Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal’s view that the provisions of sub s. (4) of s. 11 of the IT Act, 1961, cannot operate as a charging section for bringing to tax the `excess’ referred to therein is sustainable in law ?

N.V. Balasubramaniam, for the Revenue : P.P.S. Janarthana Raja for Subbaraya Aiyar, Padmanabhan & Ramamani, for the Assessee.

THANIKKACHALAM, J.:

At the instance of the Department, under s. 256(1) of the IT Act, 1961, the Tribunal referred the following two questions for the opinion of this Court:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal’s view that the provisions of sub s. (4) of s. 11 of the IT Act, 1961, cannot operate as a charging section for bringing to tax the `excess’ referred to therein is sustainable in law ?

2. Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 11(4), the Tribunal is correct in law in deleting the items of disallowances totalling Rs. 1,54,667 for the asst. yr. 1972-73?”

The assessee is an AOP which has been granted exemption under the provisions of s. 11 of the IT Act, 1961. The assessee is a charitable trust, engaged in charitable activities. There were several distinct lines of activities such as running educational institutions, technical training centres, physical educational institutions, etc. The ITO looked into the income and expenditure statement filed by the assessee. The assessee was carrying on its business in running workshops and selling the goods manufactured, etc. Holding the business undertakings run as above, as property held under trust for the purpose of s. 11 of the Act, the ITO worked out the income of such undertaking in accordance with the IT Act relating to assessment and so doing he applied the provisions of s. 11(4) of the IT Act to assess the excess between the income so determined and the income as shown in the accounts of the undertaking. In making the assessment, however, he computed the excess by only adding up the items of disallowances to the book income shown by applying the provisions of the IT Act. Thus, the ITO disallowed a sum of Rs. 1,54,667 comprising several items. Applying the provisions of s. 11(1) of the Act and holding that the above amounts were deemed not to have been applied for charitable purposes in terms of s. 11(4), the ITO brought the sum of Rs. 1,54,667 to tax. Under each head, the ITO gave the reasons as to why he considered the disallowance as warranted by the provisions of the Act.

The assessee appealed to the AAC, objecting to the assessment of Rs. 1,54,667 by applying the provisions of s. 11(4), as if they were a separate charging provision of the Act. According to the assessee, the provisions of s. 11(1) of the Act were initially attracted. Sec. 11(4) of the Act being carved out of s. 11(1) of the Act, the ITO had only to see whether the income earned has been applied to charitable and religious purposes. Sec. 11(4) of the Act could not be a separate charging section. Alternatively, it was submitted that in respect of each of the items of disallowance, the disallowance itself was challenged. The AAC held against the assessee on the first ground though in respect of individual items of disallowance comprised in the figure of Rs. 1,54,667, he gave certain quantum of reductions. As against the order passed by the AAC, the assessee preferred an appeal before the Tribunal. The Tribunal pointed out that in the present case, the surplus income of the assessee as per books came to Rs. 3,91,020. The assessee has applied a sum of Rs. 7,98,081 for charitable purposes. According to the Tribunal, when the assessee has spent Rs. 7,98,081 for charitable purposes, it is clear that the sum of Rs. 3,91,020 has been applied towards charitable purposes. The Tribunal, however, held that when once the assessee has got only one source of income such as the business undertaking and the income therefrom has been exhausted for the purposes of taxation by the application of the provisions of s. 4 and s. 11(1) of the Act, there remains absolutely nothing of the assessee’s income which could be brought to tax. Accordingly, the additional sum of Rs. 1,54,667 was deleted. This conclusion was arrived at by the learned Accountant Member and the learned Judicial Member by separate, but concurrent orders.

