INDIAN NATIONAL THEATRE TRUST v. INCOME TAX OFFICER
[Citation -1985-LL-0116]

Citation 1985-LL-0116
Appellant Name INDIAN NATIONAL THEATRE TRUST
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 16/01/1985
Assessment Year 1980-1981
Judgment View Judgment
Keyword Tags dissemination of information • income chargeable to tax • banking regulation act • charitable institution • industrial development • government securities • co-operative society • development officer • government security • business of banking • immovable property • legal requirement • long-term finance • land development • statutory limit • banking company • current income • savings bank • trust deed
Bot Summary: Chiefly, the reason was that the deposit of Rs. 1 lakh made with the Grindlays Bank on 17-5-1976 was sought by the assessee to be treated as part of the accumulation of the income of the year in satisfaction of the requirement of section 11(2) but the department denied it for the reason that the deposit must be made out of the income of the present year and a deposit made out of the income of an earlier year could not be accounted for as the deposit out of the income of the present year. For these reasons, the ITO rejected the assessee's contention and brought the income to tax in the following manner: From the total income of Rs. 10,66,004 the ITO considered only a sum of Rs. 2,87,744 as income applied for the objects of the trust and from the balance of Rs. 7,78,260, he considered Rs. 2,80,000 as accumulation of income under section 11(2) and of the balance of Rs. 4,98,260 he allowed the statutory limit of 25 per cent for accumulation of income and levied tax on the balance income, which came to Rs. 2,31,760. Lastly, Shri Sharma submitted that since the remaining income is deemed to have been accumulated in respect of which a request was made to the ITO by the exercise of this option, if the deposit of Rs. 1 lakh made with the Grindlays Bank was not regarded as accumulation of income out of current year's income, then that amount should be added to the income accumulated and the whole of it should be deemed to have been accumulated for being used in future for the furtherance of the objects of the trust and consequently, there was nothing that could be said against the assessee and no portion of the income of the trust should have been brought to tax. Section 11(1) provides that the income of a person shall not be included for the purpose of taxation if it is 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 25 per cent of the income from such property. In case where the assessee could not comply because of non-receipt of income, the Explanation provides that so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said sum would be regarded as application of income. If 75 per cent of the income referred to in clause or clause of sub-section, read with the Explanation to that sub-section, is not applied but is accumulated or set apart either in whole or in part for application to such purposes in India, such income so accumulated shall not be included in the total income. If there are more than one kind of income, that should b e accumulated, then all the moneys so accumulated by all those methods should be available for investment irrespective of the fact whether that money related to the income of the year under appeal or it came out of the income of the earlier years.


assessee in this appeal, Indian National Theatre Trust, New Delhi, is aggrieved by order passed by Commissioner (Appeals) declining to grant exemption to its income under section 11 of Income-tax Act, 1961 (' Act '). 2. assessee is trust created on 15-2-1958 by Indian National Theatre, society registered under Societies Registration Act, 1860, through Smt. Sheila Bharat Ram and Smt. Vidya Shah. objects of trust are: (1) to promote artistic and cultural expression through drama, music, conferences and cognate activities, (2) to purchase or acquire on lease, any real or personal or movable or immovable property and other assets, (3) to undertake all activities that may be conducive to aforesaid objects and purposes. trustees of trust were late Shri T.T. Krishnamachari, Shri Bharat Ram, Shri G. L. Bansal, Smt. Sucheta Kripalani and Shri K.K. Birla. preamble of trust deed provided circumstances under which this trust came to be created as adjunct of Indian National Theatre and how plot of land was allotted to it by Land and Development Officer, New Delhi, and how it was desired to utilise that land and other assets for furtherance of objects of trust enumerated above. There are several other clauses in trust deed, with which we are not directly concerned for our present purpose. This trust applied to Commissioner for registration and we are told that registration as required under section 12A of Act was granted by Commissioner vide Registration No. DLI/C/T-422. 