COMMISSIONER OF INCOME TAX-I, COIMBATOREversusMIS. G.R. GOVINDARAJULU & SONS

                     [2015] 9 S.C.R. 289


   COMMISSIONER OF INCOME TAX-I, COIMBATORE                       A
                              v.
           MIS. G.R. GOVINDARAJULU & SONS
               (Civil Appeal No.4916 of2006)
                   SEPTEMBER 03, 2015                             B

           [A.K. SIKRI AND R. F. NARIMAN, JJ.]

        Income Tax Act, 1961 - s. 11(1)(a) - Deduction from
.income-Assessment of Charitable Trust-Assessee sought
 deduction from income, of (1) the amount actually spent for      C
 the objects of the Trust, (2) the amount set apart to be spent
 for charitable purposes and showed his taxable income as
 'nil' - Assessing Officer granted deduction of the amount
 actually spent - However, denied the deduction on the
                                                                  0
 amount set apart by the assessee, on the ground that no
 option for this purpose was exercised by the assessee before
 filing of the return - The appellate authority allowed the set
 apart amount to be deducted - The order in appeal was
 confirmed by the appellate Tribunal and the High Court -         E
 On appeal, held: High Court and the authorities below rightly
 allowed deduction of set apart amount holding that if option
 is exercised at the time of filing return, it would be in
 conformity with the provisions in s. 11 - However, they have
 gone wrong in treating the entire income as exempted from        F
 income tax - The deduction of the set apart amount is
permissible only to the extent of 25% of total income - The
 set apart amount by the assessee, being more than 25%,
 the entire set apart amount could not have been allowed to
 be deducted -Appeal allowed - Direction to the Assessing         G
 Officer to recompute the taxable income.

    Additional Commissioner of Income Tax vs. A.L.N. Rao
1995 (4) Suppl. SCR 348: 1995 (6) SCC 62.5- referred to.
                             289                                  H
290         SUPREME COURT REPORTS                  [2015) 9 S.C.R.


A                       Case Law Reference

        1995 (4) Suppl. SCR 348        referred to.      Para 3

         CIVIL APPELLATE JURISDICTION: Civil Appeal No.
 B    4916of2006

          From the Judgment and Order dated 07.09.2004 of the
      High Court of Judicature at Madras, in Tax (Appeal) No. 561
      of2004.

C         Jaideep Gupta, Zahaib Hussain, Sadhana Sandhu,Anil
      Katiyar, B.V. Balaram Das for the Appellant.

         V. Prabhakar, Revathy Raghavan, Jyoti Prashar for the
      Respondents.
D
          The Judgment of the Court was delivered by

       A.K. SIKRI, J . 1. The respondent-assessee is a Public
  Charitable Trust. It filed its return for the Assessment Year 1994-
  95 declaring 'nil' taxable income. In the summary of total
E income filed by the assessee it had mentioned gross income
  forthe year in the sum of Rs. 99,41,221/-"which represented
  interest receipts, rental income, bus collections, miscellaneous
  receipts and surplus in GRS hotel. It was further stated that out
F of this income the assessee had applied and spent a sum of
  Rs. 47,27,533/-forthe objects of the Trust. In the return it was
  also stated that it was setting apart a sum of Rs. 32 Lacs to be
  spent for charitable purposes in the following year. On that
  basis the assessee claimed that it was entitled to have the
G deduction of the entire amount and for the purpose of taxation
  the income was 'nil' under Section 11 of the Income Tax
  Act, 1961 (hereinafter referred to as 'the Act').

     2. Before we proceed further and discuss as to how the
H Assessing Office:r made the assessment,' it wouid be
  COMMISSIONER OF INCOME TAX-I,. COIMBATORE v.                      291
    G.R. GOVINDARAJULU & SONS [A.K. SIKRI, J .]

necessary to take note of the provisions of Section 11 of the        A
Act which are relevant for our purpose.

