ADDL. COMMISSIONER OF INCOME TAX AND ANR.versusAL. N. RAO CHARITABLE TRUST

A          ADDL. COMMISSIONER OF INCOME TAX AND ANR.
                               v.
                  AL. N. RAO CHARITABLE TRUST

                               OCTOBER 13, 1995
B
             [B.P. JEEVAN REDDY AND S.B. MA.IMUDAR, JJ.J


          Income Tax Act, 1961-Sections ll(J)(a) and 11(2)-Chmitable
    f/ust-Scope of exemption allowed 11/s 11(1) (a}-Section 11(2) while enlarg-
e   ing scope of exemption removes restliction imposed by section II (I) (a }-It
    is an absolute exeniption.

        Respondent assessee, a charitable Trust, for the assessment year
  1969-70, submitted its Return claiming that a sum of Rs. 85,262 which was
  the surplus income of the previous year, was exempt from tax u/s 11 (1)
D (a) and sub-section (2) of Section 11 of the Income Tax Act, 1961. The
  Assessing Authority held that the assessee was not a genuine Trust and
  therefore nut entitled tu claim the benefit of section 11. Appeal filed before
  the Appellate Assistant Commissioner was dismissed. In the second ap-
  peal, the Income Tax Tribunal held that the assessee was a Charitable
  Trust and therefore was entitled to claim exemption from tax u/s 11 of the
E Act. In reference made at the instance of the Department, the High Court
  answered the question in favour of the assessee and against the Depart-
  ment. The order become final. The Assessing Authority took up the assess-
  ment and held that the assessee, after complying with the requirement of
  giving notice u/s.11 (2) (a), had invested 75% of the accumulated income
f intended to be applied for charitable purposes in future years as required
  by clause (b) of section 11 (2) and therefore, the entire surplus income was
  exempted from tax. The Commissioner of Income Tax, on looking into the
  order, held that the order of the Assessing Authority was erroneous as he
  had not applied·his mind to the question whether the assessee had com-
  plied with the provisions of section 11(2) as the assessee had not invested
G the entire surplus income and therefore the assessee was not entitled to
  the exemption provided u/s 11 of the Act. He issued a show cause notice
  u/s 263 uf the Act to the assessee to show cause as to why th~ entire surplus
  income of Rs. 85, 262 should not be brought to tax. The assessee prayed
  for the issue of a Writ in the nature of Certiorari to quash the Notice
H issued by the Commissioner. Before the Single Judge of the High Court,
                                         348
                 ADDL. COMMR. OF INCOME TAX v. A.L.N. RAO                    349

     the Department alleged that in order to claim exemption u/s 11, the            A
     assessee should have invested the entire surplus income in one or the other
     of the securities menti<ined in section 11(2)(b) of the Act and it is not
     sufticient if 75% of the· surplus income alone has been invested by the
     assessee. The assessee urged that it had complied with the rec1uirement of
     section 11 and therefore, entitled to exemption from tax in respect of 25%
     of the accumulated income or Rs. 10,000 whichever was higher plus that
                                                                                    B
     portion of the accumulated income in respect of which the conditions
     prescribed under clauses (a) and (b) of section 11(2) had been satisfied
     and since it had deposited 75% of the accumulated income in the securities
     mentioned in section 11 (2) (b), the entire surplus income which had
     accumulated was not taxable. The Single Judge of the High Court upheld         c
     the case ..of the assessee in part holding that the assessee was entitled to
     exemption from tax only in respect of 75% of the surplus income which was
     accumulated for future use.

            In writ appeal filed by the Revenue, the Division Bench while dis-      D
     missing the appeal took the view that 25% of the accumulated income of
     the Trust arising in the previous year got exempted from income tax u/s
     11 (1) (a) and that section 11 (2) dealt with remaining 75% of the accumu·
     lated income of the previous year and if such 75% of the accumulated
     income was invested the Trust was entitled to get even the 75% of the
.,   income exempted from income tax payable on the income arising to the           E
     Trust in the previous year. This appeal by special leave was directed
     against the decision of the Division Bench of the High Court.

