Full Judgment Text
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO(S).4916/2006
COMMISSIONER OF INCOME TAX-I, COIMBATORE APPELLANT(S)
VERSUS
M/S. G.R. GOVINDARAJULU & SONS RESPONDENT(S)
J U D G M E N T
A.K. SIKRI, J
The respondent-assessee is a Public
Charitable Trust. It filed its return for the
Assessment Year 1994-95 declaring 'nil' taxable
income. In the summary of total income filed
by the assessee it had mentioned gross income
for the year in the sum of Rs. 99,41,221/-
which represented interest receipts, rental
income, bus collections, miscellaneous receipts
and surplus in GRS hotel. It was further
stated that out of this income the assessee had
applied and spent a sum of Rs. 47,27,533/- for
the objects of the Trust. In the return it was
Signature Not Verified
Digitally signed by
ASHWANI KUMAR
Date: 2015.09.22
16:36:11 IST
Reason:
also stated that it was setting apart a sum of
Rs. 32 Lacs to be spent for charitable purposes
in the following year. On that basis the
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assessee claimed that it was entitled to have
the deduction of the entire amount and for the
purpose of taxation the income was 'nil' under
Section 11 of the Income Tax Act,1961
(hereinafter referred to as ‘the Act’).
Before we proceed further and discuss as
to how the Assessing Officer made the
assessment, it would be necessary to take note
of the provisions of Section 11 of the Act
which are relevant for our purpose.
“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 or set apart for application to
such purposes in India, to the extent to
which the income so accumulated or set
apart is not in excess of [fifteen] per
cent of the income from such property;
xxxxx
xxxxx
xxxxx
Explanation. —For the purposes of clauses
( a ) and ( b ),— ( 1 ) in computing the
[fifteen] per cent of the income which may
be accumulated or set apart, any such
voluntary contributions as are referred to
in section 12 shall be deemed to be part of
the income;
( 2 ) if, in the previous year, the income
applied to charitable or religious purposes
in India falls short of [eighty-five] per
cent of the income derived during that year
from property held under trust, or, as the
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case may be, held under trust in part, by
any amount—
( i ) for the reason that the whole or any
part of the income has not been received
during that year, or
( ii ) for any other reason,
xxxxx
xxxxx
xxxxx
(2) [Where [eighty-five] per cent of the
income referred to in clause ( a ) or clause
( b ) of sub-section (1) read with the
Explanation to that sub-section is not
applied, or is not deemed to have been
applied, to charitable or religious
purposes in India during the previous year
but is accumulated or set apart, either in
whole or in part, for application to such
purposes in India, such income so
accumulated or set apart shall not be
included in the total income of the
previous year of the person in receipt of
the income, provided the following
conditions are complied with, namely:—]
( a ) such person specifies, by notice in
writing given to the [Assessing] Officer in
the prescribed manner, 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 or deposited in the forms or
modes specified in sub-section (5)]:]”
This provision has come up for
interpretation in Additional Commissioner of
Income Tax vs. A.L.N. Rao [1995 (6) SCC 625]
and the legal position contained therein was
explained in the following manner:
“A mere look at Section 11(1) (a) as it stood
at the relevant time clearly shows that out of
total income accruing to a trust in the
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previous year from property held by i wholly
for charitable or religious purpose, to the
extent the income is applied for such religious
or charitable purpose, the same will get out of
the tax net but so far as the income which is
not so applied during the previous year is
concerned at least 25% of such income or
Rs.10,000/- whichever is higher, will be
permitted to be accumulated for charitable or
religious purpose and will also get exempted
from the tax net. Then follows sub-section (2)
which seeks to lift the restriction or the
ceiling imposed on such exempted accumulated
income during the previous year and also brings
such further accumulated income out of the tax
net if the conditions laid down by sub-section
(2) of Section 11 are fulfilled meaning thereby
the money so accumulated is set apart to be
invested in the Government securities etc. as
laid down by clause (b) of sub-section (2) of
Section 11 apart from the procedure laid down
by clause (a) of Section 11 (2) being followed
by the assessee-trust. To highlight this point
we may take an illustration. If Rs.1,00,000/-
are earned as the total income of he previous
year by the trust from property held by it
wholly for charitable and religious purposes
and if Rs. 20,000/- are actually applied during
the previous year by the said trust to such
charitable or religious purposes the income of
Rs.20,000/- will get exempted from being
considered for the purpose of income tax under
first part of Section 11(1). So far as the
remaining Rs.80,000/- are concerned if they
could not be actually applied for such
religious or charitable purposes during the
previous year then as per Section 11(1) (a) at
least 25% of such total income from property or
Rs.10,000/- whichever is higher will also earn
exemption from being considered as income for
the purpose of income tax, that is, Rs.25,000/-
will thus get excluded from the tax net. Thus
out of the total income of Rs.1,00,000/- which
has accrued to the trust Rs.25,000/- will earn
exemption from payment of income tax as per
Section 11(1)(a) second part. Then follows
sub-section (2) which states that the ceiling
or the limit or the restriction accumulation of
income to the extent of 25% of the income or
Rs.10,000/-, whichever is higher for earning
income tax exemption as engrafted under Section
11(1) (a) will get lifted if the money so
accumulated is invested as laid down by Section
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11(2) (b) meaning thereby out of the total
accumulated income of Rs.80,000/- accruing
during previous year and which could not be
spent for charitable or religious purposes by
the Trust balance of Rs.55,000/- if invested as
laid down by sub-section (2) of Section 11 will
also get excluded from the tax net. But for
such investment and if Section 11(1) alone had
applied Rs.55,000/- being he balance of
accumulated income would have been covered by
the tax net. Learned counsel for the Revenue
submitted that the investment as contemplated
by sub-section (2) (b) of Section 11 must be
investment of all accumulated income in
Government securities etc., namely, 100% of the
accumulated income and not only 75% thereof.
