Director Of Income Tax (Exemption v. National Association Of Software And Services Companies

* IN THE HIGH COURT OF DELHI AT NEW DELHI % Reserved on: 27[th] April, 2012 Date of Decision: 10[th] May, 2012 DIRECTOR OF INCOME TAX (EXEMPTION) .....Appellant Through: Mr.Sanjeev Sabharwal, Sr. Standing. Mr.Abhishek Maratha, Sr. Standing Counsel with Ms.Anshul Sharma, Adv. Versus NATIONAL ASSOCIATION OF SOFTWARE AND SERVICES COMPANIES ....Respondents Through: Mr. Ajay Vohra, Ms. Kavita Jha & Mr. Somnath Shukla, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V. EASWAR 1.Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporters or not ? Yes 3. Whether the judgment should be reported in the Digest? Yes3. Whether the judgment should be reported in the Digest? Yes R.V. EASWAR, J.: These nine appeals are filed by the Revenue for the assessment years 1998-99, 2002-03, 2003-04, 2004-05, 2005-06 and 2006-07. They have been filed under Section 260A of the Income Tax Act, 1961, hereinafter referred to as “the Act”. 2. The respondent-assessee is the National Association of Software and Services Companies (NASSCOM). The appeals in ITA Nos.472/2011 and 18/2011 for the assessment year 1998-99 are taken as the lead matters. 3. The assessee is a trust registered under Section 12A of the Act by order dated 29.06.1998. In respect of the assessment year 1998-99, it filed a return of income declaring “nil” income on 22.10.1998. The return was first accepted under Section 143(1)(a) on 26.03.1999 but was subsequently selected for scrutiny. Accordingly notices were issued under Section 143(2) of the Act. In the course of the assessment proceedings the Assessing Officer examined the financial statements such as income and expenditure accounts, balance sheet, etc. On a perusal thereof he noted that the assessee had filed a declaration under the Voluntary Disclosure of Income Scheme, 1997 (VDIS) and had paid taxes of `43,76,812/- in respect of the income for several years up to and including the assessment year 1997-98. The payment of the taxes was claimed by the assessee to represent application of the income of the trust for purposes of Section 11(1)(a) of the Act. He also noticed that the assessee had incurred an expenditure of `38,29,535/- on events/ activities held by the assessee outside India (Hanover, Germany). The expenditure was also incurred outside India. The Assessing Officer took the view that the expenditure cannot be considered as application of income in India for charitable purposes. He accordingly considered the aggregate of these two amounts as income not applied for charitable purposes in India and computed the surplus of the assessee-trust in the following manner: - “Gross Receipts `2,56,84,141/- Less Exemption u/s 11(1) Amount actually applied* `77,94,166/- Application applied u/s 11(2) `33,00,000/- 25% of Income accumulated `64,21,035/- for application. Assets purchased `1,12,011/- ______________ `1,76,27,212/- ______________ Surplus `80,56,929/-” 4. The CIT (Appeals) upheld the view taken by the Assessing Officer with regard to the payment of taxes and the expenditure incurred in Germany in connection with a trade fair held there. He accordingly confirmed the computation of the surplus at `80,56,929/- as made by the Assessing Officer. “Gross Receipts `2,56,84,141/- Less Exemption u/s 11(1) Amount actually applied* `77,94,166/- Application applied u/s 11(2) `33,00,000/- 25% of Income accumulated `64,21,035/- for application. Assets purchased `1,12,011/- ______________ `1,76,27,212/- ______________ Surplus `80,56,929/-” 4. The CIT (Appeals) upheld the view taken by the Assessing Officer with regard to the payment of taxes and the expenditure incurred in Germany in connection with a trade fair held there. He accordingly confirmed the computation of the surplus at `80,56,929/- as made by the Assessing Officer. 5. The assessee carried the matter in further appeal before the Tribunal. The Tribunal found that the taxes paid under VDIS related to the assessment years 1989-90 to 1997-98 and that they were paid to protect the existence of trust which was absolutely necessary for its continuance. According to the Tribunal, if the taxes paid are not to be treated as application of income of the trust, it would amount to reducing the corpus of the trust by the amount of taxes paid which would be to the detriment of the trust. In this view of the matter and following the judgment of the Madras High Court in Commissioner of Income Tax v. Janaki Ammal Ayya Nadar Trust, (1985) 153 ITR 159, the Andhra Pradesh High Court in Munna Lal and Sons v. CIT, (1991) 187 ITR 378 and the Gujarat High Court in CIT v. Ganga Charity Trust Fund, (1986) 162 ITR 612, the Tribunal held that the payment of taxes under the VDIS should be treated as application of income of the trust. 