           The appellants contended that the interpretation placed by Division
     Bench oftbe High Court on the relevant provision of section 11 (1) (a) and     F
     11 (2) of the Income Tax Act, 1961, as they stood at the relevant time was
     not sustained; that u/s ll(l)(a) 25% of the accumulated income of the
     Trust arising during the previous year or Rs. 10,000 whichever was higher
     was exempted from income tax, but at the stage of investment of such
     accumulated income unless cent percent of such accumulated income was
     invested as per the provisions of section 11(2) the assessee-Trust would       G
     not be entitled to the benefit of exclusion of such accumulated income of
 •   the previous year from the tax net of the Income Tax Act; that the
     subsequent amendment of section 11 (2) by Taxation Laws (Amendment)
     Act, 1975 showed a different legislative intention and was not merely of a
     clarificatory nature as assumed by the Division Bench of the High Court.       H
    350                  SUPREME COURT REPORTS [1995] SUPP. 4 S.C.R.

A         The respondent assessee submitted that the view taken by the
    Division Bench of the High Court on the interpretation of section 11 (l)(a)
    and section 11(2) as applicable at the relevant time was the only correct
    and plausible view.

          Dismissing the appeal, this Court
B
         HELD : 1.1. By operation of section 11, sub-section (1) (a) of the
  Income Tax Act, 1961, 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 actually spent for
C charitable or religious purposes in that year; and (iij 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 accumu-
  lated by the Trust, earmarked for such charitable or religious purposes.
  Such 25% of the income or Rs. 10,000 whichever is higher will also get
D exempted from income tax. That exhausts the operation of section 11 (1)
  (a). (358-A-B]

           Sub-section (2) of section 11 deals with the question of investment
    of the balance of accumulated income which has still not earned exemption
    under sub-section (1) (a). The ceiling or the limit of exemption of accumu-
E   lated income from income tax as imposed by sub-section (1) (a) of section
    11 would get lifted if additional accumulated income beyond 25% or
    Rs. 10,000, whichever is higher, is invested as laid down by section 11(2).
    Therefore, sub-section (2) only will have to operate qua the balance of 75%
    of the total income of the previous year income beyond Rs. 10,000
F   whichever is higher which has not got the benefit of the tax exemption from
    income tax by section 11 (1) (a) itsell'. That exemption is unfettered and
    not subject to any conditions. It is an absolute exemption. Section 11 (2)
    does not operate to whittle down or to cut acl-oss the exemption provisions
    contained in Section ll(l)(a) so f'ar as such accumulated income of the
    previous year is concerned. Sub-section(2) of section 11 does not contain
G   any non obstante clause. ConsetJUently it must be held that after section
    ll(l)(a) has full play and if still any accumulated income of the previous
    year is left to be dealt \lith and to be considered for the purpose of income   •
    tax exemption, sub-section (2) of (section 11 can be pressed in service and
    if it is complied with then such additional accumulated income beyond 25%
H   or Rs. 10,000, \Vhichever is higher, can also earn exemption from income
        ADDL. COMMR. OF INCOME TAX 1•. A.L.N. RAO [S.B. MAJMUDAR, J.J   351

tax on compliance with the conditions laid down by sub-section (2) of A
section 11. Sub-section (2) of section 11 has not clearly mentioned the
extent of the accu1nulated income which is to be invested. But on a conjoint
reading of the aforesaid two provisions of section 11(1) and 11(2) this is
the only result which can follow. Under the 1961 act, any income accumu-
lated in excess of 25% or Rs. 10,000 whichever is higher, is taxable under
                                                                               B
section 11 (1) (a) of the Act, unless the special conditions regarding
accumulation as laid down in section 11 (2) are complied with. Therefore,
if the entire income received by a trust is spent for charitable purposes in
India, then it will not be taxable but if there is a saving, i.e. to say an
accumulation of 25% or Rs. 10,000 whichever is higher, it will not be
included in the taxable income. Section 11(2) further liberalizes and          C
enlarges the exemption. A combined reading of both the provisions 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 ll(l)(a). [358-C-H, 359-A-F] ·

