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TMI Blog1978 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the whole or any portion of the income assessed by the Income-tax Officer is liable to be taxed in the assessee's hands on the ground of non-fulfilment of the conditions stipulated in section 11(2) of the Income-tax Act, 1961, for the assessment years 1966-67 and 1968-69 ? " Questions Nos. 1 and 4 are referred at the instance of the assessee, question No. 2 at the instance of the revenue and question No. 3 at the instance of both. It may be noted that question No. 4 in a way also covers questions Nos. 2 and 3. The facts leading to the reference briefly stated are these : For the assessment year 1966-67, with regard to the H.E.H. The Nizam's Supplemental Religious Endowment Trust, the assessment was completed by the ITO by an order dated March 31, 1967, on a total income of Rs. 61,056 on the ground that the assessee's trust was not of a public, religious and charitable nature and, therefore, not entitled to exemption under s. 11 of the I.T. Act. The matter was carried by way of appeal to the Appellate Tribunal which by its order dated June 17, 1970, held that the trust was wholly of a public, charitable and religious nature and hence exempt under s. 11 of the Act. On beh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss in conformity with s. 147 of the Act. The other contention was that the income that had to be taken into account for the purpose of s. 11 (1)(a) of the Act was as per the account books of the assessee and not as per the assessment made by the ITO and that even by March 31, 1966, the assessee had already invested a total amount of Rs. 52,332.50 in Govt. securities. With regard to the assessment year 1967-68, it was contended that a notice in the prescribed form in compliance with s. 11(2) of the Act was given to the ITO on August 25, 1970. The contention further was that though the ITO held that this notice must have been given before the end of the previous year and the AAC held that it should have been filed before the filing of the return, no time limit was prescribed under the Act or the Rules. In short, it was contended that the rule was thus complied with and that the accumulations ceased on the death of the Nizam, the settlor, on February 24, 1967. For the period from April 1, 1966, to February 24, 1967, the income was invested in Govt. securities. To be precise, for the year 1967-68, it was contended that Rs. 50,160 was invested in Govt. securities before March 31, 1967. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee, submits that question No. 1 referred to is not being pressed by him. In other words, the reopening of the assessment by the ITO in the light of the information enabling him to reopen the assessment is not challenged. So, that question is answered against the assessee. A few facts which are not in controversy can be stated here. The accumulations of the Trust accrued only up to February 24, 1967, on which date the Nizam died and thereafter the accumulations ceased. It is the admitted case of the assessee that for the year 1966-67, they (the trustees) have not given any notice as required by s. 11(2)(a) of the Act. The case of the assessee, however, is that the income did not exceed Rs. 10,000 for that relevant year and, therefore, there was no need to deliver any notice with regard to the setting apart of any part of the income or accumulations. From the record, it also transpires that for the subsequent year 1967-68, there was a resolution of the trustees and a letter dated August 25, 1970, was sent to the ITO by the secretary of the trust with regard to the accumulation. The further case of the assessee is that during that period they also investe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the property held under trust in part ...... (2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (a) or clause (b) of sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with (a) such persons have, by-notice in writing given to the Income-tax Officer in the prescribed manner, specified the purpose for which the income is being accumulated or set apart, and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years ; (b) the money so accumulated or set apart is invested in any Government security as defined in clause (2) of section 2 of the Public Debt Act, 1944 (XVIII of 1944), or in any other security which may be approved by the Central Government in this behalf. (3) Any income referred to in sub-section (1) or sub-section (2) as is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto or is not utilised for the purpose for which it is so accumulated in the year immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly such of the income which is left after the expenditure is required to be set apart or such of the money which is left with the trust after meeting all the expenditure that can be invested in securities. The further contention is that it is only after taking the income and expenditure as borne out by the books of the trust, the surplus income can be arrived at. In short, the contention is that for the purpose of assessing the total income, the ITO may, as per the provisions of the Act, include many