6. So far as the expenditure incurred in Germany is concerned, the Tribunal was of the view that the words “is applied to such purposes in India” appearing in Section 11(1)(a) of the Act only mean that the purposes of the trust should be in India and that the application of the income of the trust need not be in India. It was observed that “the fact that the legislature has put the words “to such purpose”between “is applied” and “in India” shows that the application of income need not ITA 17/2011 etc. Page 4 of 38 be in India, but the application should result and should be for the purposes of charitable and religious purposes in India. In this view of the matter the Tribunal accepted the contention of the assessee in respect of both the payment of the taxes under the VDIS and the expenditure incurred outside India and held that both represented application of the income to charitable purposes in India. 7. The Revenue challenges the decision of the Tribunal. After hearing both the sides, the following substantial questions of law is framed: - “1. Whether on a proper interpretation of Section 11(1)(a) of the Act, the Tribunal was right in law in holding that the payment of taxes of `43,76,892/- under the VDIS amounted to application of income of the assessee-trust to charitable purposes in India? 11(1)(a) of the Act, the Tribunal was right in law in holding that the payment of taxes of `43,76,892/- under the VDIS amounted to application of income of the assessee-trust to charitable purposes in India? 2. Whether on aproper interpretation of Section 11(1)(a) of the Act, the Tribunal was right in law in holding that the expenditure of `38,29,535/- incurred outside India amounted to application of income to charitable purposes in India?”11(1)(a) of the Act, the Tribunal was right in law in holding that the expenditure of `38,29,535/- incurred outside India amounted to application of income to charitable purposes in India?” 8. Section 11(1)(a) of the Act runs as follows: - “11.(1) Subject to the provisions of section 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 – 2. Whether on aproper interpretation of Section 11(1)(a) of the Act, the Tribunal was right in law in holding that the expenditure of `38,29,535/- incurred outside India amounted to application of income to charitable purposes in India?”11(1)(a) of the Act, the Tribunal was right in law in holding that the expenditure of `38,29,535/- incurred outside India amounted to application of income to charitable purposes in India?” 8. Section 11(1)(a) of the Act runs as follows: - “11.(1) Subject to the provisions of section 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 or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of [fifteen] per cent of the income from such property;” 9. So far as the first question regarding payment of the taxes is concerned, the argument of the Revenue before us is that the taxes paid represent the share of the government in the profits or surplus of the trust and neither under the Act nor under commercial principles can taxes be considered as an appropriate deduction in ascertaining the amount available to the assessee for application to charitable purposes. It is submitted that payment of taxes no doubt may deplete the liquid resources of the assessee but the availability of liquid resources and the computation of the income available for application to charitable purposes are two different exercises which should not be mixed up. 10. It is true that payment of taxes is not allowable as a deduction in computing the profits of the business carried on by the assessee. There are several reasons for the prohibition. Firstly, taxes are paid after the income is earned. They, therefore, represent application of income and not expenditure incurred for the purposes of earning the income. Secondly, taxes represent the Crown’s share in the profits ofthe businessman. Thirdly, taxes are considered as a personal ITA 17/2011 etc. Page 6 of 38 obligation of the trader and, therefore, not allowable. Fourthly, there is a specific bar on taxes being allowed as a deduction in Section 40(a)(ii) which says that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at the proportion of, or otherwise on the basis of any such profits or gains shall not be deducted in computing the income chargeable under the head “profits and gainsof business or profession”. These principles have been recognized in several decisions, some of which are the following: - a) Ashton Gas Company v. Attorney General & Others, (1906) A.C. 10 (HL). (1906) A.C. 10 (HL). b) The Chief CIT v. The Eastern Extension Australasia & China Telegraph Company Ltd., (1921) ITC 120 (Mad.) China Telegraph Company Ltd., (1921) ITC 120 (Mad.) c) Province of Bihar v. Rai Shambhu Lal Bose, 15 ITR 176 (Pat.) (Pat.) d) Bharat Commerce & Industries Ltd. v. CIT, (1998) 230 ITR 733 (SC). ITR 733 (SC). 11. The question before us, however, is not a simple question as to whether taxes on income are deductible in computing the taxable income of the assessee. The question before us is whether, while applying Section 11(1)(a) and determining the income available to the trust for application to charitable purposes, the availability of the income should be considered in the light of the commercial principles or whether such income is also to be arrived at or determined as ordained in the Act. This question has come up for consideration c) Province of Bihar v. Rai Shambhu Lal Bose, 15 ITR 176 (Pat.) (Pat.) d) Bharat Commerce & Industries Ltd. v. CIT, (1998) 230 ITR 733 (SC). ITR 733 (SC). 