2015 INSC 0712 SUPREME COURT OF INDIA Commissioner of Income Tax-I Vs. G.R.Govindarajula & Sons (A.K.Sikri and Rohinton Fali Nariman, JJ.) 28-09-2015 JUDGMENT A.K.Sikri, J 1. The respondent assessee had applied and spent a sum of assessee is a Public Charitable Trust. It filed 47,27,533/- for the objects of the Trust. In the its return for the Assessment Year 1994-95 return it was also stated that it was setting apart declaring `nil' taxable income. In the summary a sum of ? 32 Lacs to be spent for charitable 40 of total income filed by the assessee it had purposes in the following year. On that basis mentioned gross income for the year in the sum the assessee claimed that it w'as entitled to have of 99,41,221/- which represented interest the deduction of the entire amount and for the receipts, rental income, bus collections, purpose oftaxation the income was `nil' unde: miscellaneous receipts and surplus in GRS hotel. Section 11 of the Income Tax Act, 1961 It was further stated that out of this income the (hereinafter referred to as `the Act'). 2. 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 (2015) 10 SCALE 0207 1 SpotLaw 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 case may be, held under trust in part, by any amount-- 11) for the reason that the whole or any part of the income has not been received during that year, or if) 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 5 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 10 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 20 income is to be accumulated or set apart, which shall in no case exceed ten years; (h) the money so accumulated or set apart is invested or deposited in the forms or modes specified in sub-section (5)]:" 3. This provision has come up for interpretation in Additional Commissioner of Income Tax vs. A.L.N. Rao1 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 previous year from property held by i wholly for charitable or religious 35 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 40 concerned at least 25% of such income or ? 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 (2015) 10 SCALE 0207 1 SpotLaw clause (a) of Section 11 (2) being followed by the assessee-trust. To highlight this point we may take an illustration. If? 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? 20,000/- are actually applied during the previous year by the said trust to such charitable or religious purposes the income of ? 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 ? 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 ? 10,000/- whichever is higher will also earn exemption from being considered as income for the purpose of income tax, that is, ? 25,000/- will thus get excluded from the tax net. Thus out of the total income of ? 1,00,000/- which has accrued to the trust ? 25,000/- will earn exemption from payment of income tax as per Section 11 (l)(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 ? 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 11(2) (b) meaning thereby out of the total accumulated income of? 80,000/- accruing during previous year and which could not be spent for charitable or religious purposes by the Trust balance of? 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 ? 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 al^ 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 sued) exemption. It is difficult to appreciate t1 contention. The reason is obviou- Section 11, subsection (1) (a) operat on its own. By its operation two types income earned by the trust during t previous year from its properties are giv exemption from income tax, (i) that p of the income of previous year which actually spent for charitable or religio purposes in that year; and (ii) out of unspent accumulated income of previous year 25% of such total prop income or ? 10,000/- whichever is hi? can be permitted to be accumulated the Trust, remarked for such charita or religious purposes. Such 25% of income or ? 10,000/- whichever is hL 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 ? 10,000/- whichever is higher, as the case may be, is invested as laid (2015) 10 SCALE 0207 1 SpotLaw by Section 11 (2) after following the procedure laid down therein. Therefore, sub-section (2) only will have to operate qua the balance of 75% of the total income of the previous year or income beyond ? *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 ' 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 rrovision would become otiosolt has to be kept in view that out of the accumulated income of the previous year art amount of ?10,000/- or 25% of the : tal income from property, whichever is rtgher, is given exemption from income by Section 11(1 )(a) itself. That -.ption 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 5 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 10 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 15 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 20 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 25 additional accumulated income beyond 25% or ? 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 30 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) 35 and 11 (2) this is the only 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 40 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 ? 10,000/- whichever is higher, is 45 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, 5 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 ? 10,000/- 10 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 15 a b o v e would clearly show that Section (2015) 10 SCALE 0207 1 SpotLaw "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 20Section ll(l)(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." 4. To put it in nutshell, the exemption/ 25 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 30 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 35 question and 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 40 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). 5. Following the aforesaid principles laid 45 down in Section 11 of the Act, the Assessing Officer found that the assessee had actually spent a sum of ? 47,27,533/. Deduction to this effect was given by the Assessing Officer and there is no dispute about it. 6. Insofar as second issue is concerned, as mentioned above, the assessee set apart a sum of? 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 Government securities and, therefore, the Assessing Officer held that there was nc question of giving any further deduction or the balance income. In this manner taxable income was assessed. 7. The assessee filed the appeal agai: the aforesaid order before the Commissiom of Income Tax (Appeals). The submission that since it has set apart ? 32 Lacs in te: of Section 11A Explanation-II, by exercisii this option in the return itself that should treated as valid option. The CIT (Appe; accepted this contention, which view has b upheld by the Income Tax Appellate Trib as well as the High Court. 8. Insofar as this aspect, viz, exercis the option in the return filed by the asse: is concerned, we are of the opinion that High Court and the Authorities below are in their approach. The law does not meni any specific mode of exercising the opi The said option has to be exercised (2015) 10 SCALE 0207 1 SpotLaw be: filing of the return. According to us, option is exercised when the return is that would be treated as in conformity comply with the provisions contaim Section 11 of the Act. 9. However, we find that thereafter (Appeals) went wrong. As per the prov of Section 11 (l)(a) of the Act the which is actually applied for and spent ti me objects of the Trust is to be allowed. Actual expenditure which was made for ? -7,27,533/- 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 ;s exercised in that behalf. However, where CTT (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 than 25%. The total income was ? 99,41,221/- and 25% thereof would be ? 24,85,305/-. Thus, the entire amount of? 32 lacs could not have been allowed as directed. This aspect has not been noticed by the High 5 Court as well. No further amount could be allowed as deduction and we do not understand as to how the entire income is treated as exempted from income tax. 10. We, accordingly, allow this appeal by 10 setting aside the order of the High Court and direct the Assessing Officer to recompute the mart an amount of? 32 lacs which was more taxable income in accordance with this judgment. Cases Referred. 1(1995) 6 SCC 0625 (2015) 10 SCALE 0207 1 SpotLaw