Ahmadi, J.
1. The assessee, Ganga Charity Trust Fund, is a charitable trust. The relevant assessment years are 1971-72 and 1972-73. In the assessment year 1971-72, the assessee claimed an amount of Rs. 76,972 by way of deduction as an amount applied for charitable purposes under section 11(1)(a) of the Income-tax Act, 1961 (hereinafter called 'thejAct'). In that year, the assessee was following the mercantile system of accounting. The Income-tax Officer refused the deduction whereupon the assessee carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer on the ground that the payment of income-tax was merely an appropriation of income and could not, therefore, be allowed by way of deduction. In further appeal to the Tribunal, the assessee attempted to raise an alternative contention, but the Tribunal did not permit it. Since that alternative contention is not raised in the question referred for our opinion, we need not state it. However, on the substantive ground, the Tribunal held that the payment of income-tax was a charge on income or outgoing which ought to be taken into consideration before determining the net income for the purpose of application or setting apart, as the case may be, under section 11(1)(a) of the Act. In the view of the Tribunal, the deduction of income-tax is a necessary outgoing which has to be considered before the net income capable of application for the purposes of the trust could be ascertained. The Tribunal, therefore, upheld the assessee's contention and allowed the deduction.
2. On the above facts, so far as the assessment year 1971-72 is concerned, two questions have been referred for this court's opinion. They read as under :
'(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that income-tax liability for an amount of Rs. 76,972 should be allowed as deduction under section 11(1)(a) of the Income-tax Act, 1961 and
(2) Whether the finding of the Tribunal that in order to give meaning to the expression 'income', the deduction of income-tax liability must be taken as an outgoing before the surplus could be ascertained and that while determining the 'income' or the surplus available to the trust for the purpose of application of its income towards charitable or religious objects, it is the surplus realised or available on commercial principles that has to be taken into consideration and not as per the provisions of the Income-tax Act, is correct in law
3. In the subsequent assessment year 1972-73, the assessee changed to the cash system of accounting. It submitted a return showing a deficit of Rs. 25,820. The contention of the assessee was that it had not received any income during the previous year relevant to the assessment year in question and, therefore, it was not required to apply any income towards the purposes of the trust. The assessee pointed out to the Income-tax Officer that the companies with which the assessee had deposits had not paid any interest to the assessee and, therefore, the assessee had not actually received the interest amount in cash and was, therefore, not in possession of income which it could apply for the purposes of the trust. It may be mentioned here that the assessee had placed deposits on interest with M/s. Hindustan Tractors and M/s. Earth Movers Private Limited, which were in financial difficulties and were, therefore, not able to pay interest on the deposit money. The Income-tax Officer, however, took the view that the assessee was liable to pay tax on accrued interest and was not justified in changing the method of accounting during the relevant assessment year. The assessee carried the matter in appeal to the Appellate Assistant Commissioner who took note of the fact that the assessee was a charitable trust which had invested various funds in the two concerns and had not received any payment towards interest because the said two concerns were in financial difficulties. The Appellate Assistant Commissioner also pointed out that since the method of accounting had been changed to cash basis, the assessee wasjnot under an obligation to apply the income for charitable purposes under section 11(1)(a) of the Act since such income was not available for application and allowed the deduction of Rs. 68,674. The Revenue carried the matter in appeal to the Tribunal. The Tribunal reiterated its view in regard to the deduction permitted for the assessment year 1971-72 and stated that income had to be computed on general commercial principles and not on notional basis for the purpose of application under section 11(1)(a) of the Act. Applying the general commercial principles, it held that the assessee had not received any income which could be applied or set apart for the purposes of the trust. The Tribunal accordingly, dismissed the Revenue's appeal.
4. On these facts, so far the assessment year 1972-73 is concerned,the following questions have been referred to us for opinion :
'(1) Whether, on facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the assessee was justified in changing its method of accounting from 'mercantile' to 'cash systema', as the companies where the assessee had deposited the monies had not paid any interest during the past years including the previous year relevant to the assessment year in question on account of financial diffculties
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the assessee could not be said to have received any income in the commercial sense of the term during the previous year relevant to the assessment year in question and hence it was not under any obligation to apply any income towards trust objects under section 11(1)(a) of the Act and
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the action of the Income-tax Officer in bringing to tax income of the assessee which was notional could not be justified in law ?'