4. Learned standing counsel for the Department submitted as under: A plain reading of the provisions of s. 11(4) of the Act shows that the excess amount between the income so determined and the income as shown in the account books of the undertaking should be deemed to be the income applied for the purposes other than charities. Sec. 11(4) of the Act, according to learned standing counsel, is an extension of s. 11(1), but even though it has to be read on the terms obtaining therein and determined. Read in this manner, it was clear that the difference between the income worked out for income-tax purposes and the income as per the books maintained should be regarded as income not applied for charitable and religious purposes. Income not so applied being not exempted from tax, they have been correctly brought to tax. According to learned standing counsel, it cannot be disputed that business income has to be computed in a particular way and the method laid down in the IT Act can be the only method for working out the income. When once so working out the income, an excess under s. 11(4) is computed, that excess ceases to be income applied for charitable purposes and has to be taxed not being exempted under s. 11(1) of the Act. Learned standing counsel further submitted that if the trust does not come within the terms of “exemption claimed”, taxability under s. 11(4) of the Act automatically arises. According to learned standing counsel, the reasons given by the Tribunal was that the surplus for the purpose of this assessment would be Rs. 5,45,687 (Rs. 3,91,020 + Rs. 1,54,667) and even if this is regarded as the income of the undertaking on which the assessee has claimed exemption from tax, the entire amount of Rs. 5,45,687 would be exempted because the assessee has spent Rs. 7,98,081 on charitable and religious purposes. Learned standing counsel submitted that it is not known as to wherefrom this sum of Rs. 7,98,081 came. According to learned standing counsel, if this amount of Rs. 7,98,081 is accumulated income of the earlier years then the assessee should have followed the provisions contained in s. 11(2) of the Act, viz., after obtaining permission from the ITO, the assessee can spend the whole accumulated income for religious and charitable purposes and then claim exemption under s. 11(1) of the Act. Learned standing counsel submitted that from which unit out of the assessee’s undertakings the sum of Rs. 7,98,081 has come and how the sum of Rs. 7,98,081 was arrived at as the difference between the assessed income, according to the provisions of the Act, and the book income are not known. Therefore, according to learned standing counsel, the Tribunal was not correct in deleting the addition of Rs.1,54,667.

5. Learned counsel appearing for the assessee submitted as under: The provisions of s. 11(4) of the Act are not applicable to the assessee’s case. No claim under s. 11 (4) having been made, that section should not be applied. The expression “income”used in s. 11(4) has a special meaning, but the disallowance cannot be treated as income of the assessee. Sec. 11 (4) consists of two parts—(i) it is applicable only where s. 11(1) applies, and (ii) the assessee must take a claim for non-inclusion of the income from the business undertaking in its total income. The assessee in the present case having spent more on charitable purposes than its income, it was unreasonable to hold that any part of the income has been spent on non-charitable purposes. The provisions of s. 11(4) exempting the income under certain conditions stipulates as one such condition, the application of income for charitable purposes. The provisions of s. 11(4) only relate to non-application of certain items of income for charitable or religious purposes and does not by itself or through a fiction create a different type of income.

We have heard the rival submissions. The assessee submitted that even in a case where a business is held under trust, the income therefrom is to be computed in accordance with the provisions of the IT Act, 1961, and so much of the income as has been applied for charitable and religious purposes, as the case may be, is to be exempted from tax. The assessee further contended that s. 11(4) of the Act only creates a fiction insofar as it provides that the excess of income as determined in accordance with the provisions of the Act over the income as per books shall be deemed to have been applied for purposes other than the charitable or religious purposes and that the same cannot apply in the present case, since the assessee has actually spent on charitable and religious purposes much more than the income derived in the relevant accounting year. According to the Department, the provisions of s. 11(4) of the Act are mandatory and when on a perusal of particulars of income it is found that there is a difference between the income determined and the income as per book, the fiction would operate. The Department contended that otherwise the provisions of s. 11(4) of the Act would be rendered nugatory. According to the Department, the fact that the assessee had applied much more than the income derived in the relevant accounting year, for charitable purposes can be of no avail at all. Sec. 11(1) provides that income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the previous year of the person in receipt thereof to the extent to which such income is applied for such purposes in India. Sec. 11(4) of the Act consists of two parts. The first part merely explains that for the purposes of this section property held under trust “includes a business undertaking”. The second part provides that where the property held under trust is a “business undertaking”, the ITO shall have power to determine the income of such undertaking in accordance with the provisions of the said Act and where the income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than the charitable or religious purposes.