    "11. (1) Subject to the provisions of sections 60 to 63, the
    following income shall hot be included in the total income
    of the previous year of the person in receipt of the             B
    income--

    [(a) income derived from property held under trust wholly
    for charitable or religious purposes, to the extent to which
    such income is applied to such purposes in India; and,           c
    wher~ any such income is accumulated or set apart for
    application to such purposes in India, to the extent to which
    the income so accumulated or set apart is not in excess
    of [fifteen] per cent of the income from such property;
                                                                     D
    xxxxx
    xxxxx
    xxxxx
                                                                     E
    Explanation.-Forthe purposes of clauses (a) and (b),-
    ( 1) in computing the [fifteen] per cent of the income which
    may be accumulated or set apart, any such voluntary
    contributions as are referred to in section 12 shall be
    deemed to be part of the income;                                 F

    (2) if, in the previous year, the income applied to charitable
    or religious purposes in India falls short of [eighty-five] per
    cent of the income derived during that year from property
    held under trust, or, as the case may be, held under trust G
    in part, by any amount-

    (1) for the reason that the whole or any part of the income
    has not been received during that year, or

    (i1) for any other reason,                                       H
292       SUPREME COURT REPORTS                     [2015] 9 S.C.R.


A       xxxxx
        xxxxx
        xxxxx

B       (2) [Where [eighty-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
c       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
D
        with, namely:-]

        (a) such person specifies, by notice in writing given to the
        [Assessing] Officer in the prescribed manner, the purpose
        for which the income is being accumulated or set apart
E       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 or
        deposited in the forms or modes specified in sub-section
F       (5)]:]"

       This provision has come up for interpretation in Additional
  Commissioner of Income Tax vs. A.L.N. Rao [1995 (6JSCC
  6251 and the legal position contained therein was explained in
G the following manner:

        "A mere look at Section 11 (1) (a) as it stood at the relevant
        time clearly shows that out of total income accruing to a
        trust in the previous year from property held by i wholly for
H       charitable or religious purpose, to the extent the income
COMMISSIONER OF INCOME TAX-I, COIMBATORE v.                  293
  G.R. GOVINDARAJULU & SONS [A.K. SIKRI, J .]

  is applied for such religious or charitable purpose, the A
  same will get out of the tax net but so far as the income
  which is not so applied during the previous year is
  concerned at least J5% of such income or Rs.10,000/-
 whichever is higher, will be permitted to be accumulated
 for charitable or religious purpose and will also get B
 exempted from the tax net. Then follows sub-section (2)
 which seeks to lift the restriction or the ceiling imposed
 on such exempted accumulated income during the
 previous year and also brings such further accumulated
 income out of the tax net if the conditions laid down by C
 sub-section (2) of Section 11 are fulfilled meaning thereby
 the money so accumulated is set apart to be invested in
 the Government securities etc. as laid down by clause (b)
 of sub-section (2) of Section 11 apart from the procedure
                                                                0
 laid down by clause (a) of Section 11 (2) being followed
 by the assessee-trust. To highlight this point we may take
 an illustration. If Rs.1,00,000/- are earned as the total
 income of he previous year by the trust from property held
 by it wholly for charitable and religious purposes and if E
 Rs. 20,000/- are actually applied during the previous year
 by the said trust to such charitable or religious purposes
 the income of Rs.20,000/-will get exempted from being
 considered for the purpose of income tax under first part
 of Section 11 (1 ). So far as the remaining Rs.80,000/- are F
 concerned if they could not be actually applied for such
 religious or charitable purposes during the previous year
 then as per Section 11(1) (a) at least 25% of such total
 income from property or Rs.10,000/-whichever is higher
 will also earn exemption from being considered as income G
 for the purpose of income tax, that is, Rs.25, 000/- will thus
 get excluded from the tax net. Thus out of the total income
 ofRs.1,00,000/-which has accrued to the trust Rs.25,000/
 - will earn exemption from payment of income tax as per
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294      SUPREME COURT REPORTS                        [2015] 9 S.C.R.


A         Section 11(1)(a) second part. Then follows sub-section
          (2) which states thatthe ceiling or the limit or the restriction
          accumulation of income to the extent of 25% of the income
          or Rs.10,000/-, whichever is higher for earning income
      ·.. tax exemption as engrafted under Section 11 (1) (a) will
B         get lifted if the money so accumulated is invested as laid
          down by Section 11 (2) (b) meaning thereby out of the total
          accumulated income of Rs.80,000/- accruing during
          previous year and which could not be spent for charitable
          or religious purposes by the Trust balance of Rs.55,000/-
c         if invested as laid down by sub-section (2) of Section 11
          will also get excluded from the tax net. But for such
          investment and if Section 11(1) alohe had applied
          Rs ..55,000/- being he balance of accumulated income
          would have been covered by the tax net. Learned counsel
D
          for the Revenue submitted that the investment as
          contemplated by sub-section (2) (b) of Section 11 must
          be investment of all accumulated income in Government
          securities etc., namely, 100% of the accumulated income
 E        arid not only 75% thereof. And if that is not done then only
          the invested accumulated income to the extent of 75%
          will get excluded from income tax assessment. But so far
          the remaining 25% of the accumulated income is
          concerned it will not earn such exemption. It is difficult to
 F        appreciate this contention. The reason is obvious. Section
          11, subsection (1) (a) operates on its own. By its operation
          two types of income earned by the trust during the previous
          year from its properties are given exemption from income
          tax, (i) that part of the income of previous year which is
G         actually spent for charitable or religious purposes in that
          year; and (ii) out of the unspent accumulated income of
          the previous year 25% of such total property income or
          Rs.10,000/- whichever is higher can be permitted to be
          accumulated by the Trust, remarked for such charitable or
 H        religious purposes. Such 25% of the income or Rs.10, 0001
COMMISSIONER OF INCOME TAX-I, COIMBATORE v.                 295
  G.R. GOVINDARAJULU & SONS [A.K. SIKRI, J .]

