(1) THE petitioner is a charitable trust. It was an assessee under the income-tax Act. 1961 (here in after referred to as the Act) during the-assessment year 1969-70. The INCOME-TAX Officer was of the view that the, agsesgee was not agenuine trust and hence was not entitled to the exemptions under the provisions of S. 11 of the Act Against the order of assessment passed by the Income-Tax Officer, the petitioner filed an appeal before the appellate Asst Commr. The appellate Asst Commr dismissed the appeal but in the-appeal preferred by the assesses before the Income Tax Appeal late Tribinual It was held that the assessee was a cheritable trust and that therefore it was entitled to the exemptions under S. 11 of the Act. I am informed that a reference against the order of the Tribunal is pending before this Court.
(2) AFTER the Tribunal rendered its judgment in the appeal, the income tax Officer who was directed to pass an order of assessment in the light of the decision of the Tribunal, passed an order on 21-1-1972 holding that because 75 percent of the income in excess of tha income actually applied for charitable purposes had been invested as required by Cl. (b) of S. 11 (2)of the Act in respect of which notice-had been Driven earlier under Cl (a) of s. 11 (2), the entire surplus income was exempt from payment of income-tax. Tha Commr of IT (here in after referred to as the Commr) on looking into the order passed by the Income-tax Officer on 21-1-1972, was of the view that the order wag prejudicial to the interests of the revenue, and, therefore, he issued -a, notice to the petitioner in exercise of his powers under S. 263 of the Act calling upon the petitioner to show cause as to why the order dt. 21-9-1972 passed by the, Income-tax Officer should not be revised. Aggrieved by the said notice the petitioner has filed this writ, petition.
(3) IT is necessary for the purpose of this case to refer to the notice issued by the Commr. It reads as follows l Rev No: 136|72-CIT. Office of the, Commr of Income Tax, Mysore,, Bangalore, dt. 18-1-73 to: ALN. Rao Charitable Trust, Mangalore gentlemen sub: Revision under S. 263 of the Income-tax Act, 1961 - ALN: rao Charitable Trust, Mangalore-Assessment year 1969-70-Notice undar s. 263-issue of-Regarding. On a, perusal of the income-tax assessment records in your case for the assessment year 1969-70, it is seen that the order of the ITO dt. 21-1-1972 giving effect to the order of the Income Tax Appellate, Tribunal, Bangalore bench, Bangalore in ITA No. 775 (Bang)of 1970-71 dt. 5-10-1971 is erroneous in as much as it is prejudicial to the interests of revenue within the, meaning of that expression occurring in s. 263 of the Income-tax Act, 1961, for the following reasons : the Tribunal, by its order in ITA No. 775 (Bang) of 1970-71 dt. 5-10-71 held that the assessee was a, charitable trust and while giving effect to the said Tribunal's Order, the ITO should have ajprjied his mind whether the assessee has not complied with the provisions of 3. 11 (2). If he had applied his mind to the provisions of S. 11 (2), he would have seen that the assessee has not invested the entire surplus income of Rs,85,262 and, thetre-- fore, the assessee was not entitled to exemption under S. 11. 2. I therefore, propose to pass an order under S. 263, as the circumstances of the case
"warrant to direct the first ITO, Mangalore, to bring to tax the entire surplus income of Rs. 85,262 and not exempt any portion of it under Section 11. 3. You may file your objections, if any, to, the proposed action on or before 5-2-1973. An opportunity of personal hearing will also, be, given to you on said date 11 a. m. at my office at the Central Revenue Building, queen's Road, Bangalore-1, when you can adduce evidence in support of your case. Yours faithfully, sd. B. B. Mundkur, addl. Commr. of I. T. , Mysore, Bangalore. "
(4) FROM the notice issued by the Commr, it is clear that the sole ground on which action has been taken under S. 263 is that the. petitioner had invested only 75 per cent of the surplus income and not the entire income In govt or approved securities as required by Cl (b) of 3. 11 (2). The question for consideration in this petition, therefore, is whether it is necessary that an assessee shold invest the entire surplus income in the manner provided in S. 11 (2) (b) in order to earn the exemption in respect of any part of the surplus income.