items on notional basis. But they do not really constitute the surplus amount or the amount that would be left for purposes of investment. What is contended is that by the expression "income" and the expression "money" used in s. 11(2)(b), it has to be taken as money left with the trust in the commercial sense or as per the accounts of the trust and the actual profits earned. In this context, reliance is sought to be placed on Circular No. 5 of 1968 issued by the Central Board of Direct Taxes. Paragraphs 2 and 3 of the said circular read as follows : " 2. Section 11(1) provides that subject to the provisions of sections 60 to 63, 'the following income shall not be included in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust. We may, however, note that it is not shown that the income and expenditure accounts for the relevant periods are not in accordance with the principles of accountancy. Even otherwise, in order to find out as to what moneys could be invested, it is the actual income as borne out by these statements that would be relevant. Mr. Anjaneyulu, the learned counsel, also takes support for his contention from the decision in CIT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176 (SC). Subba Rao J. (as he then was), speaking for the court, held that in arriving at the assessable profits, the ITO may disallow many expenses actually incurred by the assessee and in computing his income, he may include many items on notional basis; but the commercial or accounting profits or the actual profits earned by the assessee are calculated on commercial principles. It cannot be said for a moment that the income and expenditure account does not give the net income or the moneys available for investment. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the exemption." It is true that the payments in a particular year as shown in the accounts is not on account of the tax for that year and they relate to the preceding assessment years. But it can nevertheless be said that those payments are outgoings in that particular year and are only incidental to the carrying out of the purposes of the trust. It is difficult to say that on account of the income-tax or wealth-tax, a provision should have been made in the relevant assessment year. In any view of the matter, the payments made in a particular year, irrespective of the fact that they relate to the assessment of the previous years, are yet outgoings and constitute expenditure. Such payments cannot be excluded from exemption and are thus to be excluded from the income of the trust. Point No. 2 is answered accordingly. 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 not 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , also contended that the Madras High Court in M. Ct. Muthiah Chettiar Family Trust v. 4th ITO [1972] 86 ITR 282 struck down r. 17 prescribing the time-limit for making an application and also paras. 2 and 4 of Form No. 10 as ultra vires the rule-making authority. That judgment was also affirmed by Division Bench of the same High Court in Second ITO v. M. C. T. Trust [1976] 102 ITR 138. Mr. Rama Rao, the learned counsel for the revenue, contends that sitting in a reference, this court cannot go into the question of the vires of the rule making power. It can, however, be noted that we are not going into the question of the vires of the rule or the validity of r. 17 prescribing a time-limit when s. 11(2)(a) of the Act does not by itself prescribe the time-limit. Suffice it to say, that under the Rules as they existed prior to the amendment of 1971, no time-limit was prescribed for the delivery of the notice with regard to the setting apart of the income or of the accumulation. It can thus be said that the notice dated August 25, 1970, is a valid notice. This leads us to the question whether the condition as laid down in s. 11(2)(b) of the Act with regard to the investment of the mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 2,906.03. Thus, no monies are available for investment. It cannot be said that there is any breach of compliance of the condition laid down under s. 11(2)(b) of the Act. In the light of the above discussion, we answer question No. 1 against the assessee. Question No. 2 is answered holding that the income as per the books of the trust have to be considered for purposes of s. 11(1) of the Act. Question No. 3 is answered holding that there was compliance with s. 11(2)(a) of the Act with regard to the assessment years 1967-68 and 1968-69 and that s. 11(2)(b) of the Act has been complied with regard to the year 1967-68, and the question of compliance with the condition under this sub-clause does not arise with regard to the assessment years 1966-67 and 1968-69. This would also answer the fourth question and that is to this effect that as there was no question of non-fulfilment of the condition under s. 11(2) of the Act, no portion of the income as assessed by the ITO is liable to be taxed in the hands of the assessee for the assessment years 1966-67 and 1968-69. Thus, these three questions are answered in favour of the assessee. The reference is answered accordingly with costs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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