      Commissioner of Income-Tax, Kera/a v. H.H. Ma1thanda Vanna               D
Elayaraja of Travancore Tmst & Ors., (1981) 129 !TR 191(Ker); Mohan/al
Hargovinddas Public Chwitable Tmst v. Commissioner of Income-Tax, M.P.,
(1980) 122ITR130 (MP); Commissioner of Income-Tax v. Tmstees of Bhat
Family Research Foundation, (1990) 185 ITR 532 (Born) and Commissioner
of Income-Tax, Tamil Nadu-JV, Madras v. C.M.Kothmi Chmitable Tmst,             E
(1984) 149 ITR 573 (Mad), approved.

        CIVIL APPELLATE JURISDICTION : Civil Appeal No. 958 of
1977.

     From the Judgment anJ Order 4.9.75 of the Karnataka High Court            F
in W.A. No. 864 of 1974.

        K.N. Shukla, R. Sathish and S.N.' Terdol for the Appellants.

        Gopal Jain for Mukul Mudgal for the Respondent.
                                                                               G
        The Judgment of the Court was delivery by

      S.B. MAJMUDAR, J. This appeal by special leave is directed against
the decision of the Division Bench of the Karnataka High Court in Writ
Appeal No. 864 of 1974 decided on 4th September 1975. The said writ
appeal, moved on behalf of the Revenue by Additional Commissioner of H
    352                    SUPREME COURT REPORTS 11995] SUPP. 4 S.C.R.

A     Income Tax, Mysore and First Income Tax Officer, Mangalorc Circle,
    · Mangalore against the order of learned Single Judge Yenkataramiah, J., as
      he then was, in the Writ Petition No. 597 of 1973 came lo he dismissed by
      the Appellate Bench of the High Court. In order to highlight the grievance
      of the Reve.nue in this appeal a few relevant introductory facts are required
      to be noted.
B
    Background facts

            Respondent A.L.N. Rao Charitable Trust, Mangalore, is a charitable
     trust. For the assessment year 1969-70, the respondent, hereinafter referred
c    to as "the assessee" submitted its Return to the First Income-Tax Officer,
     Mangalore Circle. In the said Return, the assessee claimed that a sum of
     Rs. 85,262 which was the surplus income of the previous year, was exempt
     from tax under Section ll(l)(a) and sub-section (2) of the said section. On
     the Assessing Authority holding that the assessee is not a genuine Trust
     and therefore not entitled to claim the benefit of section 11, the assessee
D    preferred an appeal before the Appellate Assistant Commissioner, which
     was dismissed. In the second appeal preferred by the assessee before the
     Income Tax Appellate Tribunal, it was held that the assessee was a
     charitable trust and therefore was entitled to claim exemption from tax
     under section 11 of the Income Tax Act, 1961 (hereinafter referred to as
E    'the Act'). In l.T.R.C. No. 31. of 1973 which was a reference made at the
     instance of the Department, the High Court by its judgment dated 4.8.1975
     answered the question referred in favour of the assessee and against the
     Department. That judgment because final. Consequently there remained
     no dispute about the eligibility of the assessee to claim benefit of section
      11.
F
           The Assessing Authority took up the assessment to pass an order in
     accordance with the judgment of the Tribunal and made an order on
     21.1.1972 by which it held that the assessee, after complying with the
     requirement of giving notice under section 11(2)(a), had invested 75% of
G    the accumulated income intended to be applied for charitable purposes in
     future years as required by clause (b) of section 11(2) and therefore, the
     entire surplus incon1e was exempt from tax.

