1998 (2) TMI 3 - SC - Income Tax

Charitable trust - Claim for exemption u/s 11(1) - assessee has applied ₹ 8 lakhs for charitable purposes in India by purchasing a building which is to be utilised as a hospital - assessee is entitled to accumulate this income and claim exemption from income-tax under section 11(1)(a).

Summary

Issues:
- Interpretation of section 11 of the Income-tax Act, 1961 regarding exemption of income for charitable trusts.
- Whether the income of the assessee is exempt from tax under section 11 for the assessment year 1970-71.
- Compliance with the conditions under section 11(2) for accumulation and investment of income.

Analysis:
The judgment deals with the interpretation of section 11 of the Income-tax Act, 1961, concerning the exemption of income for charitable trusts. The case involved a charitable trust engaged in charitable activities like repairs to old Hindu temples, building new ones, and establishing educational institutions. The trust had accumulated income for ten years for charitable purposes and invested it in Government securities as per section 11(2).

The main issue was whether the income of the assessee for the assessment year 1970-71, which included an amount of Rs. 8 lakhs utilized for purchasing a building for a hospital, was exempt from tax under section 11(1) of the Income-tax Act. The Income-tax Appellate Tribunal initially held that the Rs. 8 lakhs should be treated as income for the purposes of section 11. However, the High Court ruled that the Rs. 8 lakhs was an asset acquired in realization of an outstanding due and hence should not be included in the income of the assessee under section 11(1).

The court examined the provisions of section 11(1) and 11(2) to determine the entitlement of the assessee to claim exemption. Section 11(1) provides for exemption of income applied for charitable purposes, and if accumulated, up to 25% of the total income or Rs. 10,000, whichever is higher. Section 11(2) lays down conditions for accumulation and investment of income in Government securities for claiming exemption beyond the 25% limit.

The court clarified that compliance with the conditions under section 11(2) was necessary to claim exemption beyond the 25% limit. In this case, the assessee had utilized Rs. 8 lakhs for charitable purposes and was entitled to exemption under section 11(1). Additionally, the balance income of Rs. 1,64,210.03, being less than 25% of the total income, could also be accumulated and exempted under section 11(1)(a).

Ultimately, the court held in favor of the assessee, stating that the income utilized for charitable purposes was exempt under section 11(1) and that the assessee could claim exemption for the balance income as well. The judgment emphasized the distinction between the requirements of section 11(1) and section 11(2) for claiming exemption of accumulated income for charitable trusts.