Issues In Corpus Donation To Charitable Trusts Not Registered U/s 12A/12AA/12AB Of The Income-Tax Act, 1961

CA Anilkumar ShahCA Anilkumar Shah has explained the law relating to the taxation of donations to the corpus of a trust which is not registered under sections 12A/AA of the Income-tax Act, 1961. He has analyzed the statutory provisions and the important judgements on the point. He has also offered valuable guidance on what trusts should do in practice to be able to argue that the corpus donations received by them are capital in nature and not taxable as income

1.  Relevant sections in brief

1.1       Voluntary contributions are made taxable vide the definition of income under Section

2(24) (iia) which reads as under-

2(24)(iia) Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via) of clause (23C) of section 10 or by an electoral trust.

Explanation — For the purposes of this sub-clause, "trust" includes any other legal obligation.

Apparently this covers the donations to the corpus fund also.

1.2       However, exceptions are carved out for donations to corpus fund which are as follows-

1) Section 2(24)(xviii) refers to assistance from Govt. but excludes the same towards corpus

2(24)(xviii) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than,—

(a) the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to clause (1) of section 43; or (b) the subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government, as the case may be;

2) Section 11(1)(d) contains a specific provision as follows- [inserted by Finance Act 1989 w. e. f. 1-4-1989]

Income from property held for charitable or religious purposes.

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—

(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

3) Section 12 (1) [Originally Sec.12 only which was numbered sub section (1) by Finance Act 2000 w.e.f.1-4-2001] reads along with its heading as follows –

Income of trusts or institutions from contributions.

12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.

4) There is an old clarificatory Circular No. F. NO. 20/10/67-IT(AI) DT. 1st MAY, 1967 as follows-

1. There appears to be certain amount of misconception in minds of some ITOs regarding the provision against the accumulation of income in excess of 25%, contained in s. 11(1) of the IT Act. It may be clarified that the provisions in s. 11(1), prohibiting accumulation of income in excess of 25% apply only to the income derived from property held under trust, but such restrictions are not applicable to capital receipts. The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25% except in cases covered by s. 12(2) of the Act.

2. The above position will also be clear from s. 12(2) of the IT Act, which specifically provides that contributions made to a charitable trust by another trust, to which the provisions of s. 11 apply, should in the hands of the trustee, be deemed to be income derived from property for the purposes of s. 11. Such contributions should, of course, be included in the total income of the receiving trust for the purpose of applying the limit of 25% under s. 11(1) of the IT Act.

2. The issue

Although the law and the clarificatory circular provides that the donations to the corpus of a trust is a capital receipt and hence not taxable, the Dept. tries to tax the voluntary contributions or donations to the corpus of a trust especially the donations to the trusts which are not registered under section 12A/AA.

The donations to the corpus fund have been held as exempt being a capital receipt and hence not taxable.

There are practically umpteen number of cases reported in this matter with many facets covered in each one in the matter right from what is voluntary contribution deciding even when it is not expressly conveyed by written direction by the donor, and going to the extent of treating even the income earned on the corpus fund also exempt treating it as part of the corpus. But, the matter of trusts not registered under the Act remained controversial at least for the Dept.

There is an old judgment of Hon. Supreme Court in the case of R. B. Shreeram Religious and Charitable Trust (1988) 233 ITR 53. A detailed discussion is made on the issue of corpus donations and various High Court decisions are considered. However, while dismissing the appeal it did not specifically address the issue of corpus donations and has not made any categorical statement to deviate from those High Court decisions and thus left the issue open.

3.  The case of Mata Amrithanandamayi Math

First case is of a trust called Mata Amrithanandamayi Math, for the assessment years 2007-08 to 2009-10 and 2012-13. The trust received donations of Rs. 6,99,89,712 over a period and earned interest of Rs.37.76 crores and both were claimed exempt. The letters from donors were submitted with details like total number of donors who have given specific direction to accumulate interest on corpus fund donated by them in respect of interest added to the corpus during the relevant year, period specified by them etc. and evidences supporting the same. The AO added the same to income and taxed.

3.1 The first appeal before CIT(A)

The CIT(A) gave consolidated order dt. 02/02/2016 in favour of the trust and allowed both the items as exempt. In the well-reasoned order passed by learned CIT(A), crux of the reason given was –

I carefully examined the captioned issue. On a plain reading of section 12 of the Act, it is obvious that any voluntary contribution which is made with a specific direction that it shall form part of the corpus of the trust would not be deemed to be income derived from the property held by the trust and it cannot be treated as income of the receiving trust for the purpose of section 11(1)(d) as well. When the voluntary contribution made with a specific direction that it shall form part of the corpus of the trust itself cannot be treated as income both u/s 11 and u/s 12 then how the interest earned on such voluntary contribution kept in term deposits with banks could be treated as income of the trust.

