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October 19, 2020

Corpus voluntary contributions of Trust are exempt from tax even if they were received prior to registration u/s 12AA

by CA Shivam Jaiswal in Income Tax

Corpus voluntary contributions of Trust are exempt from tax even if they were received prior to registration u/s 12AA

Section 11 and 12 of the Income tax Act provides exemptions on the income charitable and religious organisations. According to Section 11(1)(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, shall be fully exempt.

The condition that at least 85% of the income should be applied during the previous year in which it is earned is not applicable in this case. It is not sufficient that the property is indirectly responsible for the income; it is necessary that the income must directly and substantially arise from the property held under trust. The property must be the effective source from which the income arises.

Registration under Section 12A is a pre-condition and mandatory requirement for claiming those exemptions. According to Section 12A, the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the trust or organisation is registered.

By considering the above provisions, is benefit under Section 11 and Section 12 available, merely because an organisation is registered under Section 12AA. Let us refer to the case of Income Tax Officer (Exemption) vs Hosanna Ministries (ITAT), where issue under consideration is whether voluntary contributions received by assessee-society for a specific purpose can be regarded as income under section 2(24)(iia)?

Facts of the Case:

  • Assessee is a registered society registered under the Societies Registration Act.
  • The assessee-society has received corpus donations and had shown the same in the balance sheet under the head ‘corpus fund’.
  • During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has received donations/voluntary contributions to the extent of Rs.3,33,11,930.
  • The AO also noticed that assessee had received contributions but not submitted 12A certificate therefore the amounts received by the assessee as income as per section 2(24)(iia) of the Act were not exempt u/sec. 11(1)(d) of the Act.
  • According to Section 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 8 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 subclause (iv) or sub- clause (v) of clause (23C) of section 10 are taxable under income tax
  • The assessee has submitted before the AO that the donations/voluntary contributions not chargeable to tax and he and submitted that corpus donations being in the nature of capital receipt were not chargeable to income-tax even where trust is not registered u/sec. 12AA.
  • The AO however, added the amount received by the assessee to the total income of the assessee.

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Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

  • On appeal, CIT(A) held that assessee had received corpus donations which were outside the scope of section 2(24)(iia) and the same could not be brought to tax even though the trust was not registered u/sec. 12AA of the Act.
  • Therefore, CIT(A) allowed the appeal of the assessee.
  • Being aggrieved, the Revenue appealed before the Income Tax Appellate Tribunal (ITAT).

Observations of ITAT

  • ITAT found from the assessment order that, when the assessee had submitted that the donations received are voluntarily for a specific purpose, then the AO ought to have called the assessee for submission of details of donations received.
  • However, the AO without examining the nature of the donations, simply rejected the explanation of the assessee and added to the total income of the assessee.
  • In the ITAT’s opinion, the AO was not correct in adding the income.
  • Also, once the assessee has submitted that the donations were received voluntarily for specific purpose, it was the duty of the AO to examine who is the person who donated and for what purpose he had donated.
  • All the details had to be examined and thereafter AO had to decide whether the donations were in the nature of corpus donations or income of the assessee, without doing simply rejected the explanation.
  • On appeal CIT(A) gave a finding that the voluntary contributions received by the assessee for a specific purpose cannot be regarded as income u/sec. 2(24)(iia) of the Act.
  • ITAT referred to the CIT(A) order and highlighted the following observations made by the CIT(A)

Observations of CIT(A) on meaning of Corpus Donation

  • Corpus donation comprises two words viz, corpus and donation. Corpus is a Latin Expression, which means a body or structure. It also means a direction to constitute a body or substance. In common parlance this term is understood as capital sum. This also includes endowment.
  • The expression endowment means bequest, gift. It is an act of endowing which is a capital sum provided and provides for a permanent income. Endowment also means property or money bestowed as permanent fund.
  • In terms of charity, the corpus symbolizes funds to retain its character as a Principal amount.
  • It also denotes the funds earmarked for a specific purpose.
  • The intention of the corpus is that, the funds should not be depleted and it retains its original character of the fund i.e., principal.
  • Further, the expression corpus is often used from the point of the Donor symbolizing his directions to use the money in a manner as per his wishes. This in other words means that donor gives direction to the Donee for what purpose and how it is to be used.

