1 REPORTABLE IN 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 respondent-assessee is Public Charitable Trust. It filed its return for Assessment Year 1994-95 declaring 'nil' taxable income. In summary of total income filed by assessee it had mentioned gross income for year in 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 assessee had applied and spent sum of Rs. 47,27,533/- for Signature Not Verified objects of Trust. In return it was Digitally signed by ASHWANI KUMAR Date: 2015.09.22 16:36:11 IST Reason: also stated that it was setting apart sum of Rs. 32 Lacs to be spent for charitable purposes in following year. On that basis 2 assessee claimed that it was entitled to have deduction of entire amount and for purpose of taxation income was 'nil' under Section 11 of Income Tax Act,1961 (hereinafter referred to as Act ). Before we proceed further and discuss as to how Assessing Officer made assessment, it would be necessary to take note of provisions of Section 11 of Act which are relevant for our purpose. 11. (1) Subject to provisions of sections 60 to 63, following income shall not be included in total income of previous year of person in receipt of income [(a) 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 [fifteen] per cent of income from such property; xxxxx xxxxx xxxxx Explanation. For purposes of clauses (a) and (b), (1) in computing [fifteen] 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; (2) if, in previous year, income applied to charitable or religious purposes in India falls short of [eighty-five] per cent of income derived during that year from property held under trust, or, as 3 case may be, held under trust in part, by any amount (i) for reason that whole or any part of income has not been received during that year, or (ii) for any other reason, xxxxx xxxxx xxxxx (2) [Where [eighty-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 [Assessing] 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)]:] This provision has come up for interpretation in Additional Commissioner of Income Tax vs. A.L.N. Rao [1995 (6) SCC 625] and legal position contained therein was explained in following manner: mere look at Section 11(1) (a) as it stood at relevant time clearly shows that out of total income accruing to trust in 4 previous year from property held by i wholly for charitable or religious purpose, to extent income is applied for such religious or charitable purpose, same will get out of tax net but so far as income which is not so applied during 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 tax net. Then follows sub-section (2) which seeks to lift restriction or ceiling imposed on such exempted accumulated income during previous year and also brings such further accumulated income out of tax net if conditions laid down by sub-section (2) of Section 11 are fulfilled meaning thereby money so accumulated is set apart to be invested in Government securities etc. as laid down by clause (b) of sub-section (2) of Section 11 apart from procedure laid down by clause (a) of Section 11 (2) being followed by assessee-trust. To highlight this point we may take illustration. If Rs.1,00,000/- are earned as total income of he previous year by trust from property held by it wholly for charitable and religious purposes and if Rs. 20,000/- are actually applied during previous year by said trust to such charitable or religious purposes income of Rs.20,000/- will get exempted from being considered for purpose of income tax under first part of Section 11(1). So far as remaining Rs.80,000/- are concerned if they could not be actually applied for such religious or charitable purposes during 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 purpose of income tax, that is, Rs.25,000/- will thus get excluded from tax net. Thus out of total income of Rs.1,00,000/- which has accrued to 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 ceiling or limit or restriction accumulation of income to extent of 25% of income or Rs.10,000/-, whichever is higher for earning income tax exemption as engrafted under Section 11(1) (a) will get lifted if money so accumulated is invested as laid down by Section 5 11(2) (b) meaning thereby out of total accumulated income of Rs.80,000/- accruing during previous year and which could not be spent for charitable or religious purposes by Trust balance of Rs.55,000/- if invested as laid down by sub-section (2) of Section 11 will also get excluded from 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 tax net. Learned counsel for Revenue submitted that 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 accumulated income and not only 75% thereof. And if that is not done then only invested accumulated income to extent of 75% will get excluded from income tax assessment. But so far remaining 25% of accumulated income is concerned it will not earn such exemption. It is difficult to appreciate this contention. reason is obvious. Section 11, subsection (1) (a) operates on its own. By its operation two types of income earned by trust during previous year from its properties are given exemption from income tax, (i) that part of income of previous year which is actually spent for charitable or religious purposes in that year; and (ii) out of unspent accumulated income of previous year 25% of such total property income or Rs.10,000/- whichever is higher can be permitted to be accumulated by Trust, remarked for such charitable or religious purposes. Such 25% of income or Rs.10,000/- whichever is higher will also get exempted from income tax. That exhausts operation of Section 11(1) (a). Then follows sub-section (2) which naturally deals with question of investment of 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 ceiling or 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 case may be, is invested as laid by Section 11 (2) after following procedure laid down therein. Therefore, sub-section (2) only will have to 6 operate qua balance of 75% of total income of previous year or income beyond Rs.10,000/- whichever is higher which has not got benefit of tax exemption under sub-section (1) (a) of Section 11. If learned counsel for Revenue is right and if 100% of accumulated income of previous year is to be invested under sub-section (2) of Section 11 to get exemption from income tax then ceiling of 25% or Rs.10,000/- whichever is higher, which is available for accumulation of income of previous year for