           The Commissioner of Income Tax, on looking into the order dated
     21.1.1972 passed by the Assessing Authority, was of the view that the order
H    of the Assessing Authority was erroneous as he had not applied his mind
     ADDL. COMMR. OF INCOME TAX v. AL.N. R.AO [S.B. MATMUDAR.J.)         353

to the question whether the assessce had complied with the provisions of A
Section 11(2) and that if he had applied his mind lo the said provisions,
he would have noticed that the asscssee had not invested the entire surplus
income, viz., Rs. 85, 262 (but only Rs. 70, 975) and therefore the assessce
was not entitled to the exemption provided under section 11 of the Act.
Thus, in the opinion of the Commissioner, the order of the Income Tax
                                                                                B
Officer \vas erroneous inasn1uch as it was prejlldicial to the interests of the
Revenue. He issued a show-cause notice under section 263 of the Act on
18.1.1973 to the assessee to show cause as to why the entire surplus income
of Rs. 85,262 should not be brought to tax. The assessee, on receipt of the
said notice, approached the High Court for relief under Articles 226 and
227 of the Constitution and prayed for the issue of a Writ in the nature of c
Certiorari to quash the Notice dated 18.1.1973 issued by the Commissioner.
In that Writ Petition (W.P. No. 597 of 1973), Venakataramiah, J. made an
order directing the Commissioner to dispose of the proceedings initiated
under Section 263 in the light of his order as to the interpretation of section
 ll(l)(a) and section 11(2) of the Act.
                                                                                D
      Before the learned Single Judge, the contention of the department
was that in order to claim exemption under section 11, the assessee should
have invested the entire surplus income in one or the other of the securities
mentioned in section 11(2)(b) of the Act and it is not sufficient if 75% of
the surplus income alone has been invested by the assessee. The learned         E
counsel for the assessee urged that the assessee had complied with the
requirements of section 11; according to the learned counsel, the assessee
was entitled to exemption from tax in respect of 25% of the accumulated
income or Rs. 10,000 whichever was higher plus that portion of the
accumulated income in respect of which the conditions prescribed under          F
Clauses (a) and (b) of section 11(2) had been satisfied. According lo the
assessce, since it had deposited 75% of the accumulated income in the
Securities mentioned in section 11(2)(b.), the entire surplus income which
had accumulated was not taxable.

       The learned single judge rejected the contention of the Revenue and G
upheld the contention of the assessee in part only. The learned Judge held
that the assessee was entitled to exemption from tax only in respect of 75%
of the surplus income which was accumulated for future use.


      The Revenue carried the matter in writ appeal which came to. be H
    354                   SUPREME COURT REPORTS [1995] SUPP. 4S.C.R.

A   decided by the impugned judgment. The Division Bench on interpretation
    of section ll(l)(a) and sub-section (2) thereof as they stood at the relevant
    time, took the view that 25'if) of the accumulated income of the Trust
    arising in the previous year got exempted fro1n income tax under section
    ll(l)(a). That section 11(2) dealt with remaining 75% of the accumulated
    income of the previous year and if such 75% of the accumulated income
B
    was invested as laid down by the said provision the Trust was entitled to
    get even the 75% of the accumulated income exempted from income tax
    payable on the income arising to the Trust in the previous year. In short
    while dismissing the appeal of the Revenue the Division Bench of the High
    Court on interpretation of the sections took a view which was wholly in
c   favour of respondent-Trust. For taking the said view the Division Bench of
    the High Court referred to similar view taken by the High Court of .T ammu
    & Kash~ir in the case of Conunissioner of Inconle Tax, Patiala v. Shri
    Krishen Chand C/zmitab/e Tmst, (1975) 98 !TR 387.


D   Rival Contentions


           Learned counsel appearing for the appellants vehemently contended
    that the interpretation placed by Division Bench of the High Court on the
    relevant provisions of section ll(l)(a) and 11(2) of the Income Tax Act,
E   1961 as they stood at the relevant time is not well sustained. That it is true
    that under section ll(l)(a) 25% of the accumulated income of the Trust
    arising during the previous year or Rs. 10,000 whichever was higher was
    exempted from income tax. But as laid down by section 11(2) at the stage
    of investment of such accumulated income unless cent percent of such
F   accumulated incon1c \\'as invested as )Jcr the said provision the asscssce-
    Trust would not be entitled to the benefit of exclusion of such accumulated
    income of the previous year from the tax net of the Income Tax Act. It was
    further contended that the subsequent amendment of section 11(2) as
    brought on the Statute Book by Taxation Laws (Amendment) Act, 1975
    clearly showed a different legislative intention and was not merely of a
G   clarificatory nature as assumed by the Division Bench of the High Court.
    The learned counsel for the Revenue, however, fairly submitted that his




