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8. The trustees shall not be entitled to sell or mortgage the trust property but shall be entitled to let out the portion of the trust property as may be decided from time to time by the trustees in a joint meeting or by a circular resolution on such terms and conditions as may be agreed by the trustees, but in such a way as not to frustrate the object of the trust. The trustees may enlarge the property by additional construction out of the reserve fund."

2. It is surprising that in the year 1952 when social values had considerably changed and traditional beliefs had given way to rational and scientific approach based on social awareness and responsibility, the settlors should have provided that 75 per cent. of the net income of the trust should be mainly applied in feeding pigeons, cows and dogs. The settlors very probably did not anticipate that there would be any large income from the trust property, 75 per cent. of which might be diverted for feeding pigeons, cows and dogs. The dominant object of the settlors in making the declaration of trust obviously was to establish a dharamshala for Hindus but since there might be surplus income from the trust property, subsidiary or ancillary provisions were made in clauses 6, 7 and 8 for application of such income. Now it appears that, by reason of proper management, the trust property yielded a fairly large amount of surplus income far exceeding what was perhaps anticipated by the settlors. The trustees were fortunately enlightened persons, conscious of their social responsibility and, therefore, instead of spending the entire 75 per cent. of the net income of the trust in such socially and economically futile activities as feeding pigeons, cows and dogs, they wisely and prudently expended only a part of the net income exceeding 25 per cent., and out of it, purchased certain immovable properties by way of investment. The trustees took the view that all these immovable properties including the dharamshala property originally settled upon trust were held under trust wholly for charitable purposes and the entire income of the trust was, therefore, exempt from tax under section 4(3) (i) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the old Act"), and they accordingly did not file any return of income for the assessment years 1955-56 to 1961-62. The Income-tax Officer while assessing the trustees for the assessment years 1962-63 and 1963-64 was, prima facie, of the view that the income from the immovable properties purchased by the trustees was not exempt from tax since "that income is not from the use of the trust property for carrying out the object of the trust" and, in any event, 25 per cent. of the income of the trust which was to be accumulated as forming part of reserve fund under clause 7, was not eligible for exemption since there was no legal obligation on the trustees to utilise it for charitable purposes. The Income-tax Officer, on this view, entertained the belief that the income of the trust had escaped assessment by reason of failure on the part of the trustees to file a return of income for the assessment years 1955-56 to 1961-62 and he accordingly initiated proceedings for assessment of the trustees under section 147, clauses (a), of the Income-tax Act, 1961 (hereinafter referred to as "the new Act"), for the assessment years 1955-56 to 1961-62. The trustees contested the proceedings and contended that the immovable properties purchased by the trustees formed as much the subject-matter of the trust as the dharamshala property originally settled by the settlors and the trustees were under a legal obligation to apply the whole of the income of these immovable properties for charitable purposes in the same manner as the income from the dharamshala property. The trustees also urged that the purposes set out in clause 7 for application of the reserve fund consisting of accumulation of 25 per cent. of the net income of the trust were charitable purposes and there was clearly legal obligation on the trustees to apply 25 per cent. of the net income of the trust for charitable purposes. These contentions of the trustees did not find favour with the Income-tax Officer who took the view that the income from the immovable properties purchased by the trustees was not exempt from tax tax 25 per cent. of the income from the dharamshala property was also not eligible to exemption from tax. The trustees appealed against this decision on the Income-tax Officer ton the Appellate Assistant Commissioner, there being a separate appeal in respect of each assessment year, but the appeals were unsuccessful. The trustees thereupon carried the matter in further appeal to the Tribunal. The same two contentions were urged on behalf of the trustees before the Tribunal. The Tribunal was impressed by these contentions and held that the income from the immovable properties purchased by the trustees was as much income from "property held under trust" as the income from the dharamshala property which was originally settled on trust and it was, therefore, entitled to exemption under section 4(3)(i) and so far as 25 per cent. of the income from the dharamshala property was concerned, it was also exempt from tax under the same provision, since, under clause 7, it could be spent only for a purpose consistent with the object of the trust and such purpose would be clearly a charitable purpose. The Tribunal accordingly upheld the claim for exemption made by the trustees in respect of both categories of income for the assessment years 1955-56 to 1961-62. The Commissioner was obviously dissatisfied with this decision of the Tribunal and he accordingly applied for a reference and on his application, the Tribunal referred the following question of law for the opinion of this court :