5. It would appear from the above facts and the question formulated for our opinion that mainly two questions arise for consideration, namely, whether the assessee-trust was entitled to deduct the amount of income-tax paid by it from the total income in order to be able to apply or set apart the income under section 11(1)(a) of the Act. Secondly, we are called upon to decide whether the assessee was justified in switching over to cash system of accounting from the assessment year 1972-73 in view of the difficulties experienced because of non-receipt of interest income from the depository companies as they experienced financial difficulties.
6. Section 11(1)(a) of the Act with which we are concerned reads as under :
'11.(1) Subject to the previous of sections 60 to 63, 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 twenty-five percent of the income from such property;'
7. On a plain reading of this sub-section, it becomes clear that the income referred to in clause(a) is not liable to be added to thejtotal income of the previous year of the assessee in receipt of the income to the extent to which such income applied for the purposes of the trust in India and, where 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 25% of the income from such property. It is, therefore, clear that the income derived from property must be such as can be applied for the purposes of the trust or accumulated or set apart for such application at a future date not exceeding 25% of the income from such property. The word 'applied' was construed by the Supreme Court in H. E. H. Nizam's Religious Endowment Trust v. CIT : [1966]59ITR582(SC) and the Supreme Court stated that it envisaged actual application of the income for the purposes of the trust. Similarly, the word 'accumulated' meant the income so set apart during the year for future spending on such purposes. There can be no actual application or setting apart or accumulation of income derived from the trust property unless it is actually available for application or accumulation in the hands of the trustees. Where an assessee is following the mercantile system of accounting, income on accrual basis may be reflected in the account books, but such notional income is incapable of actual application or accumulation under section 11(1)(a) of the Act and if the assessee-trust is called upon to pay income-tax for want of such application or accumulation, it would result in rendering the benevolent provision found in clause(a) of section 11(1) of the Act nugatory. Therefore, on a plain reading of section 11(1)(a) of the Act, the view taken by the Tribunal commends itself to us.
8. In CIT v. Trustees of H. E. H the Nizam's Supplemental Religious Endowment Trust : [1981]127ITR378(AP) , the Andhra Pradesh High Court held that the payment of income-tax and wealth-tax made during the relevant year relating to the previous assessment years were incidental to the carrying out of charitable purposes of the trust. Such payment were outgoings in that particular year and were, therefore, incidental to the carrying out of the objects of the trust and had, therefore, to be excluded from the income of the trust. In CIT v. Rao Bahadur Calavala Cunnan Chetty Charities : [1982]135ITR485(Mad) , the Madras High Court held that the income from the properties of the trust would have to be arrived at in the normal commercial manner without classification under the various heads set out in section 14 of the Act. The same High Court in CIT v. Estate of V. L. Ethiraj : [1982]136ITR12(Mad) held that the income from the property held under a trust would have to be arrived at in the normal commercial manner without reference to the provisions of section 14 of the Act. In CIT v. Janaki Ammal Ayya Trust : [1985]153ITR159(Mad) , the Madras High Court held that where the entire income of the trust during the relevant assessment year had been applied for payment of tax, it had to be treated as having been applied for charitable purposes and the assessee would be entitled to exemption. It further held that in such a fact situation, there would be no income in the relevant assessment year for being spent for charitable purposes, as the amount of income-tax paid has been taken into account for the determination of commercial profits and the available surplus in the hands of the trustees for application for the purposes of the trust. The said payment must, therefore, be taken to be an outgoing of the year which it was paid and as much constituted an actual expenditure to be deducted before calculating the surplus income.
