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
List of Cases Discussed / Relied Upon
- Mata Amrithanandamayi Math, 2017 (9) TMI 1232 — distinguished because the donors in that case had expressly directed that interest earned on their contributions should be added to the corpus.
- Director of Income Tax v. Society for Development Alternatives, 2012 (1) TMI 77 — held not applicable because that case concerned unspent project grants subject to agency terms, whereas the present case concerned interest earned on fixed deposits held by the assessee trust.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This Tax Case Appeal is filed under Section 260A of the Income-tax Act, 1961. The assessee/appellant challenges the order dated 29.12.2023, passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Chennai, in I.T.A.No.588/CHNY/2023 for the Assessment Year 2017–18. By the impugned order, the Tribunal upheld the addition of Rs.94,66,848/- as taxable interest income.
2.1. The appellant is a public charitable trust registered under Section 12AA of the Act on 08.02.1995. For Assessment Year 2017–18, the trust filed its original return of income on 24.10.2017, declaring ‘NIL’ income. A revised return was filed on 12.1.2019, also declaring ‘NIL’ income. The case was selected for scrutiny and a notice under Section 143(2) of the Act was issued on 22.9.2019. During the assessment, the Assessing Officer observed that the trust received fixed deposit interest of Rs.1,81,83,804/-.
2.2. It is stated that, out of this total interest, the trust credited Rs.87,44,300/- to its Income and Expenditure Account.
However, it directly credited the remaining Rs.94,39,503/- (along with savings interest and other income totaling Rs.94,66,848/-) 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) or foreign donors to be returned with accrued interest. Therefore, it argued that the interest was held as a custodian and did not constitute taxable income.
2.3. The Assessing Officer rejected this contention, treating the entire interest of Rs.94,66,848/- as revenue income for failure to meet the requirements of Section 11(1)(d) of the Act. The total taxable income was determined at Rs.80,46,820/-. The National Faceless Appeal Centre (NFAC) and the Income Tax Appellate Tribunal sequentially dismissed the assessee’s appeals. Hence, the present appeal.
3. The assessee/trust raised the following substantial questions of law for consideration:
(i) Whether the Tribunal was correct in law in confirming the order of lower authorities applying Section 11(1)(d) of the Income Tax Act, holding that the amount of interest from deposits is assessable in the hands of assessee?
(ii) Whether the Tribunal was justified in law in holding that the SJDT funds belonging to the SHGs are income of assessee and liable to tax?
(iii) Whether the Tribunal was correct in law in confirming the addition of interest on bank deposits held by assessee as a custodian of the SHG funds and duly returnable as per the agreements between assessee and SHGs?
4. Section 11(1)(d) of the 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. The trust relied on foreign donor correspondence, such as letters from Secours Catholique, CBM, and Kinder Not Hilfe. These documents show that the original grants were given for micro-credit programmes and revolving loan funds. The letters 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 trust’s corpus.
5. The reliance placed by the appellant on the decision of the Kerala High Court in CIT (Exemptions) v. Mata Amrithanandamayi 1 Math is misplaced. In Mata Amrithanandamayi Math (supra), the donors had issued explicit written instructions that the interest earned on their specific contributions should be added back to the corpus. In the case at hand, no such express direction issued by the donor exists. 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.
6. The appellant contended that it acted merely as a custodian of the funds for SHGs and had a legal obligation to return the principal and interest. This argument cuts no ice with the court. The appellant accumulated these funds from refunded micro-credit assistance and deposited them in fixed bank deposits under its own name. The interest was generated by the appellant trust’s own financial investments. Furthermore, the trust claimed credit for the Tax Deducted at Source (TDS) of Rs.16,45,460/- deducted on the total interest income. The appellant trust cannot claim tax credit for TDS on interest income, while simultaneously excluding the underlying interest from its gross revenue receipts.
7. The judgment of the Delhi High Court in Director of Income 2 Tax v. Society for Development Alternatives does not assist the appellant. In that case, unspent project grants from tied-up funding agencies were held as unutilized grants under strict agency terms, where unspent amounts were returnable to the donors. In the instant case, the funds represent interest earned on fixed deposits held by the assessee trust, which the trust is free to use towards its general charitable objects.
8. The appellant trust argued that the Assessing Officer should have followed the re-assessment order for AY 2009–10. In the facts of the present case, it is clear that the interest accrued directly to the trust from its bank deposits. 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. 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.
9. For the reasons aforegiven, we are of the firm view that the Tribunal correctly held that the interest income of Rs.94,66,848/- earned on bank fixed deposits constitutes taxable revenue receipt. It does not qualify for exemption under Section 11(1)(d) of the Act due to the absence of specific donor directions. The substantial questions of law are answered in favor of the Revenue and against the assessee.
In fine, the tax case appeal is dismissed, by affirming the impugned order dated 29.12.2023 passed by the Tribunal. There shall be no order as to costs.
Notes:
1 2017 (9) TMI 1232
2 2012 (1) TMI 77
