St. Joseph’s Development Trust Vs ITO (Madras High Court)
Madras HC: Interest on Corpus/Project Funds Taxable Unless Donor Specifically Directs Interest to Form Part of Corpus; ₹94.67 Lakh Addition Upheld
Summary: The Madras High Court dismissed the assessee trust’s appeal and upheld the addition of ₹94,66,848 as taxable interest income for Assessment Year 2017–18. The appellant, a public charitable trust registered under Section 12AA, had received fixed-deposit interest of ₹1,81,83,804/-, of which ₹94,66,848 was credited directly to the Balance Sheet under the “SJDT Sustainable Fund” rather than the Income and Expenditure Account. The trust contended that the funds belonged to Self-Help Groups or foreign donors and were held as a custodian. The Court held that Section 11(1)(d) requires a specific written direction from the donor for voluntary contributions to form part of the corpus. The donor correspondence concerning micro-credit programmes and revolving loan funds did not expressly direct that interest earned on fixed deposits should form part of the corpus. The Court also rejected the custodian argument, noting that the deposits were made in the trust’s own name and that it had claimed TDS credit of ₹16,45,460/- on the interest. Any subsequent obligation to utilise or allocate the interest for SHGs amounted to application of income rather than diversion at source. The Court distinguished Mata Amrithanandamayi Math and held that the interest was a taxable revenue receipt not qualifying for exemption under Section 11(1)(d). The substantial questions of law were answered in favour of the Revenue and the appeal was dismissed.
The Madras High Court upheld the addition of ₹94,66,848 as taxable interest income in the hands of a charitable trust registered under Section 12AA. The trust had earned fixed-deposit interest of ₹1.81 crore, but credited ₹94.67 lakh directly to the Balance Sheet under the “SJDT Sustainable Fund”, claiming that the underlying funds belonged to Self-Help Groups/foreign donors and that the trust merely held them as a custodian.
The Court held that Section 11(1)(d) requires a specific direction from the donor for a voluntary contribution to constitute corpus. Though the donor correspondence showed that the original grants were intended for micro-credit programmes and revolving loan funds, there was no express direction that the interest subsequently earned on fixed deposits should also form part of the corpus.
Distinguishing the Kerala High Court ruling in Mata Amrithanandamayi Math, the Court observed that in that case the donors had expressly directed that interest earned on their contributions be added to corpus. In the absence of such an express direction here, the interest constituted a revenue receipt and had to be routed through the Income & Expenditure Account.
The Court also rejected the “custodian” argument. The refunded micro-credit funds were deposited by the trust in fixed deposits in its own name, and the interest arose from the trust’s own investments. Significantly, the trust had also claimed TDS credit of ₹16,45,460 on the interest; it could not claim credit for TDS while simultaneously excluding the corresponding interest from its revenue receipts.
Further, any obligation to subsequently utilise or allocate the interest for SHGs amounted merely to application of income and not diversion of income at source. The fact that similar interest had not been taxed in AY 2009-10 was irrelevant because each assessment year is a separate unit.
Accordingly, the High Court held that the ₹94.67 lakh interest earned on bank FDs was a taxable revenue receipt and did not qualify for exemption under Section 11(1)(d). All substantial questions of law were answered in favour of the Revenue, and the trust’s appeal was dismissed
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