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TMI Blog1983 (2) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... ally, from textile fibres, whether natural or artificial, including articles such as tents and tent material, cotton apparel, cotton tape, imitation leather cloth, stockinette cloth, hosiery of all kinds, readymade garments of all sorts, whether made out of knitted fabrics or not, bindings, ribbon, cotton waste, strings, ropes and all types and varieties of cotton manufactures and to carry on such activities by such methods as may be necessary or expedient and without prejudice to the generality of the above by . . ." and the subsequent sub-clauses explain the scan of the objects. The income-tax authorities accepted the object of the council is a charitable purpose entitled to the exemption under sections 11 to 13 of the Income-tax Act, 1961 ('the Act'), in the light of the Supreme Court decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. 3. The assessee furnished a notice under section 11(2) of the Act on 29-6-1978 along with a resolution in Form No. 10 seeking accumulation of its surplus fund to the extent of Rs. 50 lakhs till the period ending 31-3-1980 Council apparently for the purpose of carrying out the primary purpose of the viz., p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urplus of Rs. 23,46,455 the trustees gave notice for accumulation of the surplus on 30-6-1977 and complied with the provisions of section 11(2)(b). This was noticed and regarded as proper compliance with the law by the ITO who allowed the accumulation. The position for subsequent year was the same. 5. Apart from the above, it is pointed out that the object clauses contained a clear distribution between the purposes of the trust, i. e., its objects and the ways and methods of fulfilling such purposes. The purpose refers to the charitable purpose, which has been clearly identified and accepted as eligible for exemption by the department. The modes or the ways and means of fulfilling the purpose need not in fact be set out by the assessee but have to be followed in fulfilling the purpose. The learned counsel referred, in this connection, to certain portions of the report of the council for the years 1977-78, particularly at pages 18 to 27, which detailed the activities undertaken by the assessee in fulfilment of its charitable purpose. Certain agreements had to be entered into with different foreign countries such as USA, UK, Austria, Sweden, Norway, Finland, Australia, etc. Elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the income is applied for such purposes or where it is accumulated or set apart for such accumulation to the extent of such accumulation where it is not in excess of 25 per cent of the income. In effect, therefore, up to 25 per cent of the income there is a clear exemption whereas to the balance the exemption would be available only if it is 'accumulated'. Section 11(2) deals with the accumulation and is as under : "11. (2) Where seventy-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely :---" Sub-section (3) of section 11 refers to certain consequences for default in connection with section 11(2). Rule 17 provides that a notice for accumulation of income by charitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder trust for charitable or religious purposes (except to the extent of 25 per cent of such income) only if that income is spent actually on those charitable purposes. Each year being for assessment purposes, a separate period, normally the income of any year should be spent during that year itself unless of course a case could be made out for outstanding liabilities towards charity of the earlier years being met with current year's income. It is evident that the primary purpose of section 11(1) restricting the exemption to the incomes spent on charity, is to prevent moneys earned being entitled to the exemption without the charity getting the benefit of such expenditure. That this is so, is clear also from the provisions of sub-clause (3) of section 11 which provides for the manner in which the amounts are to be treated after accumulation is made. It is against the above background that the provisions with regard to the accumulation have to be read and understood. 10. For the purposes of availing of the exemption different criteria have to be applied with regard to the 25 per cent of the income and the balance of 75 per cent of the income. The former part without being utilised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally applies. In other words, the ITO has neither the power nor the discretion to accept or reject the application in order to go into the merits of the accumulation itself. When the Legislature goes through an elaborate procedure covered by several sub-sections of the Act, it certainly must have done it for some purpose. Merely filing with the ITO a notice about accumulation with no authority for the officer to do anything about the application such as accepting or rejecting it, would be a futile exercise. Added to this is the prescription of rule 17, a prescription of a form, Form No. 10, etc., all of which show that the Legislature did expect the ITO to go through the notice wherein certain details are furnished and make some decision. What we want to emphasise is that in view of the elaborate procedure laid down in