) 33, 41; Indian Tax Laws (1971) Concise Edn., Pt, II, pp, Ixxxiv, xcii]. This is also the view taken by the Karnataka and Jammu and Kashmir High Courts [See Addl. CIT v. A. L. N. Rao Charitabte Trust [1976] 103 ITR 44 (Kar) and CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387 (J & K)]. The same view is expressed in Kanga and Palkhivala's Income-tax Act (seventh edn.), Vol. I, p. 291, In our opinion, therefore, it was not necessary that, to claim exemption for the amount of Rs. 37,018 which was less than 25% of the income and which fell within Sub-section (1)(a), the assessee should have complied with the conditions mentioned in Clauses (a) and (b) of Sub-section (2) in respect of this amount. It is not disputed that the remaining amount of accumulations of Rs. 2,20,000 fulfilled the conditions of Clauses (a) and (b) of Sub-section (2).

5. It was argued by the learned counsel for the department that the amount of Rs. 37,018 cannot be said to be accumulated within the meaning of Sub-section (1)(a) as it was only carried forward in the balance-sheet and was not set apart for charitable or other religious purposes. The relevant words in Sub-section (1)(a) in this respect are: "where any such income is accumulated for application to such purposes in India". Such purposes here refer to charitable and religious purposes. Now, we are here dealing with a case where the income derived from property is held under trust wholly for charitable and religious purposes and the activities of the trust are limited to charities within India. In this background, any income of the trust which is not actually applied and is carried forward is accumulated for application to such purposes in India within the meaning of Sub-section (1)(a). A comparison of the language of Sub-section (1)(a) with the language in Sub-section (2)(a) shows that whereas for the applicability of Sub-section (2)(a) the purpose for which the income is accumulated or set apart has to be specified, this condition is not necessary for the applicability of Sub-section (1)(a). All that is necessary under Sub-section (1)(a) is that accumulation of income should be for application to charitable or religious purposes in India. This condition is fulfilled in view of the fact that the income of the trust in the instant case can be spent only for charitable or religious purposes within India. The learned counsel referred us to the decision of the Supreme Court in H. E. H. .Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 and pointed out that the act of merely carrying forward the savings will not amount to accumulation of income. In that case, the Supreme Court was dealing with Section 4(3)(i) of the 1922 Act and with a trust the activities of which were not limited within the taxable territories. It was in that context that it was observed that "accumulated" involved a conscious act in praesenti giving a clear indication on the part of the trustee to set apart the income for future spending on religious or charitable purposes within the taxable territories. As pointed out by us, in the instant case, it is not in dispute that the trust is concerned with charities within India and, therefore, any part of the income which is not applied in a year and is carried forward can be said to have been accumulated for application to charitable and religious purposes in India within the meaning of Sub-section (1)(a).

6. For the reasons given above, we answer question No. 1 in the negative and question No. 2 in the affirmative in favour of the assessee and against the department. There shall be no order as to costs.