TAXABILITY OF CORPUS DONATIONS RECEIVED BY AN UNREGISTERED TRUST

The issue has arisen as to whether such voluntary contributions (referred to as ‘corpus donations’) received by an unregistered trust, not registered u/s 12A or 12AA or 12AB, can be regarded as income taxable in its hands on the ground that it does not qualify for the exemption u/s 11, or in the alternative whether such donations can be regarded as the capital receipt not falling within the scope of income at all.

Several Benches of the Tribunal have taken a view, post-amendment, that a voluntary contribution received by an unregistered trust with a specific direction that it shall form part of its corpus, is a capital receipt and therefore not chargeable to tax at all. As against this, recently, the Chennai Bench of the Tribunal took a view that such a corpus donation would fall within the ambit of income of the trust and hence is includible in its total income.

SHRI SHANKAR BHAGWAN ESTATE’S CASE
The issue had first come up for consideration before the Kolkata Bench of the Tribunal in the case of Shri Shankar Bhagwan Estate vs. ITO (1997) 61 ITD 196.

In this case, two religious endowments were effectuated vide two deeds of endowment dated 30th October, 1989 and 19th June, 1990, respectively, in favour of Shree Ganeshji Maharaj and Shri Shankar Bhagwan by Smt. Krishna Kejriwal. The debutter properties, i.e., estates were christened as ‘Shree Ganeshji Maharaj Estate’ and ‘Shree Shankar Bhagwan Estate’. She constituted herself as the Shebait in respect of the deity. The estates were not registered u/s 12AA as charitable / religious institutions. The returns of income of the two estates for the A.Y. 1991-92 were filed declaring paltry income excluding the donations / gifts received towards the corpus of the estates.

During the course of the assessment proceedings, it was observed from the balance sheet that gifts were received by the estates from various persons. The assessees claimed that the said amounts were received towards the corpus of the endowments and, therefore, could not be taxed. Though the A.O. accepted the fact that the declarations filed by the donors indicated that they have sent moneys through cheques as their contributions to the corpus of the endowments, he held that the receipts were taxable u/s 2(24)(iia). Accordingly, the assessment was made taking the status of the assessees as a private religious trust, as against the status of an individual as claimed by the assessees, and taxing the income of the estates u/s 164, including the amounts received as corpus donations. He also held that the deities should have been consecrated before the endowments for them to be valid in law.

Before the CIT(A), the assessee contended that the provisions of section 2(24)(iia) did not authorise the assessment of the corpus gifts. However, the CIT(A) endorsed the view taken by the A.O. and upheld the assessment of the corpus gifts as income.

Upon further appeal, the Tribunal decided the issue in favour of the assessee by holding as under –

‘So 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. It is significant that section 2(24)(iia) was inserted with effect from 1st April, 1973 simultaneously with the present section 12, both of which were introduced from the said date by the Finance Act, 1972. Section 12 makes it clear by the words appearing in parenthesis that contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall not be considered as income of the trust. The Board’s Circular No. 108 dated 20th March, 1973 is extracted at page 1277 of Vol. I of Sampat Iyengar’s Law of Income-tax, 9th Edn. in which the interrelation between section 12 and section 2(24)(iia) has been brought out. Gifts made with clear directions that they shall form part of the corpus of the religious endowment can never be considered as income. In the case of R.B. Shreeram Religious & Charitable Trust vs. CIT [1988] 172 ITR 373 it was held by the Bombay High Court that even ignoring the amendment to section 12, which means that even before the words appearing in 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 CIT vs. Trustees of Kasturbai Scindia Commission Trust [1991] 189 ITR 5. The position after the amendment is a fortiori. In the present cases, the A.O. on evidence has accepted the fact that all the donations have been received towards the corpus of the endowments. In view of this clear finding, it is not possible to hold that they are to be assessed as income of the assessees. We, therefore, hold that the assessment of the corpus donations cannot be supported.’