3. For year under appeal, as in past, this trust was recognised as charitable institution under section 11 and there was no dispute over that aspect except insofar as present assessment year is concerned. Although income of trust was being exempted from tax but for this year exemption is sought to be denied primarily for three reasons. One was that though trust applied for accumulation of income, it did not accumulate income in manner required by statute. We shall come to details of this aspect little later. Chiefly, reason was that deposit of Rs. 1 lakh made with Grindlays Bank on 17-5-1976 was sought by assessee to be treated as part of accumulation of income of year in satisfaction of requirement of section 11(2) but department denied it for reason that deposit must be made out of income of present year and deposit made out of income of earlier year could not be accounted for as deposit out of income of present year. In other words, equation sought for by assessee was not acceptable to department. Secondly, sum of Rs. 59,000 was lent to another trust called Shri Ram Centre for Art and Culture and this sum was claimed as application of income during year but department did not agree as, according to it, said Shri Ram Centre for Art and Culture could not be considered to be trust established having similar objects as that of assessee-trust. Thirdly, assessee applied for accumulation of income, which, according to department, was vague and unspecific and could not be considered as exercise of option for accumulation of income within meaning of section 11(2). For these reasons, ITO rejected assessee's contention and brought income to tax in following manner: From total income of Rs. 10,66,004 ITO considered only sum of Rs. 2,87,744 as income applied for objects of trust and from balance of Rs. 7,78,260, he considered Rs. 2,80,000 as accumulation of income under section 11(2) and of balance of Rs. 4,98,260 he allowed statutory limit of 25 per cent for accumulation of income and levied tax on balance income, which came to Rs. 2,31,760. If deposit of Rs. 1 lakh made with Grindlays Bank is treated as accumulation of income, then accumulation of income would go to Rs. 3,80,000. If loan of Rs. 50,000 given to Shri Ram Centre for Art and Culture is regarded as application of income, income applied would increase to Rs. 3,37,744. As consequence of this income available for accumulation would be only Rs. 3,48,260 and if statutory limit of accumulation for income of 25 per cent is deducted, there will only be income of Rs. 81,759 which should be regarded as income in respect of which option was exercised to accumulate. If so worked out, there would not be any income for tax. Whether this is as per law in short controversy. What we have got now to decide in this appeal is, therefore, (a) whether amount of Rs. 1 lakh deposited with Grindlays Bank in yester years could be regarded as income accumulated out of current income, i.e., can it be regarded as accumulation out of current year's income, and (b) whether, option has been properly exercised within meaning of section 11(2) or whether it was vague and whether loan of Rs. 50,000 to Shri Ram Centre for Art and Culture is application of income or not. Same calculations have been given to us by assessee's learned counsel, Shri G.C. Sharma, on page 1 of paper book and we have arrived at same figure in above manner but basically there are three questions that fall for our decision in this appeal. 4. We have already mentioned views of ITO on these questions although there was nothing specific in his order about vagueness of exercise of option. order of ITO shows that he was concentrating more upon investment in Government securities and whether that would satisfy requirement of section 11(2) but order of Commissioner (Appeals) made this point specific. 5. When matter went before Commissioner (Appeals) on appeal, same points were reiterated but in vain. Commissioner (Appeals) was of t h e opinion that deposit made with Grindlays Bank on 17-5-1976 is not available for being reckoned against deposits to be invested in year and, therefore, that deposit should be excluded. reason that prevailed with Commissioner (Appeals) in coming to this conclusion is that requirement of section 11(2)(b) is that deposit must be made out of income of previous year for purpose of being counted as accumulation and deposit made in earlier year out of earlier years' income could not be so reckoned. For this purpose, he relied mainly upon language of section 11(2)(b). Once Rs. 1 lakh is excluded then deposit made in accounting year would come to Rs. 2,80,000 and that fell short of requirement. As regards loan to Shri Ram Centre for Art and Culture, Commissioner (Appeals) was not prepared to accept it as application of income. According to him, sole activity of Shri Ram Centre for Art and Culture was not merely to promote artistic expression through drama, music and conferences but also to maintain reading rooms and libraries, which activity could not give rise to artistic and cultural expression or promotion. Though maintenance of reading rooms and libraries