Trust to earn exemption from income tax as laid by Section 11 (1) (a) would be rendered redundant and said exemption provision would become otiose. It has to be kept in view that out of accumulated income of previous year amount of Rs.10,000/- or 25% of 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 absolute exemption. If subsection (2) is so read as suggested by learned counsel for Revenue, what is absolute and unfettered exemption of accumulated income as guaranteed by Section 11(1) (a) would become restricted exemption as laid down by Section 11(2). Section 11(2) does not operate to whittle down or to cut across exemption provisions contained in Section 11(1) (a) so far as such accumulated income of 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 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 previous year is left to be dealt with and to be considered for 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 conditions laid down by sub-section (2) of Section 11. It is true that sub-section (2) of Section 11 has not clearly mentioned extent of accumulated income which is to be invested. But on conjoint reading of aforesaid two provisions of Sections 11(1) and 11(2) this is only 7 result which can follow. It is also to be kept in view that under earlier Income Tax Act of 1922 exemption was available to charitable trusts without any restriction upon accumulated income. There was change in this respect under present Act of 1961. Under present Act, any income accumulated in excess of 25% or Rs.10,000/- whichever is higher, is taxable under Section 11(1) (a) of Act, unless special conditions regarding accumulation as laid down in Section 11(2) are complied with. It is clear, therefore, that if entire income received by trust is spent for charitable purposes in India, then it will not be taxable but if there is saving, i.e. to say accumulated of 25% or Rs.10,000/- whichever is higher, it will not be included in taxable income. Section 11(2) quoted above further liberalizes and enlarges exemption. combined reading of both provisions quoted above would clearly show that Section 11(2) while enlarging scope of exemption removes restriction imposed by Section 11(1) (a) but it does not take away exemption allowed by Section 11(1)(a). On express language of Sections 11(1) and (2) as they stood on Statute Book at relevant time no other view is possible. To put it in nutshell, exemption/deduction from income can be taken in three stages which are as under: i) assessee would be entitled to have deduction of entire amount which has actually been spent and applied for charitable purposes i.e. in furtherance of objects of Trust. ii) assessee is entitled to set apart 25% of total income for charitable purposes even if not spent in year in question and 8 when option is exercised in this behalf stating that income up to 25% which is set apart would be spent in succeeding year; iii) assessee would be entitled to deduction of remaining amount, by virtue of sub-section (2), to extent it is invested in Government securities as mentioned in sub-section(5). Following aforesaid principles laid down in Section 11 of Act, Assessing Officer found that assessee had actually spent sum of Rs.47,27,533/. Deduction to this effect was given by Assessing Officer and there is no dispute about it. Insofar as second issue is concerned, as mentioned above, assessee set apart sum of Rs.32 Lacs. This was, however, denied by Assessing Officer on ground that no option for this purpose was exercised by assessee before filing of return. Though assessee had stated so in return itself, that was not treated as exercising option in valid manner. Admittedly, in present case, no amount is invested in any 9 Government securities and, therefore, Assessing Officer held that there was no question of giving any further deduction on balance income. In this manner taxable income was assessed. assessee filed appeal against aforesaid order before Commissioner of Income Tax (Appeals). submission was that since it has set apart Rs.32 Lacs in terms of Section 11A Explanation-II, by exercising this option in return itself that should be treated as valid option. CIT (Appeals) accepted this contention, which view has been upheld by Income Tax Appellate Tribunal as well as High Court. Insofar as this aspect, viz, exercising option in return filed by assessee is concerned, we are of opinion that High Court and Authorities below are right in their approach. law does not mention any specific mode of exercising option. said option has to be exercised before filing of return. According to us, if option is exercised when return is filed, that 10 would be treated as in conformity and comply with provisions contained in Section 11 of Act. However, we find that thereafter CIT (Appeals) went wrong. As per provisions of Section 11(1)(a) of Act amount which is actually applied for and spent towards objects of Trust is to be allowed. Actual expenditure which was made for Rs. 47,27,533/- was allowed by Assessing Officer also. aforesaid provision also entitled assessee to set apart further amount if not spent in same year and option is exercised in that behalf. However, where CIT (Appeals) has gone wrong is that he ignored provision which entitled assessee to exercise such option only to extent of 25%. In instant case, assessee had exercised option of setting apart amount of Rs.32 lacs which was more than 25%. total income was Rs. 99,41,221/- and 25% thereof would be Rs.24,85,305/-. Thus, entire amount of Rs. 32 lacs could not have been allowed as directed. This aspect has not been noticed by High Court as well. No further amount could 11 be allowed as deduction and we do not understand as to how entire income is treated as exempted from income tax. We, accordingly, allow this appeal by setting aside order of High Court and direct Assessing Officer to recompute taxable income in accordance with this judgment. ................................J. [A.K. SIKRI] ................................J. [ROHINTON FALI NARIMAN] NEW DELHI; SEPTEMBER 03, 2015. 12 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 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 counsel Court made following O R D E R appeal is allowed in terms of signed reportable Judgment. (Ashwani Thakur) (Renu Diwan) COURT MASTER COURT MASTER (Signed reportable Judgment is placed on file) COMMISSIONER OF INCOME TAX-I, COIMBATORE v. M/S. G.R. GOVINDARAJULU & SONS