The Tribunal upheld the claim of the assessee that the voluntary contributions received towards the corpus could not be brought to tax. In deciding the appeal, the Bench also held that the status of the endowments should be ‘individual’ and it was not necessary that the deities should have been consecrated before the endowments, or that the temple should have been constructed prior to the endowments.

Apart from this case, in the following cases a similar view has been taken by the Tribunal that the corpus donation received by an unregistered trust is a capital receipt and not chargeable to tax –

• ITO vs. Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust

•  For A.Y. 2003-04 – ITA No. 3866/Del/2007, dated 30th January, 2009

•  For A.Y. 2004-05 – ITA No. 5082/Del/2010, dated 19th January, 2011

• ITO vs. Chime Gatsal Ling Monastery [ITA No. 216 to 219 (Chd) of 2012, dated 28th October, 2014]
• ITO vs. Gaudiya Granth Anuved Trust [2014] 48 taxmann.com 348 (Agra-Trib)
• Pentafour Software Employees Welfare Foundation vs. Asstt. CIT [IT Appeal Nos. 751 & 752 (Mds) of 2007]
• ITO vs. Hosanna Ministries [2020] 119 taxmann.com 379 (Visakh-Trib)
• Indian Society of Anaesthesiologists vs. ITO (2014) 47 taxmann.com 183 (Chen-Trib)
• J.B. Education Society vs. ACIT [2015] 55 taxmann.com 322 (Hyd-Trib)
• ITO vs. Vokkaligara Sangha (2015) 44 CCH 509 (Bang–Trib)
• Bank of India Retired Employees Medical Assistance Trust vs. ITO [2018] 96 taxmann.com 277 (Mum-Trib)
• Chandraprabhu Jain Swetamber Mandir vs. ACIT [2017] 82 taxmann.com 245 (Mum-Trib)
• ITO vs. Serum Institute of India Research Foundation [2018] 90 taxmann.com 229 (Pune-Trib)

VEERAVEL TRUST’S CASE
Recently, the issue again came up for consideration before the Chennai Bench of the Tribunal in the case of Veeravel Trust vs. ITO [2021] 129 taxmann.com 358.

In this case, the assessee was a public charitable and religious trust registered under the Indian Trusts Act, 1882. It was not registered under the Income-tax Act. It had filed its return of income for A.Y. 2014-15, declaring Nil total income. The return of income filed by the assessee had been processed by the CPC, Bengaluru u/s 143(1) and the total income was determined at Rs. 55,82,600 by making additions of donations received amounting to Rs. 55,82,600.

The assessee trust filed an appeal against the intimation issued u/s 143(1) before the CIT(A) and contended that while processing the return u/s 143(1), only prima facie adjustments could be made and no addition could be made for corpus donations. The assessee further contended that corpus donations received by any trust or institution were excluded from the income derived from property held under the trust u/s 11(1)(d) and hence, even though the trust was not registered u/s 12AA, corpus donations could not be included in the income of the trust.

The CIT(A) rejected the contentions of the assessee and held that the condition precedent for claiming exemption u/s 11 was registration of the trust u/s 12AA and hence, in the absence of such registration, exemption claimed towards corpus donations could not be allowed. The CIT(A) relied upon the decision of the Supreme Court in the case of U.P. Forest Corpn. vs. Dy. CIT [2008] 297 ITR 1.

Being aggrieved by the order of the CIT(A), the assessee trust filed a further appeal before the Tribunal and contended that the donations under consideration were received for the specific purpose of construction of building and the said donations have been used for construction of building. Therefore, when donations have been received for specific purpose and such donations have been utilised for the purpose for which they were received, they were capital receipts by nature and did not fall within the scope of income.

The assessee relied upon the following decisions in support of its contentions –

(i) Shree Jain Swetamber Deharshar Upshraya Trust vs. ACIT [IT Appeal No. 264 (Mum) of 2016, dated 15th March, 2017]
(ii) ITO vs. Serum Institute of India Research Foundation [2018] 90 taxmann.com 229 (Pune)
(iii) Bank of India Retired Employees Medical Assistance Trust vs. ITO (Exemption) [2018] 96 taxmann.com 277 (Mum)
(iv) Chandraprabhu Jain Swetamber Mandir vs. Asstt. CIT [2017] 82 taxmann.com 245 (Mum)

The Revenue reiterated its stand that in the absence of registration of the trust u/s 12AA, no exemption could be given to it for the corpus donations.

