JUDGMENT :

A.K. Sikri, J.

1. The Respondent-Assessee is a Public Charitable Trust. It filed its return for the Assessment Year 1994-95 declaring 'nil' taxable income. In the summary of total income filed by the Assessee it had mentioned gross income for the year in the sum of Rs. 99,41,221/- which represented interest receipts, rental income, bus collections, miscellaneous receipts and surplus in GRS hotel. It was further stated that out of this income the Assessee had applied and spent a sum of Rs. 47,27,533/- for the objects of the Trust. In the return it was also stated that it was setting apart a sum of Rs. 32 Lacs to be spent for charitable purposes in the following year. On that basis the assesses claimed that it was entitled to have the deduction of the entire amount and for the purpose of taxation the income was 'nil' Under Section 11 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act').

2. Before we proceed further and discuss as to how the Assessing Officer made the assessment, it would be necessary to take note of the provisions of Section 11 of the Act which are relevant for our purpose.

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) 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;

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Explanation.- For the purposes of Clauses (a) and (b),- (1) in computing the [fifteen] per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in Section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of [eighty-five] per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount-

(i) for the reason that the whole or any part of the income has not been received during that year, or

(ii) for any other reason,

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(2) [Where [eighty-five] per cent of the income referred to in Clause (a) or Clause (b) of Sub-section (1) read with the Explanation to that Sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes in India during the previous year but is accumulated or set apart, either in whole or in part, for application to such purposes in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:-]

(a) such person specifies, by notice in writing given to the [Assessing] Officer in the prescribed manner, the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;

[(b) the money so accumulated or set apart is invested or deposited in the forms or modes specified in Sub-section (5)]:]

3. This provision has come up for interpretation in Additional Commissioner of Income Tax v. A.L.N. Rao, 1995 (6) SCC 625 and the legal position contained therein was explained in the following manner:

A mere look at Section 11(1) (a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by I wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 2