The judgment of the court was delivered 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 (see [1976] 103 ITR 44) decided on September 4, 1975. The said writ appeal, moved on behalf of the Revenue by the Additional Commissioner of Income-tax, Mysore, and the First Income-tax Officer, Mangalore Circle, Mangalore, against the order of the learned single judge Venkataramiah J., as he then was, in Writ Petition No. 597 of 1973 (see [1975] 101 ITR 838) came to be dismissed by the Appellate Bench of the High Court. In order to highlight the grievance of the Revenue in this appeal, a few relevant introductory facts are required to be noted.

Background facts :

The respondent, A. L. N. Rao Charitable Trust, Mangalore, is a charitable trust. For the assessment year 1969-70, the respondent (hereinafter referred 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 11(1)(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 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 " the Act "). In I. T. R. C. No. 31 of 1973 (see [1976] 102 ITR 474), which was a reference made at the instance of the Department, the High Court by its judgment dated August 4, 1975, answered the question referred in favour of the assessee and against the Department. That judgment became final. Consequently, there remained no dispute about the eligibility of the assessee to claim the benefit of section 11.

The assessing authority took up the assessment to pass an order in accordance with the judgment of the Tribunal and made an order on January 21, 1972, by which it held that the assessee, after complying with the requirement of giving notice under section 11(2)(a), had invested 75 per cent. of 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 income was exempt from tax.

The Commissioner of Income-tax, on looking into the order dated January 21, 1972, passed by the assessing authority, was of the view that the order of the assessing authority was erroneous as he had not applied his mind to the question whether the assessee had complied with the provisions of section 11(2) and that if he had applied his mind to the said provision, he would have noticed that the assessee had not invested the entire surplus income, viz., Rs. 85,262 (but only Rs. 70,975), and, therefore, the assessee 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 Officer was erroneous inasmuch as it was prejudicial to the interests of the Revenue. He issued a show-cause notice under section 263 of the Act on January 18, 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 certiorari to quash the notice dated January 18, 1973, issued by the Commissioner. In that writ petition (Writ Petition No. 597 of 1973 (see [1975] 101 ITR 838)), Venkataramiah 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 11(1)(a) and section 11(2) of the Act.

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 per cent. of the surplus income alone has been invested by the assessee. Learned counsel for the assessee urged that the assessee had complied with the requirements of section 11 ; according to learned counsel, the assessee was entitled to exemption from tax in respect of 25 per cent. of the accumulated income or Rs. 10,000, whichever is higher, plus that portion of the accumulated income in respect of which the conditions prescribed under clauses (a) and (b) of section 11(2) had been satisfied. According to the assessee, since it had deposited 75 per cent. 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 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 per cent. of the surplus income which was accumulated for future use.

The Revenue carried the matter in writ appeal which came to be decided by the impugned judgment. The Division Bench, on an interpretation of section 11(1)(a) and sub-section (2) thereof as they stood at the relevant time, took the view that 25 per cent. of the accumulated income of the trust arising in the previous year got exempted from income-tax under section 11(1)(a) ; that section 11(2) deals with the remaining 75 per cent. of the accumulated income of the previous year and if such 75 per cent. of the accumulated income was invested as laid down by the said provision, the trust was entitled to get even the 75 per cent. 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 an interpretation of the sections, took a view which was wholly in favour of the respondenttrust. For taking the said view, the Division Bench of the High Court referred to a similar view taken by the High Court of Jammu and Kashmir in the case of CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387.

Rival contentions :

Learned counsel appearing for the appellant vehemently contended that the interpretation placed by the Division Bench of the High Court on the relevant provisions of sections 11(1)(a) and 11(2) of the Income-tax Act, 1961, as they stood at the relevant time is not well sustained ; that it is true that under section 11(1)(a), 25 per cent. of the accumulated income of the trust arising during the previous year or Rs. 10,000, whichever is 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 per cent. of such accumulated income was invested as per the said provision, the assessee 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 the Taxation Laws (Amendment) Act, 1975, clearly showed a different legislative intention and was not merely of a clarificatory nature as assumed by the Division Bench of the High Court. Learned counsel for the Revenue, however, fairly submitted that his submissions are based on the express language of section 11(1)(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.

Learned counsel for the respondent-assessee, on the other hand, submitted that the view taken by the Division Bench of the High Court on the interpretation of section 11(1)(a) and section 11(2) of the Income-tax Act, 1961, as applicable at 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 to the Jammu and Kashmir High Court in CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387. He also submitted that a similar view has been taken by the High Courts of Kerala, Madhya Pradesh, Madras, Bombay and Rajasthan in the following decisions :

1. CIT v. Shree Padmanabhaswami Temple Trust [1979] 120 ITR 42 (Ker) ;

2. CIT v. H. H. Marthanda Varma Elayaraja of Travancore Trust [1981] 129 ITR 191 (Ker) ;

3. Mohanlal Hargovinddas Public Charitable Trust v. CIT [1980] 122 ITR 130 (MP) ;

4. CIT v. C. M. Kothari Charitable Trust [1984] 149 ITR 573 (Mad) ;

5. CIT v. Trustees of Bhat Family Research Foundation [1990] 185 ITR 532 (Bom) ; and

6. CIT v. Anjuman Moinia Fakharia [1994] 208 ITR 568 (Raj).

Consideration of the rival contentions :

Before we proceed to deal with the rival contentions centring round the true scope and ambit of section 11(1)(a) and section 11(2) of the Income-tax Act, 1961, as applicable to the assessment year in question, namely, 1969-70, it would be apposite to refer to 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--

(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,...

