1978-VIL-668-AP-DT

Equivalent Citation: [1981] 127 ITR 378

ANDHRA PRADESH HIGH COURT

Date: 10.02.1978

COMMISSIONER OF INCOME-TAX, AP -I

Vs

TRUSTEE OF H. EH THE NIZAM´S SUPPLEMENTAL RELIGIOUS ENDOWMENT TRUST

BENCH

Judge(s)  : S. OBUL REDDY., NARASINGA RAO

JUDGMENT

The judgment of the court was delivered by

NARSINGA RAO J.-The following four questions have been referred to us under s. 256(1) of the I.T. Act for decision :

" 1. Whether, on the facts and in the circumstances of the case, the reassessment made by the Income-tax Officer under section 147 of the Income-tax Act, 1961, for the assessment year 1966-67 is valid ?

2. Whether, on the facts and in the circumstances of the case, the income as per the books of the trust has to be considered for the purposes of section 11 of the Income-tax Act, 1961, for the assessment years 1966-67, 1967-68 and 1968-69 ?

3. Whether, on the facts and in the circumstances of the case, there was compliance by the assessee with the conditions stipulated in section 11(2) of the Income-tax Act, 1961, for the assessment years 1966-67, 1967-68 and 1968-69 ?

4. Whether, on the facts and in the circumstances of the 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 behalf of the revenue, a contention was raised that the exemption had to be limited after considering the accumulations and application of such income in accordance with the provisions of sub-ss. (2) and (3) of s. 11 of the Act. With regard to this contention, the Appellate Tribunal held that it would be open to the department to take such action as it deemed fit. In the light of this observation, the ITO reopened the assessment under s. 147 of the Act and held that the provisions of s. 11(2) and (3) were not complied with and that the entire income became liable to tax. The assessee contended that the income did not exceed Rs. 10,000 and, therefore, it was not liable to tax. On the assessment being thus made, the assessee carried the matter to the AAC who upheld the reassessment made by the ITO. He overruled the objection of the assessee that the assessment could not be reopened.

For the assessment years 1967-68 and 1968-69, the assessee filed returns before the ITO disclosing the income of Rs. 66,019 and Rs. 68,098, respectively, but claimed exemption under s. 11. The ITO held that the object of construction of Azakhana Zohra was not for the benefit of the general public and was not wholly for religious or charitable purposes. Alternatively, he also held that the conditions laid down in s. 11(2) of the Act have not been satisfied and that the notice prescribed under s. 11(2)(a) was not given and, therefore, the assessee was not entitled to exemption under s. II (3) of the Act for both the years. On appeal by the assessee, the AAC held that the income and expenditure account of the assessee did not conform to the accepted principles of accountancy and that the requirement of a notice was not fulfilled. He thus upheld the assessment orders for both the years. The assessee carried these three matters by way of an appeal to the Appellate Tribunal.

The contentions of the assessee before the Appellate Tribunal with regard to the assessment year 1966-67 were that the excess of income over expenditure for that year was only Rs. 9,428.61 and that the said sum being less than Rs. 10,000 the provisions of s. 11(2) of the Act did not apply and thus there was no need to give any notice; nor was there any need to invest the income in Govt. securities. It was also contended that the reopening of the assessment by the ITO was neither warranted nor justified and much less 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. For the year 1968-69, it was contended that there was no excess and thus there was no investment. For computing the income, it was again contended that the books of account of the assessee were alone to be taken into account.

The Appellate Tribunal held that the reassessment by the ITO for the year 1966-67 was on the basis of information and, therefore, it was valid for determining the income for all the three periods. It held that the books of the trust alone have to be considered for the purpose under s. 1 of the Act. With regard to the assessment year 1966-67, it held that there was no compliance of the issuance of a notice and that the expenditure on account of income-tax and wealth-tax is not an expenditure to be taken into account for the purpose of the income and expenditure statement of the relevant financial year, as those payments do not relate to that year and, therefore, they are not outgoings out of the income of that year. With regard to the assessment year 1967-68, the Tribunal held that inasmuch as the time limit specified in Form No. 10 was held to be ultra vires the intendment of s.11 of the Act, as held by the High Court of Madras, the letter addressed by the secretary of the trust was a sufficient compliance of the requirement of a notice. Taking into account the investment in the Govt. securities of the face value of Rs. 57,000 the income of the trust for this year was held to be exempt.

With regard to the assessment year 1968-69, it held that there was compliance of the requirement of the notice regarding accumulations of income. Though according to the income and expenditure statement there was an excess of expenditure over the income in a sum of Rs. 2,906, it held that if the amount of income-tax and wealth-tax in a sum of Rs. 29,000 was included, there will be a net surplus of at least Rs. 26,184 available for investment. But the requirement as to the investment in securities for this year was said to have been not complied with and thus the income of the trust was not eligible for exemption for this year. Under the amended order, the Tribunal held that for the assessment year 1966-67, the sum of Rs. 50,360 was held not to be exempt and for the year 1968-69, the taxable amount was reduced to Rs. 26,184. Thus, the assessee and the revenue sought for reference on the above four questions.