could lead to better education but that was not purpose for which trust was created. Perceiving this as dissimilarity in objects, Commissioner (Appeals) came to conclusion that this advance of loan could not be said to be application of income for purpose of assessee-trust nor did he see any clause in trust deed of assessee empowering assessee-trust to have its objects trust deed of assessee empowering assessee-trust to have its objects attained through another trust. He, therefore, justified action of ITO insofar as this point is concerned. Then came discussion regarding clarity or lack of it of option exercised by assessee. By quoting letter written by assessee-trust to ITO, he interpreted it as saying that neither in law nor in effect that letter amounted to exercise of option. According to him, chief deficiency in that letter was non-disclosure of any conscious application of mind by assessee-trust to accumulate any specific sum for any specific purpose nor does it give any justification for shortfall in expenditure during accounting year. Because of this, which he saw as lacuna, he described option as vague and indefinite and in no way creating binding force. He, therefore, held that requirements of Explanation 2 to sub-section (1) of section 11 were not satisfied. 6. Arguing for assessee, Shri G.C. Sharma, learned senior advocate submitted that none of reasons shown by department for rejecting claim of assessee are either valid or relevant. Commenting upon about deposit made with Grindlays Bank of Rs. 1 lakh, he submitted that letter of law, according to department, would have been satisfied if assessee had withdrawn that money and again deposited. department does not have any quarrel if this procedure is adopted and it would have readily agreed that said deposit was made out of current year's income. same result is achieved by treating this deposit by earmarking it as deposit made out of year's income, legal requirement is not only satisfied in spirit but also in law and practice. If assessee is forced to take loan from deposit and again deposit it, that would mean some loss of income to assessee-trust. trustees avoided this loss to trust by treating that deposit as deposit made out of current year's income for purpose of accumulation. When effect is same, merely because particular procedure was not followed, could it be said, he asked, that law was not satisfied so as to deny exemption. Would it not be hypertechnical view that department is taking in case of trust which has nothing but satisfaction of requirement of law at its heart and no personal gain was derived by anyone whatsoever. This way Shri Sharma submitted that there was substantial compliance with law if not strict compliance and that should not be held against assessee. He then submitted that loan of Rs. 50,000 to Shri Ram Centre for Art and Culture has been misappreciated in sense that objects of these two trusts were dissimilar. By pointing out to us objects of these two trusts and making comparative study, learned senior advocate submitted that objects of both trusts are similar and both have object of promoting drama, music and other cognate activities and nothing else. If reading room is maintained for benefit of student, if library is maintained for benefit of students or professors, it would only subserve main object of trust of promotion of dance, drama and music and its education by dissemination and it is unfortunate that learned Commissioner (Appeals) has not seen this aspect in proper perspective and in proper light but counted maintenance of library or reading room as if it is different object from spread of education for dance, drama and music. This should not have been, therefore, made reason to bring income of trust to tax. Finally, turning his attention to option exercised and by taking us through letter written by assessee-trust to ITO and also provisions of Explanation 2 to section 11(1) he submitted that there was nothing wrong in wording of this letter. option was so clear, so unambiguous and so definite that all it said was that so much of income of subsequent year as does not exceed shortfall in application of income, would be deemed to be so applied, which, if carefully read, would only mean that all income which does not exceed shortfall in application of income would be deemed to have been applied for purpose of trust. option was couched in language used in section 11(1) and it made pointed reference to Explanation 2 to section 11(1) and there could be nothing wrong with it and even if it is read as vague, indefinite, since reference to Explanation 2 to sub-section (1) of section 11 was made, all provisions of that Explanation must be read into this option which would then mean that accumulation sought for is in order. department is, therefore, not justified in not giving proper meaning to words used in letter exercising option. Lastly, Shri Sharma submitted that since remaining income is deemed to have been accumulated in respect of