1975 (9) TMI 44 - HC - Income Tax

Charitable trust entitled to tax exemption for accumulated income under Income-tax Act

The court held that the assessee, a charitable trust, is entitled to tax exemption for the entire accumulated income, having complied with the conditions ... Charitable Trust, Income Tax Act, Taxing Statutes Issues Involved:1. Interpretation of Section 11 of the Income-tax Act, 1961.2. Compliance with the conditions of Section 11(2) for claiming tax exemption.3. The legality of the Commissioner's notice under Section 263 of the Income-tax Act.Detailed Analysis:1. Interpretation of Section 11 of the Income-tax Act, 1961:The primary issue revolves around the interpretation of Section 11, particularly subsections (1)(a) and (2). The court examined whether the assessee, a charitable trust, is entitled to tax exemption for its accumulated income. The learned single judge initially held that the assessee is entitled to exemption only for 75% of the surplus income accumulated for future use, rejecting the revenue's contention that the entire surplus income must be invested in specified securities for exemption.The court clarified that Section 11(1)(a) allows exemption for income applied for charitable purposes and for accumulated income up to 25% or Rs. 10,000, whichever is higher. Section 11(2) provides an alternative, allowing exemption for income accumulated beyond 25% if specific conditions are met, such as giving notice to the Income-tax Officer and investing in approved securities.The court disagreed with the interpretation that Section 11(2) is an alternative to Section 11(1)(a) and held that the exemptions under both sections are independent. Therefore, compliance with Section 11(2) does not negate the exemption provided under Section 11(1)(a).2. Compliance with the Conditions of Section 11(2):The court examined whether the assessee complied with the conditions of Section 11(2), which include giving notice to the Income-tax Officer and investing the accumulated income in approved securities. The assessee had invested 75% of the accumulated income in approved securities and had given the required notice. The court held that the assessee is entitled to exemption for the entire accumulated income, including the 25% exempted under Section 11(1)(a) and the 75% under Section 11(2).The court emphasized that the interpretation of Section 11 should be reasonable and practicable, avoiding any unreasonable or harsh results. The court referred to the judgment in Commissioner of Income-tax, Patiala v. Shri Krishen Chand Charitable Trust, which supported the view that compliance with Section 11(2) does not take away the exemption granted under Section 11(1)(a).3. Legality of the Commissioner's Notice under Section 263:The Commissioner issued a notice under Section 263, arguing that the assessee had not invested the entire surplus income in approved securities, and thus, the exemption should be denied. The court found this view to be erroneous. The Income-tax Officer had correctly exempted the entire accumulated income based on compliance with the conditions of Section 11(2).The court held that the Commissioner's action under Section 263 was not authorized by law, as the assessee had complied with the necessary conditions for exemption. The court directed the Additional Commissioner of Income-tax to recall the impugned notice dated January 18, 1973.Conclusion:The court concluded that the assessee is entitled to exemption for the entire accumulated income, having complied with the conditions of Section 11(2). The Commissioner's notice under Section 263 was deemed illegal and was ordered to be recalled. The respondent (assessee) was awarded costs, including an advocate's fee of Rs. 250.