Voluntary contributions including those made with a specific direction that they shall form part of the corpus of the trust/institution shall fall within the definition of ‘income’ u/s 2(24)(iia).
• To avail exemption under section 11(1)(d) in respect of Voluntary contributions made with a specific direction that they shall form part of the corpus of the trust/institution, identity of donor(s) must be established- If identity of donors not established, there is no question of the donations having been received with such a direction since such a direction could be validly given by the donor only at the time of giving the donation.
• Further, exemption under section 11(1)(d) available only to voluntary donations. The word ‘voluntary’ means there should be no consideration whatsoever in the act of giving a donation by the donor and should be of donor’s own volition.
• Whether given under a general direction to form a part of the corpus, or as toward, say, a building fund, the furnishing and proving the identity of the donor is the first pre-requisite, which remains unsatisfied in the instant case. If, on the other hand, the identity is confirmed, and the donor confirms the same to be toward a particular fund or corpus, the onus to prove that it is not `voluntary’, and given, or made to be given, for and toward a consideration, so that it is income would only be on the Revenue.
• Municipal Corporation of Delhi v Children Book Trust (1992) 3 SCC 390 – Supreme Court held that if the donor makes a donation to gain an advantage or benefit or because he apprehends that but for the contribution some adverse consequence would follow, it ceases to be a ‘voluntary contribution’.
FULL TEXT OF THE JUDGEMENT IS AS FOLLOWS
ITAT JODHPUR BENCH
Income-tax Officer, Ward-2, Sri Ganganagar
Smt. Vidyawanti Labhuram Foundation for Science Research & Social Welfare
IT Appeal NO. 395 (JU) of 2009 – Assessment years 2004-05 to 2006-07
April 27, 2012
Sanjay Arora, Accountant Member – These are a set of three Appeals by the Revenue, arising out of separate orders by the Commissioner of Income Tax (Appeals), Bikaner (‘CIT(A)’ for short) for three consecutive assessment years (A.Ys.), being AYs 2004-05, 2005-06 and 2006-07, of even date (24-03-2009), partly allowing the assessee’s appeals contesting its assessments u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the respective years, with corresponding cross objections (COs) by the assessee for each year. The same raising common issues, were heard together, and are being disposed of vide a common order:
Assessment Year 2004-05
2. The sole ground of the Revenue’s appeal reads as under:-
“On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the disallowance by holding that expenses are related to the trust which are disallowances by the Income-Tax Officer in a summary manner under various heads, i.e., salary Rs. 10,00,000/-, Telephone / Mobile Rs. 28,356/-, Advertisement Rs.1,00,823/-, and Hotel Moonlight Rs. 12,000/ though the AO has rightly made said addition as per facts of the case.”
3. We have heard the parties, and perused the material on record. The disallowance of expenditure on salary was on the premises that the assessee had employed staff in excess of the norms of the Dental Council. The assessee-trust is running a Dental College. In our view, the ld. CIT(A) is right when he says that the same; the norm being again per 100 students, cannot by itself form the basis of the disallowance. The only issue that is relevant is whether the claim for salary represents a genuine claim, i.e., actually paid by the assessee in lieu of the services rendered by the respective doctors for the dental college. The assessee has explained that some doctors had left and in their place other doctors were employed, so that the norms could not be strictly complied with, and which rather by itself shows the exigency of the situation. The argument cannot be faulted with. So however, we find that the assessee has not been able to lead satisfactory evidence with regard to its claim for expenditure, having been called upon to file the full names and addresses as well as proof of filing the return of income by the relevant doctors. If the ratio is high on account of a higher turnover, it would not lead to any increase in the average employment of doctors for the year and, consequently, any increase in the salary bill, except perhaps marginal due to some overlap in the tenures of the outgoing and the incoming doctors, while it could also be that there is in fact a gap in their joining times, leading to a decrease in expenditure. The question thus essentially boils down to verification of the expenditure, qua which the AO has only called for some relevant information, which is all the more so considering that the salary expenditure is subject to tax deduction at source. Surely, a strength of 72 doctors against 100 students, as is stated to obtain for the current year, is disproportionately high, and the AO in stating so is only drawing support from the guidelines of the Dental Council of India in this regard, and not basing his disallowance thereon, as projected by the ld. AR before us. The ld. CIT(A) has not properly appreciated the case of the Revenue nor issued any definite findings of fact in the matter. It is the satisfaction of the assessing authority that is relevant, whose powers in the matter of assessment are plenary; the only condition being that he should be guided by reason, i.e., act reasonably. What is the average strength of the doctors? Going by the assessee’s explanation for the breach of the prescribed ratio/strength, there should be at best a marginal increase in the average strength of the doctors, and that too assuming an overlap in tenures between the outgoing and the incoming doctors. In view of the factual indetermination, therefore, the matter is required to be restored back to the file of the AO for allowing an opportunity to the assessee to establish its case in the matter. We decide accordingly.