Question No. (2) :

7. This question becomes relevant because under section 11, sub-section (1), clause (a), of the new Act, exemption can be claimed in respect oa income of the trust utilised in constructing the new dharamshala and, for the purpose of this question, we will assume that the new dharamshala was constructed out of income of the trust for Samvat Years 2017 and 2018 being the relevant previous years for the assessment years 1962-63 and 1963-64, though there is a contrary finding by the Tribunal only if it can be shown that the utilisation of such income was not by way of investment of surplus trust funds but it represented application of income to the charitable purposes for which the trust properties were held by the trustees. The contention of the revenue was, and this contention appears to have found favour with the Tribunal, that the construction of the new dharamshala represented investment of surplus trust funds because the new dharamshala was a capital asset and expenditure incurred by the trustees in acquiring a capital asset could not be regarded as expenditure for carrying out the charitable objects of the trust. But this contention is wholly unsustainable and must be rejected. It seeks to limit the scope and ambit of the exempting provision contained in section 11, sub-section (1), clause (a), by reading words which are not there. The only requirement of section 11, sub-section (1), clause (a), is that the income of the trust must be applied to the charitable purposes for which the properties are held on trust by the trustees. It does not say that the application of the income should be such that it necessarily results in revenue expenditure. The charitable purpose may, in a given case, require for its fulfilment, purchase of a capital asset and where income is applied for purchase of such a capital, asset, it would still be application of income to the charitable purpose. Take, for example, a case where there is a trust for maintenance of a hospital and the trustees are bound to apply the net income of the trust properties for maintaining the hospital. The trustees of such a trust may, for the purpose of making the hospital a well-equipped medical unit and improving the efficiency of medical service at the hospital, purchase costly X-ray equipment or order medical or surgical appliances out of the income of the trust properties. Can it be suggested for a moment, in such a case, that merely because income of the trust properties is applied for purchasing a capital asset, it represents investment of the income of the trust properties and not application of such income for carrying out the objects of the trust ? The answer is obviously "No". The same reasoning must apply in the present case. Here, as is evident from clause (2), the dominant object of the settlors was to establish dharamshala for the use of the Hindu public and clause 8 contemplated that the trustees may enlarge the dharamshala by additional construction. The establishment of additional dharamshala was, therefore, clearly a charitable purpose which fell within the objects of the trust. It was in order to carry out this charitable object that the trustees utilised the construction of the new dharamshala were, therefore, clearly by way of application of income of the trust properties for carrying out a charitable purpose of the trust. The Tribunal was, in our view, wrong in holding that the use of moneys in the construction of the new dharamshala was an investment of the trust funds and not its expenditure.

