The tax deducted at source on dividend cannot be treated as income for the purposes of Section 11, Income-tax Act, 1961, and the entire gross dividend income is eligible for deduction under Section 80k, Income-tax Act, 1961.

( 1 ) THE Tribunal has referred the following two questions of law under Section 256 (1), Income-tax Act, 1961 :" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the tax deducted at source on dividend could not be treated as income for the purposes of Section 11, Income-tax Act, 1961, and in that view in directing the Income-tax Officer to exclude the amount of tax deducted at source from the income of the assessee ?

( 2 ) " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding the entire gross dividend income under Section 80k, Income-tax Act, 1961, and the pro rata basis applied by the Income-tax Officer for giving relief under Section 80k, Income-tax Act, 1961, was not correct ?"2. The assessee, Jayashree Charity Trust, is a charitable trust. The relevant assessment year for the purpose of this case is 1973-74 for which the accounting period ended on March 31, 1972.

( 3 ) THE assessee held a large number of shares. The gross dividend income from the shares was Rs. 3,49,696. The net dividend received by the assessee after deduction of tax at source during the relevant accounting period was Rs. 2,72,722. The assessee, in his return of income, did not include the amount of the tax deducted at source. The assessee's case was that the amount deducted at source had not been received by the assessee and could not be applied by the assessee for the objects of the trust. The entire amount that was received by the assessee after deduction of tax at source had been spent for charitable purposes.

( 4 ) THE Income-tax Officer rejected the assessee's contention and included a sum of Rs. 76,974 being the amount of tax deducted at source as the taxable income of the assessee. The Appellate Assistant Commissioner, however, relying upon a clarification made by the Commissioner of Income-tax, Delhi, by his letter dated June 2, 1974, held that the tax deducted at source could not be treated as income of the trust for the year in which it was not actually received by the assessee.

( 5 ) THE Tribunal, on further appeal, referred to a circular issued by the Central Board of Direct Taxes on June 19, 1968, and held that "income" under Section 11 is to be understood in the commercial sense. The Tribunal held that as the assessee had not obtained any refund of tax in the relevant year of account, the amount of tax deducted at source could not be treated as the assessee's income for the purpose of Section 11, Income-tax Act, 1961.

( 6 ) SECTION 11 (1) (a), as it stood at the material time, was as under :"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 for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent. of the income from the property or rupees ten thousand, whichever is higher. "

( 7 ) IN order to qualify for exemption under Section 11 (1) (a), it has to be established that the property is held under trust wholly for charitable or religious purpose and the income of the property is being actually applied for such purposes in India. The relief is limited to the extent to which the income is applied for the purpose of the trust in India. If the entire income is not actually applied for the purpose of the trust in the relevant accounting period but is accumulated for application to such purposes, the exemption is limited to the extent to which the accumulated income is not in excess of 25% of the income of the property held under trust or rupees 10,000, whichever is higher.

( 8 ) IN the case before us, the assessee ha