H
    submissions are based on the express language of sections ll(l)(a) read
    with section 11(2) of the Act as applicable at the relevant time and he is
    not supported by any decision rendered by any of the High Courts on this
    point.
                                                                                     -
     ADDL. COMMR. OF INCOME TAX v. A.L.N. RAO [S.B. MAIMUDAR. J.]         355

      Learned counsel for the respondent-asscssec on the other hand              A
suhmitled that the view taken by the Division Bench of the High Court on
the interpretation of section ll(l)(a) and section 11(2) of the Income Tax
Act, 1961 as applicable al the relevant time is the only correct and plausible
view and that the Division Bench of the High Court was justified in
agreeing with the view on similar lines which appealed lo the .lammu &
                                                                                 B
Kashmir High Court in Commissioner of Income Tax v. Slui K1ishen Chand
Chmitab/e T111st, (supra). He also submitted that similar view has been
taken by the High Courts of Kerala, Madhya Pradesh, Madras, Bombay
and Rajasthan in the following decisions :

         1.   Commissioner of Income Tax, Kera/a-I v.Shree Padmanabha-           c
              swami Temple Tntst, (1979) 120 !TR 42 (Ker.) ;

        2.    Conunissioner of lncon1e Tax, Kerala v. H.H. Ma1thanda
              Vanna E/ayaraja of Travancore T1Ust and Others, (1981) 129
              ITR 191 (Ker.);
                                                                                 D
        3.    Mohanlal Hargovinddas Public Chmitable T1Ust v. Cmnmis-
              sioner of Income Tax, M.P., (1980) 122 !TR 1.30 (M.P.);

        4.    Conunissioner of lnconie Tax, Taniil Nadlt-Iv, Madras v. C.M.
              Kothmi Chmitab/e Tntst, (1984) 149 !TR 573 (Mad.);
                                                                                 E
        5.    Conunissioner of Inconze Tax v. Trustees of Bhat Fa1nily
              Research Foundation, (1990) 185 ITR 532 (Born); and

        6.    _Conunissioner of Inconie Tax v. Anjunzan Moinia Fakha1ia
              ( 1994) 201! !TR 568 (Raj.).
                                                                                 F
Consideration of the Rival Contentions

      Before we proceed to deal with the rival contentions centering round
the true scope and ambit of section ll(l)(a) and section 11(2) of the
Income Tax Act, 1961 as applicable to the assessment year in question,           G
namely, 1969-70 it would be apposite to refer lo these provisions at the
outset. These provisions as they stood at the relevant time read as under :

        "11(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 -                            H
    356                      SUPREME COURT REPORTS [1995] SUPP. 4 S.C.R.

A           (a) income derived from property held under trust wholly for
            charitable or religious purposes, lo 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 25%
          · of the income from the property or rupees ten thousand, whichever
B
            is higher, ...... .

            (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
c           apart shall not apply for the period during which the said condi-
            tions 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
D           which the income is to be accumulated or set apart, which shall in
            no case exceed ten ye~rs;

            (b) The money so accumulated or set apart is invested in any
            Government security as defined in clause (2) of section 12 of the
            Public Debt Act, 1944 (XVIII of 1944), or in any other security
E
            which may be approved by the Central Government in this behalf."

    Section 11 underwent an amendment by Taxation Laws (Amendment) Act,
    1975. As we are not concerned with these amended provisions in the
    present case, we need ndt dilate on them.
F
          A mere look at Sectio~ ll(l)(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 it 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
G   so applied during the previous year is concerned at least 25% of such
    income or Rs. 10,QOO whichever is higher, will be permitted to be accumu-
    lated for charitable or religious purpose and it will also get 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
H   previous year and also brings such further accumulated income out of the
        ADDL. COMMR. OF INCOME TAX v. A.L.N. RAO [S.B. MATMUDAR. J.]       357