(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 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf. "

Section 11 underwent an amendment by the Taxation Laws (Amendment) Act, 1975. As we are not concerned with these amended provisions in the present case, we need not dilate on them.

A mere look at section 11(1)(a) as it stood at the relevant time clearly shows that out of the total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purposes, to the extent the income is applied for such religious or charitable purposes, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25 per cent. of such income or Rs. 10,000, whichever is higher, will be permitted to be accumulated 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 previous year and also brings such further accumulated income out of the tax net if the conditions laid down by sub-section (2) of section 11 are 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 income of the previous year by the trust from property held by it wholly for charitable and religious purposes and if Rs. 20,000 are actually applied during the previous 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 the first part of section 11(1). So far as 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 11(1)(a) at least 25 per cent. 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 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 11(1)(a), second part. Then follows sub-section (2) which states that the ceiling or the limit or the restriction of accumulation of income to the extent of 25 per cent. of the income or Rs. 10,000, whichever is higher, for earning income-tax exemption as engrafted under section 11(1)(a) will get lifted if the money so accumulated is 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, the 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 investment and if section 11(1) alone had applied Rs. 55,000 being the balance of the accumulated income would have been covered by the tax net. Learned counsel for the Revenue submiffed that the investment as contemplated by sub-section (2)(b) of section 11 must be investment of all the accumulated income in Government securities, etc., namely, 100 per cent. of the accumulated income and not only 75 per cent. thereof. And if that is not done, then only the invested accumulated income to the extent of 75 per cent. will get excluded from income-tax assessment. But so far as the remaining 25 per cent. of the accumulated income is concerned, it will not earn such exemption. It is difficult to appreciate this contention. The reason is obvious. Section 11, sub-section (1)(a) operates on its own. By its operation 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 the 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 per cent. of such total 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 per cent. of the income or Rs. 10,000, whichever is higher, will also get exempted from income-tax. That exhausts the operation of section 11(1)(a). Then follows sub-section (2) which naturally deals with the question of investment of the balance of accumulated income which has still not earned exemption under subsection (1)(a). So far as that balance of the 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 (1)(a) of section 11 would get lifted if additional accumulated income beyond 25 per cent. 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 per cent. 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 sub-section (1)(a) of section 11. If learned counsel for the Revenue is right and if 100 per cent. 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 per cent. 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 11(1)(a) would be rendered redundant and the said exemption provision would become 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 per cent. of the total income from property, whichever is higher, is given exemption from income-tax by section 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words, it is an absolute exemption. If sub-section (2) is so read as suggested by learned counsel for the Revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by section 11(1)(a) would become a restricted exemption as laid down by section 11(2). Section 11(2) does not operate to whittle down or to cut across the exemption provisions contained in section 11(1)(a) so far as such accumulated income of the previous year is concerned. It has also to be appreciated that sub-section (2) of section 11 does not contain any non obstante clause like " notwithstanding the provisions of sub-section (1) ". Consequently, it must be held that after section 11(1)(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-tax exemption, sub-section (2) of section 11 can be pressed into service and if it is complied with then such additional accumulated income beyond 25 per cent. or Rs. 10,000, whichever is higher, can also earn 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 section 11 has not clearly mentioned the extent of the accumulated income which is to be invested. But on a conjoint reading of the aforesaid two provisions of sections 11(1) and 11(2), this is the only result which can follow. It is also to be kept in view that under the earlier Income-tax Act of 1922, exemption was available to 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 income accumulated in excess of 25 per cent. or Rs. 10,000, whichever is higher, is taxable under section 11(1)(a) of the Act, unless the special conditions regarding accumulation 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, that is to say, an accumulation of 25 per cent. or Rs. 10,000, whichever is higher, it will not be included in the taxable income. Section 11(2) quoted above further liberalizes and enlarges the exemption. A combined reading of both the provisions quoted above would clearly show that section 11(2), while enlarging the scope of exemption, removes the restriction imposed by section 11(1)(a), but it does not take away the exemption allowed by section 11(1)(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.

In the light of the aforesaid discussion and keeping in view the illustration which we have given earlier, the combined operation of section 11(1)(a) and section 11(2) as applicable at the relevant time would yield 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 and if Rs. 20,000 therefrom are actually applied 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 11(1)(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 exempted from payment of income-tax as per the second part of section 11(1)(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 the first and the second part of section 11(1)(a).

(iii) The aforesaid ceiling of Rs. 25,000 of the accumulated income from property of the previous 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 illustration 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).

(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.

(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 the High Courts of Kerala in CIT v. H. H. Marthanda Varma Elayaraja of Travancore Trust [1981] 129 ITR 191 ; Madhya Pradesh in Mohanlal Hargovinddas Public Charitable Trust v. CIT [1980] 122 ITR 130, Bombay in CIT v. Trustees of Bhat Family Research Foundation [1990] 185 ITR 532 and Madras in CIT v. C. M. Kothari Charitable Trust [1984] 149 ITR 573 have taken the same view as the Karnataka High Court in the present case. We approve the view taken in the aforesaid decisions. We also approve the similar view taken by the Jammu and Kashmir High Court in Shri Krishen Chand Charitable Trust's case [1975] 98 ITR 387. Learned counsel for the Revenue, therefore, has made out no case for our interference with the decision rendered by the Division Bench of the Karnataka High Court.

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.