10. The finding reached by the Tribunal was that no part of the surplus net income of the trust properties for the relevant previous years was utilised in constructing the new dharamshala and the new dharamshala was constructed out of the accumulations of past income. This findings was challenged on behalf of the trustees and their contention was that it was based on an erroneous inference drawn from the accounts maintained by the trustees. Now, it is clear from the judgment of the Tribunal that what strongly impressed the Tribunal in taking a view against the trustees was that the expenditure incurred by the trustees in constructing the new dharamshala was not debited to the profit and loss account. The argument which found favour with the Tribunal was that if the expenditure incurred by the trustees in constructing the new dharamshala had come out of the surplus net income of the trust properties for the relevant previous years, such expenditure could have been debited by the trustees to the profit and loss account, but that was not done in the present case and this circumstance went to show that no part of the surplus net income of the trust properties for the relevant previous years was utilised for the purpose of meeting such expenditure but it was paid out of the accumulations of past income. We cannot give our assent to this line of argument which found acceptance with the Tribunal. We fail to see how the Tribunal could draw an adverse inference against the trustees from the mere fact that expenditure on the construction of the new dharamshala was not debited in the profit and loss account. The expenditure incurred in constructing the new dharamshala, though undoubtedly expenditure for carrying out the dominant charitable purpose for which the trust properties were held by the trustees, was not revenue expenditure : it was expenditure for bringing into existence a capital asset : it did not go out of the books of account but was substituted by a capital asset. Such expenditure, obviously, could not be debited to the profit and loss account according to any recognised method of book-keeping even if it was made out of the net income of the trust properties for the relevant previous years. The only way in which such expenditure could be accounted for in the books of account was by showing it on the assets side of the balance-sheet and that is precisely what was done in the present case. The Tribunal was, therefore, clearly in error in taking the view that because the expenditure incurred in constructing the new dharamshala was not debited to the profit and loss account, it could not have come out of the net income of the trust properties for the relevant previous years. We think that, in the absence of any strong and cogent circumstance indicating that the new dharamshala was constructed out of the accumulations of past income, the normal presumption would be that the expenditure on the construction of the new dharamshala was made out of the net income of the relevant previous years except of course to the extent to which such expenditure was in excess of the net income. the revenue has not been able to point out any countervailing circumstance which would offset the weight of this presumption. The balance-sheets of the trust in fact show that the expenditure on the construction of the new dharamshala in samvat years 2017 and 2018, being the relevant previous years, could not have come wholly out of the trust properties for those Samvat years was utilised in constructing the new dharamshala. Take, for example, the year 2018. The amount expended by the trustees was Rs. 61,141.53. The balance-sheet of the trust for Samvat year 2018 shows that at the commencement of the year there was a balance of Rs. 2,34,132.14 to the credit of the income and expenditure account. That was the accumulation of past income but all of it was invested in the assets shown on the assets side of the balance-sheet for Samvat year 2017. Barring outstanding loans to the extent of Rs. 8,000 which seem to have been realised in Samvat year 2018, none of the other assets in which the accumulation of past income stood invested at the beginning of Samvat year 2018 was liquidated for the purpose of meeting the expenditure incurred in constructing the new dharamshala in Samvat year 2018. The balance-sheet for Samvat year 2018 shows that the trustees in fact borrowed an aggregate sum of Rs. 17,000 on interest-free loan in order to meet the expenditure of constructing the new dharamshala. The expenditure on constructing the new dharamshala thus came out of the net surplus income of Rs. 31,541.26, borrowing of Rs. 17,000 realisation of outstanding loans of Rs. 8,000 and recovery of some outstanding rent and part of cash and bank balance. The whole of the net surplus income of Rs. 31,541.26 was thus utilised in constructing the new dharamshala in Samvat year 2018. Similarly, a comparison of the balance-sheet for Samvat years 2016 and 2017 would show that the whole of the net surplus income of Rs. 35,298 was utilised in constructing the new dharamshala in Samvat year 2017. We must, therefore, reach the conclusion that the net surplus income of the trust properties for the relevant previous years was applied wholly in constructing the new dharamshala and the finding of the Tribunal to the contrary must be rejected.

11. That takes us top the second contention whether the whole of the net surplus income of the trust properties applied in constructing the new dharamshala would be exempt from tax or only such part of it as was equivalent to twenty-five per cent. of the net income of the trust properties would be exempt and the balance would be liable to suffer tax. The argument of the revenue was that under clauses 7 and 8 of the declaration of trust only twenty-five per cent. of the net income of the trust properties could be spent for construction of the new dharamshala and, therefore, the net surplus income of the trust properties utilised in constructing the new dharamshala, to the extent to which it exceeded twenty-five per cent. of the net income of the trust properties, could not be said to be applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly not exempt from tax under section 11, sub-section (1), clause (a). We do not think this argument is well founded. It is no doubt true that clauses 7 and 8 of the declaration of trust contemplate application of only twenty-five per cent. of the net income of the trust properties in the construction of a new dharamshala but it must be remembered, and we have already adverted to this fact earlier, that the dominant object of the settlors in creating the trust was to establish dharamshala for the benefit of Hindus and that being the overriding charitable intention manifest in the declaration of trust, the utilisation of net surplus income of the trust properties in the construction of the new dharamshala, even if it exceeded twenty-five per cent. of the net income of the trust properties, could not be said to be application to purposes other than the charitable purposes of the trust. Even apart from clauses 7 and 8 of the declaration of trust, the trustees were entitled to spend the net surplus income of the trust properties for constructing the new dharamshala. So long as the application of the net surplus income of the trust properties to the construction of the new dharamshala could not be said to be outside the purposes of the trust, and indeed it could not be, for, otherwise, it would amount to breach of trust which it was clearly not, and which even the revenue did not allege, it must be held that the application was to the charitable purposes of the trust. The whole of the net surplus income of the trust properties was, therefore, clearly applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly exempt from tax under section 11, sub-section (1), clause (a)