11. The question before us, however, is not a simple question as to whether taxes on income are deductible in computing the taxable income of the assessee. The question before us is whether, while applying Section 11(1)(a) and determining the income available to the trust for application to charitable purposes, the availability of the income should be considered in the light of the commercial principles or whether such income is also to be arrived at or determined as ordained in the Act. This question has come up for consideration before several High Courts. We may briefly notice some of them. In Commissioner of Income Tax v. Ganga Charity Trust Fund, (1986) 162 ITR 612 the question arose as to whether the income tax liability of `77,972/- should be allowed as a deduction while computing the income available for application to charitable purposes in accordance with Section 11(1)(a) of the Act. The Gujarat High Court held that “income derived from trust property” for the purposes of Section 11(1)(a), must be determined on commercial principles and in doing so, all outgoings including outgoing by way of income tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise. The question was examined by the Madras High Court in Commissioner of Income Tax v. Janaki Ammal Ayya Nadar Trust, (1985) 153 ITR 159. In this judgment, the Court placed reliance on circular No.5 dated 19.06.1968 issued by the CBDT. The relevant portion of the circular is extracted below: - “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). 3. In the case of a business undertaking held under trust, its „income‟ will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the Income-tax Officer, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed by the account will be eligible for exemption under section 11(1), the permitted accumulation of 25% will also be calculated with reference to this income.” Relying on the circular, it was held by the Madras High Court that the expenditure incurred by a charitable trust by way of payment of tax out of the current year’s income has to be considered as application for charitable purposes because such payment has to be made to preserve the corpus, the existence of which is absolutely necessary for the trust. In Commissioner of Income Tax v. Trustee of H.E.H., (1981) 127 ITR 378, the Andhra Pradesh High Court had expressed the view that only such income which is left after deducting the expenditure or such of the monies which are left with the trust after meeting all expenditure, that the surplus income can be arrived at and that such surplus income has to be computed on the basis of commercial principles. In that case, wealth tax and income tax had been paid by the trust during the relevant years though they related to the preceding assessment years. Nevertheless, the High Court held that the payments should be deducted from the income of the trust for the purposes of arriving at the income available for application to charitable purposes. Similar view has been taken by the Calcutta High Court in Commissioner of Income Tax v. Birla Janahit Trust, (1994) 208 ITR 372 and, by the Madhya Pradesh High Court in Commissioner of Income Tax v. Raipur Pallottine Society, (1989) 180 ITR 579. 12. Thus, it appears that there is a consensus of judicial view on the question whether payment of taxes can be considered as a proper deduction while determining the income available to a trust for application to charitable purposes as required by Section 11(1)(a) of the Act. The question is not whether taxes are allowable while computing the business income of an assessee under the provisions of the Act. The question is whether the word “income” used in Section 11(1)(a) of the Act must be assigned the same meaning as the words “total income” as defined in Section 2(45) of the Act. The CBDT itself has opined in the circular cited above that it would be incorrect to assign to the word “income” used in Section 11(1)(a) the same meaning as has been statutorily assigned to the expression “total income” under Section 2(45) of the Act. Having regard to the authorities noticed above and keeping in view the fact that the long-settled position, which has also been accepted by the CBDT, should not be upset, particularly where the statute which we are dealing with is an all-India statute, we express our agreement with the judicial trend and hold that the payment of taxes under the VDIS is to be deducted before arriving at the commercial income of the assessee-trust that is available for application to charitable purposes. We are thus in agreement with the view taken by the Tribunal on this point. 