     tax net if the conditions laid down by sub-section (2) of section 11 are A
      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 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 B .:'
      income of the previous year by the trust from property held by it wholly
___ JQr charitable and religious purposes and if Rs. 20,000 are actually applied
      during 11\e previolJ.~ 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 C
     the remaining Rs. 80,000 are concerned if they could not be actually
      applied for such religious or charitable purposes during the previous year
      then as per section ll(l)(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 for the purpose of income tax, that is,
     Rs. 25,000 will thus get excluded from the tax net. Thus out of the total D ·.
     income of Rs. 1,00,000 which has accrued to the trust Rs. 25,000 will earn
     exemption from payment of income tax as per section ll(l)(a) second part.
     Then follows sub-sec.lion (2) which states that the ceiling or the limit or
     the restriction of accumulation of income to the extent of 25% of the
     income or Rs. 10,000, whichever is higher for earning income tax exemption E
     as engrafted under section ll(l)(a) will .get lifted if the money ~o accumu-
     lated as invested as-laid down by Section 11(2)(b) meaning thereby out of
     the total accumulated income of Rs. 80,000 accruing during the previous
     year and which could not be spent for charitable or religious purposes by
     the Trust balance of Rs. 55,000 if invested as laid down by sub-section '(2)
     of section 11 will also get_ excluded from the tax net. But for such invest-
                                                                                    F
     ment and if section 11(1) alone had applied Rs. 55,000 being the balance
     of accumulated income would have been-covered by the tax net. Learned
     counsel for the Revenue submitted that the investment as contemplated by
    sub-section (c)(b) of section 11 must be investment of all accumulated
     income in Government securities etc., namely 100% of the accumulated G
     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 \vill not earn such exemption. It is difficult to
    appreciate this contention. The reason is obvious. Section 11, sub-section H
    358                   SUPREME COURT REPORTS [1995J SUPP. 4S.C.R.

A (l)(a) operates on its own. By its operation two types of income earned bv
  the trust during the previous year from its properties are given cxcn1ptio~
  from income tax, (i) that part of the income of previous year which is
  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
B property income or Rs. 10,000 whichever is higher can be permitted to be
  accumulated by the Trust, earmarked for such charitable or religious
  purposes. Such 25% of the income or Rs. 10,000 whichever is higher will
  also get exempted from income tax. That exhausts the operation o( section
  ll(l)(a). Then follows sub-section (2) which naturally deals with the ques-
  tion of investment of the balance of accumulated income which has still not
c earned exemption under sub-section (l)(a). So far as that balance of
  accumulated income is concerned, that also can earn exemption from
  income tax meaning thereby the ceiling or the limit of exemption of
  accumulated income from income tax as imposed by sub-section (l)(a) of
  section 11 would get lifted if additional accumulated income beyond 25%
D or Rs. 10,000, whichever is higher, as the case may be, is invested as laid
  down 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 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
E sub-section (l)(a) of section ll. 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 Rs. 10,000 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 down by section ll(l)(a) would
F
   be rendered redundant and the sai<l exemption prnvisinn \vould beco1ne
  otiose. It has to be kept in view that out 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 exemption from income tax by
   section ll(l)(a) itself. That exemption is unfettered and not subject to any
G conditions. In other words it is an absolute exemption. If sub-section (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 ll(l)(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
H across the exemption provisions contained in section l l(l)(a) so far as such
     ADDL. COMMR. OF INCOME TAX v. AL.N. RAO [S.B. MAJMUDAR,l.I            359

