status of corpus donation in the absence of exemption u/s 11

[ketanvyas1975]

Friends,

One trust is not eligible for exemption u/s 11 in a year as it applied for registration u/s 12A belatedly. The said trust had received certain corpus donations in that year. What will be the taxability thereof in the absence of exemption u/s 11? are they receipts liable for tax or capital receipt? kindly advise.

[ketanvyas1975]

If anybody can guide me as the matter is urgent for me. Thanks in advance.

[camanojgupta]

Section 2(24)(iia) defines income to include 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.
Therefore every contribution received by a trust is its income.
Forther as per section 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.
Section 11(1)(d) provides exemption to 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.
This exemption is available to only the trusts which are eligible for exemption under section 11.
Therefore if trust is not eligible for exemption then the corpus donation will be taxed.
CA MANOJ GUPTA
JODHPUR
09828510543

[bkafca]

IN THE ITAT, AHMEDABAD BENCH 'd' (THIRD MEMBER)
Income-tax Officer, Ward-6(1), Surat
v.
Sardar Vallabhbhai Education Society
IT APPEAL NO. 2984 (AHD.) OF 2008
(c.o. no. 223 (ahd.) of 2008)
[ASSESSMENT YEAR 2000-01]
Sl. No.(s)   Decision on the case of   Reported in
1.    Sri Dwarkadheesh Charitable Trust v. ITO [1975]   98 ITR 557 (All.)
2.    Sukhdeo Charity Trust v. CIT [1984]   149 ITR 470
3.    CIT v. Billeswara Charitable Trust [1984]   145 ITR 29
4.    CIT v. Bal Utkarsh Society [1979]   119 ITR 137 (Guj.)
5.    CIT v. Eteral Science or Man's Society [1981]   128 ITR 456 (Delhi)

Go through the above case law it will be help full

[ketanvyas1975]

Thank you very much CA Manoj gupta for sharing your expert knowledge. Let me refine the question to have possiblity of corpus donation not being taxed.

The said trust has not claimed any exemption u/s 11 in the return of income. Will this factor matter? can we argue that when we have not claimed exemption in return of income, normal provisons should apply and as per that, corpus donation is  capital receipt? i feel less chance because of section 2(24). kindly advise.

Is there any other way out for this? kindly advise.

Thank you very much in advance

[camanojgupta]

No way pl note that as per section 2(24) any voluntary contribution recd by a trust is its income. Section 11(1)(d) provides exemption to corpus donation if certain conditions are fulfilled. The receipt is income in first place then exempted in certain conditions are fulfilled.

[ketanvyas1975]

assuming that corpus donations will be taxed, can we demand purchase of fixed assets as application of income?

i understand that income of the trust is to be computed as per accounting principle and not as per tax principles. so out of gross income of the trust, expenses will be deducted first. thereafter, can we claim purchase of fixed assets as application of income? kindly advise.

[bkafca]

Kindly try to apply this principles of recent supreme court decision.  Even though the order is in against the assessee it clearly explains the concept of mutuality

M/s Bangalore Club vs. CIT (Supreme Court)

For a receipt to be exempt on the principles of Mutuality, three conditions have to be satisfied. The first is that there must be a complete identity between the contributors and participators. The second is that the actions of the participators and contributors must be in furtherance of the mandate of the association. The third is that there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. On facts, though the interest was earned from banks which were corporate members of the club, it was not exempt on the ground of mutuality because (i) the arrangement lacks a complete identity between the contributors and participators. With the funds of the club, member banks engaged in commercial operations with third parties outside of the mutuality, rupturing the 'privity of mutuality', and consequently, violating the one to one identity between the contributors and participators, (ii) the surplus funds were not used in furtherance of the object of the club but were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality & (iii) The Banks generated revenue by paying a lower rate of interest to the assessee-club and loaning the funds to third parties. The interest accrued on the surplus deposited by the club like in the case of any other deposit made by an account holder with the bank. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality.

[camanojgupta]

yes u can there is a host of decisions on this issue. u can refer to the following cases.
1. Escorts Ltd. v. Union of India [1993] 199 ITR 43/[1992] 65 Taxman 420 (SC)
2. CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.)
3. CIT v. Institute of Banking Personnel Selection (IBPS) [2003] 264 ITR 110/131 Taxman 386 (Bom.)
4. CIT v. Society of Sisters of St. Anne [1984] 146 ITR 28/16 Taxman 400 (Kar.)
5. CIT v. Raipur Pallotine Soceity [1989] 180 ITR 579/[1990] 50 Taxman 233 (MP.)
6.CIT v. Sheth Manjulal Ranchhoddus Vishram Bhavan Trust [1992] 198 ITR 598/[1993] 70 Taxman 228 (Guj.)
7. CIT v. Manav Mangal Society [2010] 328 ITR 421/[2009] 184 Taxman 502 (Punj. & Har.)
8. CIT v. Market Committee Pipli [2011] 330 ITR 16/[2012] 20 taxmann.com 559 (Punj. & Har.) 9. CIT v. Tiny Tots Education Society [2011] 330 ITR 21/11 taxmann.com 242 (Punj. & Har.) 10. Lissie Medical Institutions v. CIT Kerala High Court
But the decision of Bangalore Club quoted by fellow member is totally not relevant to the discussion.
CA MANOJ GUPTA
JODHPUR
09828510543

[ketanvyas1975]

Manog Gupta sir, the decisions cited were in the context when trust was eligible for exemption u/s 11. There is no dispute or doubt when trust is eligible for exemption u/s 11.

My question or confusion was when trust is not eligible for exmeption u/s 11 and when corpus donations will be taxed u/s 2(24) without corresponding deduction u/s 11(1)(d), can purchase of fixed assets be claimed as deduction?

The confusion arose as purchase of fixed assets was treated as application of income for the purpose of section 11 in various cases. When section 11 benefit is not there, can this benefit be claimed by trust?

[catusharshah]

I think Application of income concept comes only when the trust is registered. When the trust is   not registered it will be assessed as per normal provisions and taxed at MMR .

CA Tushar Shah
Ahmedabad
9016883086

[subash agarwal,Adv kolkata]

CA Tushar's view is correct. When  taxable income is computed  as per normal provisions of the Act,  application of income is immaterial. Income is taxed at d point of accrual or at d point of receipt as per d method of accounting employed.

[camanojgupta]

the trust income will be computed as per normal provisions of the Act and in that case cost of fixed asset will not be allowed as deduction while computing the trust's income.