13. We now proceed to the examination of the second substantial question of law framed by us. The question is whether the expenditure of `38,29,535/- incurred by the assessee-trust on events/ activities held in connection with the exhibition in Hanover, Germany amounts to application of the income in accordance with Section 11(1)(a) of the Act. The argument put forward by the learned Standing Counsel for the Revenue was that the expenditure, even if it is considered as application of the income, was outside India and the mandate of the Section is that the income should be applied in India to charitable purposes and this condition not having been satisfied, the Tribunal was clearly wrong in holding that the expenditure should be considered as application of the income of the trust in India. The argument of the assessee is that there is no such mandate in the Section to the effect that the income of the trust should be applied in India and that the only requirement is that the purposes should exist in India and if that is satisfied, the income can be applied for such purposes even outside India. According to the learned counsel for the assessee, so long as the purposes are in India, it does not matter as to where the situs of the application is. 14. A little historical background is necessary to be brought out in understanding the mandate of Section 11. Section 11 of the Act corresponds to Section 4(3)(i) of the Indian Income Tax Act, 1922, hereinafter referred to as the “old Act”. That Section, before its repeal by the Act, stood as under: - “4. Application of income. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: following classes shall not be included in the total income of the person receiving them: 14. A little historical background is necessary to be brought out in understanding the mandate of Section 11. Section 11 of the Act corresponds to Section 4(3)(i) of the Indian Income Tax Act, 1922, hereinafter referred to as the “old Act”. That Section, before its repeal by the Act, stood as under: - “4. Application of income. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: following classes shall not be included in the total income of the person receiving them: (i) Subject to the provision of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto: (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto: Provided that such income shall be included in the –total income (a) if it is applied to religious or charitable purpose without the taxable territories, but in the following cases, namely: without the taxable territories, but in the following cases, namely: (i) where the property is held under trust or other other legal obligation created before the commencement of the Indian Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories; and other legal obligation created before the commencement of the Indian Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories; and (ii) where the property is held under trust or legal obligation created after such commencement, and the income therefrom is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is interested, obligation created after such commencement, and the income therefrom is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is interested, the Central Board of Revenue may, by general or special order, direct that it shall not be included in the total income; (b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes –on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes –of the institution and either (i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or actual carrying out of a primary purpose of the institution, or (ii) the work in connection with the business is mainly carried on by beneficiaries of the institution; mainly carried on by beneficiaries of the institution; (c) if it is applied to purposes other than religious or charitable purposes or ceases to be accumulated or set apart from application thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set apart. charitable purposes or ceases to be accumulated or set apart from application thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set apart. (ii) the work in connection with the business is mainly carried on by beneficiaries of the institution; mainly carried on by beneficiaries of the institution; (c) if it is applied to purposes other than religious or charitable purposes or ceases to be accumulated or set apart from application thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set apart. charitable purposes or ceases to be accumulated or set apart from application thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set apart. (ii) Any income of a religious or charitable institution derived from voluntary contributions and applicable solely to charitable purposes.”from voluntary contributions and applicable solely to charitable purposes.” 15. Before being amended by the Income Tax (Amendment) Act, 1953, w. e. f. 1.4.1952, Section 4(3)(i) of the old Act read as follows: - “(i) any income derived from property held in trust or other legal obligation wholly for religious or charitable purposes, … and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto.” 16. The position both before 1.4.1952 and thereafter, so far as Section 4 (3)(i) is concerned, has been noticed and contrasted by Subba Rao, J., speaking for a Bench of three Judges of the Supreme Court in H.E.H. Nizam’s Religious Endowment Trust v. Commissioner of Income-Tax, (1966) 59 ITR 582. The learned Judge observed as under: - “Under the said clause, trust income, irrespective of the fact whether the said purposes were within or without the taxable territories, was exempt from tax in so far as the said income was applied or finally set apart for the said purposes. Presumably, as the State did not like to forgo the revenue in favour of a charity outside the country, the amended clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income applied or accumulated for religious or charitable purposes without the taxable territories.” 