(5) IN order to appreciate, the question of law which arises for consideration in this case, it is necessary to reier to S. 11 (l) (a) and 11 (2) of the act, as they stood during the relevant period. Those provisions read as follows : a reading of the provisions of S. 11 (l) (a) extracted above shows that ordinarily any amount spent by the charitable trust from out of its income during the previous year on charitable, purpose would be exempt from taxation and in So far as the income that is allowed to be accumulated for application to charitable purposes in India is concerned, to the extent to which the, income so accumulated is not in excess of 25 per cent of the income from the property, or Rs. 10,000 whichever is higher, would be exempt from taxation. To illustrate, let me Assume that the income of a charitable trust is Rs. 1,00,000 during any year and a sum of Rs. 40,000. 00 is spent on charitable purposes and the remaining Rs. 60 000 is allowed to accumulated for application to charitable purposes in India,. Under S. 11 (1) (a) a sum of Rs. 40,000 spent on the charitable purposes and a sum of rs. 25,000 (which is 25 per cent of the total income) out of the, balance of rs. 60,000 which is allowed to be accumulated would be, exempt from taxation. The, remaining Rs. 35,000 would be subject to taxation,. Sub-sec (2)provides that in the event of the, trust complying with thq requirements of Cls (a) and (b) thereto, it would be entitled to, claim exemption in respect of any amount that is allowed to be accumulated for application to charitable purposes in India even though it may be in excess of 25 per cent of the income or Rs. 10,000 whichever is higher. I am of the, view that the words "the restriction specified in Cl. (a). . . . of sub-sec. (1) as respects accumulation. . . shall not apply for the period during which the said conditions remain complied with " mean that as respects the Amount allowed to be accumulated in respect of which Cls. (a) and (b) of sub-section (2)have been complied with, the assessee would be entitled tq exemption even though it may be in excess of the 25 per cent of the total income or Rs. 10,000 whichever is higher. If the Parliament intended that the entire surplus income had to be invested to earn the exemption in sub-sec. (2) it would have said so,. The very fact there is no reference to the extent of the income that has to be invested in sub-sec (2), suggests that the intention of the parliament wag that any amount which is allowed to be accumulatqd even though it may be in excess of 25 per cent or Rs. 10,000 whichever is higher, in respect of which Cls. (a) and (b) of sub-sec (2) of S. 11 are complied with shall be exempted from the payment of income tax.
(6) IN this case, there is no, dispute, that the, assesses issued a notice as required by Cl (a) of S. 11 (2) in the prescribed manner and that 75 per cent of the surplus income has been Invested as required by Cl (b) of S. 11 (2). But the dispute centres round the construction to be placed on the provisions of S. 11. Whereas, the contention of the revenue is that when the entire surplus Is not invested in the approved securities as provided in cl (b) of 3. 11 (2) of the,act, after issuing notice as required by Cl (a) of s-11 (2), the entire surplus amount would be liable to income-tax, the con-teaition Of the assessee is that if, in respect of any portion of the surplus amount, the assessee has complied with the requirements of Cls (a) and (b) of S. 11 (2), then the assessee would be entitled to exemption from payment of income-tax in respect of 25 per cent of the income as provided in cl (a) of S. ll (l) Plus that portion of the income in respect of which the conditions prescribed under Cls. (a)and (b) of S. 11 (2) have been complied, with. In the instant case according to the revenue, the, entire surplus income is liable to, payment of income-tax because the entire, surplus income has not been invested in the, Govt or approved securities, but according to the assessee the entire surplus income would be, exempted from tax because 25 per cent of the surplus income is exempted under S. 11 (1) (a) and 75% is exempted under S. 11 (2) The contention urged on behalf of the revenue has to be rejected in view of the provisions of S. 11 (2) which lays down that as respects accumulation in respect of which Cls (a) and fb) qf S. 11 (2) are complied with, no income-tax is payable. In soi far as the contention of the assessee, is concerned, it has to be observed that S. 11 (2) does not provide for an exemption in addition to what is provided in S. 11 (1) (a). I am of the view that S. 11 (2) is only art alternative to S. 11 (1) (a) and it is open to thq assessee to adopt the more favourable one having regard to the facts of the case. The assessee is not however entitled to claim exemption in respect of 25 percent under S. 11 (1) (a) and also claim exemption to respect of the surplus amount invested under S. 11 (2) In th
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e facts and circumstances of this case, because admittedly the assessee; has invested 75 per cent of the surplus income as provided unde,r Cl (b) of S. 11 (2) and has also given the required notice under S. 11 (2) (a), he is entitled to claim exemption from payment of income-tax only in respect of 75 per cent of the surplus income. (7) SRI G. Sarangan, learned Counsel for the petitioner, questioned, the validity of Form No. 10 prescribed under the Income-tax Rules which requires the investment of surplus amount to be made before the expiry of the period specified therein. The said question does not arise in these, proceedings, it is open to, the, assessee if it becomes necessary to (raise the said question before) this Court if he feels aggrieved by any decision which the commr may render. The Commr of I. T. shall now dispose of the proceedings under Sec. 263 of the Act in the Light of this order after giving reasonable: opportunity to the assessee to make its representation. The petition is accordingly disposed of. No costs.