159 ITR 280 (CAL.)
HIGH COURT OF CALCUTTA
Commissioner of Income-tax
Jayashree Charity Trust
SATISH CHANDRA, CJ. AND SUHAS CHANDRA SEN J.
IT REFERENCE NO. 184 OF 1978
DECEMBER 11, 1984
Suhas Chandra Sen, J.—The Tribunal has referred the following two questions of law under section 256(1), Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the tax deducted at source on dividend could not be treated as income for the purposes of section 11, Income-tax Act, 1961, and in that view in directing the Income-tax Officer to exclude the amount of tax deducted at source from the income of the assessee?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the entire gross dividend income under section 80K, Income-tax Act, 1961, and the pro rata basis applied by the Income-tax Officer for giving relief under section 80K, Income-tax Act, 1961, was not correct?"
The assessee, Jayashree Charity Trust, is a charitable trust. The relevant assessment year for the purpose of this case is 1973-74 for which the accounting period ended on March 31, 1972.
The assessee held a large number of shares. The gross dividend income from the shares was Rs. 3,49,696. The net dividend received by the assessee after deduction of tax at source during the relevant accounting period was Rs. 2,72,722. The assessee, in his return of income, did not include the amount of the tax deducted at source. The assessee's case was that the amount deducted at source had not been received by the assessee and could not be applied by the assessee for the objects of the trust. The entire amount that was received by the assessee after deduction of tax at source had been spent for charitable purposes.
The Income-tax Officer rejected the assessee's contention and included a sum of Rs. 76,974 being the amount of tax deducted at source as the taxable income of the assessee. The Appellate Assistant Commissioner, however, relying upon a clarification made by the Commissioner of Income-tax, Delhi, by his letter dated June 2, 1974, held that the tax deducted at source could not be treated as income of the trust for the year in which it was not actually received by the assessee.
The Tribunal, on further appeal, referred to a circular issued by the Central Board of Direct Taxes on June 19, 1968, and held that "income" under section 11 is to be understood in the commercial sense. The Tribunal held that as the assessee had not obtained any refund of, tax in the relevant year of account, the amount of tax deducted at source could not be treated as the assessee's income for the purpose of section 11, Income-tax Act, 1961.
Section 11(1)(a), as it stood at the material time, was 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—
(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."
In order to qualify for exemption under section 11(1)(a), it has to be established that the property is held under trust wholly for charitable or religious purpose and the income of the property is being actually applied for such purposes in India. The relief is limited to the extent to which the income is applied for the purpose of the trust in India. If the entire income is not actually applied for the purpose of the trust in the relevant accounting period but is accumulated for application to such purposes, the exemption is limited to the extent to which the accumulated income is not in excess of 25% of the income of the property held under trust or rupees 10,000, whichever is higher.
In the case before us, the assessee has spent in the relevant accounting period, the entire amount of dividend that it had actually received for charitable purposes. There is no dispute about this. A sum of Rs. 76,974 had been deducted from the dividend income on account of income-tax. Any amount that has been deducted from the dividend income is deemed to be income received by the shareholder under the provisions of section 198. Section 11(1) lays down that the income derived from property held under trust for charitable or religious purposes shall not to the extent indicated in that section "be included in the total income of the previous year of the person in receipt of the income". The question is whether "income" in section 11(1)(a) will include the amount of tax that has been deducted at source and is deemed to be "income received" by section 198 of the Act.
To resolve this controversy, regard must be had to the language that has been employed and also to the object of the statute. It is well settled that, if possible, the words of a statute must be construed so as to give a sensible meaning to them. The words ought to be construed ut res magis valeat quam pereat. The entire object of section 11 is to grant immunity to the income of a charitable trust from income-tax. The immunity, however, is confined "to the extent to which such income is applied to such purposes in India". The exemption will be denied if the income is not actually applied for charitable purpose. Only 25% of the income or Rs. 10,000, whichever is lower, can be accumulated for application to charitable purpose. If a portion of the income of a charitable trust is not applied for charitable purposes or is accumulated beyond the permitted limit, that portion will not qualify for the immunity from taxation which has been granted by section 11. In other words, the income that has not been applied for charitable purpose or accumulated beyond the prescribed limit for charitable purpose will not enjoy the immunity from taxation. This exclusion from the immunity that has been granted by section 11 must be confined to the real income of the trust. The amount of income which is taken away by deduction at source under section 194 is not available to the trust for application to charitable purposes. Section 198 provides that the amounts deducted by way of income-tax shall be deemed to be "income received". What is deemed to be income can neither be spent nor accumulated for charitable purpose. "Application" or "accumulation" can only be of real income which has actually been received by an assessee. If a portion of the income has been taken away by way of income-tax deducted at source, that portion is not available to the assessee for application or accumulation. Section 11 cannot be interpreted to mean that the amount which has been deducted at source by way of income-tax shall be included in the "total income" of the trust and brought under taxation. It is true that section 198 provides that the sums deducted by way of income-tax shall be deemed to be income received. But, the deeming provisions of section 198 should not be construed in a way to frustrate the object of section 11. The entire income that has been actually received by the assessee has been applied for charitable purpose. The immunity from taxation that has been granted by section 11 cannot be denied to the assessee on the ground that the notional income remains unspent or unaccumulated for the purpose of charity. The "accumulation" or "application" in section 11(1)(a) must be of real income. In my judgment, the immunity from taxation that has been granted to the income of a charitable trust cannot be denied on the ground that the deemed income under section 198 has not been actually spent for the purpose of charity.