17. If we carefully notice the above observations, it would appear clear that under the provision as it existed prior to 1.4.1952, there was no difference maintained between application of the income of the trust within or without the taxable territories. The provision as it existed after the amendment made w. e. f. 1.4.1952 makes a reference to application or accumulation for application of the income of the trust “to such religious or charitable purposes as relate to anything done within the taxable territories”. Mr. Vohra, learned counsel for the assessee, in an assiduously prepared argument, contended that the words “as relate to anything done ITA 17/2011 etc. 17. If we carefully notice the above observations, it would appear clear that under the provision as it existed prior to 1.4.1952, there was no difference maintained between application of the income of the trust within or without the taxable territories. The provision as it existed after the amendment made w. e. f. 1.4.1952 makes a reference to application or accumulation for application of the income of the trust “to such religious or charitable purposes as relate to anything done within the taxable territories”. Mr. Vohra, learned counsel for the assessee, in an assiduously prepared argument, contended that the words “as relate to anything done ITA 17/2011 etc. within the taxable territories” clearly show that the charitable purposes must be executed within the taxable territories and that it was immaterial where the income is actually applied. It is difficult to conceive of a situation under which the charitable purposes are executed within the taxable territories but the income of the trust is applied elsewhere in the implementation of such purposes. Be that as it may, the position is put beyond doubt by the proviso to Section 4(3)(i) of the old Act. It says that the income of the trust shall stand included in its total income if it is applied to religious or charitable purposes throughout/ within the taxable territories. The proviso is indicative of the object of the main provision. In the main part, it was provided that the income of the trust should be applied within the taxable territories to religious or charitable purposes and in the proviso an exception was carved out to provide that if the income is applied outside the taxable territories, even though to religious or charitable purposes, the trust will not secure the exemption from tax in respect of such income. Two situations were anticipated for which provision was made in the proviso itself. In these two situations, the Central Board of Revenue (CBR, the present CBDT) was empowered to direct by general or special order, that in such cases the income of the trust shall not be included in the total income merely because the income was applied to charitable purposes outside the taxable territories. The first situation was where the property was held under a trust or other legal obligation created before 1.04.1952. The second situation was where the property was held under trust or other legal obligation created after the aforesaid date and the income therefrom is applied outside the taxable territories to charitable purposes as are done to promote international welfare in which India is interested. In these two cases the income of the trust could be applied or spent outside India without losing exemption, provided the CBR passes an appropriate order. 18. The Supreme Court in the judgment cited above explained the rationale behind the proviso. Adverting to Craies in his book “Statute Law”, Sixth Edition, Page 217 where the learned author had explained the effect of an excepting or qualifying proviso, it was observed thus: - “…..The proviso to clause (i) excepts the two classes of income subject to the condition mentioned therein from the operation of the substantive clause. It comes into operation only when the said income is applied to religious or charitable purposes without the taxable territories. In that event, the Central Board of Revenue, by general or special order, may direct that it shall not be included in the total income. The proviso also throws light on the construction of the substantive part of clause (i) as the exception can be invoked only upon the application of the income to the said purposes outside the taxable territories. The application of the income is praesenti or in future for purposes in or outside the taxable territories, as the case may be, is the necessary condition for invoking either the substantive part of the clause or the proviso thereto.” 