9. The view taken by the courts in the above referred cases is that before determining the income which could be actually applied or accumulated for the purposes of the trust under section 11(1)(a) of the Act, all outgoings, including the outgoing in the nature of payment of income-tax, must be deducted. It is only from the surplusjincome that remains in the hands of the trustees that actual application or accumulation for the purposes of the trust can be expected. If there is no income which could be actually applied or accumulated by the trustees would be incapable of actually applying or accumulating the income for talking the benefit of section 11(1)(a) of the Act. Therefore, even in the case of an assessee following the mercantile system of accounting, there can be no doubt that for the purposes of actual application or accumulation or setting apart of income from trust property for the purposes of the trust, the trustees must have on hand income which could be so utilised and what are outgoings towards payment of income-tax must be deducted for working out such surplus income. If a notional income calculated on the basis of accrual under the mercantile system of accounting is conceived as income for the purposes under section 11(1)(a) of the Act, it must be conceded that such notional income can never be actually applied or accumulated or set apart for the purposes of the trust and the assessee-trust while being liable to pay income-tax on accrual basis, will not be able to derived the benefit conferred by the said provision. We are, therefore, of the view that the Tribunal was right in coming to the conclusion that the income derived form trust property must be determined on commercial principles and in doing so, all outgoings including outgoing by way of income-tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise. In this view that we take, we do not feel called upon to examine the second contention bases on the decisions referred to above, whether the expenditure incurred by the trust for the payment of income-tax can be said to be actual application of income for the charitable purposes of the trust in India.
10. On the second question regarding the change of system of accounting, we find that when the assessee-trust experienced difficulty in the assessment year 1971-72, because of non-receipt of income from interest from two parties with which it had placed its funds by way of deposits, it decided to switch over to cash system of accounting, so that it may not be required to pay income-tax on notional income as on earlier occasions. There is nothing in the Act which precludes the assessee, who bona fide desires to switch over to another system of accounting, from doing so. There is no finding of fact that the switch over to the cash system of accounting in the previous year relevant to the assessment year 1972-73 was not bona fide. Besides, it is not shown by the Revenue that the change lacked durability or regularity and was merely a stop-gap arrangement to avoid payment of tax. In such fact situation, we fail to understand, why a bona fide assessee should be precluded from switching over to another system of accounting which he finds convenient and which would reflect his real income. In CIT v. Rajasthan Investment Co.(P.) Ltd. : [1978]113ITR294(Cal) , the Calcutta High Court held that on the Tribunal's finding and in keeping with the real state of affairs of its business the change in the method of accounting of the assessee was bona fide and in keeping with the real state of affairs of its business the change in the method of accounting was proper and permissible. In Reform Flour Mills P. Ltd. v. CIT : [1978]114ITR227(Cal) , the Calcutta High Court held that it was open to a taxpayer to adjust his own affairs in such a way that his tax liability may be reduced, provided the means employed are lawful. It further held that section 145(1) of the Act does not place any embargo on the assessee's right to alter the method of accounting. In other words, according to their Lordships, the assessee was entitled to change his method of accounting unilaterally. In Snow White Food Products Co. Ltd. v. CIT : [1983]141ITR861(Cal) , the Calcutta High Court reiterated that an assessee is entitled to change his regular methodjof accounting by another regular method and such a change can be effected even in respect of a part of the assessee's income. According to their Lordship's a recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accounting is substituted by another regular method, the same result will follow. It is only in a case where the assessee changes his regular method of accounting by another method and does not follow the changed method regularly thereafter that it may be possible to say that by introducing successive changes in his method of accounting, he proposes to exclude certain items in the computation of his total income. In such a case, the bona fides of the assessee may be doubted. Unless there is material on record to hold that the assessee's action is not bona fide, the change in the method of accounting must be accepted.
11. In view of the above discussion, we are of the opinion that the circumstances in which the assessee was placed compelled the trustees to switch over to cash system of accounting which was the only course open to a prudent trustee for preserving the property of the trust. In the view that the Tribunal took, the Tribunal has not expressed any opinion on this question, but since the question has been specially referred to us, we have dealt with the same. We are therefore, of the opinion that the assessee-trust was entitled to switch over to the cash method of accounting in view of the peculiar circumstances in which the trust was placed.
12. For the above reasons, we answer both the questions relating to the assessment year 1971-72 in the affirmative,i.e., in favour of the assessee and against the Revenue and the first question relating to the assessment year 1972-73 also in the affirmative,i.e., in favour of the assessee and against the Revenue. In view of our reply to question No.(1) of 1971-72, it is not necessary for us to answer questions Nos. 2 and 3 in so far as the assessment year 1972-73 is concerned. The reference stands disposes of accordingly with no order as to costs.