My trust filed Form 10 to accumulate income but then spent the money on a hospital building instead of buying government securities. Have I lost the exemption altogether?
No. The Supreme Court held that a trust which fails the conditions of section 11(2) still keeps the whole of the exemption section 11(1)(a) gives it. Income actually applied to charitable purposes in India is exempt whether or not a declaration was filed, and buying a building to be used as a hospital is such an application. On top of that the trust may accumulate up to 25 per cent of its total income - the limit then in force - and claim exemption on that accumulation without investing it in government securities. Section 11(2) only lifts the ceiling; it does not cut down section 11(1).
Decided by the Supreme Court (Supreme Court of India - Mrs Sujata V. Manohar and D.P. Wadhwa, JJ) on 1998-02-04, reported as AIR 1998 SC 1107; (1998) 2 SCC 584; (1998) 230 ITR 636; (1998) 96 Taxman 635; 1998 AIR SCW 912. It bears on section 11(1)(a), section 11(2), section 11 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
This is the answer to the department's most common move against a trust that has departed from its Form 10 - that breach of the section 11(2) conditions destroys the exemption. It does not. The two sub-sections operate on different things: section 11(1)(a) exempts income applied, plus a permitted accumulation, and section 11(2) exists only to remove the ceiling on that accumulation for a trust that wants to hold back more. It applies the Court's earlier decision in A.L.N. Rao Charitable Trust, which held that section 11(2) does not restrict the operation of section 11(1) and that the accumulation exempt under section 11(1)(a) need not be invested in the prescribed securities. It also confirms that a capital purchase for a charitable object is an application of income.
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The assessee was a charitable trust for thiruppani - repairs to old Hindu temples - building new temples, and aiding or establishing hostels and educational and industrial institutions. Its objects were admittedly charitable. On 1 March 1963 the trustee resolved to accumulate income for ten years from 13 April 1961 for the purposes set out in the resolution, and the trust filed Form 10 under section 11(2) and invested the accumulations in government securities. In the year ending 12 April 1970, relevant to assessment year 1970-71, an advance of Rs 7,82,792.44 to a Rangoon firm, shown as an asset in the earlier balance sheet, was realised and replaced on the assets side by a building of Rs 8 lakh, bought to start a hospital. The trust also had other income of Rs 1,64,210.03 that year, and claimed exemption for both amounts under section 11(1). The Tribunal allowed the claim by a majority; the High Court held the Rs 8 lakh was not income at all and denied exemption on the balance for want of investment in securities.
The referred question was answered in the affirmative and in favour of the assessee, and the appeal was allowed with costs. Taking the department's own position that the Rs 8 lakh was income of the trust for the year, the Court held that the trust had applied it to charitable purposes in India by purchasing a building to be used as a hospital, so it was exempt under section 11(1). The trust could not and did not claim under section 11(2), having failed its conditions for that year, but that failure took nothing away from section 11(1)(a). In addition the trust was entitled to accumulate up to 25 per cent of its total income for the year and to exemption on that accumulation, and section 11(1)(a) does not require that limited accumulation to be invested in government securities. The balance income of Rs 1,64,210.03 was less than 25 per cent of the income for the year and was therefore exempt as accumulated income.
The Court read the two sub-sections against each other. Section 11(1)(a) gives every charitable or religious trust, whether or not it has filed a declaration under section 11(2), exemption for income applied to its purposes in India, and for accumulated income up to 25 per cent of the income from the property or Rs 10,000, whichever is higher. Section 11(2) says that where the stated conditions are complied with, the restriction specified in clause (a) of sub-section (1) as respects accumulation shall not apply. The restriction so lifted is the 25 per cent ceiling, and nothing else. It follows that section 11(2) is an enlarging provision, not a condition attached to section 11(1), and that a trust which wants exemption for accumulation beyond the ceiling must give the notice in Form No. 10 under Rule 17 and invest in the securities specified. A trust that does not, or that has broken those conditions, simply loses the extra headroom. The Court took this directly from A.L.N. Rao Charitable Trust, where it had held that section 11(2) does not in any manner restrict the operation of section 11(1) and that the accumulated income exempt under section 11(1)(a) need not be invested in government securities. On the facts the Rs 8 lakh had not been accumulated at all - it had been spent on a building for a hospital - so it was income applied, and the question of investing it never arose.