which request was made to ITO by exercise of this option, if deposit of Rs. 1 lakh made with Grindlays Bank was not regarded as accumulation of income out of current year's income, then that amount should be added to income accumulated and whole of it should be deemed to have been accumulated for being used in future for furtherance of objects of trust and consequently, there was nothing that could be said against assessee and no portion of income of trust should have been brought to tax. 7. learned departmental representative, Shri Kapila, while countering arguments advanced on behalf of assessee-trust, mainly relied upon observations made by Chaturvedi and Pithisaria in Income-tax Law Vol. 2, third edn., at p. 2070 to emphasise point that deposit must be out of current year's income chargeable to tax in year under appeal and neither in spirit nor in contemplation deposit was never meant to be made in earlier years out of earlier years' income. whole object of permitting assessee to accumulate income is to secure that income of trust is not frittered away otherwise than for purpose of trust at same time ensuring that amount so accumulated for furtherance of objects of trust is made available for public purpose. That was why requirement of deposit was enacted. If funds required for accumulation are not required to be deposited in manner provided for in Act, those funds could be used for business purposes or for any other purpose of author of trust and in ultimate analysis funds may not be available for purpose of trust when need arises. This object of trust cannot be said to have been fulfilled if deposit made in one year is to be regarded as deposit to be made for another year. When whole object is to freeze funds by compelling it to deposit in particular manner thereby preventing its abuse, that object is frustrated if deposit made of one year is regarded as deposit of another year. According to departmental representative, this is very negation of purpose for which sub-section (2) of section 11 was enacted. He, therefore, submitted that deposit of Rs. 1 lakh made with Grindlays Bank on 17-5-1976 could by no stretch of imagination be considered as deposit made out of current year's income so as to be called as accumulation. Insofar as loan to Shri Ram Centre for Art and Culture is concerned, he preferred to rely on order of Commissioner (Appeals). Dealing with question of exercise of option, he submitted that wording used was very confused and is capable of more than one meaning and any document giving rise to more than one meaning cannot but be said to be vague and it is implicit in it and when Commissioner (Appeals) says that option exercised was vague for want of clarity, he was not wrong at all as he was emphasising obvious. He, therefore, justified that conclusion of Commissioner (Appeals). 8. In our considered opinion, we will not say for present that there is no merit in department's argument insofar as treatment to be accorded to deposit made with Grindlays Bank is considered but if it is considered lacuna, that is more than made up by exercise of option by assessee to accumulate income. That particular circumstance should not, therefore, come in way of assessee in getting benefit provided option exercised is read as definite, clear and not giving rise to any ambiguity. We, therefore, think that it would be better to approach problem posed before us from point of view of option and then try to resolve other points raised from that standpoint. Now we will have to notice section 11 and Explanation 2. Section 11(1) provides that income of person shall not be included for purpose of taxation if it is income derived from property held under trust wholly for charitable or religious purposes to 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 extent to which income so accumulated or set apart is not in excess of 25 per cent of income from such property. analysis of section 11(1)(a) would show that for exemption provided for therein to be available, (i) income should be derived from property held under trust; and (ii) trust shall be wholly for charitable or religious purpose. Now Legislature envisaged possibilities of whole of income not being or capable of being spent and also simultaneously need to accumulate income or set apart income for application to such purposes. Legislature then intervened and said that exemption is available to extent to which such income is applied to charitable or religious purposes in India and in eventuality of entire income not being spent to extent of so much of income as is accumulated or set apart for application to such purposes in India. Then question would arise, could entire income be accumulated or set apart for application of income. If entire income is allowed to be accumulated or set apart, then nothing would be spent for charitable or religious purposes and this possibility could be used for evasion of tax and may even frustrate very purpose of trust. It, therefore, imposed restriction