The Tribunal referred to the relevant provisions of the Act and observed that the definition of income u/s 2(24) included voluntary contributions received by any trust created wholly or partly for charitable or religious purpose; that the provisions of sections 11, 12A and 12AA dealt with taxation of trust or institution and the income of any trust or institution was exempt from tax on compliance with certain conditions; the provisions of section 11(1)(d) excluded voluntary contributions received by a trust, with a specific direction that they shall form part of the corpus of the trust or institution which was subject to the provisions of section 12A, which stated that the provisions of sections 11 and 12 shall not apply in relation to income of any trust or institution, unless such trust or institution fulfilled certain conditions.

The Tribunal held that as per the said section 12A, one of the conditions for claiming benefit of exemption under sections 11 and 12 was registration of the trust as per sub-section (aa) of section 12A; that on a conjoint reading of the provisions, it was very clear that the income of any trust, including voluntary contributions received with a specific direction, was not includible in the total income of the trust, only if such trust was registered u/s 12A / 12AA and the registration was a condition precedent for claiming exemption u/s 11, including for voluntary contributions.

The Tribunal also took support from the decision of the Supreme Court in the case of U.P. Forest Corporation (Supra) wherein it was held that registration u/s 12A was a condition precedent for availing benefit under sections 11 and 12. Insofar as various case laws relied upon by the assessee were concerned, the Tribunal found that none of the Benches of the Tribunal had considered the ratio laid down by the Supreme Court in the case of U.P. Forest Corporation (Supra) while deciding the issue before them. In this view of the matter, it was held that corpus donations with a specific direction that they form part of the corpus received by the trust which was not registered under sections 12A / 12AA was its income and includible in its total income.

OBSERVATIONS
The issue under consideration is whether the voluntary contribution received by a trust with a specific direction that it shall form part of its corpus can be considered as the ‘income’ of the trust, is a capital receipt, not chargeable to tax, and whether the answer to this question would differ depending upon whether or not the trust was registered with the income-tax authorities under the relevant provisions of the Act.

Sub-clause (iia) was inserted in section 2(24) defining the term ‘income’ by the Finance Act, 1972 with effect from 1st April, 1973. It included the voluntary contribution received by a trust created wholly or partly for charitable or religious purposes within the scope of the term ‘income’ with effect from 1st April, 1973. Therefore, firstly, what was the position about taxability of such voluntary contribution prior to that needs to be examined.

The Supreme Court had dealt with this issue of taxability of an ordinary voluntary contribution for the period prior to 1st April, 1973 in the case of R.B. Shreeram Religious & Charitable Trust [1998] 233 ITR 53 (SC) and it was held that –

Undoubtedly by a subsequent amendment in 1972 to the definition of income under section 2(24), voluntary contributions, not being contributions towards the corpus of such a trust, are included in the definition of ‘income’ of such a religious or charitable trust. Section 12 as amended in 1972 also expressly provides that any voluntary contribution received by a trust for religious or charitable purposes, not being contribution towards the corpus of the trust, shall, for the purpose of section 11, be deemed to be income derived from property held by the trust wholly for charitable or religious purposes. This, however, does not necessarily imply that prior to the amendment of 1972, a voluntary contribution which was not towards the corpus of the receiving trust, was not income of the receiving trust. Even prior to the amendment of 1972, any income received by a religious or charitable trust in the form of a voluntary contribution would be income of the trust, unless such contribution was expressly made towards the corpus of the trust’s fund.