Section 11(2) does not in any manner restrict the operation of Section 11(1). The accumulated income which is exempt under Section 11(1)(a) need not be invested in Government securities.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that a trust which fails the conditions of section 11(2) still keeps the whole of the exemption section 11(1)(a) gives it. Income actually applied to charitable purposes in India is exempt whether or not a declaration was filed, and buying a building to be used as a hospital is such an application. On top of that the trust may accumulate up to 25 per cent of its total income - the limit then in force - and claim exemption on that accumulation without investing it in government securities. Section 11(2) only lifts the ceiling; it does not cut down section 11(1). This was decided by the Supreme Court (Supreme Court of India - Mrs Sujata V. Manohar and D.P. Wadhwa, JJ) and bears on section 11(1)(a), section 11(2), section 11 of the Income Tax Act 1961. It is reported as AIR 1998 SC 1107; (1998) 2 SCC 584; (1998) 230 ITR 636; (1998) 96 Taxman 635; 1998 AIR SCW 912. This is the answer to the department's most common move against a trust that has departed from its Form 10 - that breach of the section 11(2) conditions destroys the exemption. It does not. The two sub-sections operate on different things: section 11(1)(a) exempts income applied, plus a permitted accumulation, and section 11(2) exists only to remove the ceiling on that accumulation for a trust that wants to hold back more. It applies the Court's earlier decision in A.L.N. Rao Charitable Trust, which held that section 11(2) does not restrict the operation of section 11(1) and that the accumulation exempt under section 11(1)(a) need not be invested in the prescribed securities. It also confirms that a capital purchase for a charitable object is an application of income. If it applies to you, the first step is this: When the department invokes a Form 10 breach, do not concede the whole exemption - separate the income actually applied to the objects, which section 11(1)(a) exempts on its own footing.
The assessee was a charitable trust for thiruppani - repairs to old Hindu temples - building new temples, and aiding or establishing hostels and educational and industrial institutions. Its objects were admittedly charitable. On 1 March 1963 the trustee resolved to accumulate income for ten years from 13 April 1961 for the purposes set out in the resolution, and the trust filed Form 10 under section 11(2) and invested the accumulations in government securities. In the year ending 12 April 1970, relevant to assessment year 1970-71, an advance of Rs 7,82,792.44 to a Rangoon firm, shown as an asset in the earlier balance sheet, was realised and replaced on the assets side by a building of Rs 8 lakh, bought to start a hospital. The trust also had other income of Rs 1,64,210.03 that year, and claimed exemption for both amounts under section 11(1). The Tribunal allowed the claim by a majority; the High Court held the Rs 8 lakh was not income at all and denied exemption on the balance for want of investment in securities. The matter was decided on 1998-02-04 by the Supreme Court (Supreme Court of India - Mrs Sujata V. Manohar and D.P. Wadhwa, JJ). On those facts the Supreme Court held as follows. The referred question was answered in the affirmative and in favour of the assessee, and the appeal was allowed with costs. Taking the department's own position that the Rs 8 lakh was income of the trust for the year, the Court held that the trust had applied it to charitable purposes in India by purchasing a building to be used as a hospital, so it was exempt under section 11(1). The trust could not and did not claim under section 11(2), having failed its conditions for that year, but that failure took nothing away from section 11(1)(a). In addition the trust was entitled to accumulate up to 25 per cent of its total income for the year and to exemption on that accumulation, and section 11(1)(a) does not require that limited accumulation to be invested in government securities. The balance income of Rs 1,64,210.03 was less than 25 per cent of the income for the year and was therefore exempt as accumulated income.
The Court read the two sub-sections against each other. Section 11(1)(a) gives every charitable or religious trust, whether or not it has filed a declaration under section 11(2), exemption for income applied to its purposes in India, and for accumulated income up to 25 per cent of the income from the property or Rs 10,000, whichever is higher. Section 11(2) says that where the stated conditions are complied with, the restriction specified in clause (a) of sub-section (1) as respects accumulation shall not apply. The restriction so lifted is the 25 per cent ceiling, and nothing else. It follows that section 11(2) is an enlarging provision, not a condition attached to section 11(1), and that a trust which wants exemption for accumulation beyond the ceiling must give the notice in Form No. 10 under Rule 17 and invest in the securities specified. A trust that does not, or that has broken those conditions, simply loses the extra headroom. The Court took this directly from A.L.N. Rao Charitable Trust, where it had held that section 11(2) does not in any manner restrict the operation of section 11(1) and that the accumulated income exempt under section 11(1)(a) need not be invested in government securities. On the facts the Rs 8 lakh had not been accumulated at all - it had been spent on a building for a hospital - so it was income applied, and the question of investing it never arose. In the words reproduced by the source cited on this page: "Section 11(2) does not in any manner restrict the operation of Section 11(1). The accumulated income which is exempt under Section 11(1)(a) need not be invested in Government securities."