4. Coming to the next issue, no case for the disallowance of advertisement and hotel expense of Hotel Moonlight has been made out. The dental college intends and plans to attract students from within as well as from outside of State of Rajasthan, so that the issue of advertisement in the publication/s in circulation outside by the State cannot form the basis of disallowance. Similarly, it has been explained that the bill of hotel Moonlight for boarding and lodging is of the doctors who had come for inspection of the college on behalf of the Dental Council of India. However, with regard to the expenses on telephone/ mobile, disallowed @ 1/5th, the same is only on account of the relevant bills being in the personal name of the trustees, and the assessee being unable to furnish the complete details of the expense. The said disallowance is accordingly upheld.
5. The C.O. for A.Y. 2004-05 is largely supportive in nature, so that the same warrants no independent adjudication, apart from its Ground No. 3, which concerns the confirmation of the disallowance in the sum of Rs. 10,156 u/s. 40A(3) of the Act. While the basis of the AO’s stand is the attraction of s. 40A(3), the ld. CIT(A) has not given any specific reason in upholding the AO’s action, even as the assessee (refer pages 34 and 35 of the appellate order) specifically argues before him that the said provision is not applicable thereto in view of its income being subject to exemption u/s. 11 of the Act, so that its income would not be subject to computation under Chapter IV-D of the Act. We find much merit in the assessee’s clam. The income of the assessee, holding property under trust, is to be computed according to the principles of commercial accounting. How could, one may ask, the income represented by the said disallowance is to be applied for charitable purposes; the amount having been already expended on the relevant expenditure? The disallowance is accordingly deleted. We decide accordingly.
Assessment Year 2005-06
6. Our adjudication in respect of the disallowance qua salary (Rs. 15.00 lacs) and telephone expenses (Rs. 9,810/-) in the Revenue’s appeal for 2004-05 (vide paras 3 & 4 of this order); the facts and circumstances being the same, would apply in equal measure for the current year as well. We decide accordingly.
7. As regards the disallowance in respect of air traveling expenditure, the assessee was observed to have incurred expenditure at Rs. 1,21,156/- by way of air travel. The assessee explained that the doctors were required to visit different places in the country to study the pattern of the college, and was thus only to improve the standard of quality of the Institute. Being not convinced, the AO disallowed the same to the extent of 1/5th, i.e., 24,230/-, stating that it has not been established that the air travel of the doctors was for the purpose/s of the assessee’s college. The ld. CIT(A) has not issued any specific finding in the matter, and allowed the assessee’s claim on the basis of commercial expediency. The incurring of the expenditure by the trust is not in question, but the fact as to whether the same was expended on the visit of its doctors to various other dental colleges for reviewing their system, which could rather be proved through a host of contemporaneous evidence/s, both preceding as well as succeeding their visit. The assessee’s college would only be in dialogue with the colleges visited, being only official visits, pre-mediated, if not actually recommended by the inspecting doctors of the Dental Council of India, followed up by tour report/s, if not by an actual follow-up reports as well. The same apparently has not been. Under the circumstances, the matter is remitted back to the file of the AO to allow an opportunity to the assessee to present its case in the matter, being factually indeterminate. We decide accordingly.
