9911796707
TMI Blog1981 (6) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the trust for a full exemption of the entire income, the ITO brought to assessment 75 per cent. of the total income, granting to the trust exemption relating to the balance of 25 per cent. For the next two assessment years 1969-70 and 1970-71, the ITO having rejected the claim for total exemption, brought to tax the entire income as assessable in the relevant years. The trust appealed against these assessments before the AAC, but without success. On further appeal before the Tribunal, the trust contended that it was eligible for exemption from tax under s. 11(2) of the I.T. Act, in respect of that part of the total income which had been set apart for the other purposes and which had been invested in. Government securities under s. 11(2) of the Act, in accordance with the procedure prescribed in rule 17. As for the balance of the income which had not been so invested, the trust contended that it was eligible for exemption even though not even a portion thereof was immediately applied to any object of charity. This claim was made on the ground that the non-application and accumulation of this balance would come under s. 11(1)(a) of the Act and would be eligible for exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that time, the income was per se exempt from income-tax because it was income from trust property for charity. There is no statutory pre-condition under the early taxing enactment that the income of a charity has got to be applied for the avowed charitable purposes or at least accumulated and distinctly set apart for future application. The exemption of charitable income, without any strings, so far as it went, was beneficial for advancing the objects of charitable trusts in the country. But, it was also productive of abuses, because in the name of charity income was earned, but not actually used for charitable objects. Even where no income was properly applied to any charitable purpose, yet tax exemption was being obtained on the mere fact that the income was derived from property held under charitable trust. In order to remedy this mischief, opportunity was availed of by Parliament when the I.T. Act was remodelled in 1961. For the first time, the principle was incorporated into the Act that the exemption from tax of charitable trusts must be dependent upon the application of the trust to the charitable purposes and must be limited to the income actually so applied during the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption. The case of the assessee, which was accepted by the Tribunal on the basis of the decision of the Jammu and Kashmir High. Court earlier cited, was that to the extent that there was compliance by a charitable trust with the provisions of s. 11(2) of the Act, the income covered by the investment will be exempt from tax. Nevertheless, it will be open to the trust to fall back upon the provisions of s. 11(1)(a) with reference to the balance of the income to the extent of such exemption could be granted under that provision. In the present case, as earlier observed, the assessee had made investments up to 75 per cent. or more of its income and claimed exemption under S.11(2) of the Act. The assessee had complied with all the terms and conditions of the said provision and also the prescribed conditions under r. 17 of the I.T. Rules. That being so, there was nothing to prevent the assessee from obtaining the exemption under the sub-section. It left less than 25 per cent. of the income which was not covered by any investment, but which was simply accumulated without any application whatever during the account years in question. The question was whether, there was anything in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accumulated income. There was a change in this respect under the present Act of 1961. Under the present Act any income accumulated in excess of 25% or Rs. 10,000, whichever is higher, is taxable under section 11(1)(a) of the Act, unless the special conditions regarding accumulation as laid down in section 11(2) are complied with. An examination of section II (1)(a) shows that this section comprises of two parts : (1) which excludes that part of the income to the extent to which such income is applied for charitable purposes in India; (2) where there is accumulation of the income, then to the extent to which the income so accumulated is not in excess of 25% or Rs. 10,000, whichever is higher. It is clear, therefore, that 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 saving, i.e., to say an accumulation of 25% or Rs. 10,000, whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalises and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2) while enlarging the scope of exemption r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax liability on the excess, if the trust complies with certain procedural formalities (of giving notice to the Income-tax Officer specifying the purpose for which the income is desired to be accumulated, and the period for which the accumulation is proposed to be made) and subject the requirement that the income so accumulated is invested in Government securities or any other approved securities ........ (the underlining is ours) This passage from the Board's Circular shows that the accepted view even of the highest revenue authority of ss. .11(1)(a) and l1(2) was that while up to a limit of 25% accumulations were free of tax, the balance of the income would also be exempt from tax if the formalities connected with the accumulation and the actual investment of that balance were carried out in accordance with sub-s. (2). Mr. Rangaswami, however, brought to our notice an earlier Board's Circular dated September 6, 1968, in which a different opinion had earlier been expressed in the following words ; " It is hereby clarified that the correct position in this regard is that if a person desires to accumulate income in excess of the limit laid down in section 11 (1), the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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