19. We should have thought that the position for which Mr. Vohra contends was quite unarguable after the aforesaid elucidation by the Supreme Court, but with his usual perseverance he claims that the judgment or the observations made therein are not against the proposition canvassed by him. In order to appreciate the argument of Mr. Vohra, it is necessary to refer briefly to the facts of the case cited supra. The Nizam of Hydrabad created a trust for charitable and religious objects, some of which had to be effectuated in the taxable territories and some outside the taxable territories (in Mecca and Madina). The income of the trust properties was directed to be accumulated until the death of the Settler. In the assessment made to income tax for the assessment years 1952-53 and 1953-54, the assessee claimed exemption in respect of the income arising from the trust property as per Section 4(3)(i) of the old Act. The taxing authorities noticed that there were four religious objects enumerated in the trust deed out of which two were to be effectuated in Mecca and Madina. The trust deed also conferred absolute discretion upon the trustees to apply the income of the trust to one or more of the four categories of religious purposes. The Income Tax Officer, on a construction of the trust deed held that so far as the income that was to be applied to religious and charitable purposes situated outside the taxable territories was concerned, since no order had been made by the CBR under clause (a) of the proviso to Section 4(3)(i) of the old Act, the income did not qualify for exemption. His view was upheld by the Appellant Assistant Commissioner on a different ground. The assessee carried the matter in appeal to the Tribunal which affirmed the view taken by the taxing authorities. On a reference to the Andhra Pradesh High Court, it was held by the Division Bench (reported in (1963) 48 ITR 992) that if there is plurality of objects, and the trustees are given an unfettered discretion to apply the income for an object which is not a charitable object, the entire income was outside the scope of exemption. The High Court held that since the trustees of Nizam’s Trust had a discretion to apply the trust fund for purposes outside the taxable territories for which the CBR had declined permission, the income did not fall within the scope of Section 4(3)(i) of the old Act. The High Court observed thus: - “In cases where the income is actually expended outside the taxable territories, there can be no question of exemption except in circumstances and to the extent referred to in proviso to section 4(3). We are not concerned in this case with the proviso, for the stage of application of the income had not yet been reached. We are concerned only with accumulation of income. In our view, the words “to such religious or charitable purposes as relate to anything done within the taxable territories” occurring in section 4(3)(i) must govern both the actual application of the income and the accumulation thereof for its eventual application. The same considerations, as relate to the application of the income, must also govern its accumulation. Accumulation is a process ancillary to the application. It is a mode of investment. It is not an end. It is a means to an end, the end being its application to religious and charitable objects within the taxable territories. So long as it cannot be predicated with certainty that the income is wholly to be applied for religious or charitable purposes within the taxable territories, the accumulation of the income for such application cannot fall within the ambit of section 4(3)(i) of the Act.” 20. It was the above judgment which was taken up in appeal to the Supreme Court by the trust, to which we have already referred. The Supreme Court dismissed the appeal. The argument of the learned counsel for the assessee that these judgments do not militate against the contention put forward by him is difficult to be accepted. The proviso to Section 4(3)(i) of the old Act is clear. Coming to the present Act, which is the 1961 Act, Section 11(1)(c) conveys the same idea which the proviso to Section 4(3)(i) of the old Act conveyed. The Section is couched in the following terms: - “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)……………. (b)……………….. (c)Income [derived] from property held under trust (i)Created on or after the 1[st] day of April, 1952, for a charitable purposes which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and a charitable purposes which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and (ii)For charitable or religious purposes, created before the 1[st] day of April, 1952, to the extent to which such income is applied to such purposes outside India: before the 1[st] day of April, 1952, to the extent to which such income is applied to such purposes outside India: Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income;” 21. Here again it may be noticed that sub-clause (ii) of clause (c) of sub-section (i) of Section 11, in substance provides for the same condition which was imposed by sub-clause (i) of clause (a) of the proviso to Section 4(3)(i) of the old Act. Sub-clause (i) of the clause (c) of sub-section (1) of Section 11 of the Act is in the same terms as sub-clause (ii) of clause (a) of the proviso to Section 4(3)(i) of the old Act. Since these provisions are similar both under the old Act and under the present Act, the observations made by the Supreme Court in the judgment (cited supra) are applicable with