8. The last objection by the Revenue is with regard to the deletion of the disallowance in the sum of Rs. 2.00 lacs in respect of hostel and mess expenses, claimed at a total of Rs. 10,01,123/- and Rs. 25,36,240/- respectively. The assessee explained that the heavy expenditure in the month of March, 2005 was for purchase of heavy quantity of sweetmeats, namkin, dry fruits, cents, etc., which it had to in view of the inspection of the college on March 10 & 11, 2005 for starting of the classes of the Third Year. We are unable to appreciate as to why such huge expenditure had to be incurred? The inspection team would consist of only a few members. It is only the expenditure for their purpose/s, even as clarified by us in respect of the Revenue’s appeal for the assessment year 2004-05, whereat such expenditure was disallowed at Rs. 12,000/-, and which stood deleted by us. The staff is in any case supposed to work, and all the facilities would already be in place. Even if some of the staff members were required to work overtime for a couple of days during the inspection period, or even for some time prior thereto, of which though there is no claim, this would not lead to such an exaggerated claim, i.e., the expenditure in that case would be on food, etc. for staff for those days. Under the circumstances, therefore, the incurring of the said expenditure for the object/s of the trust is not explained, much less proved. Where is the question of commercial expediency while incurring expenditure in extending common courtesy to the officials on an official visit, and in computing the income of a charitable trust, as the assessee, which itself pleads for the non-application for the provisions of Chapter IV-D of the Act in the computation of its income, an argument with which we have expressed our agreement. The said disallowance is thus upheld.
9. The assessee’s C.O.is wholly supportive in nature and, therefore, requires no independent adjudication. We decide accordingly.
Assessment Year 2006-07
10. The second ground of Revenue appeal concerns a number of similar disallowances, i.e., as for the preceding two years. Our adjudication in respect of disallowance qua salary expenditure (disallowed at Rs. 15.00 lacs) and telephone expenditure (disallowed at Rs. 26,895/-), for the earlier years (refer paras 3, 4 & 6 of this order) would apply equally for the current year as well. We decide accordingly.
11. The disallowance in respect of other miscellaneous expenditure of Rs. 28,385/- is in respect of number of items. The assessee has issued proper clarification, including the supporting documents, in respect of each, except for Rs. 17,500/-, which is stated to be in respect of material purchased from M/s. Khanna Dental Lab. Clearly, the claim for purchase has to be supported by proper bill or some other material evidencing the purchase of the relevant goods required, and where-against only in fact the payment would have been paid. Even if the same is misplaced, a duplicate thereof could have been secured. As such, while we confirm the deletion of the disallowance for the balance expenditure of Rs. 10,885/-, the matter, in view of it having been restored back to the file of the AO on other grounds, is likewise restored in respect of this expenditure for Rs. 17,500/-, to enable the assessee an opportunity to establish its case in its respect. We decide accordingly.
12. The ld. CIT(A) has in respect of the only other disallowance, as also for the preceding years, not adverted to the facts of the case, and deleted the disallowance on generalize observations, which has no basis in law; the sole issue being whether the amount under reference, i.e., traveling expenses in the sum of Rs. 6,55,931/- (the correct amount though seems to be Rs. 6,55,631/-), was genuinely incurred for the object/s of the trust, the onus to prove which is on the assessee; the disallowance having been made only in view of the inability of the assessee to establish the same as having been incurred for the purpose of college by the trustee/s. The ld. CIT(A) has not gone into this aspect of the matter, allowing the assessee’s appeal on generalized grounds, even as the matter is purely factual. When the assessee itself says before the assessing authority that it is trying to obtain the necessary evidence/s to establish the business purpose of the visit to USA of Sh. Gaurav Gupta, a trustee, how else could the AO, we wonder, in the absence of such relevant materials frame the assessment, which has to be on the basis of the material on record, with the onus to prove its return or the claims preferred thereby being on the assessee. The assessment stands modified by the ld. CIT(A) without either reference to such material/s or by confronting the same to the AO, as required by law. There should in fact be a plethora of evidence in the form of, say, correspondences with the relevant college in New York, which is stated to have been visited by him, as well as the subsequent developments. The expenditure, where properly vouched, and its purpose explained and evidenced, could of course not be disallowed, which has been by inferring the same, in its absence, as of personal nature. This aspect has to be necessarily eliminated. The issue would necessarily have to travel back to the file of the AO for allowing an opportunity to the assessee to present its case. The issue, in the interest of justice and fairness of procedure, is also likewise remanded.
13. This leaves us with Ground No. 1, which is in respect of cash donation in the sum of Rs. 2,09,49,153/-, added to the assessee’s income by the AO on the basis that the particulars of the cash creditors were not furnished, so that their identity, leave alone their creditworthiness, and genuineness of the transaction/s, were not established. The assessee, however, found the favor with the ld. CIT(A) on the basis that the donations under reference were with a direction that the same shall form part of the corpus of the assessee-trust. The same were thus in the nature of the capital receipts, not subject to tax. Further, the provision of section 115BBC, providing for the levy of tax at a flat, defined rate on anonymous donations, stands inserted in the statute by Finance Act 2006, w.e.f. 01-04-2007, so that the same would apply only in respect of the donations received on or after 01-04-2006. Aggrieved, the Revenue is in appeal.