that income so accumulated or set apart should not be in excess of 25 per cent of income from such property, i.e., 75 per cent of income must be spent. Simultaneously, it also provided for maximum period of accumulation which is 10 years. Since rule that at least 75 per cent of income of previous year should be applied for specified purposes during previous year is likely to work hardship in practice (as it is conceivable that many trusts may not be able to do so for genuine reasons) relaxations were provided in Explanations 1 and 2. We are concerned here with Explanation 2 which provided for option to be exercised by trustees. This Explanation analyses possible reasons as to why assessee could not spend income in previous year of its accrual; maybe assessee did not receive part of it during previous year, there having been no cash realisation or may be for some other reason. In case where assessee could not comply because of non-receipt of income, Explanation provides that so much of income applied to such purposes in India during previous year in which income is received or during previous year immediately following as does not exceed said sum would be regarded as application of income. This concession is available to assessee only if he exercised option given to him by Explanation before expiry of time allowed under sub-section (1) or sub-section (2) of section 139 of Act whether fixed originally or on extension for furnishing return of income. natural consequence of such option is that said amount will be treated as having been applied for specified purpose in year of receipt and will not be again available to assessee in respect of assessment year relevant to previous year in which it was actually applied for specified purposes. Thus, as per provisions of section 11(2), no portion of income need be spent and entire income may be kept unspent without losing right to exclusion provided trustees give notice in writing in manner prescribed by rules informing ITO of their intention to set apart income and to accumulate it for particular charitable or religious purpose or purposes to spend on which money is being accumulated or set apart and period for which it is proposed to be accumulated, and money so accumulated or set apart is invested in Government security as defined in clause (2) of section 2 of Act and trust is registered under section 12A. 9. In this case assessee wrote to ITO exercising option in following manner in notice given to ITO in Form No. 10 prescribed under rule 17 of Income-tax Rules, 1962 (' Rules ') read with section 11(2): " To Income-tax Officer, Trust Circle IV, New Delhi. I, Vinay Bharat Ram, on behalf of Indian National Theatre Trust (name of trust), hereby bring to your notice that it has been decided by resolution passed by trustees on .... (date) (copy enclosed) that, out of income of trust for previous year (s) relevant to assessment year 1980-1981 and subsequent previous year(s), amount of Rs. 3,78,397 should be accumulated or set apart till previous year(s) ending 30-9-1989 in order to enable trustees to accumulate sufficient funds for carrying out following purposes of trust: (1) Building extension, (2) Acquisition of other movable/immovable assets for objects of trust. 2. Before expiry of six months commencing from end of each year, amount so accumulated or set apart has been--- (i) invested in any Government security as defined in clause (2) of section 2 of Public Debt Act, 1944, or in any other security which may be approved by Central Government in this behalf; (ii) deposited in any account with Post Office Savings Bank (including) deposits made under Post Office (Time Deposits) Rules, 1970 or banking company to which Banking Regulation Act, 1949 applies (including any bank o r banking institution referred to in section 51 of that Act) or co-operative society engaged in carrying on business of banking (including co-operative land mortgaged bank or co-operative land development bank; or (iii) deposited in account with financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by Central Government for purposes of clause (viii) of sub- section (1) of section 36. 3. Copies of annual accounts of trust along with details of investments (including deposits) and utilisation, if any, of money so accumulated or set apart will be furnished to you before expiry of six months commencing from end of each relevant previous year or before 30th day of June immediately following such previous year, whichever is later. 