In the reasons the CIT(A) also explained that the corpus fund by way of fixed deposits is property held in trust and income earned till the time the fund is actually used is also exempt. He relied on the following judgments in holding the assessee eligible for the said exemption-

CIT vs Vanchi Trust & Another (127 ITR 227) (Ker)

CIT vs Sthanakvasi Vardhanman Vanik Jain Sangh (260 ITR 366(Guj))

CIT vs Haryana CM Relief Fund (309 ITR 275 (P&H))

CIT vs Punjab Energy Development Agency (323 ITR 463 (P&H))

In one of the grounds the Dept. contended that,

Intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

The CIT(A)’s reason against the said contention was –

In ITO vs. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

The CIT(A)’s conclusions were as follows-

i) The interest got added on to the deposit by virtue of specific directions to do so and both the principal and interest continuously remained with the bank.

 ii) The income does not reach the hands of the assessee as it gets added on to the deposit. In other words, income should actually be earned and cannot be due from, which is a notional income and cannot be actually spent for charitable purposes.

iii) It is not the case of the AO that the assessee had failed to bring out documentary evidence for donations received and mandate given. All these were verified by the AO.

3.2 Second appeal before Hon. ITAT Cochin

Dept. went in appeal before the Hon. ITAT Cochin. which upheld the order of the CIT(A) and answered specific grounds taken by the Dept. in negative as follows-

6.4 In the Grounds of Appeal, in point 2(a), the Department has taken a stand that neither the intention of the donor nor the objects of the trust will be fulfilled since both the capital and interest will not be applied for the objects of the trust in the interest of beneficiaries and continue to remain unutilised perpetually. This argument is incorrect since the mandate is for specific number of years for which period alone the interest gets added to the corpus. Thereafter the interest on such corpus becomes available for the objects of the trust. Therefore, this argument of the department is incorrect.

6.5 In Ground 2(b) the department has taken a stand that there is no provision under the Income Tax Act which exempts interest income out of deposits made out of the corpus donations u/s 11(1)(d) of the IT Act. In the case of the assessee: the issue is not with regard to exempting interest income out of the deposits made of corpus funds, but the question is whether the interest earned on such corpus donations kept as deposits with a specific mandate to accrue the interest on the principal, would not amount to the corpus itself by virtue of an overriding title created as a result of the mandate.

6.6 In Ground 2 (c), the department has taken a ground that intention of the donor can be restricted only to the amount of corpus donations made and not the income earned thereon. There is no such restriction in the Income Tax Act whatsoever and therefore that ground is also not sustainable. Unless the income is received in a particular year, it cannot be applied. The interest from corpus deposits is also taken to the corpus fund and hence the assessee had rightly excluded the interest income on Term Deposits with Bank which were accrued but not due. This is being consistently followed by the assessee.

6.7 In ITO vs. Shrisachyaya Mataji Trust Osian, Jodhpur ITA No.538/Jodh/2013, dated 09/05/2014, the Jodhpur bench of ITAT held that if a voluntary contribution is made with a specific direction, it shall be treated as capital of the trust for carrying on its charitable or religious activities. Then such an income falls under section 11(1)(d) as is not liable to tax. If the intention of the donor is to give that money to a trust to keep in trust the account in deposit and utilise the income therefrom for carrying on a particular activity, it satisfies the definition part of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax.

7. In view of the aforesaid reasoning and the judicial pronouncements, we hold that the CIT(A)’s order is correct and in accordance with law no interference is called for. It is ordered accordingly.

ACIT vs. Mata Amrithanandamayi Math, (2016) 48 CCH 0503 Cochin Trib, ITA No 185 to188/Coch/2016

3.3 Appeal before Hon. High Court of Kerala

The common questions of law framed for the consideration of the Court were the following:

1. Whether the ITAT has erred on facts and law in treating the interest on corpus funds received by the assessee as corpus donations u/s 11(1)(d) of the IT Act, to be exempt from Income Tax while section 11(1)(d) covers donations with specific direction that they shall form part of corpus and not interest thereon since it will result in exemption to interest in perpetuity defeating the legislative intent?

2. Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations?

After considering the facts, the Hon. High Court ruled as follows-

We are of the view that the question that is framed has to be answered in the light of Section 11(1)(d) of the Act. A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income. The person in receipt of the income, insofar as these cases are concerned, is the respondent assessee. One of the income that is enumerated in clause (d) of sub-Section (1) of the Section is the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

The fact that the donors had instructed that the interest earned shall be added to the corpus of the trust is undisputed. If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust. If that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act.