It is not the total income as would be assessed by the ITO that is relevant for the purpose of investing the funds of the trust or assessing the income of the trust. The mode of determination by the ITO as per the provisions of the IT Act, is specifically restricted to the income over and above the income as shown in the accounts of the business undertaking held by a trust. It follows that with regard to the income of the trust as such, it is the accounts of the trust alone that have to be taken into consideration for the purposes of s. 11(1)(a) of the Act.

For the purposes of s. 11(4) of the IT Act, 1961, property held under trust includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the person in receipt thereof, the ITO shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than the charitable or religious purposes and, accordingly, chargeable to tax within the meaning of sub-s. (3).

9. Wherever Parliament considered the computation of income should be in accordance with the provisions of the IT Act, 1961, it introduced the concept by using appropriate language. In the absence of any such language in s. 11(1) of the Act, the computation as envisaged by the other provisions of the Act cannot be imported into s. 11(1). Sec. 11 contemplates application of the income for charitable purposes. The charity can accumulate 25 per cent of the income. Taking into account the purpose for which the conditions of s. 11(1)(a) are imposed it would be clear that income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. The application of income for charitable purposes will have to be excluded and it is only the balance that would require an examination for finding out whether the assessee has complied with the rule of accumulation. Under s. 11(1)(a) of the Act 25 per cent of the income from the property or Rs. 10,000 whichever is higher shall be included in the total income of the previous year of the trust. Under sub-s. (2) of s. 11 of the Act, the restriction contained in cl. (a) or cl. (b) of sub-s. (1) of s. 11 shall not apply, provided the conditions specified in cls. (a) and (b) of sub-s. (2) of s. 11 are complied with. Sub-s. (2)(a) requires that a notice in writing shall be given to the ITO in the prescribed manner specifying the purpose for which income is being accumulated or set apart, but the period for which the income was accumulated or set apart shall, in no case, exceed ten years. Under s. 11(2)(b) of the Act, the money so accumulated or set apart is required to be invested in any Government security.

The assessee in the present case contended that it has spent more than its income for charitable purposes which was Rs. 46,071 from the part of the trust known as P.S. Govindaswamy Naidu & Sons Charities, equal to its income and Rs. 7,52,011 from P.S.G. Industrial Institute against the net surplus shown of Rs. 3,44,950. The utilisation in this manner totalled to Rs. 7,98,081. Thus out of the net surplus as per books, the assessee had spent by way of excess appropriation a sum of Rs. 4,07,062. It was contended by the assessee that since its income was far below the amount of appropriation for charitable purposes, the entire income should be exempted under s.11(1) of the Act.

According to the Tribunal, the surplus income of the assessee as per book income is Rs. 3,91,020. The ITO disallowed and added back specified amounts for reasons specified in the Act. In the present case, such addition came to Rs. 1,54,667. The surplus, therefore, for the purpose of this assessment year would be not Rs. 3,91,020 but Rs. 3,91,020 + Rs. 1,54,667, i.e., Rs. 5,45,687. The Tribunal held that even if this is regarded as the income of the undertaking on which the assessee had claimed exemption from tax, the entire amount of Rs. 5,45,687 would be exempt because the assessee has spent on charitable and religious purposes a sum of Rs. 7,98,081. Therefore, the assessee is entitled to exemption under s. 11(1) of the Act.

According to the Tribunal, the surplus for the purpose of this assessment year would be Rs. 3,91,020 + Rs. 1,54,666, i.e., Rs. 5,45,687. If that is so, where did the surplus income of Rs. 7,98,081 come from? Whether it is an accumulated surplus of the previous years or whether it includes the surplus of Rs. 3,91,020. If it is accumulated surplus of the previous years, it is not known whether the assessee has followed the procedure as contemplated under s. 11(2) of the Act. The Tribunal is, therefore, directed to verify as to whether the surplus of Rs. 7,98,081 included the surplus of Rs. 3,91,020 and where this Rs. 7,98,081 came from, and whether the said amount has been applied for charitable purposes in accordance with the provisions contained in s. 11(1) of the Act. Without getting clarifications on these aspects, it is not possible to answer the question referred to us. After ascertaining these facts, the Tribunal is directed to dispose of this matter in accordance with the provisions contained in s. 11 of the Act. We, accordingly, return the questions referred to us unanswered.

[Citation : 223 ITR 831]