equal force to the provisions of Section 11(1)(c) of the Act. 21. Here again it may be noticed that sub-clause (ii) of clause (c) of sub-section (i) of Section 11, in substance provides for the same condition which was imposed by sub-clause (i) of clause (a) of the proviso to Section 4(3)(i) of the old Act. Sub-clause (i) of the clause (c) of sub-section (1) of Section 11 of the Act is in the same terms as sub-clause (ii) of clause (a) of the proviso to Section 4(3)(i) of the old Act. Since these provisions are similar both under the old Act and under the present Act, the observations made by the Supreme Court in the judgment (cited supra) are applicable with equal force to the provisions of Section 11(1)(c) of the Act. 22. Mr. Vohra’s contention that the words “to the extent to which such income is applied to such purposes in India” appearing in Section 11(1)(a) of the Act only require that the charitable purposes should be confined to India and the application of the income of the trust to the execution of such purposes can be outside India, with respect, appears to us to be also opposed to the natural and grammatical meaning that can be ascribed to the words. The word “applied” is a verb used in past tense. In the provision, it is used in the transitive form because it is followed by the words “to such purposes in India”. It answers three questions which would arise in the mind of the reader: apply what? applied to what? and where? The answers would then make the meaning obvious. The answer to the first question would be: apply the income of the trust. The answer to the second question will be: applied to charitable purposes. The answer to the third question will be: applied in India. Thus even grammatically speaking it seems to us that the group of words “to such purposes in India” qualifies the preceding verb “applied”. It is a case of a verb being qualified by two prepositions which follow, viz., “to” and “in”. So read, it seems clear to us that grammatically also it would be proper to understand the requirement of the provision in this way, that is, that the income of the trust should be applied not only to charitable purposes, but also applied in India to such purposes. The submission of Mr. Vohra that the words “in India” qualify only the words “such purposes” so that only the purposes are geographically confined to India does not appear to us to be the natural and grammatical way of construing the provision. That would break or clog the natural flow of the entire group of words “to the extent to which such income is applied to such purposes in India”. The meaning sought to be attached by Mr. Vohra to the words “in India” as qualifying only the “purposes” places a strain on the natural or grammatical interpretation of the group of words. If what Mr. Vohra contends is correct, then Section 11(1)(c) may become redundant and otiose. If as he says, the income of the trust can be applied even outside India so long as the charitable purposes are in India, then there is no need for a trust which tends to promote international welfare in which India is interested and which was created after 1.4.1952 to apply to the CBDT for a general or special order directing that the income to the extent to which it is applied to the promotion of international welfare outside India shall not be denied the exemption, nor would it be necessary for a charitable or religious trust created before the aforesaid date to seek such an order from CBDT in respect of its income which is applied to charitable or religious purposes outside India. In our opinion, therefore, the words “in India” appearing in Section 11(1)(a) and the words “outside India” appearing in Section 11(1)(c) of the Act qualify the verb “applied”appearing in these provisions and not the words “such purposes”. 23. Mr. Vohra protests that we would be changing the group of words appearing in Section 11(1)(a) by displacing the words “in India” and transposing them between the words “applied” and the words “to such purposes” and thus re-drafting the clause in the following manner: - 23. Mr. Vohra protests that we would be changing the group of words appearing in Section 11(1)(a) by displacing the words “in India” and transposing them between the words “applied” and the words “to such purposes” and thus re-drafting the clause in the following manner: - “to the extent such income is applied in India to such ”purposes. If, as we have explained in the preceding pagaraph, grammatically also the group of words as they exist in the clause are to be understood as expressing the requirement that the income of the trust should be applied in India to charitable or religious purposes, then even if we were to relocate the words “in India” in the manner in which Mr. Vohra says that we are doing, it would make no difference to the meaning to be ascribed to the group of words. Perhaps in that case the meaning would have been brought out in still more precise or clear terms but there are different ways of expressing the requirement that the income of the trust should be applied in India in order to get exemption and even if we were to assume that the language used in the clause is not sufficiently