CIT (Exemption) vs. Mata Amrithanandamayi Math Amritapuri, (2017) 99 CCH 0449 KerHC

3.4 SLP before Hon. Supreme Court

Dept. further went before Hon. Apex Court with a SLP and after condoning the delay and hearing, Hon. Court dismissed the SLP saying that-

We do not find any ground to interfere with the impugned order(s).

CIT (Exemption) vs. Mata Amrithanandamayi Math Amritapuri, (2018) 102 CCH 0050 ISCC, (2018) 256 TAXMAN 0062 (SC), dt. 14-5-2018

In Kunhayammed and others vs. State of Kerala and Another 2000 AIR (SC) 2587 Hon. Apex Court has ruled about effects of dismissal of SLP that

An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that it means is that Court was not inclined to exercise its discretion so as to allow the appeal being filed.

Although dismissal of SLP does not amount to a binding precedent as the same is under article 136 and not under article 141, as per general rules for interpretation, it might be taken as the affirmation of the High Court’s views on merits of the case. There is no reason to dilute the binding nature of precedents in such cases.

(Refer Interpretation of Taxing Statutes, published by AIFTP, December 2005 first edition, page 158)

4.  The case of Basanti Devi and Chakkhanlal Garg Educational Trust

However, in this case the decision is made under article 141 in a SLP with Civil Appeal which has a binding precedent, decided in the case of –

DIT (Exemption) vs. Basanti Devi and Chakkhanlal Garg Educational Trust.

Briefly the case is as under-

The assessee trust received a sum of Rs.1,06,55,343/-, as infrastructure fund. Holding that this amount was not allowable as a deduction u/s 11 of the I.T. Act, the AO brought it to tax for AY 2002-03 in a reopened case.

Before this, the ITAT had decided the matter in favour of the assessee’s own case for AY 2003-04 on the same issue, confirming the CIT(A)’s order in favour of assessee and against the AO.

By the time the case for AY 2002-03 came before the ITAT, the Hon. Delhi High Court had already upheld the matter in favour of the assessee on 23-9-2009 (ITA no. 927/2009) and Dept. had filed a SLP before Hon. Apex court which had granted leave to file appeal against the Hon. High Court order, but without a stay to the HC order.

The High Court order available on its portal is a very short and reads as follows-

The respondent/assessee is admittedly a Charitable Organisation which is a trust registered under the Indian Trust Act which has also been granted registration under the Income Tax Act w. e. f. 1.4.2003. The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, we are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

For AY 2002-03, Dept. took a view before the Hon. ITAT that the aforesaid High Court order is under challenge before the Hon’ble Supreme Court by way of a SLP filed by the Department. But, Hon. ITAT did not agree saying, “this, however, is not premise enough to allow the Department’s appeal, particularly when the High Court order has not been shown to have been stayed.

Hon. ITAT allowed the appeal on 19-1-2011, respectfully following the High Court decision(supra) in the assessee’s own case for assessment year 2003-04, and rejected the grievance of the Department and held as follows-

The assessee received certain donations towards its corpus which had been deposited in the bank and the money was admittedly spent for acquiring land for construction of a college. In these circumstances, are of the opinion that the CIT(A) as well as ITAT rightly concluded that the donations received towards corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. No question of law arises. Dismissed.

Hon. Apex Court has dismissed the appeal on 17-9-2018.

(CA No. 002201/2013, SLP (C) CC No.004610/2013, SLP (C) No.010535/2013, all regd. on 4-3-2013 and disposed on 17-9-2018).

This order of Hon. Supreme Court, being under Article 141, is binding and has settled the issue finally, that the voluntary donations towards corpus are exempt from tax being capital receipts, even if the trust is not registered u/s 12A/12AA.

5.  Donations held towards corpus when not expressly stated by donors

At this juncture, it is proper to refer the decisions clarifying as to what constitutes the donations to corpus especially when it is not expressly conveyed by the donors.

5.1 If the receipts issued to the donors clearly mention that they were given towards corpus, then it had to be construed that the contributions were made with a specific direction that they shall form part of the corpus – N. A. Ramachandra Raja Charity Trust v. First ITO (1985) 14 ITD 230 (Mad. Trib.); Meherangarh Museum Trust v. Asstt. CIT (2014) 48 taxmann.com129 (Jodh. Trib)

5.2 If the trust deed clearly provides that donations received by trustees shall be deemed to be accretions to the trust and imposes an obligation on the trustees to hold such donations as part of the corpus of the trust, then contributions could be received only towards corpus of the trust – Hakmuddin Mulla Hasanbhai Singaporewala Charitable Trust v. 5th ITO [1985] 23 TTJ 43 (Bom. Trib.)