Thus, even prior to the insertion of sub-clause (iia) in the definition of income in section 2(24), the ordinary voluntary contribution received by a religious or charitable trust was regarded as income chargeable to tax and, therefore, no substantial change had occurred due to its specific inclusion in the definition of the term income. At the same time, the position was different as far as a voluntary contribution received towards the corpus was concerned. The settled view was that it was a capital receipt not chargeable to tax. The following are some of the cases in which such a view was taken by different High Courts as referred to by the Supreme Court in the case of R.B. Shreeram Religious & Charitable Trust (Supra) –
• Sri Dwarkadheesh Charitable Trust vs. ITO [1975] 98 ITR 557 (All)
• CIT vs. Vanchi Trust [1981] 127 ITR 227 (Ker)
• CIT vs. Eternal Science of Man’s Society [1981] 128 ITR 456 (Del)
• Sukhdeo Charity Estate vs. CIT [1984] 149 ITR 470 (Raj)
• CIT vs. Shri Billeswara Charitable Trust [1984] 145 ITR 29 (Mad)

The objective of inserting sub-clause (iia) treating voluntary contributions received by a religious or charitable trust specifically as its income in section 2(24) was not to unsettle this position of law as held by the Courts as explained above. Only ordinary voluntary contributions other than those which were received with a specific direction that they shall form part of the corpus of the trust were brought within the definition of ‘income’, perhaps by way of clarification and removal of doubts. The sub-clause (iia) as it was inserted with effect from 1st April, 1973 is reproduced below –

‘(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 not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution’

Thus, the voluntary contributions made with a specific direction that they shall form part of the corpus of the trust were expressly kept outside the ambit of the term ‘income’ and they continued to be treated as capital receipts not chargeable to tax. This position in law has been expressly confirmed by the Supreme Court in the above quoted paragraph, duly underlined for emphasis, when the Court clearly stated that the said section 2(24)(iia) covered donations not being the contributions towards corpus.

In such a scenario, a question may arise as to what was the purpose of making such an amendment in the Act to include the voluntary contributions (other than corpus donations) within the definition of ‘income’? The answer to this question is available in Circular No. 108 dated 20th March, 1973 explaining the provisions of the Finance Act, 1973 (as referred in the case of Shri Shankar Bhagwan Estate Supra). The relevant extract from this Circular is reproduced below –

The effect of the modifications at (1) and (2) above would be as follows:
(i) Income by way of voluntary contributions received by private religious trusts will no longer be exempt from income-tax.
(ii) Income by way of voluntary contributions received by a trust for charitable purposes or a charitable institution created or established after 31st March, 1962 (i.e., after the commencement of the Income-tax Act, 1961) will not qualify for exemption from tax if the trust or institution is created or established for the benefit of any particular religious community or caste.
(iii) Income by way of voluntary contributions received by a trust created partly for charitable or religious purposes or by an institution established partly for such purposes will no longer be exempt from income-tax.
(iv) Where the voluntary contributions are received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes, such contributions will qualify for exemption from income-tax only if the conditions specified in section 11 regarding application of income or accumulation thereof are satisfied and no part of the income enures and no part of the income or property of the trust or institution is applied for the benefit of persons specified in section 13(3), e.g., author of the trust, founder of the institution, a person who has made substantial contribution to the trust or institution, the relatives of such author, founder, person, etc. In other words, income by way of voluntary contributions will ordinarily qualify for exemption from income-tax only to the extent it is applied to the purposes of the trust during the relevant accounting year or within next three months following. Such charitable or religious trusts will, however, be able to accumulate income from voluntary contributions for future application to charitable or religious purposes for a maximum period up to ten years, without forfeiting exemption from tax, if they comply with certain procedural requirements laid down in section 11 in this behalf. These requirements are that (1) the trust or institution should give notice to the Income-tax Officer, specifying the purpose for which the income is to be accumulated and the period for which the accumulation is proposed to be made, and (2) the income so accumulated should be invested in Government or other approved securities or deposited in post office savings banks, scheduled banks, co-operative banks or approved financial institutions.