4. It is requested that in view of our complying with conditions laid down in section 11(2) of Income-tax Act, 1961, benefit of that section may be given in assessments of trust in respect of income accumulated or set apart as mentioned above. Sd/- Vinay Bharat Ram Signature Vinay Bharat Ram Date: 26-6-1980 Designation: Trustee Address: 25, Sardar Patal Road New Delhi." Now question is whether sum of Rs. 3,78,397 has been invested in manner required under Act. By resolution passed on 29-12-1979 it was decided that fixed deposit with Grindlays Bank dated 17-5-1976 will be treated as deposit for purpose of accumulation. It made further deposit of Rs. 80,000 with Grindlays Bank and another deposit of Rs. 2 lakhs with State Bank of Bikaner and Jaipur. As we have mentioned earlier. controversy was whether fixed deposit of Rs. 1 lakh made with Grindlays Bank earlier could be treated as deposit for purpose of accumulation. Commissioner (Appeals) also referred to copy of letter written by assessee to ITO exercising option which was in following terms; which he describes as vague and indefinite: " Option is hereby exercised under Explanation to sub-section 1 of section 11 of Income-tax Act, 1961, in respect of so much of income applied for purposes of foundation in subsequent year immediately following accounting year ended June 30, 1979 as does not exceed shortfall in application of income during aforesaid year and will be deemed to be so applied." This clearly postulates application of income in immediately following accounting year ending 30-6-1979 to make it for shortfall as provided for in Explanation 2, sub-item (a). purpose of this option is to treat expenditure incurred in next year as having come out of unapplied surplus of year under appeal. That is why it says that so much of income applied for purpose of foundation in subsequent year, i.e., 1981-82, as does not exceed shortfall in application of income during that year, will be deemed to be income applied for purpose of trust, There is nothing ambiguous or imprecise about this resolution exercising option. In any case no indefiniteness or impreciseness is present of our mind, while reading exercise of option. This option is to be read in juxtaposition with language of item (ii) of Explanation 2. That Explanation provided that if, in previous year, income applied to charitable or religious purpose in India falls short of 75 per cent of income derived during that year from property held under trust for reason that whole or any part of income has not been received during that year or for any other reason, then in case of non-receipt of income so much of income applied to such purposes in India during next previous year, which does not exceed said amount would be deemed to be application of income. precise language used in letter written to ITO is language used in statute of Act. If language used in Act is indefinite and imprecise, then it can be said that language in letter exercising option is also imprecise and vague. We cannot attribute indefiniteness or impreciseness to Legislature. Therefore, Commissioner (Appeals), in our opinion, fell into error in reading into this letter vagueness and (Appeals), in our opinion, fell into error in reading into this letter vagueness and indefiniteness. All this means that next year's income would be utilised to meet shortfall of this year. Since this Explanation provided that once option is exercised amount so applied in next year would be deemed to be income applied to such purposes, i.e., charitable or religious purposes during previous year in which income was derived, it means that ITO has first of all to compute shortfall and whatever shortfall that is computed would have to be made good in next year. According to assessee, shortfall computed was as we have observed short while ago, Rs. 81,509. assessee by exercise of this option postpones spending of income to next year for purpose of being counted as application of income. Without going into merits whether fixed deposit of Rs. 1 lakh could be regarded as having accumulated out of present year's income or not, if that amount of Rs. 1 lakh also is regarded as shortfall, then total amount of Rs. 1,81,509 should be deemed to be amount in respect of which option was exercised. Except for fact that option exercised was said to be vague and imprecise, it was not contention of revenue that any other requirement of law was not satisfied. There is another aspect we would like to touch upon here as it is very relevant, i.e., loan advanced to Shri Ram Centre for Art and Culture. On careful examination of objects of assessee-trust as well as Shri Ram Centre for Art and Culture, we found that objects are similar if not in identical terms. Both of them stand and are established for promotion of music, dance and drama and spread of education relating to music, dance and drama. dissemination of information relating to promotion of these arts cannot but be achieved by providing for libraries and reading rooms. provision of library or reading room and stocking library with books on these subjects and reading rooms with magazines concerning these subjects cannot be said to be object different from main object. This is one of means, if not more perfected and better means, to achieve main objects. There was, thus, confusion in mind of Commissioner (Appeals) when he says that objects were dissimilar. departmental representative, though he took great pains, could not point out dissimilarities. Therefore, loan