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2015 (9) TMI 1248 - SUPREME COURT

2015 (9) TMI 1248 - SUPREME COURT - [2015] 378 ITR 1 (SC) - Exemption u/s 11 - accumulation of income upto 25% - Held that:- where CIT (Appeals) has gone wrong is that he ignored the provision which entitled the assessee to exercise such an option only to the extent of 25%. In the instant case, the assessee had exercised the option of setting apart an amount of ₹ 32 lacs which was more than 25%. The total income was ₹ 99,41,221/- and 25% thereof would be ₹ 24,85,305/-. Thus, th .....

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Dated:- 3-9-2015 - Mr. A.k. Sikri and Mr. Rohinton Fali Nariman, JJ. For the Petitioner : Mr. Jaideep Gupta, Sr. Adv., Mr. Zahaib Hussain, Adv., Ms. Sadhana Sandhu, Adv., Ms. Anil Katiyar, Adv., Mr. B. V. Balaram Das, Adv. For the Respondent : Mr. V. Prabhakar, Adv., Mrs. Revathy Raghavan,Adv., Ms. Jyoti Prashar, Adv. JUDGMENT A.K. SIKRI, J The respondent-assessee is a Public Charitable Trust. It filed its return for the Assessment Year 1994-95 declaring 'nil' taxable income. In the sum .....

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the following year. On that basis the assessee claimed that it was entitled to have the 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'). Before we proceed further and discuss as to how the Assessing Officer made the assessment, it would be necessary to take note of the provisions of Section 11 of the Act which are relevant for our purpose. "11. (1) Subject to th .....

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cess of [fifteen] per cent of the income from such property; xxxxx xxxxx xxxxx Explanation.-For the 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; (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 .....

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dia 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:-] (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 .....

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tood 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 charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the 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 25% of such income or ₹ 10,000/- whichever is higher, will be permitted to be accumulated for charitable or r .....

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) of Section 11 apart from the procedure 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 ₹ 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 ₹ 20,000/- are actually applied during the previous year by the said trust to such charitable or religious purposes the income of ₹ 20,000/- will get e .....

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excluded from the tax net. Thus out of the total income of ₹ 1,00,000/- which has accrued to the trust ₹ 25,000/- will earn exemption from payment of income tax as per Section 11(1)(a) second part. Then follows sub-section (2) which states that the ceiling or the limit or the restriction accumulation of income to the extent of 25% of the income or ₹ 10,000/-, whichever is higher for earning income tax exemption as engrafted under Section 11(1) (a) will get lifted if the money .....

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een covered by the tax net. Learned counsel 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 and 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 ear .....

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or ₹ 10,000/- whichever is higher can be permitted to be accumulated by the Trust, remarked for such charitable or religious purposes. Such 25% of the income or ₹ 10,000/- whichever is higher will also get exempted from income 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 balanc .....

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of the total income of the previous year or income beyond ₹ 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 is to be invested under sub-section (2) of Section 11 to get exemption from income tax then the ceiling of 25% or ₹ 10,000/- whichever is higher, which is available for accumulation of income of the previous .....

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e exemption. If subsection (2) is so read as suggested by the learned counsel for the 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 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 .....

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ever 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 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 Act of 1922 exemption was available to .....

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a, then it will not be taxable but if there is a saving, i.e. to say an accumulated of 25% or ₹ 10,000/- whichever is higher, it will not be included in the taxable 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 exemption removes the restriction imposed by Section 11(1) (a) but it does not take away the exemption allowed by Section 11 .....

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otal income for charitable purposes even if not spent in the year in 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; 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). Following the aforesaid principles laid down in Section 11 of the Act, the Assessing Officer .....

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ot 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 manner taxable income was assessed. The assessee filed the appeal against the aforesaid order before the Commissioner of Income Tax (Appeals). The submission was that since it has set apart ₹ 32 Lacs in terms of Section 11 .....

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