5.3 If the intention of the donor is to give that money to a trust which will keep it in trust account in deposit and the income from the same is utilised for carrying on a particular activity, it satisfies the definition part of the corpus – DIT v. Sri Ramakrishna Seva Ashrama [2012] 18 taxmann.com 37, 205 Taxman 26 (Kar.)

5.4 Donations received towards ‘Building Fund’ and ‘Kayami Fund’ (Permanent Fund) were held to be towards corpus – ITO v. Satya Kabir Sahabani Gadi [1994] 50 TTJ501 (Ahd. Trib.)

5.5 Contribution received towards specific purpose of construction of Wadi was held to be forming part of corpus – CIT v. Sthanakvasi Vardhman Vanik Jain Sangh [2003] 131 Taxman 270 (Guj)

5.6 Voluntary contributions made by the donors with a specific direction that they were made towards construction of a building in the premises of the assessee for its use – St. Ann’s Home for the Aged v. ITO [1980] 10 TTJ 144 (Bang. Trib.)

5.7 No specific letter was received from the donors that the donations were Towards corpus. However, the counter foil of receipts showed that they were received for construction of temple and Dharamshala. The Tribunal held that the preamble to the trust deed, directions of the donors and the contents of the receipts showed that the donations could be treated as corpus donations – Shri Vasu Pujiya Jain Derasar Pedhi v. ITO [1991] 39TTJ337 (JP. Trib.)

5.8 Although the receipts indicated that the donations were received towards corpus, in some cases the donors had not specifically stated that the donations were towards corpus. The donations were utilized towards the objects of the trust to establish a technical institution. The Tribunal held that the donations were a part of the corpus – ITO v. Sardar Vallabhbhai Education Society [2012] 26 taxmann.com 174 (Ahd. Trib.) (TM)

5.9 Donation received towards purchase and investment in Sidha Land Project which was a capital project was a corpus donation – Dharma Pratishthanam v. ITO [1985] 11 ITD40 (Delhi- Trib.)

5.10 Donation towards construction of stadium for indoor games was a corpus donation – CIT v. Indore Table Tennis Trust [1997] 92 Taxman 199 (MP)

6. Donations towards corpus are exempt even if there is no registration under sec. 12A/AA with different facts –

It is worth considering various cases which had different issues and facts, but ultimately the donations are held exempt.

6.1       DCIT vs. Nasik Gymkhana, (2001) 72 TTJ 0467, (Pune) AY 1984-85

This is an interesting case. The trust had received donations from unidentified donors which was not attributed to the corpus. Donations attributed to the corpus by shop owners belonging to the assessee, proved not voluntarily made as they were allotted extended area in consideration. Hon. ITAT observed as under-

Accordingly, such donations, though not voluntarily made, are held as capital receipts and consequently, cannot be considered as income of the trust. Even assuming for the sake of convenience that such donations were made voluntarily, as contended by the counsel for the assessee, the same cannot be held as income since such donations were, given towards corpus of the trust. The receipts issued by the trust clearly show that donations were received towards buildings reserve and general maintenance fund. The receipts are duly signed by the donors. All the donations received were transferred to this fund. Further, there is nothing on the record to suggest that this fund was not used for construction of building. Later on, all the donors have certified that such donations were given towards corpus of the trust. No adverse inference can be drawn from the fact that receipts were issued by one person or the fact that the amount was given towards building fund was printed on the receipts. There is sufficient material to hold that donations were towards corpus of the trust. Hence, such donation cannot be considered as income of the assessee. The legal contention of the Departmental Representative that prior to 1st April, 1989, donations towards corpus were not exempt is without force. prior to 1st April, 1989, the donations towards corpus were exempt under s. 2(24)(iia) itself. Therefore, this contention of the Revenue is rejected.