expressive of the idea, sitting here we should be able to set right and construe the provision in the manner in which it makes sense, unless by construing the words in the manner in which we have done, there results an absurdity which cannot be countenanced at all. We have earlier referred to the judgment of the Supreme Court in H.E.H. Nizam’s Religious Endowment Trust (supra) wherein it was observed that though before 1.4.1952 there was no requirement as to the territorial limits within which the income should be applied to charitable purposes, after 1.4.1952 the position was different since the government perhaps thought that it could not forego the revenue where the income of the trust is not actually applied within the territorial limits of India. This was the result of the amendment made by the Income Tax (Amendment) Act, 1953 w. e. f. 1.4.1952 when Section 4 (3)(i) of the old Act was recast to bring out clearly the territorial limits within which the income of the trust needs to be applied in order to secure exemption. Thus whatever might have been the position prior to 1.4.1952, it is clear that after that date it was not the intention of the legislature to forego the tax as well as the benefits arising out of the application of income of the trust within the territorial limits of India. The position has remained unchanged from 1.4.1952 for at least 60 years now. Therefore, it cannot be said that by construing Section 11(i)(a) in the manner that the requirement therein is that the income of the trust should be applied in India for charitable or religious purposes, we are doing any violence to the provisions nor can it be said that we are condoning an absurd result. 24. We do not intend to burden this order with a plethora of authorities on the construction of a Section, but since a point of grammar is also involved in the interpretation of the provision, we think it fit and appropriate to briefly refer to a few rules of interpretation laid down in some of the decided cases. In Jugalkishore Saraf v. M/s. Raw Cotton Co. Ltd., AIR 1955 SC 376, S. R. Das, J. speaking for the Supreme Court observed as follows: - “The cardinal rule of construction of statutes is to read the statute literally, that is by giving to the words used by the legislature their ordinary, natural and grammatical meaning. If, however, such a reading leads to absurdity and the words are susceptible of another meaning the Court may adopt the same. But if no such alternative construction is possible, the Court must adopt the ordinary rule of literal interpretation. In the present case a literal construction of the rule leads to no apparent absurdity and, therefore, there can be no compelling reason for departing from that golden rule of construction.” In Kanai Lal Sur v. Paramnidhi Sadhukhan, AIR 1957 SC 907, Gajendragadkar, J. speaking for the Supreme Court, stated the rule as follows: - “The cardinal rule of construction of statutes is to read the statute literally, that is by giving to the words used by the legislature their ordinary, natural and grammatical meaning. If, however, such a reading leads to absurdity and the words are susceptible of another meaning the Court may adopt the same. But if no such alternative construction is possible, the Court must adopt the ordinary rule of literal interpretation. In the present case a literal construction of the rule leads to no apparent absurdity and, therefore, there can be no compelling reason for departing from that golden rule of construction.” In Kanai Lal Sur v. Paramnidhi Sadhukhan, AIR 1957 SC 907, Gajendragadkar, J. speaking for the Supreme Court, stated the rule as follows: - “The words used in the material provisions of the statute must be interpreted in their plain grammatical meaning and it is only when such words are capable of two constructions that the question of giving effect to the policy or object of the Act can legitimately arise. When the material words are capable of two constructions, one of which is likely to defeat or impair the policy of the Act whilst the other construction is likely to assist the achievement of the said policy, then the Courts would prefer to adopt the latter construction.” Following the rule of interpretation laid down by the House of Lords in Grey v. Pearson, (1857) 6 HL Cas 61, the Supreme Court in Union of India v. Rajiv Kumar, (2003) 6 SCC 516 quoted the rule in the following manner: - “25. The golden rule for construing wills, statutes, and, in fact, all written instruments has been thus stated: “The grammatical and ordinary sense of the words is to be adhered to unless that would lead to some absurdity or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid that absurdity and inconsistency, but no further.” (See Grey v. Pearson)” 25. What we have done is to construe Section 11(1)(a) in accordance with the rules laid down in the above judgments. 26. It may not be out of place to state that the view of the learned authors Kanga and Palkhivala in their treatise on “Law and Practice of Income Tax” is the same as ours. In their 4[th] Edition (1958), which is a treatise on the old Act, the following observations appear at page 197 of the book