section 11(2) and (3) read with rules and the Form, it would be illogical to conclude that the ITO has no power to reject or accept the form and that when the Form is filed by an assessee it has to get automatically accepted by the ITO. We, therefore, have to hold that the purpose of filing the notice in the prescribed form is not merely to intimate the ITO about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt held that the full accumulated income can be invested in the prescribed securities at any time before the assessment is made because in the statute itself there is no prescribed time-limit within which it should be made. 14. Rule 17 and Form No. 10 are prescribed under section 11(2) and there is no dispute that the notice has to be given to the ITO in the prescribed manner. Paragraph 1 of Form No. 10 specifies that the amounts are accumulated : ". . . in order to enable the trustees to accumulate sufficient funds for carrying out the following purposes of the trust :--- (1) . . . . (2) . . ., etc. This form itself requires the assessee to indicate the purposes which necessitate the accumulation of sufficient funds. There is nothing in this portion of Form No. 10 which could be regarded as repugnant to the provisions of the main section or ultra vires of the same for any reason as was held by the Madras and the Andhra Pradesh High Courts in respect of a limitation superimposed. In M. C. T. Trust case their Lordships pointed out that : ". . . the reasonableness of the rules can, in appropriate cases, be considered by the court. It is true that the reasonableness is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification for permitting that amount to be accumulated and carried over for a subsequent year. For instance, if there is a trust for feeding the poor and the trust income instead of being used for feeding the poor during the previous year is accumulated and used for feeding them in a subsequent year, that would be a remarkable case of driving the hungry to death and trying to feed them either at the time of or immediately after the death. Certainly, this could not have been the idea of feeding the poor conceived in section 11 read with section 2(15) and the scheme for accumulation. If the object of the trust is to feed the poor and it can be done with the income of the previous year during the year, in our view, subject to the free limit of 25 per cent of 'the income, it should be done in the previous year. If on the contrary feeding the poor necessitates construction of a building for the purpose and the income of the previous year is not sufficient for the purpose, certainly accumulation could be made subject to the rules and the object achieved through the same. We have, therefore, no hesitation in holding that the purpose of serving the notice on the ITO in the prescribed manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vague and non-specific has to be accepted as correct. If, for instance, the assessee were to point out certain specific lines of activity requiring the investment of Rs. 50 lakhs set apart for accumulation and the manner in which that amount is to be spent on the project, that could be called a specific purpose. No such purpose has been expounded before the ITO or even before us. We, therefore, hold that the assessee is not entitled to the benefits of accumulation in the present case. 17. It was pointed out before us that an exemption provision should be liberally construed. We agree with this proposition, but section 11(2) while liberalising the exemption provisions has in-built in the same certain procedural safeguards to thwart the misuse of the funds. With no time-limit for investment, with no time-limit even for issue of a notice, if the income of the assessee were to be exempt for the year on the ground of a charitable purpose and the assessee were free to deal with it as it likes, it would be a poor consolation for the revenue to be told that it has to interpret certain exemption provisions liberally. A person who seeks a relief on the contrary should be more vigilant in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of exports naturally involves activities abroad. For this purpose maintenance of an office, incurring of incidental expenses and also other expenses on travelling, etc., has to be done sometimes abroad. It is a natural corollary and incident to the fulfilment of the Indian charitable object in the present case. Maintenance of the office itself abroad is certainly not an object of the assessee-trust. If the fulfilment of the charitable object, therefore, requires activities and expenditure abroad, this cannot be regarded as a separate expenditure of the income of the assessee for charitable or other purposes abroad. In fact these expenditures should be regarded as requiring to be deducted even before the income of the assessee is to by computed. Section 11 refers to the expenditure of the income of the assessee on charitable purposes in India. The disputed amount in the present case would get deducted even before arriving at the 'income' of the assessee. Apart from what the Commissioner mentioned, in our view, one cannot even hold that there has been factually an expenditure of the assessee's income abroad. The Commissioner's order on this point is upheld. 23. The other point ..... 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