Search
  • CA Kuldeep Arora

Taxability of Interest on Investment out of #Corpus Fund of a #Trust or #Institution: An Analysis


Voluntary Contribution

According to Section 11(1)(d) of income Tax Act, 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 shall not be included in the total income of the trust or institution.

According to Section 12(1) of Income tax Act, 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.]

As per definitions the primary condition to qualify the exemption under section 11(1)(d) and 12(1) of the Act, the trust must satisfy the following conditions:

i. The receipt must be voluntary in nature.

ii. It must be towards the corpus of the trust.

iii. It must be made with the specific direction

Anonymous Donations

In order to curb on black money Section 115BC of the Act had been introduced, which is reproduced as under:


"115BBC. (1) Where the total income of an assessee, being a person in receipt of income on behalf of any university or other educational institution referred to in sub-clause (iiiad) or sub- clause (vi) or any hospital or other institution referred to in sub-clause (iiiae) or sub clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any anonymous donation, the income-tax payable shall be the aggregate of:


(i) the amount of income tax calculated at the rate of thirty per cent on the aggregate of anonymous donations received in excess of the higher of the following namely:


(A) five per cent of the total donations received by the assessee; or (B) one lakh rupees, and


(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the aggregate of anonymous donations received.


(2) The provisions of sub-section (1) shall not apply to any anonymous donation received by:


(a) any trust or institution created or established wholly for religious purposes.


(b) any trust or institution created or established wholly for religious and charitable purposes other than any anonymous donation made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.


(3) For the purpose of this section, "anonymous donation" means any voluntary contribution referred to in sub-clause (iia) of clause (24) of section 2, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed."

From the above, it is clear that the object was to catch the 'unaccounted money' which was brought in as Tax Free Income in the hands of the Charitable Trusts and this law was never meant for taxing the genuine Charities. The Legislature intended to tax the unaccounted money or black money which was brought in the books of charitable trusts in bulk and this law was not meant for taxing the small and general charities collected by the Genuine Charitable Trusts.

The object of the amendment has further been made clear by the Hon'ble Finance Minister, in his Budget Speech, reported at 281 ITR (St.) 57 in the said ITR. The relevant para 168 thereof reads as under:


"The Standing Committee on Finance has expressed concern that many charitable institutions misuse the provisions of the Income-tax Act. I propose to focus on one misuse, namely, receiving anonymous or pseudonymous donations. Accordingly, I propose that anonymous or pseudonymous donations to wholly charitable institutions will be taxed at the highest marginal rate. Such donations to partly religious and partly charitable institutions / trusts will be taxed only if the donation is specifically for an educational or medical purpose. However, I make it clear that such donations to wholly religious institutions and religious trusts will not be covered by the new provision."

Further, CBDT Circular 14 dated 28.12.2006 explains the provisions of section 115BBC, as follows:


"With a view to prevent channelization of unaccounted money to these institutions by way of anonymous donations, a new section 115BBC has been inserted to provide that any income of a wholly charitable trust or institution by way of anonymous donation shall be included in its total income and taxed at the rate of 30 per cent. Anonymous donation made to wholly charitable and religious trusts or institutions, i.e. mixed purpose trusts or institutions shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them. Anonymous donation to wholly religious trusts or institutions will not be taxed. 25.3 Anonymous donation has been defined in the new section to mean any voluntary contribution referred to in section 2(24)( iia) of the Act, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as may be prescribed.


Consequential amendments have been made in section 10(23C) and section 13 to provide that any income by way of any anonymous donation which is taxable under section 115BBC, shall be included in the total income of the assessee."

Taxability of Interest earned from Investments made out of funds received with Specific Direction of Donor

Now the question arises that if any donor gives specific direction that not only donations made by him but also interest earned out of that investments would form a corpus, what would be nature of interest earned from such investments? In such a situation we have to test that whether the donation made with such specific direction qualify the preliminary conditions laid down under section 11(1)(d) and 12(1) of the Act;


i. The receipt must be voluntary in nature.

ii. It must be towards the corpus of the trust.

iii. It must be made with the specific direction

In the present case the donation is undoubtedly is qualifying all the three conditions and should be qualified exemption under section 11(1)(d) of the Act.

The fact has been considered by Hon’ble High Court of Kerala in the case of Commissioner of Income-tax, (Exemption) v. Mata Amrithanandamayi Math, (KER- HC) 2017 ITL 1817. In the aforementioned case it was held:


“5. Having considered the submissions made, 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.


We do not find any question of law arising in these cases for the consideration of this Court. The appeals fail and are accordingly dismissed.”

The same case has also be reviewed by the Hon’ble Supreme Court of India. The decision of the Apex Court has been reported in (SC) 2018 ITL 1535: (2018) 256 TAXMAN 62. In the aforementioned case the apex court held as follows:


“1. Heard.

2. Delay condoned.

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

4. The special leave petitions are accordingly dismissed.

5. Pending applications, if any, shall also stand disposed of.”

Conclusion

As the situation reviewed by the apex court and decided accordingly, the final conclusion is irresistible that where assessee trust received corpus donation on which it earned interest, in view of specific direction of donors that said interest would also form part of corpus, and therefore eligible for exemption under section 11(1)(d) of the Act.

95 views

©2019 by CA Kuldeep Arora.         Designed By UnicomAdvertising