Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that even though the assessee received voluntary contributions from non-charitable institutions, the expenditure incurred should be deemed to have been met out of the income derived from property held under trust ? " This question has to be decided in the background of the fact that the assessee is a charitable trust. The assessment year involved is 1972-73, and the relevant accounting year is the financial year which ended on 31st March, 1972. During the accounting year relevant to the assessment year under reference the assessee received voluntary contributions amounting to Rs. 2,20,000 firm two individuals and one company. The income of the trust derived from property held wholly for charitable or religious purposes has been set off against the entire expenditure. In order to obviate any controversy, it may be appropriate to refer to the relevant portion of the order of the ITO to understand the basis upon which the ITO proceeded. The ITO observed in his order as follows : "From the income and "expenditure a/c. it is seen that the assessee received voluntary contributions amounting to Rs. 2,20,000. From the details filed it is noted that the contributions were received from two individuals and one company. While computing the aggregate income for the purpose of Section 11, the said voluntary contributions have not been taken into account. The rest of the income has been set off against the entire expenditure. This has been done relying on the provisions of sec. 12(1). The method followed by the assessee is not acceptable for the reasons discussed below: Every voluntary contribution received by a trust is its income. This is clear from the opening words, 'Any income of a trust derived from voluntary contributions', used in Section 12(1). For the purpose of the statute such contribution has been divided into two categories, viz. : (i) contribution received from non-charitable institution, and (ii) contribution received from charitable institution. The first category is not to be included in the total income of the trust or institution without requiring it to fulfil the conditions laid down in Section 11. The second category also can avail of the exemption like the first category. But for the second category the conditions laid down in Section 11 have been made applicable. The provisions of Section 12(1) do not say that voluntary contributions received from non-charitable institutions are not 'income' of the trust. The trustees also have treated the same as income by showing the contributions in the income and expenditure a/c. Therefore, the voluntary contributions in question form part of the composite income fund of the trust out of which all its outgoings have been met in the normal course. Since the conditions laid down in Section 11 are not to be fulfilled in respect of the contributions in question, the said contributions are not to be included in the 'income derived from property ' for the purposes of Section 11. But since the contributions have formed part of the composite income fund of the trust and since the total amount applied for charitable or religious purposes has been met out of the said composite income fund, the amount of expenditure for the purpose of Section II, in the facts and circumstances of the case, has to be arrived at by reducing the total amount of expenditure by an amount which bears to the total amount of expenditure the same proportion as the said contributions bear to the aggregate income of the trust including the said contributions. In the instant case, the trustees had a common pool into which both income from property held under trust and other income flowed and out of which the trustees in reality met all their expenses without making any distinction between the two kinds of income. For this reason the question of allocation of expenditure between the two kinds of income arises.
(2.) In the circumstances stated above, the amount applied for charitable or religious purposes, attributable to the said amount of the voluntary contributions is worked out below on the basis of the principle discussed above. JUDGEMENT_556_ITR135_1982Html1.htm Therefore, expenditure for the purpose of sec. 11(1) comes to Rs. 40,595 (Rs. 1,36,045 minus Rs. 95,450). Unspent income is computed below : JUDGEMENT_556_ITR135_1982Html2.htm The assessee being aggrieved by the said, assessment order went up in appeal before the AAC. The AAC dealing with this aspect was of the view that there was no provision in the I.T. Act or the Rules framed thereunder authorising the ITO to determine the amount applied to charitable purposes for the purposes of exemption under Section 11 of the Act on any pro rata basis. The AAC further noted that it was contended on behalf of the assessee that although there was a composite fund, the assessee had proved before the ITO beyond any doubt that out of the sum of Rs. 2,20,000 received as voluntary donations, Rs. 1,95,000 was either deposited with the banks directly or was utilised for construction of the Udippi Share Sales and no part of Rs. 1,95,000 could be said to have been utlised and included in the sum of Rs. 1,44,672 being the amount spent on the objects of the trust during the relevant year. It was further urged before the AAC on behalf of the assessee that the ITO had ignored such evidence. But, in view of the principles accepted by the AAC, the AAC held that the ITO should have granted the full benefit of exemption from tax and such exemption should not have been reduced by reason of any voluntary contribution received by the trust from non-charitable institutions.
(3.) Being aggrieved by this order, the revenue went up in appeal before the Tribunal. The Tribunal set out the relevant facts and the rival contentions and the decisions that were cited on behalf of the parties. The Tribunal thereafter, observed and it is necessary to set out the actual observations on the particular aspect because of the argument made before us which were as follows : "The assessee has received donations amounting to Rs. 2,20,000 from two individuals and a company which are not charitable trusts and so Section 12 has no application. The aggregate income of the assessee including the dividend income was Rs. 1,20,613 and the expenditure incurred was Rs. 1,44,172, but the assessee had income which has been brought from the earlier year. Thus, the entire expenditure incurred has been met out of the income of this year and the income of the earlier year." The Tribunal, on the basis of the aforesaid observations, observed that the assessee was entitled to set off the expenditure incurred against the income derived from property under trust for charitable and religious purposes. The Tribunal went on to observe that merely because the donations had been received, which formed part of the same fund, the ITO could not disallow the expenditure on pro rata basis. The contributions received by the assessee did not form part of the income as Section 12 had no application. The Tribunal observed further that once the assessee derived income from the property held under trust for charitable and religious purposes the expenditure incurred should be deemed to have been met out of that income. The Tribunal then held that the ITO had not brought on record any material to show that the expenditure had been met out of the contributions received by the assessee. In the aforesaid view of the matter, according to the Tribunal, the allocation of expenditure made by the ITO on pro rata basis was not correct. The Tribunal referred to some decisions some of which we shall presently note, and upheld the order of the AAC and dismissed the revenue's appeal.;