1995 (10) TMI 2 - SC - Income Tax

Charitable Trust - whether exemption under s. 11 can be denied on the ground that the assessee should have invested the entire surplus amount in one or other of the securities mentioned in s. 11(2)(a) - 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 hearing i.e. an accumulation of 25 per cent. or 10, 000 whichever is higher it will not be included in the taxable income

Issues Involved:
1. Eligibility of the assessee trust for tax exemption under Section 11 of the Income-tax Act, 1961.
2. Interpretation of Section 11(1)(a) and Section 11(2) of the Income-tax Act, 1961.
3. Compliance with investment requirements under Section 11(2)(b) for tax exemption.

Detailed Analysis:

1. Eligibility of the Assessee Trust for Tax Exemption under Section 11 of the Income-tax Act, 1961:
The respondent, a charitable trust, claimed exemption for a surplus income of Rs. 85,262 under Section 11(1)(a) and Section 11(2) of the Income-tax Act, 1961. The assessing authority initially denied this exemption, labeling the trust as not genuine. However, the Income-tax Appellate Tribunal reversed this decision, confirming the trust's charitable status and its eligibility for tax exemption under Section 11. This decision was upheld by the High Court, leaving no further dispute regarding the trust's eligibility for exemption under Section 11.

2. Interpretation of Section 11(1)(a) and Section 11(2) of the Income-tax Act, 1961:
The core issue revolved around the interpretation of Section 11(1)(a) and Section 11(2). The Division Bench of the Karnataka High Court interpreted these sections to mean that 25% of the accumulated income of the trust arising in the previous year is exempt under Section 11(1)(a). Additionally, if 75% of the accumulated income is invested according to the provisions of Section 11(2), this portion is also exempt from tax. This interpretation was consistent with the view taken by the Jammu and Kashmir High Court in CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387.

3. Compliance with Investment Requirements under Section 11(2)(b) for Tax Exemption:
The Commissioner of Income-tax challenged the assessment order, arguing that the trust failed to invest the entire surplus income of Rs. 85,262 as required by Section 11(2)(b). The trust had invested only Rs. 70,975, leaving Rs. 14,287 uninvested. The High Court, however, held that the trust was entitled to exemption for the 75% of the accumulated income that was invested as per Section 11(2). The Division Bench further clarified that Section 11(2) does not require 100% of the accumulated income to be invested for exemption; rather, the exemption applies to the portion that meets the investment criteria.

Judgment Summary:
The Supreme Court upheld the Division Bench's interpretation of Sections 11(1)(a) and 11(2) of the Income-tax Act, 1961. It clarified that:
1. Section 11(1)(a) provides exemption for income applied for charitable purposes in India and allows for 25% or Rs. 10,000 (whichever is higher) of the accumulated income to be exempt from tax.
2. Section 11(2) lifts the restriction on the remaining 75% of the accumulated income if it is invested in specified securities, thereby exempting this portion from tax as well.

The Supreme Court approved the views of various High Courts, including Kerala, Madhya Pradesh, Bombay, and Madras, which aligned with the Karnataka High Court's interpretation. Consequently, the appeal by the Revenue was dismissed, affirming the tax exemptions claimed by the trust under Sections 11(1)(a) and 11(2).

In conclusion, the judgment reinforced that the trust's compliance with the investment requirements under Section 11(2) was sufficient for tax exemption on the invested portion of the accumulated income, and the Revenue's interpretation requiring 100% investment for exemption was not upheld. The appeal was dismissed with no order as to costs.

← Previous Next →