accumulated incon1c of the previous year is concerned. It has also to be          A
appreciated that sub-section (2) of section 11 does not contain any non-
obstante clause like "notwithstanding the provisions of sub-section (l)".
Consequently it must be held that after section ll(J)(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 lax exemption, sub-section         B
(2) of section 11 can be pressed in service and if it is complied with then
such additional accumulated income beyond 25% or Rs. 10,000, whichever
is higher, can also edrn exemption from income tax on compliance with the
conditions laid down by sub-section (2) of section 11. It is true that
sub-section (2) of sec!Ion 11 has not clearly mentioned the extent of the
accumulated income which is to be invested. But on a conjoint reading of          C
the aforesaid two provisions of sections ll(l) 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 Charitable Trusts
without any restriction upon the accumulated income. There was a change
in this respect under the Present Act of 1961. Under the present Act, any         D
income accumulated in excess of 25% qr Rs. 10,000 whichever is higher, is
taxable under section ll(l)(a) of the Act, unless the special conditions
regarding a.ccumulation 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 if there is a
saving, i.e. to say an accumulation of 25% or Rs. 10,000 whichever is higher,     E
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 ll(l)(a) but it does nol lake away the exemption allowed hy section       F
ll(l)(a). On the express language of sections 11(1) and 11(2) as they stood
on the Statute Book at the relevant time no other view is possible.


       iu the light of the aforesaid discussion and keeping in view the
illustration which we have given earlier the combined operation of Section
ll(l)(a) and section 11(2) as applicable at the relevant time would yield         G
the following result :

         (i)   If the income derived from property held under trust wholly
               for charitable or religious purposes during the previous year
               is Rs. 1,00,000 am! if Rs. 20,000 therefrom are actually applied   H
    360                  SUPREME COURT REPORTS [1995) SUPP. 4 S.C.R.

A                 to such purposes in India then those Rs. 20,000 will get
                  exempted from payment of income tax as per the first part
                  of section ll(l)(a).

           (ii) Out of the remaining accumulated income of Rs. 80,000 for
                the previous year, a further sum of Rs. 25,000 will get ex-
B               empted from payment of income tax as per second part of
                section ll(l)(a). Thus out of the total income derived from
                property as aforesaid during the previous year, that is,
                Rs. 1,00,000; Rs. 45,000 in all will get excluded from the tax
                net on a combined operation of first and second part of
c               section ll(l)(a).

            (iii) The aforesaid ceiling of Rs. 25,000 of accumulated income
                  from property of pervious year, will get lifted under section
                  11(2) to the extent the balance of such accumulated income
                  is invested as laid down by section 11(2). To take an illustra-
D                 tion if, say, an additional amount of Rs. 20,000 out of the
                  balance of accumulated income of Rs. 55,000 is invested as
                  per section 11(2) then this additional amount of Rs. 20,000
                  of accumulated income will get excluded from the -tax net as
                  per section 11(2).
E
            (iv) The remaining balance of the accumulated income out of
                 Rs. 55,000, that is Rs. 35,000 if not invested as per sub-section
                 (2) of section 11 will be added to the taxable income of the
                 trust and will not get exempted from the tax net.

F           (v)   If on the other hand the entire remaining accumulated income
                  of Rs. 55,000 is wholly invested as per section 11(2) the said
                  entire amount of Rs. 55,000 will get exempted from the tax
                  net.

          We may also at this stage mention that High Court of Kerala in
G Commissioner of Income-Tax, Kera/av. H.H. Mait/wnda Vanna Elayaraja
    of Travancore Tntst & 01'., (1981) 129 !TR 191; M. P. in Mohan/al
    Hargovinddas Public Chalitab/e T1Usl v. Commissioner of Income-Tax, M.P.,
    (1980) 122 !TR 130; Bombay in Commissioner of Income-Tax v. T111stees of
    Bhat Family Research Foundation, (1990) ITR 532 and Madras in Commis-
H   sioner of Income-Tax, Taniil Nadu-IV, Madras v. C.M. Kothali Chalitable
       ADDL. COMMR OF INCOME TAX"· ALN. RAO [S.B.MATMUDAR,J.]             361


Tnist, (1984) 149 ITR 573 have taken the same view as Karnataka High A
Court in the present case. We approve the view taken in the aforesaid_
decisions. We also approve the similar view taken by the Jammu & Kashmir
High Court in Sh1i !Vishen Chand Chmitab/e T11tst (supra). The learned
counsel for the Revenue, therefore, has made out no case for our inter-
ference with the decision rendered by the Division Bench of the Karnataka
High Court.
                                                                          B

      In the result, this appeal fails and is dismissed. However, in the facts
and circumstances of the case there will be no order as to costs.

R.A.                                                       Appeal dismissed.