And if that is not done then only the invested
accumulated income to the extent of 75% will
get excluded from income tax assessment. But so
far the remaining 25% of the accumulated income
is concerned it will not earn such exemption.
It is difficult to appreciate this contention.
The reason is obvious. Section 11, subsection
(1) (a) operates on its own. By its operation
two types of income earned by the trust during
the previous year from its properties are given
exemption from income tax, (i) that part of the
income of previous year which is actually spent
for charitable or religious purposes in that
year; and (ii) out of the unspent accumulated
income of the previous year 25% of such total
property income or Rs.10,000/- whichever is
higher can be permitted to be accumulated by
the Trust, remarked for such charitable or
religious purposes. Such 25% of the income or
Rs.10,000/- whichever is higher will also get
exempted from income tax. That exhausts the
operation of Section 11(1) (a). Then follows
sub-section (2) which naturally deals with the
question of investment of the balance of
accumulated income which has still not earned
exemption under sub-section (1) (a). So far as
that balance of accumulated income is
concerned, that also can earn exemption from
income tax meaning thereby the ceiling or the
limit of exemption of accumulated income from
tax as imposed by sub-section (1) (a) of
Section 11 would get lifted if additional
accumulated income beyond 25% or Rs.10,000/-
whichever is higher, as the case may be, is
invested as laid by Section 11 (2) after
following the procedure laid down therein.
Therefore, sub-section (2) only will have to
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operate qua the balance of 75% of the total
income of the previous year or income beyond
Rs.10,000/- whichever is higher which has not
got the benefit of tax exemption under
sub-section (1) (a) of Section 11. If learned
counsel for the Revenue is right and if 100% of
the accumulated income of the previous year is
to be invested under sub-section (2) of Section
11 to get exemption from income tax then the
ceiling of 25% or Rs.10,000/- whichever is
higher, which is available for accumulation of
income of the previous year for the Trust to
earn exemption from income tax as laid by
Section 11 (1) (a) would be rendered redundant
and the said exemption provision would become
otiose. It has to be kept in view that out of
the accumulated income of the previous year an
amount of Rs.10,000/- or 25% of the total
income from property, whichever is higher, is
given exemption from income tax by Section
11(1) (a) itself. That exemption is unfettered
and not subject to any conditions. In other
words it is an absolute exemption. If
subsection (2) is so read as suggested by the
learned counsel for the Revenue, what is an
absolute and unfettered exemption of
accumulated income as guaranteed by Section
11(1) (a) would become a restricted exemption
as laid down by Section 11(2). Section 11(2)
does not operate to whittle down or to cut
across the exemption provisions contained in
Section 11(1) (a) so far as such accumulated
income of the previous year is concerned. It
has also to be appreciated that sub-section (2)
of Section 11 does not contain any non obstante
clause like " notwithstanding the provisions of
sub-section (1)". Consequently it must be held
that Section 11(1) (a) has full play and if
still any accumulated income of the previous
year is left to be dealt with and to be
considered for the purpose of income tax
exemption, sub-section (2) of Section 11 can be
pressed into service and if it is complied with
then such additional accumulated income beyond
25% or Rs.10,000/-, whichever is higher, can
also earn exemption from income tax in
compliance which the conditions laid down by
sub-section (2) of Section 11. It is true that
sub-section (2) of Section 11 has not clearly
mentioned the extent of the accumulated income
which is to be invested. But on a conjoint
reading of the aforesaid two provisions of
Sections 11(1) and 11(2) this is the only
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result which can follow. It is also to be kept
in view that under the earlier Income Tax 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. 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 accumulated of 25%
or Rs.10,000/- whichever is higher, it will not
be included in the taxable income. Section
11(2) quoted above further liberalizes 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). On the express language of Sections
11(1) and (2) as they stood on the Statute Book
at the relevant time no other view is
possible.”