advanced to Shri Ram Centre for Art and Culture cannot but be said to be application of income. Therefore, reading rooms and libraries sought to be established by Shri Ram Centre for Art and Culture is only in furtherance of objects of trust. That amount of Rs. 50,000 also must be held to have been applied for purposes of trust. Once Rs. 50,000 is held to have been applied for purposes of trust, amount available for which option would become relevant, as we have said earlier. is Rs. 81,509 plus Rs. 1 lakh, i.e., Rs. 1,81,509. option exercised by assessee should, therefore, be regarded to have been with reference to this sum of Rs. 1,81,509 even though it was said in letter that it was only with regard to Rs. 81,509. figure of Rs. 81,509 was mentioned in letter because trustees felt bona fide that fixed deposit with Grindlays Bank of Rs. 1 lakh could be regarded as investment made for purpose of accumulation out of present year's income. It was with that genuine reason that they excluded that sum. If not, then that is to be regarded as amount accumulated in respect of which option is exercised. point to be noted here is that there was no dispute between assessee and department and that there was no option exercised nor requirements of law in regard to exercise of option were satisfied except that wordings of option were vague and imprecise for which reason option was ignored. Since we found that language used in letter was same as language used in Act, we cannot say that there is any impreciseness in option. purpose of option is very clear that shortfall would be met out of income of subsequent years. Therefore, option exercised cannot be said to be improper nor loan advanced to Shri Ram Centre for Art and Culture could be said to be non-application of income. Once these two reasons are taken away then there is nothing else in way of assessee from getting exemption from tax that it claimed. In view that we are taking, we first thought it unnecessary to express any definite opinion about main question on which Shri Sharma argued, i.e., about fixed deposit. But for purpose of completeness, now we may refer to that argument also. Before we deal with argument it is necessary to notice relevant provision: " 11(2) Where seventy-five per cent of income referred to in clause (a) or clause (b) of sub-section (1) read with Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during 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 total income of previous year of person in receipt of income, provided following conditions are complied with, namely: (a) such person specifies, by notice in writing given to Income-tax Officer in prescribed manner, purpose for which income is being accumulated or set apart and period for which income is to be accumulated or set apart, which shall in no case exceed ten years; (b) money so accumulated or set apart is invested or deposited in forms or modes specified in sub-section (5)." important words which require our consideration are ' money so accumulated or set apart '. money so accumulated referred to in clause (b) relates to income accumulated or set apart referred to in sub-item (ii) of Explanation 2 to section 11(2). If 75 per cent of income referred to in clause (a) or clause (b) of sub-section (1), read with Explanation to that sub-section, is not applied but is accumulated or set apart either in whole or in part for application to such purposes in India, such income so accumulated shall not be included in total income. requirements to be satisfied for availing this exemption are: (i) ITO must be given notice in prescribed manner, (ii) purposes for which income is being accumulated and money so accumulated should be invested in manner provided in Act. What is that income that is to be invested or deposited? Is it income of year or surplus of income of earlier years? As we have already quoted above, money to be invested or deposited is money so accumulated. Then we must see what is money that could be accumulated and what are those circumstances under which money could be so accumulated under provisions of section 11. If there are more than one kind of income, that should b e accumulated, then all moneys so accumulated by all those methods should be available for investment irrespective of fact whether that money related to income of year under appeal or it came out of income of earlier years. For purpose of accumulation, therefore, we have got to go again to section 11(1)(a) and Explanation. Section 11(1)(a), as we have noticed earlier, grants exemption not only to income applied for charitable or religious purposes but also to income accumulated or set apart for application subject to certain limits. Now Explanation 1 says that for purposes of clauses (a) and (b), in computing 25 per cent of 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 income. There is no difficulty insofar as understanding this Explanation is concerned because it only speaks of what would constitute income for purpose of