 - whichever is higher will also get exempted from income       A
 tax. That exhausts the operation of Section 11 (1) (a). Then
 follows sub-section (2) which naturally deals with the
 question of investment of the balance of accumulated
 income which has still not earned exemption under sub-
 section (1) (a). So far as that balance of accumulated         B
 income is concerned, that also can earn exemption from
 income tax meaning thereby the ceiling or the limit of
 exemption of accumulated income from tax as imposed
 by sub-section (1) (a) of Section 11 would get lifted if
 additional accumulated income beyond 25% or                    C
 Rs.10,000/- whichever is higher, as the case may be, is
 invested as laid by Section 11 (2) after following the
 procedure laid down therein. Therefore, sub-section (2)
 only will have to operate qua the balance of 75% of the        D
 total income of the previous year or income beyond
 Rs.10,000/- whichever is higher which has not got the
 benefit of tax exemption under sub-section (1) (a) of
 Section 11. If learned counsel for the Revenue is right and
 if 100% of the accumulated income of the previous year         E
 is to be invested under sub-section (2) of Section 11 to
 get exemption from income tax then the ceiling of 25% or
 Rs.1 G,000/- whichever is higher, which is available for
 accumulation of income of the previous year for the Trust
 to earn exemption from income tax as laid by Section 11        F
 (1) (a) would be rendered rec:lundant and the said
 exemption provision would become otiose. It has to be
 kept in view that but of the accumulated income of the
 previous year an amount of Rs.10,000/- or 25% of the total
 income from property, whichever is higher, is given            G
 exemption from income tax by Section 11 (1) (a) itself. That
 exemption is unfettered and not subject to any conditions.
 In other words it is an absolute exemption. If subsection
 (2) is so read as suggested by the learned counsel for the
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                        '
296     SUPREME COURT REPORTS                        [2015] 9 S.C.R.


A      Revenue, what is an absolute and unfettered exemption
      of accumulated income as guaranteed by Section 11 (1)
       (a) would become a restricted exemption as laid down by
      Section 11 (2). Section 11 (2) does not operate to whittle
      down or to cut across the exemption provisions contained
B      in Section 11 (1) (a) so far as such accumulated income
      of the previous year is concerned. It has also "to be
      appreciated that sub-section (2) of Section 11 does not
      contain any non obstante clause like " notwithstanding the
      provisions of sub-section (1)". Consequently it must be
c     held that Section 11 (1) (a) has full play and if still any
      accumulated income of the previous year is left to be dealt
      with and to be considered for the purpose of income tax
      exemption, sub-section (2) of Section 11 can be pressed
      into service and if it is complied with then such additional
D
      accumulated income beyond 25% or Rs.10,000/-,
      whichever is higher, can also earn exemption from income
      tax in compliance which the conditions laid down by sub-
      section (2) of Section 11. It is true that sub-section (2) of
E     Section 11 has not clearly mentioned the extent of the
      accumulated income which is to be invested. But on a
      conjoint reading of the aforesaid two provisions of Sections
      11 ( 1) and 11 (2) this is the only result which can follow. It is
      also to be kept in view that under the earlier Income Tax
F     Act of 1922 exemption was available to charitable trusts
      without any restriction upon the accumulated income.
      There was a change in this respect under the present Act
      of 1961. Under the presentAct, any income accumulated
      in excess of 25% or Rs.10,000/- whichever is higher, is
G     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. 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
H
  COMMISSIONER OF INCOME TAX-I, COIMBATORE v.                       297
    GR. GOVINDARAJULU & SONS [A.K. SIKRI, J .]