6.2       CIT vs. Trustees of Visha Nima Charity Trust, (1982) 138 ITR 0564 (Bom HC) – AY 1965-66

One of the clauses of the deed of Trust authorised the trustees to invite and receive or without such invitation, receive voluntary contributions from any person and that all such contributions shall be treated as forming part of the Trust fund. The assessee organised a charity show and invited advertisements in souvenirs which brought a net receipt of Rs. 96,771 which was transferred to the trust fund or corpus. The amount collected was used for the payment of the price of the ownership flats purchased by the assessee. The ITO took the view that the said income was income from property held under a trust wholly for charitable purposes, which would have been exempt from tax under the terms of s. 11(1)(a) if applied to such purposes, but since it was accumulated for application to such purposes it was held that exemption was available only to the extent of 25% thereof and after granting the same he brought the balance to tax. Hon. High Court held as under-

The object of the Trust was to have a permanent home for providing shelter for a short duration which was in the nature of general public charity. It is hardly likely that on the facts and circumstances of the case and taking into account the nature of the Trust, the persons to whom the appeal for tickets and advertisements was issued and other relevant factors, any one would have given an advertisement in this souvenir for any purpose other than the charity and as a voluntary contribution and the same can be said about the persons who must have purchased the tickets for the said show. In these circumstances the contributions made by way of tickets and for advertisements should, on the facts and circumstances of this case, be regarded as merely voluntary contributions and in view of this the exemption contained in sub-s. (1) of s. 12 would be clearly attracted, even assuming that these receipts constituted the income of the assessee and not the corpus thereof. Moreover, these contributions could never be regarded as income derived by the assessee-trust from property. Accordingly, the entire income contribution received by the assessee trust was exempt.

Amount received by assessee trust from sale of charity show tickets and advertisement in souvenir were from voluntary contributions, exempt under s. 12(1).

This judgment is referred to in many other orders & judgments.

6.3       CIT vs. Sri Durga Nimishamba Trust, (2011) 79 CCH 0890 KarHC – AY – Not mentioned

Tribunal had set out decision on which Appellate Commissioner relied on to come to conclusion that contribution made towards corpus fund could not be treated as income for purpose of levying of tax—Even if that corpus fund was misused it could not be treated as income and income tax levied—Only course was to seek for cancellation of registration granted u/s 12A of Act—In that view of matter court did not saw any merit in this appeal—Application for condonation of delay was dismissed, as cause shown do not constitute sufficient cause under section 5 of Limitation Act—Revenue’s appeal dismissed.

This Karnataka HC has settled that even if there is misuse of corpus fund, still the same cannot be taxed but the course open is to cancel the registration u/s 12A/12AA.

6.4       ITO vs. Gaudiya Granth Anuved Trust, (2014) 65 SOT 0137 (Agra) ((URO)) – AY 2007-08

The question arises whether such corpus donation is taxable as income or not even in the cases in which the trust is not registered u/s 12AA because for those trusts which are registered u/s 12AA, exemption to corpus donation has been provided as per provision of section 11(1)(d). Corpus donation being in the nature of capital receipt are not chargeable to income Tax.

The ITAT AM delivering the order further observed that,

I have also come across another decision of Hon’ble ITAT, Kolkatta in case of Shri Shankar Bhagwan Estate Vs. ITO dated 13.01.1997 reported in (1997) 61 ITD 196 (Cal) in which, the taxability of corpus donation has been examined in the light of section 12 read section 2(24(iia) of the Income Tax Act and in this decision, it has been held as under :-“So far as section 2(24)(iia) is concerned, this section has to be read in the context of the introduction of the present section 12 it is significant that section 2(24)(iia) was inserted with effect from 01.04.1973 simultaneously with the present section 12, both of which were introduced from the said date by the Finance Act, 1972. Section 12 makes it clear by the words appearing in parenthesis that contributions made with a specific direction that they shall from part of the corpus of the trust or institution shall not be considered as income of the trust. The Board’s Circular no.108 dated 20.03.1973 is extracted at page 1277 of Vol. I of Sampat Iyengar’s Law of Income tax, 9th Edn. In which the inter-relation between section 12 and section 2(24) has been brought out. Gifts made with clear directions that they shall form part of the corpus of the religious endowment can never be considered as income. In the case of R.B. Shreeram Religious and Charitable Trust V CIT (1988) 172 ITR 373/39 taxman 28 it was held by the Bombay High Court that even ignoring the amendment to section 12, which means that even before the words appearing to parenthesis in the present section 12, it cannot be held that voluntary contributors specifically received towards the corpus of the trust may be brought to tax. The aforesaid decision was followed by the Bombay High Court in the case of CIT Vs. Trustees of Kasturbai Scindia Commission Trust (1991) 189 ITR 5/57 taxman 38. The position after the amendment is a forori. In the present cases the Assessing Officer on evidence has accepted the facts that all the donations have been received towards the corpus of the endowments. In view of this clear finding, it is not possible to hold that they are to be assessed as income of the assessees. We, therefore, hold that the assessment of the corpus donations cannot be supported.