At the outset, Mr. Anjaneyulu, the learned 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 invested a sum of Rs. 50,160 in securities of the Govt. of the face value of Rs. 57,000. With regard to the year 1968-69, the stand of the assessee is that as per the books of account, the wealth-tax is an expenditure and for that year the expenditure exceeded the income by Rs. 2,906 and thus there was no question of accumulation.

In order to decide the remaining three question, the following are the relevant points for consideration which are common to all the three relevant years :

1. Whether for the purpose of s. 11(1)(a) of the I.T. Act, it is the income and expenditure that is to be taken into account as per the books of the trust ?

2. Whether the payment of income-tax or wealth-tax during the year, though that liability is of the preceding year, is liable to be excluded from the income of the trust ?

3. In order to claim exemption with regard to any part of the income or accumulation, is there any time limit within which the notice of setting apart that income is to be given ? What is the period within which the amount so set apart is to be invested in the securities or approved securities ?

It is necessary to read the relevant provisions of s. 11 of the I.T. Act, 1961, as applicable to the relevant years to find out what income shall not be included in the total income of the trust for the purpose of attracting the liability to tax :

" II. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the 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, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent. of the income from the property or rupees ten thousand, whichever is higher ;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from 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 following the expiry of the period allowed in this behalf shall be deemed to be the income of such person of the previous year in which it is so applied, or ceases to be so accumulated or so set apart or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

(4) For the purposes of this section 'property held under trust' includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment ; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and accordingly chargeable to tax within the meaning of sub-section (3). "

What was contended by Mr. Anjaneyulu, the learned counsel for the assessee, is that in the above section the reference is to income and where a trust also holds a business undertaking, the income accruing from the business undertaking is liable to be determined by the ITO in accordance with the provisions of this Act. It is common ground that this trust property does not hold any business undertaking. Thus, sub-s. (4) of s. 11 of the Act is not at all attracted. But, as contended by Mr. Anjaneyulu, only to the limited extent of finding out the mode of determination of the income of the trust, by way of contrast, reference can be had to this subsection. Undoubtedly, sub-s. (4) of s. 11 of the Act, specifically lays the mode of determination of the income of the business undertaking of trust. A similar provision is not to be found with regard to the other income of the trust. By an inferential process, it can be said that that mode of determination by the ITO is only restricted to the income of the business undertaking. It is equally relevant to note that even the Tribunal holds that it is only the books of the trust that are to be looked into for the purpose of arriving at the income of the trust. It was also the contention of Mr. Anjaneyulu, the learned counsel, that while s. 2(45) specifically defines " total income ", the expression used in the section is only "income " and that only 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 total income of the previous year...' The reference in clause (a) is invariably to 'income' and not to 'total income'. The expression 'total income' has been specifically defined in section 2(45) of the Act as 'the total amount of income computed in the manner laid down in this Act'. It would accordingly be incorrect to assign to the word 'income' used in section 11(1)(a), the same meaning as has been specifically assigned to the expression 'total income', vide section 2(45).

3. In the case of a business undertaking held under trust, its 'income' will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25% will also be calculated with reference to this income. " (Underlining ours).

Impliedly excepting the income with regard to the business undertaking as would be assessed by the ITO, the income that has to be computed with regard to a trust is one based on the accounts of the trust. Thus, giving the full effect of sub-s. (4) of s. 11 under which the power to determine the income by the ITO is limited only to business undertakings of trust, the income of the trust to be determined could be based only on the accounts of the trust. As put even otherwise by Mr. Anjaneyulu, the learned counsel for the assessee, the moneys that could be invested could be only such moneys as are arrived at by deducting the actual expenditure as borne out by the accounts of the trust. The assessee has also filed the income and expenditure accounts for the three years. The contention of Mr. Anjaneyulu was that the accounts maintained are in conformity with the principles of accountancy and that the income and expenditure account takes the place of a profit and loss account in non-trading concerns. The other contention is that the conformity of this account with the principles of accountancy is not called in question and if so, these accounts or account books are the only basis for the purpose of computing the income of the 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 by the ITO, as per the provisions of the Act, is specifically restricted to the income over and above the income as shown in the accounts of the business undertaking held by trust. It follows that with regard to the income of the trust as such, it is the accounts of the trust alone that have to be taken into consideration. Thus, point No. 1 set out above is answered in the affirmative to the effect that it is the books of the trust which have to be taken into account in determining the income and expenditure of the trust for purposes of s. 11 (1)(a) of the Act.