14. We have heard the parties, and perused the material on record.
14.1 Our first observation in the matter is that the matter under reference does qualify to form part of the income in view of the specific provision of sec. 2(24)(iia) of the Act, which reads as under:-
2. Definitions.- In this Act, unless the context otherwise requires,
(24) “income” includes-
(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.
Explanation.- For the purposes of this sub-clause, “trust” includes any other legal obligation;
As such, a voluntary contribution would qualify to form a part of the income of the recipient trust. The only exception is where such income is directed to form part of the corpus of the trust or institution, as being claimed in the instant case; it in that case, in view of the specific provision of section 11(1)(d) of the Act, which reads as under, being not even liable to be applied for charitable purposes, i.e., for being claimed exempt:-
11. Income from property held for charitable or religious purposes.
(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–
(a) …. .
(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.’
14.2 Apart from the legal position as clarified above, we find a clear contradiction in the findings by the assessing authority and the first appellate authority. The AO states that the identity has not been established. Where, then, is the question of the donations having been received with a direction that the same shall form part of the corpus of the trust? Such a direction, to be valid, could be given by the donor only, while giving the donation. In fact, the assessee by adverting to sec. 115BBC, a provision in respect of anonymous donations, which though has come into force from a later date, itself supports the AO’s finding of the identity of the donors having not been established or proved. Secondly, even as pointed out by the Bench during hearing, section 11(1)(d) is applicable only to voluntary donations. The word ‘voluntary’ is of significance inasmuch as there should be no consideration whatsoever in the act of giving a donation by the donor. Rather, the word ‘donation’, though qualified by the word ‘voluntary’, itself signifies that it is without any consideration and on own violation [sic - volition]. The relationship between the donor/s and the assessee-donee was enquired by the Bench during hearing, and which drew a blank from the ld. AR. As also clarified by the apex court in the case of Municipal Corporation of Delhi v. Children Book Trust [reported at (1992) 3 SCC 390], where the identity is not disclosed, the presumption would be that the same flows from the beneficiary of the assessee’s activity, i.e., the students, or their parents or close relatives. The same could not be termed as a voluntary contribution subject to sec. 11(1)(d), and neither would the ingredients of sec. 68 be satisfied in such a case. Whether given under a general direction to form a part of the corpus, or as toward, say, a building fund, the furnishing and proving the identity of the donor is the first pre-requisite, which remains unsatisfied in the instant case. If, on the other hand, the identity is confirmed, and the donor confirms the same to be toward a particular fund or corpus, in our view, the onus to prove that it is not ‘voluntary’, and given, or made to be given, for and toward a consideration, so that it is income would only be on the Revenue. Also, where given for a `building fund’, and utilized for that purpose, the same would only amount to an application of funds for the objects of the trust, where the building is owned by the trust and used, or to be used, for its purposes. In view of the foregoing, we remand the matter back to the file of the AO to allow an opportunity to the assessee to present its case, and who shall decide the relevant issues arising out of the factual considerations and findings, in accordance with law. We decide accordingly. The ld. AR during hearing would contend that such a course would amount to allowing an opportunity to the Revenue to improve its case. We do not think so. Our foregoing observations emanate only from the respective cases of both the parties before us; we only endeavoring to clarify the legal position that obtains in the matter; particularly considering that the material on record in the matter is sparse. The ld. CIT(A), nevertheless, admitted the assessee’s plea of the donations being for the corpus of the trust, which necessarily requires a donor/s and, secondly, of him to have no interest except philanthropy in giving donation to the assessee. The matter having been decided, thus, de hors the relevant material on record and without issuing proper findings, has necessarily to be restored back, delineating the issues arising in their proper perspective.
15. The C.O. of the assessee is supportive in nature and does not require any adjudication by us.
16. In the result, the Revenue’s appeals are partly allowed and partly allowed for statistical purposes. The assessee’s C.O. for AY 2004-05 is partly allowed, while that for AY 2005-06 & 2006-07 are dismissed.