This order is invariably referred to in many orders/judgments. Similar view is expressed in the following orders/judgments-

6.5       CIT vs. Pentafour Software Employees’ Welfare Foundation, (2019) 418 ITR 427 (Mad HC) –

AY 1998-99, 1999-2000 & 2002-03

  • The assessee filed appeal before the CIT(A), who held that the amounts paid by the businessmen towards advertisements could not be considered as "donations". On appeal to the Tribunal, the Tribunal following the judgment of the Bombay High Court in CIT vs. Trustees of Visha Nima Charity Trust (1982) 28 CTR (Bom) 227: (1982) 138 ITR 564 (Bom), held that the amounts received by the society could not be treated as "trading receipts" and they were mere voluntary contributions. Further, the Tribunal confirmed the finding recorded by the authorities that the society was not a charitable institution. When the matter was carried on appeal to the Bombay High Court, the question referred was whether the Tribunal was correct in holding that the amount received by way of advertising charges are voluntary contributions or donations and are not trading receipts. After taking note of s.2(24) of the Act, it was held that the assessee society has been held as not a charitable institution and it is not also one of the institutions which are satisfied under s. 2(24) of the Act which are treated as "income" within the meaning of s. 2(24) of the Act and therefore, voluntary contributions received by the assessee society cannot be treated as "income" or "trading receipts". This decision applies with full force in support of the assessee herein and the Revenue is not able to put forth any submission to dislodge such conclusion.

6.6       Bank of India Retired Employees Medical Assistance Trust vs. ITO (Exemption) (2018) 196 TTJ 0706 (Mumbai)-AY 2012-13

In this case the trust was registered with the Charity Commissioner. It was for the object of not for the benefit of the general public, but was solely dedicated for the welfare of the retired employees of the bank, and the same could not be held as a charitable trust as contemplated u/s 2(15). It had received voluntary contribution towards corpus of the trust. The AO added the donation to income and taxed. CIT(A) confirmed the addition. But Hon. ITAT allowed the same as exempt being capital receipt.

6.7       Chandraprabhu Jain vs. ACIT, (2016) 47 CCH 0650 MumTrib, AY 2011-12

In this case the trust’s registration copy was not traceable, hence it applied for copy of registration u/s 12A/AA but there was no communication from the authority. For want of the registration certificate the AO denied the exemption to corpus donations and taxed at maximum marginal rate. CIT(A) upheld the AO’s order but reduced the rate of tax to normal rate, object being a public trust.

ITAT allowed the claim of the trust and held the corpus donations as capital receipt. In the process it has discussed various decisions holding the corpus donations as capital receipt and exempt from tax.

6.8       ITO vs. Serum Institute of India Research Foundation, (2018) 195 TTJ 0820 (Pune), AY 2005-06

In this case the issues in corpus donations are exhaustively discussed. This case was a second round of appeal in assessee’s case before Hon. ITAT for the same year. Provisions of Sec. 2(24)(iia), 11 and 56(2) are discussed and position after amendment in 1989. The ld. DR had argued that the cases hitherto decided by various authorities merely held the corpus donations as capital receipt, being for the period prior to the amendments and were decided without going into the amended provisions of the Act and hence were not applicable to the case.

Hon. ITAT has discussed the provisions in detail, rejected the ld. DR’s contentions, and still concluded that –

The Corpus-specific-voluntary contributions are outside the taxation in case of an unregistered Trust u/s.12/12A/12AA of the Act too. From this point of view, and for this reason, the decision of the CIT(A) in granting relief to assessee does not call for any interferences. Accordingly, grounds of appeal raised by the Revenue are dismissed.

7. Registration u/s 12A/AA

To make the discussion complete, at least a brief mention about the amendment in Sec. 12A(2) is necessary. These are held to be retrospective. Thus, once the registration is granted, the same is held effective retrospectively. Following cases give an interesting insight in the issue-

1) Shree Bhanushali Mitra Mandal Trust vs. ITO, (2016) 47 CCH 0197 AhdTrib – AY 2011-12

2) Punjab Educational Society vs. ITO, (2018) 192 TTJ 0037 (Asr) ((UO))- AY 2011-12

3) ITO vs M/s. Shri Vishwakalyan Jivraksha Pratishthan, 2013/PN/2014, dt. 22-07-2016 – AY 2011-12

4) Shree Halar Deshodhharak P.Pu. Vijammrusurji Smarak Trust vs ITO (Exemption), ITA.No.2494/Ahd/2015 – AY 2008-09

Finance Act 2020 has made many changes in taxation of trusts and one of them is amendments in Sec. 12A.

The existing proviso to Sec.12A(2) which is interpreted in the foregoing cases is amended and is now a second proviso. However, the contents are kept as it is except that the new Sec.12AB is also mentioned along with 12AA.