Point No. 2: According to the assessee, the wealth-tax and income-tax paid during the relevant years, though those payments are for the preceding assessment years, would constitute items of expenditure for the year in which they are paid. Such payments are said to be outgoing and would constitute expenditure and, therefore, they are liable to be deducted. The contention of the revenue is that for a particular assessment year, a provision could be made for that year and in that event alone that expenditure can be excluded in computing the income, but the payment during a year with regard to a previous assessment year is not deductible. In considering this question, the Appellate Tribunal while holding that the income as shown by the books of the trust are to be taken into consideration, had proceeded to hold that those books were not maintained in conformity with the principles of accountancy. In that context, Mr. Anjaneyulu, the learned counsel, has invited our attention to maintenance of income and expenditure account as noted in Advanced Accounting by Batliboi (20th edn.), at page 108. We have already noted above that it is not shown that those income and expenditure statements are not in conformity with the principles of accountancy. It is true that payments on account of income-tax and wealth-tax are not expenditure by themselves for the purpose of the trust. But it can hardly be disputed that such expenses are incidental to the carrying out of charitable purposes. It is an incidence of the income or the accumulation of the income of the trust. It is noted at page 1057 of Simon's Taxes:

" Income applied to meet expenses (such as normal expenses of management), which, are not in themselves charitable but are incidental to the carrying out of charitable purposes, is in practice not excluded from 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) of sub-s. (2) of s. 11 are complied with. Sub-section (2)(a) requires that a notice in writing shall be given to the ITO in the prescribed manner specifying the purpose for which the income is being accumulated or set apart; but the period for which the income is so accumulated or set apart shall, in no case, exceed ten years. Under s. 11(2)(b) of the Act, the money so accumulated or set apart is required to be invested in any Govt. security. The contention of Mr. Rama Rao, the learned counsel for the revenue, was that admittedly for the year 1966-67, no such notice was given and for the years 1967-68 and 1968-69, the notices given on August 25, 1970, are beyond the period, as they were to be given before the expiry of six months from the end of the previous year or before the 30th of June of the assessment year, whichever is later. The contention is that under r. 17 of the I.T. Rules, 1962, the period prescribed for the issue of such a notice is the same as that laid down under s. 139 of the Act. If this contention is true, the notice delivered by the Secretary of the trust on August 25, 1970, with regard to these two periods is beyond six months from the relevant assessment years. But Mr. Anjaneyulu, the learned counsel for the assessee, rightly contends that r. 17 did not prescribe any time-limit and that the time-limit was incorporated into this rule only by way of amendment, as per Notification No. S.O. 1917, dated February 20, 1971 Prior to the amendment r. 17, read as follows:

" The notice to be given to the Income-tax Officer under sub-section (2) of section 11 shall be in Form No. 10."

After amendment by the above-referred notification, the above rule reads as follows:

" The notice to be given to the Income-tax Officer under sub-section (2) of section 11 shall be in Form No. 1O and shall be delivered to him before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income."

Thus, it can be seen that for the two relevant years, as per r. 17, as it stood then, no time-limit was specified and the introduction of the time-limit was by a later amendment. It can, thus, be said, that, as per the then existing rules, the notice delivered to the ITO by the secretary of the trust is not hit by any time factor. Mr. Anjaneyulu, the learned counsel, 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 money in the Govt. security or approved securities has been complied with or not so as not to attract the restrictions specified in cls. (a) and (b) of sub-s. (1) of s. 11 of the Act. In this context Mr. Rama Rao, the learned counsel for the revenue, contended that the Tribunal as a question of fact found that this condition bad not been complied with regard to all the three years. We would like to correct this assumption. The finding of the Tribunal is that as the payments made on account of income-tax and wealth-tax for the year 1968-69 have to be excluded for that year, there was no investment in Govt. securities. Thus, the finding about the non-compliance of this condition is only with regard to the year 1968-69. With regard to the year 1966-67, to repeat, the finding of the Tribunal was that the amount paid on account of income-tax and wealth-tax during that year constitutes not an item of expenditure but a revenue amount and thus the income was Rs. 50,656.71. The case of the assessee was that as per its accounts, after deducting the income-tax and the wealth-tax paid during that year, the surplus income over the expenditure was only a sum of Rs. 9,428.61 and, as this income did not exceed Rs. 10,000, no question of investment in Govt. securities arose. In the view of the matter we have taken above, that the payments made on account of income-tax and wealth-tax are outgoings, it follows that the surplus income was only Rs. 9,428.61. That income is not required to be computed as per subs. (1)(a) of s. 11 of the Act.

As regards the compliance of this condition with regard to the assessment year 1967-68, it is also the finding of the Tribunal that investment in Govt. securities was made in a sum of Rs. 50,160 during that period for the purchase of the securities of the face value of Rs. 57,000 and thus there was compliance of this condition. Thus, the income of the trust is exempt under s. 11(1) of the Act. Regarding the year 1968-69, if the Tribunal held that there was non-compliance of the condition of the investments in the securities, it was because of the fact that the payment made towards income-tax and wealth-tax were included in the income of that year. As held above, those payments being outgoings, have to be excluded. If that is so, as per the income and expenditure accounts for that year, there is an excess of expenditure over income in a sum of 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 of the assessee. Advocate's fee Rs. 250.

 

 

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