Observations of CIT(A) on Corpus Donation under Income Tax Act

  • The Direct Tax Laws (Amendment) Act 1989 w.e.f. 1.4.89 had revamped corpus donation. The amendment carried out is that, the word voluntary contribution was brought under section 2(24)(iia).
  • The effect of amendment was that every voluntary contribution took the character of income.
  • Corpus donation was a Voluntary contribution and therefore, constituted income under section 2(24)(iia).
  • Another amendment was made in section 11(1)(d) by the same Act. The effect of the amendment is that deduction will be allowed under section 11(1)(d) in respect of Voluntary contribution with specific direction that they shall form part of the corpus of the trust or institutions.
  • Prior to this amendment, voluntary contribution with a specific direction, which was also known as corpus donation was never considered as an income and was totally excluded from the purview of income.

Observations of CIT(A) on whether such corpus donation is taxable as Income or not

  • The question arises whether such corpus donation is taxable as Income or not, even in the case 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 provisions of section 11(1)(d).
  • For a trust to which registration u/s 12AA has not been provided, its tax liability is required to be decided with reference to the scheme of the Income Tax Act as held in the case of M/s. Pentafour Software Employees Welfare Foundation and further in the case of Smt Basantidevi and Shri Chakan Lala Garg Education Trust, by Delhi High Court.
  • In both the cases, it was held that corpus donation being in the nature of capital receipt are not chargeable to income tax.
  • As 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.
  • Section 2(24)(iia) was inserted w.e.f. 1-04-1973 simultaneously with the present section 12. Section 12 made it clear by the words appearing in parenthesis that contributions made with a specific direction that they should form a part of the corpus of the trust or institution shoul not be considered as income of the trust.

Reference to older cases by CIT(A)

  • In the case of RB. Shriram Religious and charitable Trust v. CIT Bombay High Court held that even ignoring the amendments to section 12, which meant that even before the words appearing to parenthesis in the present section 12, it cannot be held that voluntary contributions 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 Trustees of Kasturbai Scindia Commission Trust.
  • The ITAT, Chennai in Indian Society of Anaesthesiologists v. ITO held that specific funds created for fulfilling specific objectives for which these separate funds are constituted remain as capital funds as the funds can be used for fulfilling specific objectives for which these funds are constituted and hence to be treated as corpus funds and to be excluded from computation of Income.
  • The ITAT, Bangalore in ITO v. Vokkaligara Sangha held that voluntary contributions received for a specific purposes cannot be regarded as income u/s 2(24)(iia) of the Act since they were capital receipts being corpus fund and tied up grants for specific purposes.

Observations of CIT(A) on current case

  • The AO had not disputed the nature of funds received or purpose of funds utilized by the appellant society as to whether they were of Corpus and Capital Receipts or not or whether they were utilized for the specified purposes.
  • AO had only treated such donations/voluntary contributions received by the appellant society as liable to tax during the period prior to the Registration of the appellant society u/s.12AA of the Income-tax Act, 1961.
  • The appellant got registered its Society u/s.12AA of the Income-tax Act, 1961 and the Order granting Registration u/s.12AA was passed by the CIT (Exemptions) and copy of the same was filed by the appellant during the course of appellate proceedings.
  • Reliance was also placed on the decision of ITAT in the case of ITO (Exemptions) Vs. Serum Institute of India Research Foundation wherein it was held that corpus specific voluntary contribution being in nature of capital receipt, were outside the scope of income under section 2(24)(iia) and thus the same could not be brought to tax even in case of trust not registered u/s. 12A/12AA.
  • In view of the above and as the appellant got registered u/s 12AA and as the donations/voluntary contributions received of Rs. 3,33,11,930 by the appellant society were of Corpus and Capital nature, to be treated as exempt from tax liability, as the principles relating to judicial discipline assume significance and the priority.
  • Accordingly, following the ratios of the judicial pronouncements mentioned supra, it was treated that the donations/voluntary contributions received by the appellant society were outside the taxations, even for the period prior to its registration u/sec. 12AA.
  • Therefore, the AO was directed to delete the disallowance/addition made in this regard.

In view of the above, ITAT found no reason to interfere with the order passed by the CIT(A) and dismissed the appeal filed by the Revenue. Therefore, voluntary contributions received by assessee-society for a specific purpose cannot be regarded as income under section 2(24)(iia) and hence, could not be brought to tax even in case of trust not registered under section 12AA.

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