To put it in nutshell, the
exemption/deduction from the income can be
taken in three stages which are as under:
i) The assessee would be entitled to have the
deduction of entire amount which has actually
been spent and applied for charitable purposes
i.e. in furtherance of the objects of the
Trust.
ii) The assessee is entitled to set apart 25%
of the total income for charitable purposes
even if not spent in the year in question and
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when the option is exercised in this behalf
stating that income up to 25% which is set
apart would be spent in the succeeding year;
iii) The assessee would be entitled to
deduction of the remaining amount, by virtue of
sub-section (2), to the extent it is invested
in the Government securities as mentioned in
sub-section(5).
F ollowing the aforesaid principles laid
down in Section 11 of the Act, the Assessing
Officer found that the assessee had actually
spent a sum of Rs.47,27,533/. Deduction to
this effect was given by the Assessing Officer
and there is no dispute about it.
Insofar as second issue is concerned, as
mentioned above, the assessee set apart a sum
of Rs.32 Lacs. This was, however, denied by
the Assessing Officer on the ground that no
option for this purpose was exercised by the
assessee before the filing of the return.
Though the assessee had stated so in the return
itself, that was not treated as exercising the
option in a valid manner. Admittedly, in the
present case, no amount is invested in any
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Government securities and, therefore, the
Assessing Officer held that there was no
question of giving any further deduction on the
balance income. In this manner taxable income
was assessed.
The assessee filed the appeal against the
aforesaid order before the Commissioner of
Income Tax (Appeals). The submission was that
since it has set apart Rs.32 Lacs in terms of
Section 11A Explanation-II, by exercising this
option in the return itself that should be
treated as valid option. The CIT (Appeals)
accepted this contention, which view has been
upheld by the Income Tax Appellate Tribunal as
well as the High Court.
Insofar as this aspect, viz, exercising
the option in the return filed by the assessee
is concerned, we are of the opinion that the
High Court and the Authorities below are right
in their approach. The law does not mention
any specific mode of exercising the option. The
said option has to be exercised before filing
of the return. According to us, if the option
is exercised when the return is filed, that
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would be treated as in conformity and comply
with the provisions contained in Section 11 of
the Act.
However, we find that thereafter CIT
(Appeals) went wrong. As per the provisions of
Section 11(1)(a) of the Act the amount which is
actually applied for and spent towards the
objects of the Trust is to be allowed. Actual
expenditure which was made for Rs. 47,27,533/-
was allowed by the Assessing Officer also. The
aforesaid provision also entitled the assessee
to set apart further amount if not spent in the
same year and option is exercised in that
behalf. However, where CIT (Appeals) has gone
wrong is that he ignored the provision which
entitled the assessee to exercise such an
option only to the extent of 25%. In the
instant case, the assessee had exercised the
option of setting apart an amount of Rs.32 lacs
which was more than 25%. The total income was
Rs. 99,41,221/- and 25% thereof would be
Rs.24,85,305/-. Thus, the entire amount of Rs.
32 lacs could not have been allowed as
directed. This aspect has not been noticed by
the High Court as well. No further amount could
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be allowed as deduction and we do not
understand as to how the entire income is
treated as exempted from income tax.
We, accordingly, allow this appeal by
setting aside the order of the High Court and
direct the Assessing Officer to recompute the
taxable income in accordance with this
judgment.
................................J.
A.K. SIKRI
[ ]
................................J.
ROHINTON FALI NARIMAN
[ ]
NEW DELHI;
.
SEPTEMBER 03, 2015
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ITEM NO.113 COURT NO.13 SECTION IIIA
S U P R E M E C O U R T O F I N D I A
RECORD OF PROCEEDINGS
Civil Appeal No(s). 4916/2006
COMMISSIONER OF INCOME TAX-I, COIMBATORE Appellant(s)
VERSUS
M/S. G.R. GOVINDARAJULU & SONS Respondent(s)
Date : 03/09/2015 This appeal was called on for hearing today.
CORAM :
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN
For Appellant(s) Mr. Jaideep Gupta, Sr. Adv.
Mr. Zahaib Hussain, Adv.
Ms. Sadhana Sandhu, Adv.
Ms. Anil Katiyar, Adv.
Mr. B. V. Balaram Das,Adv.
For Respondent(s) Mr. V. Prabhakar, Adv.
Mrs. Revathy Raghavan,Adv.
Ms. Jyoti Prashar, Adv.
UPON hearing the counsel the Court made the following
O R D E R
The appeal is allowed in terms of the signed reportable
Judgment.
(Ashwani Thakur) (Renu Diwan)
COURT MASTER COURT MASTER
(Signed reportable Judgment is placed on the file)