The Madras High Court has affirmed the ITAT’s order treating Rs. 94.66 lakhs of bank deposit interest as taxable revenue receipt, ruling that absence of a specific written direction from the donor at the time of contribution defeats the corpus claim under Section 11(1)(d) of the Income-tax Act, 1961.
The Court clarified that where a charitable trust receives foreign donor grants for micro-credit and revolving loan programmes and invests the refunded amounts in its own bank fixed deposits, the interest so earned is taxable revenue receipt in the hands of the trust and does not qualify for corpus exemption under Section 11(1)(d) of the Income-tax Act, in the absence of an express written direction from the donor at the time of contribution that such interest shall form part of the corpus.
The Division Bench comprising the Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan observed that Section 11(1)(d) of the Income Tax Act exempts voluntary contributions only when made with a specific written direction from the donor that they shall form part of the corpus. Interest earned from investing these capital funds constitutes income generated by the trust itself. The trust relied on foreign donor correspondence from Secours Catholique, CBM, and Kinder, which showed that the original grants were given for micro-credit programmes and revolving loan funds, and permitted the appellant to distribute refunded funds to SHGs. However, none of the original donation letters contained an explicit direction from the donors instructing that bank interest earned on fixed deposits must automatically form part of the appellant’s corpus.
The Court held that the reliance placed by the appellant on the Kerala High Court’s decision in CIT (Exemptions) v. Mata Amrithanandamayi Math [2017 (9) TMI 1232] was misplaced, because in that case the donors had issued explicit written instructions that the interest earned on their specific contributions should be added back to the corpus. In the present case, no such express direction issued by the donor exists, and in the absence of an explicit direction from the donor at the time of contribution, interest earned on bank deposits constitutes revenue receipt and must be routed through the Income and Expenditure Account.
The Court further observed that the appellant’s argument that it acted merely as a custodian of the funds for SHGs and had a legal obligation to return the principal and interest cut no ice. The appellant accumulated these funds from refunded micro-credit assistance and deposited them in fixed bank deposits under its own name, and the interest was generated by the appellant trust’s own financial investments. Additionally, the trust claimed credit for the Tax Deducted at Source (TDS) of Rs. 16.45 lakhs deducted on the total interest income, and the Court noted that the appellant trust cannot claim tax credit for TDS on interest income while simultaneously excluding the underlying interest from its gross revenue receipts.
The Court rejected the appellant’s argument that the Assessing Officer should have followed the re-assessment order for AY 2009–10, observing that the interest accrued directly to the trust from its bank deposits, and any subsequent obligation or agreement to spend or allocate those funds for SHGs constitutes an application of income, not a diversion at source. Each assessment year is a separate unit, and the failure of the Assessing Officer to tax similar interest in AY 2009–10 does not bar the Revenue from correctly applying Section 11(1)(d) of the Act in AY 2017–18.
Briefly, the appellant, St. Joseph’s Development Trust, is a public charitable trust registered under Section 12AA of the Income-tax Act, since Feb 08, 1995. For Assessment Year 2017–18, the trust filed its original return declaring ‘NIL’ income, followed by a revised return also declaring ‘NIL’ income. During the assessment, the Assessing Officer observed that the trust had received fixed deposit interest of Rs. 1.81 crores. Out of this, the trust credited Rs. 87.44 lakhs to its Income and Expenditure Account, but directly credited the remaining Rs. 94.39 lakhs to the Balance Sheet under a capital fund account titled the “SJDT Sustainable Fund”.
The trust claimed that these funds were received from Self-Help Groups (SHGs) and foreign donors to be returned with accrued interest, and therefore the interest was held merely as a custodian and did not constitute taxable income. The Assessing Officer rejected this contention, treating the entire Rs. 94.66 lakhs as revenue income for failure to meet the requirements of Section 11(1)(d) of the Income Tax Act, and determined the total taxable income at Rs. 80.46 lakhs. The National Faceless Appeal Centre (NFAC) and the Income Tax Appellate Tribunal sequentially dismissed the assessee’s appeals.