In my personal view, this has not disturbed the view already settled in the issue.

I may quote the observation of Hon. ITAT Ahemdabad in the case of Shree Halar Deshodhharak case referred above. In that case Hon. ITAT Ahmedabad has quoted the order of Hon. ITAT Kolkata in the case of Sree Sree Ramkrishna Samity vs. CIT, (2016) 156 ITD 0646 (Kolkata), and one paragraph especially in respect of interpretation which worth quoting as follows –

We also hold that though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. It is only elementary that a statutory provision is to be interpreted “ut res magis valeat quam pereat”, i.e. to make it workable rather than redundant. Applying this legal maxim, it would be just and fair to hold that the amendment in section 12A is brought in the statute to confer benefit of exemption u/s 11 of the Act on the genuine trusts which had not changed its objectives and had carried on the same charitable objects in the past as well as in the current year based on which the registration u/s.12AA is granted…

8. Conclusion

To avoid any controversy, it is better –

  • to obtain a letter from the donor with specific direction that the donation is towards corpus of the trust;
  • issue the receipt specifically conveying that the donation is accepted towards corpus of the trust; and
  • entries in the books of account must be correctly reflecting the donation towards corpus;
  • preferably have a clause in trust deed to accept the donations towards corpus.

Philanthropy in taxation of trusts is getting complicated day by day due to various reasons on both sides of the table.

John Rockefeller once said, "The best philanthropy is constantly in search of the finalities — a search for a cause, an attempt to cure evils at their source." Based on Rockefeller’s quote, I may say in the matter that, philanthropy in taxation, at least in India, is also in search of finality constantly.

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7 comments on “Issues In Corpus Donation To Charitable Trusts Not Registered U/s 12A/12AA/12AB Of The Income-Tax Act, 1961
  1. CA Anilkumar Shah says:

    I have further analysed the query regarding effects of insertions in Sec.56(2)and 2(24) and given the same to Editors and I hope that it may be published by the Editors as and when thought fit. The length is itself one article and hence it would not be proper to give it in reply to the comments.

  2. K Venkatesh Shenoy says:

    Sir has explained very exhaustively and clearly. Also practically. Really loved the content and format. Thanks Sir.

  3. Sameer says:

    Commendable effort sir
    However insertion of provisions of sec 56(2)(x) may now have an impact on corpus donation received by trust not registered u/s 12A

  4. Varada says:

    Excellent

  5. CA S S Dhamne says:

    CA Anilbhai very informative article. Congratulations.

  6. CA Sameer Valia says:

    Wonderful dissection sir!. I have one query on Corpus Donation. Would be glad if you can clarify.
    1) Is the Trust allowed to donate Corpus Donation to another Trust? If yes, how? If no, and still if the Trust has done it, what are the repurcussions of this?
    2) What is the Income Tax effect on the Trust donating Corpus donation?
    3) What is the Income Tax effect on the Trust receiving Corpus Donation?

  7. CA Anilkumar Shah says:

    I have added two points in the article and are as follows-

    4.2 The disposal is due to increase in monetary limits by CBDT to file appeal-

    The order reads as – “Delay, if any, is condoned. Leave granted. In these appeals, the tax effect is less than Rs.1,00,00,000 (Rs. One core) and are covered by the Circular of CBDT. These appeals are, accordingly, dismissed.”

    This is a little twist in the matter. The SC has disposed of the appeals as an effect of increase in monetary limits of filing appeals by the Revenue vide CBDT circular No. 3/2018, of 11-7-2018. Hence, the binding effect needs to be examined.

    Para 2 and 11 of the said circular reads as under-

    2. It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.

    11. The monetary limits specified in para 3 above shall not apply to writ matters and Direct tax matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to be governed by relevant provisions of statute and rules. Further, in cases where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12A/12AA of the IT Act, 1961 etc., filing of appeal shall not be governed by the limits specified in para 3 above and decision to file appeals in such cases may be taken on merits of a particular case.

    The circular clearly states that the decision to file appeals in cases having important matters is to be decided on merits.

    Hon. Supreme Court has exhaustively dealt with the issue of whether the CBDT circulars in the matter operate retrospectively and in the course has analysed the Instruction No.3 of 2011 dated 9.2.2011 and the National Litigation Policy in the case of

    DIT vs S.R.M.B. Dairy Farming Pvt. Ltd. (2018) 400 ITR 0009 (SC) dt.27-11-2017.