The Madras High Court, in the case of CIT v. Rao Bahadur Calavala Cunnan Chetty Charities  135 ITR 485, held that taking into account the purposes for which the conditions of section 11(1)(a) were imposed, it would be clear that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust. It was held that the income from properties held under trust would have to be calculated in the commercial manner. It was observed that section 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent. of the income. The application as well as the accumulation has necessarily to be of the income as accounted for in the accounts and not as computed under the Income-tax Act, subject, of course, to what is provided in sub-section (4) of section 11.
We are in respectful agreement with the view expressed by the Madras High Court. This judgment is also in consonance with the view taken by the Andhra Pradesh High Court in the case of CIT v. Trustees of H.E.H. the Nizam's Supplemental Religious Endowment Trust  127 ITR 378.
It also appears that the view we have taken has also been adopted by the Central Board of Direct Taxes in Board's Circular No. 5-P (LXX-6) dated May 19, 1968. It was stated in that circular, inter alia (see  Indian Tax Laws, Appx. II, p. lxxxv):
"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 sub-section (1)(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)...
4. Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner, should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption under section 11(1).
5. To sum up, the business income of the trust as disclosed by the accounts plus its other income computed as above, will be the 'income' of the trust for purposes of section 11(1). Further, the trust must spend at least 75 per cent. of this income and not accumulate more than 25 per cent. thereof. The excess accumulation, if any, will become taxable under section 11(1)."
This circular makes it clear that the word "income" in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.
The second question relates to the scope of section 80K, Income-tax Act, 1961. There is no dispute that the assessee is entitled to deduction in respect of dividends attributable to profits and gains from industrial undertakings. There is no dispute that the deduction under section 80K is available only if the qualifying dividend forms part of the gross total income of the assessee. The dispute, however, is whether the deduction is to be computed with reference to the gross amount of the dividend.
The assessee had received gross dividend income of Rs. 57,834 and claimed relief under section 80K on the gross dividend. The Income-tax Officer was of the view that under section 80K, the assessee was entitled to get relief on that portion of the dividend which was included in the gross total income and not on the gross dividend income. The gross total income of the assessee as assessed by the Income-tax Officer was Rs. 1,07,553. The Income-tax Officer found that the assessee got a relief of Rs. 6,65,191 under section 11. The Income-tax Officer was of the opinion that a portion of the dividend income of Rs. 57,834 must be taken to have enjoyed relief under section 11. The Income-tax Officer calculated that the exempted portion of the dividend under section 11 came to Rs. 49,784 and held that only Rs. 8,050 out of Rs. 57,834 had been actually included in the gross total income of Rs. 1,07,553 and only that amount qualified for exemption under section 80K.
The Appellate Assistant Commissioner was of the view that it could not be notionally assumed that a part of the dividend income had been applied for charitable purpose and was thus notionally not included in the total income because of the provisions of section 11 of the Act. The Tribunal, on further appeal, upheld the order of the Appellate Assistant Commissioner.
We are of the view that the Tribunal has taken a correct view of the law. The assessee's gross total income of Rs. 1,07,553 was computed after allowance of relief under section 11. The assessee is entitled to claim that its dividend income of Rs. 57,834 had not been spent for the purpose of charity and, as such, was not included in the income that enjoyed exemption from taxation under section 11.
There is no dispute that the assessee had sufficient funds in its hands apart from the dividend income to meet the expenditure that qualified for exemption. It was open to the assessee to pay as it pleased and it was more advantageous to the assessee not to pay for charitable purpose out of the dividend income even if the dividend income and other heads of income were kept in one fund. There is no principle of law by which apportionment can be introduced. It cannot be said, as a matter of law, that the assessee must be taken to have made payments for the purpose of charity proportionately or at all out of the dividend income. It was observed by Pollock M.R. in the case of Sterling Trust Ltd. v. IRC  12 TC 868 at p. 881:
"Where you are considering the business of a company which has two sources of income, the one subjected to tax and the other not, you are entitled to assume and deem that it has paid the money that it ought to pay according to the most businesslike way of appropriating the revenue to the expenses; further, that even though that has not been done in fact by any separate allocation of the money, as was done here in the later years by putting it at a special bank, still you are entitled to treat the money as having been paid out of the fund which is most favourable to the company, which is, in this case, the taxpayer."
The dictum of Pollock M.R. was applied by a Division Bench of this court in the case of CIT v. Ashoka Charity Trust  135 ITR 556. In that case, the question was whether the Tribunal was justified in holding that even though the assessee received voluntary contributions from noncharitable institutions, the expenditure incurred by the assessee should be deemed to have been met out of the income derived from property held under trust by the assessee. It was held in that case that the expenditure incurred should be considered to have been met from the income derived from property held by the assessee under trust even though the expenditure was met out of a composite fund consisting of voluntary contribution and also income from properties held under trust.
In view of the aforesaid, the contention of the Department that a portion of the gross dividend income of Rs, 57,834 must be taken to have enjoyed relief under section 11, Income-tax Act, on pro rata basis cannot be sustained in the facts of this case.
In that view of the matter, both the questions are answered in the affirmative and in favour of the assessee.
There will be no order as to costs.
Satish Chandra, CJ.—I agree.