computation of statutory percentage. Then comes Explanation 2 which says if in previous year income applied to charitable or religious purposes falls short of 75 per cent of income, either for reason that whole or any part of income has not been received during year or for any other reason, then so much of income applied to such purposes in India during previous year in which income is received or during previous year immediately following would be deemed to be income applied to charitable or religious purposes during previous year in which income was derived, i.e., if out of income of Rs. 1 lakh, Rs. 40,000 was not received, person in receipt of income could obviously not apply 75 per cent of Rs. 1 lakh, i.e., Rs. 75,000, for religious or charitable purposes. In such case if amount not less than Rs. 60,000 has actually been applied to such purposes in year in which income of Rs. 1 lakh was derived, deficiency could be made up in year in which balance of income is received or in previous year next following. This benefit can be availed of by exercising option in writing under item (ii) of Explanation within time allowed under sub-section (1) or sub-section (2) of section 139. income applied to such purposes would also be taken to have been applied for religious purposes. But if option is not made during extended period, then such income would be deemed to be income of later previous year. In other words, Act took notice of complication that it is not always possible to receive all income in cash and that some income would be left unrealised in shape of receivables. That was reason why provision was made to deem receivable income as income of previous year in which it was received or of year following. second alternative is for another reason also, income could be received in next year. Now take case of assessee who exercised option to accumulate income. How will that assessee invest that money which was not received though he exercised option. He can invest money as required by section 11(2)(b) only when money was received. So in example we have given above, if out of Rs. 1 lakh only Rs. 40,000 was not received and if that Rs. 40,000 was received subsequently, requirement of investment to satisfy requirement of accumulation can be made only in year in which that money was received. Otherwise requirement of accumulation of income by compelling assessee to invest it in prescribed manner will become well-nigh impossible. Legislature cannot be expected to require assessee to do impossible. Impossibility of performance in strictly applying provisions of section 11(2) insofar as they relate to investment in manner prescribed under Act should, therefore, suggest that requirement of investment can be deemed to have been satisfied if investment was made in year in which income was received, which means that money required to be deposited need not necessarily relate to or be out of income of previous year but it can relate to earlier years also. If we are right in our thinking that it can be out of earlier years' income also, then investment made out of surplus income of earlier years can also be converted into or can be reckoned as investment required for purpose of accumulation. whole argument of department is based on theory that investment made must be made necessarily out of current year's income and once it is seen from scheme of section 11 that this is impossible of performance and execution and it permits investment out of earlier years' income, there is no reason why investment made not out of accumulation of income of that year but out of surplus income remaining as such without being earmarked for accumulation of that year be not available. We are, therefore, of opinion that argument of revenue that investment of income to satisfy requirement of accumulation under section 11(2)(b) must essentially come out of current year's income, is difficult to accept. It is not case of revenue that fixed deposit made with Grindlays Bank on 17-5-1976 is not investment made by way of accumulation of income of that year. In other words, that amount was free and available for being invested. Therefore, there is nothing wrong in treating that deposit, which was lying as deposit simpliciter without being earmarked as deposit to be made for purpose of option exercised for this year. Therefore, argument advanced on behalf of assessee by learned senior advocate, Shri G.C. Sharma, can be accepted though for slightly different reason. In view of our conclusion as above, we do not think it necessary to discuss example given by learned senior advocate for assessee though that example set us on thinking. 10. For these reasons, we hold view taken by authorities below does not seem proper and just. We accept assessee's appeal and allow its claim, ITO is directed to modify assessment in accordance with above conclusions. 11. In result, appeal is allowed. *** INDIAN NATIONAL THEATRE TRUST v. INCOME TAX OFFICER
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