    Hon. Apex court has quoted CIT & JCIT vs Ranka & Ranka, (2013) 352 ITR 0121, and stated that –

    11. We consider it appropriate to refer to some of the observations in the judgment of the Karnataka High Court, which have our imprimatur, as under:

    “22. The Government has formulated the National Litigation Policy with a view to ensure conduct of responsible by the Central Government and urges every State Government to evolve similar policies. Its aim is to transform Government into an efficient and responsible litigant. “Efficient litigant” means ensuring that good cases are won and bad cases are not needlessly persevered with. The litigation should not be resorted to for the sake of litigating. The Government must cease to be a compulsive litigant. The philosophy, “that matters should be left to the courts for ultimate decision”, has to be discarded. The easy approach, “Let the court decide,” must be eschewed and condemned. The purpose underlying this policy is also to reduce the Government litigation in courts so that valuable court time would be spent in resolving other pending cases, so as to achieve the goal in the National Legal Mission to reduce average pendency time from 15 years to 3 years. All pending cases involving the Government has to be reviewed with the intention of filtering frivolous and vexatious matters from the meritorious one. Panels have to be set up to implement categorization, review such cases, to identify cases, which can be withdrawn. These include cases which are covered by decisions of courts and the cases which are found without merit. Such cases have to be withdrawn. This must be done in a time bound fashion.

    Hon. Supreme court has also quoted in para 10 of the judgment, the National Litigation Policy and the para of Review of Pending cases reads as under-

    Review of pending cases

    (A) All pending cases involving the Government will be reviewed. This due diligence process shall involve drawing upon statistics of all pending matters which shall be provided for by all Government departments (including public sector undertakings). The Office of the Attorney General and the Solicitor General shall also be responsible for reviewing all pending cases and filtering frivolous and vexatious matters from the meritorious ones.

    (B) Cases will be grouped and categorized. The practice of grouping should be introduced whereby cases should be assigned a particular number of identity according to the subject and statute involved. In fact, further sub-grouping will also be attempted. To facilitate this process, standard forms must be devised which lawyers have to fill up at the time of filing of cases. Panels will be set up to implement categorization, review such cases to identify cases which can be withdrawn. These include cases which are covered by decisions of courts and cases which are found without merit withdrawn. This must be done in a time bound fashion.

    It is obvious that the dismissal of appeal by Hon. Supreme Court in the case under discussion must have been done after considering the merits of the matter as compelled in the policy. But, the binding nature needs to be examined by experts in the constitution and civil laws and comments on the same are welcome.

    4.3 Binding precedent of the dismissal of appeal by Hon. Supreme Court

    Hon. Supreme Court had an occasion to decide the binding precedent in case of dismissal of SLP and an appeal before it, and it has finally decided that –

    (vi) Once leave to appeal has been granted and appellate jurisdiction of Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation.

    (vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before Supreme Court the jurisdiction of High Court to entertain a review petition is lost thereafter as provided by sub-rule (1) of Rule (1) of Order 47 of the C.P.C. (Para 36)

    34. Once a special leave petition has been granted, the doors for the exercise of appellate jurisdiction of this Court have been let open. The order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter would be an appellate order and would attract the applicability of doctrine of merger. It would not make a difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would also not make any difference if the order is a speaking or non-speaking one. Whenever this Court has felt inclined to apply its mind to the merits of the order put in issue before it though it may be inclined to affirm the same, it is customary with this Court to grant leave to appeal and thereafter dismiss the appeal itself (and not merely the petition for special leave) though at times the orders granting leave to appeal and dismissing the appeal are contained in the same order and at times the orders are quite brief. Nevertheless, the order shows the exercise of appellate jurisdiction and therein the merits of the order impugned having been subjected to judicial scrutiny of this Court. (Para 34)

    Kunhayammed and Others vs. State of Kerala and Another (2000) 245 ITR 0360 (SC) (Three judges bench)

    Hon. Supreme Court has recently affirmed the above decision after thorough analysis in –

    Khoday Distilleries Ltd. & Ors. ss. Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd. (Under Liquidation) Represented by The Liquidator, (2019) 308 CTR 0001 (SC) (Three judges bench)

    Thus, after the analysis of the Civil Procedure Code by the Apex Court and of all the judgments rendered in this behalf and after thorough analysis of the specific question to resolve the conflicting views on the issue and to decide the binding precedents in case of dismissal of appeal, it is conclusively decided by the Hon. Supreme Court that, once an appeal is admitted by the Apex Court against an order of Hon. High Court, the High Court order ceases to be open for review, and the dismissal by whatever way by the Apex Court is a binding judgment under Article 141, and that the order of the Hon. High Court merges with that of the Supreme Court.

    This leads us to an inevitable and irresistible conclusion that the decision in the case of Basanti Devi is now final and has conclusively decided the matter.

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