     ifthere is a saving, i.e. to say an accumulated of 25% or A
     Rs.10,000/-whichever is higher, it will not be included in
     the faxable income. Section 11 (2) quoted above further
     liberalizes 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 B
     exemption removes the restriction imposed by Section
   · 11(1) (a) but it does not take away the exemption allowed
     by Section 11 (1 )(a). On the express language of Sections
     11(1) and (2) as they stood on the Statute Book at the
     relevant time no other view is possible."                  C

    4. To put it in nutshell, the exemption/deduction from the
income can be taken in three stages which are as under:

     i) The assessee would be entitled to have the deduc ion         o
of entire amount which has actually been spent and app 'ed
for charitable purposes i.e. in furtherance of the objects of 11e
Trust.

     ·ii) The·assessee is entitled to set apart 25% of the tot< I E
income for charitable purposes even if not spent in the year ir
question and when the option is exercised in this behalf stating
that income up to 25% which is set apart would be spent in the
succeeding year;
                                                                     F
     iii) The assessee would be entitled to deduction of the
remaining amount, by virtue of sub-section (2), to the extent it
is invested in the Government securities as mentioned in sub-
section(5).

    5. Following the aforesaid principles laid down in Section       G
11 of the Act, the Assessing Officer found that the assessee
had actually spent a sum of Rs.47,27,533/. Deduction to this
effect was given by the Assessing Officer and there is no
dispute about it.
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298         SUPREME COURT REPORTS                    [2015] 9 S.C.R.


A        6. Insofar as second issue is concerned, as mentioned
  , above, the assessee set apart a sum of Rs.32 Lacs. 1:his was,
    however, denied by the Assessing Officer on the ground that
    no option for this purpose was exercised by the assessee
    before the filing of the return. Though the assessee had stated
B so in the return itself, that was not treated as exercising the
    option in a valid manner. Admittedly, in the present case, no
    amount is invested in any Government securities and,
    therefore, the Assessing Officer held that there was no question
    of giving any further deduction on the balance income. In this
C manner taxable income was assessed.

           7. The assessee fileff)he appeal against the aforesaid
      order before the Commi~sior1er of Income Tax {Appeals). The
      submission was that since it has set apart Rs.32 Lacs in terms
D     of Section 11A Explanation-II, by exercising this option in the
      return itself that should be treated as valid option. The CIT
      (Appeals) accepted this contention, which view has been
      upheld by the Income Tax Appellate Tribunal as well as the
      High Court.
E
           8. Insofar as this aspect, viz, exercising the option in the
      return filed by the assessee is concerned, we are of the opinion
      that t~e High Court and the Authorities below are right in their
      approach. The law does not mention any specific mode of
F     exercising the option. The said option has to be exercised
      before filing of the return. According to us, if the option is
      exercised when the return is filed, that would be treated as in
      conformity and comply with the provisions contained in Section
      11 of the Act.
G
          9. However, we find that thereafter CIT (Appeals) went
      wrong. As per the provisions of Section 11(1)(a) oftheActthe
      amount which is actually applied tor. and spent towards the
      objects of the Trust is to be allowed. Actual expenditure which
H
  COMMISSIONER OF INCOME TAX-I, COIMBATORE v.                      299
   · G.R. GOVINDARAJULU & SONS [A.K. SIKRI, J .]

was made for Rs. 47,27,533/-was allowed by the Assessing            A
Officer also. The aforesaid provision also entitled the
assessee to set apart further amount if not spent in the same
year and option is exercised in that behalf. However, where
CIT (Appeals) has gone wrong is that he ignored the provision
which entitled the assessee to exercise such an option only to      B
the extent of 25%. In the instant case, the assessee had
exercised the option of setting apart an amount of Rs. 32 lacs
which was more than 25%. The total income was Rs.
99,41,221/- and 25% thereof would be Rs.24,85,305/-. Thus,
the entire amount of Rs. 32 lacs could not have been allowed        C
as directed. This aspect has not been noticed by the High
Court as well. No further amount could be allowed as deduction
and we do not understand as to how the entire income is treated
as exempted from income tax.
                                                                    D
   · 10. We, accordingly, allow this appeal by setting aside
the order of the High Court and direct the Assessing Officer to
recompute the taxable income in accordance with this
judgment.
                                                                    E
Kalpana K. Tripathy                              Appeal allowed.