(2001) 248 ITR 1 (SC)
Application of income by a charitable trust; accumulated income
On gross receipts. The trust is entitled to accumulate the statutory percentage of the total income derived from property held under trust, not of the balance left over.
Is the permitted accumulation computed on gross receipts, or only on the net income remaining after application?
The trust received donations of approximately ₹2.57 lakh in the relevant year and applied about ₹1.70 lakh to its charitable objects, leaving a balance of roughly ₹87,000. It claimed accumulation of twenty-five per cent — the percentage then permitted — computed on the gross receipts of ₹2.57 lakh, which came to about ₹64,000. The Assessing Officer took the view that the permitted accumulation should be computed on the unapplied balance of ₹87,000 rather than on the gross figure, producing a much smaller allowance and bringing the difference to tax.
The Kerala High Court decided in favour of the trust, holding that the accumulation was to be computed on gross receipts. The Revenue appealed to the Supreme Court, which disposed of the matter by a short judgment affirming the High Court.
For the assessee
The provision permits accumulation of a specified percentage of the income derived from property held under trust. That income is the gross receipts of the trust. Nothing in the language directs the percentage to be applied to a residue computed after deducting amounts already spent on the objects.
For the Revenue
Accumulation is concerned with what remains unspent. Allowing the percentage on gross receipts, when a large part has already been applied, over-compensates the trust and permits a larger sum to escape tax than the provision intends.
The Court took the straightforward view that the statutory language governs. The provision entitles the trust to accumulate or set apart a specified percentage of the income derived from property held under trust, and on the facts that income was the gross donations received, namely ₹2.57 lakh. Twenty-five per cent of that figure was accordingly available for accumulation, and the assessment computing it on the unapplied residue was wrong. The judgment is brief and does not elaborate at length, but it settled a point on which differing approaches had been taken, and it has been consistently applied since. The effect is that the trust first determines the permitted accumulation on gross receipts, and the requirement to apply income to charitable purposes operates on the remainder.
The accumulation mechanism now sits in Sections 341 and 342 of the IT Act 2025. The computation base continues to matter in every trust assessment, and this remains the authority for taking gross receipts rather than a post-application residue. It is a short judgment but a decisive one, and is routinely cited in trust computations.