It was decided by the Supreme Court on 1998-02-04 and is reported as AIR 1998 SC 1107; (1998) 2 SCC 584; (1998) 230 ITR 636; (1998) 96 Taxman 635; 1998 AIR SCW 912. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 11(1)(a), section 11(2), section 11, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The referred question was answered in the affirmative and in favour of the assessee, and the appeal was allowed with costs. Taking the department's own position that the Rs 8 lakh was income of the trust for the year, the Court held that the trust had applied it to charitable purposes in India by purchasing a building to be used as a hospital, so it was exempt under section 11(1). The trust could not and did not claim under section 11(2), having failed its conditions for that year, but that failure took nothing away from section 11(1)(a). In addition the trust was entitled to accumulate up to 25 per cent of its total income for the year and to exemption on that accumulation, and section 11(1)(a) does not require that limited accumulation to be invested in government securities. The balance income of Rs 1,64,210.03 was less than 25 per cent of the income for the year and was therefore exempt as accumulated income. It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 11(1)(a), section 11(2), section 11 of the Income Tax Act 1961, and was decided by Supreme Court of India - Mrs Sujata V. Manohar and D.P. Wadhwa, JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Treat a capital outlay made for the charitable object, such as a building for a hospital, as an application of income, and show the object it serves. Claim the permitted accumulation for the year in addition, and do not accept that this limited accumulation must be parked in prescribed investments. Check the percentage and the mode of investment against the section as it now stands; this case was decided on the 25 per cent limit and the section 11(2)(b) list as they stood for assessment year 1970-71.
Still good law. A citator search returns 98 later decisions citing this judgment. The Madras High Court in CIT v M.Ct. Muthiah Chettiar Family Trust (30 November 1999) held the question before it concluded against the Revenue by this decision read with A.L.N. Rao Charitable Trust; the Punjab and Haryana High Court applied it in CIT v Gulab Devi Memorial Hospital Trust (23 December 2016); and it is still applied at Tribunal level, most recently in DCIT v Santosh Trust (Delhi Tribunal, 29 August 2025) and Society for Welfare Awareness Research v ITO (Delhi Tribunal, 27 April 2022). Nothing overruling or doubting it was found. Section 11 has of course been amended since 1998 - the accumulation limit, the permitted modes of investment and the filing requirements in particular - so the conditions themselves must be read as they stand for the year in question. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court decided the case on the department's concession before it that the Rs 8 lakh was income of the trust for the year; the High Court had held the opposite, and that question was therefore not decided. The judgment is on section 11 as it stood for assessment year 1970-71, when the accumulation ceiling was 25 per cent or Rs 10,000 and the permitted investments were those in section 11(2)(b); the current limits and conditions differ and I did not check them. The key quote reproduces the Court's own statement of what it held in A.L.N. Rao Charitable Trust. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The referred question was answered in the affirmative and in favour of the assessee, and the appeal was allowed with costs. Taking the department's own position that the Rs 8 lakh was income of the trust for the year, the Court held that the trust had applied it to charitable purposes in India by purchasing a building to be used as a hospital, so it was exempt under section 11(1). The trust could not and did not claim under section 11(2), having failed its conditions for that year, but that failure took nothing away from section 11(1)(a). In addition the trust was entitled to accumulate up to 25 per cent of its total income for the year and to exemption on that accumulation, and section 11(1)(a) does not require that limited accumulation to be invested in government securities. The balance income of Rs 1,64,210.03 was less than 25 per cent of the income for the year and was therefore exempt as accumulated income.
TaxSphere, “S.Rm.M.Ct.M. Tiruppani Trust v CIT”, https://taxnotice.vittsphere.com/caselaw/case/s-rm-m-ct-m-tiruppani-trust-v-cit/ (validity last checked 2026-08-29)
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