Thus, it can be seen from the Circular that the objective of the amendment made with effect from 1st April, 1973 was to make the trust or institution liable to tax on the voluntary contributions received in certain cases like where it has not been applied for the objects of the trust, it has been received by a private religious trust, or it has been received by a trust created for the benefit of any particular religious community or caste and to make the charitable and religious trusts to apply the contributions only on the objects of the trust and to apply for the accumulation thereof where it has not been so utilised before the year-end. In other words, the intention is expressed to regulate voluntary contributions of an ordinary nature.

This position under the law continued till 1st April, 1989 and the issue deliberated in this article could never have arisen till then as the Act itself had provided expressly that the voluntary contributions received with a specific direction that they shall form part of the corpus would not be regarded as ‘income’ and, hence, not chargeable to tax. The issue under consideration arose when the law was amended with effect from 1st April, 1989. The Direct Tax Laws (Amendment) Act, 1987 deleted the words ‘not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution’ from sub-clause (iia) of section 2(24) with effect from 1st April, 1989.

The Revenue authorities read sub-clause (iia) as amended with effect from 1st April, 1989, in contrast to the erstwhile sub-clause (iia), to hold that even the voluntary contributions received with a specific direction that they shall form part of the corpus of the trust would be considered as income chargeable to tax subject to the provisions dealing with exemptions upon satisfaction of several conditions, including that of registration of the trust with the income-tax authority.

The aforesaid interpretation of the Revenue is on the basis of the Circular No. 516 dated 15th June, 1988, Circular No. 545 dated 24th September, 1989, Circular No. 549 dated 31st October, 1989 and Circular No. 551 dated 23rd January, 1990 explaining the provisions of the Direct Tax (Amendment) Act, 1987 [as amended by the Direct Tax Laws (Amendment) Act, 1989]. The relevant extract dealing with the amendment to section 2(24)(iia) is reproduced below –

4.3 Under the old provisions of sub-clause (iia) of clause (24) of section 2 any voluntary contribution received by a charitable or religious trust or institution with a specific direction that it shall form part of the corpus of the trust or institution was not included in the income of such trust or institution. Since this provision was being widely used for tax avoidance by giving donations to a trust in the form of corpus donations so as to keep this amount out of the regulatory provisions of sections 11 to 13, the Amending Act, 1987 amended the said sub-clause (iia) of clause (24) of section 2 to secure that all donations received by a charitable or religious trust or institution, including corpus donations, were treated as income of such trust or institution.

Analysing the impact of the amendment, the eminent jurist Mr. Nani Palkhivala, in his commentary Law and Practice of Income Tax page 156 of the 11th edition, has commented:

‘This, however, does not mean that such capital contributions are now taxable as income. Sometimes express exclusion is by way of abundant caution, due to the over-anxiety of the draftsman to make the position clear beyond doubt. But in such a case, the later omission of such express exclusion does not necessarily involve a change in the legal position. Section 12 still provides that voluntary contributions specifically made to the corpus of a charitable trust are not deemed to be income, and the same exclusion must be read as implicit in section 2(24)(ii-a). It would be truly absurd to expect a charitable trust to disburse as income any amount in breach of the donor’s specific direction to hold it as corpus; such breach in many cases would involve depriving charity of the benefit of acquiring a lasting asset intended by the donor. Under this sub-clause, only voluntary contributions received by such institutions as are specified therein are taxable as income. A voluntary contribution received by an institution not covered in this sub-clause is not taxable as income.’

Further, in the commentary on section 12(1), page 688 of the same edition, it is stated:

‘The correct legal position is as under:
(i) All contributions made with a specific direction that they shall form part of the corpus of the trust are capital receipts in the hands of the trust. They are not income either under the general law or under section 2(24)(ii-a).
(ii) Section 2(24)(ii-a) deems revenue contributions to be income of the trust. It thereby prevents the trust from claiming exemption under general law on the ground that such contributions stand on the same footing as gifts and are therefore not taxable.
(iii) Section 12 goes one step further and deems such revenue contributions to be income derived from property held under trust. It thereby makes applicable to such contributions all the conditions and restrictions under sections 11 and 13 for claiming exemption.
(iv) Section 11(1)(d) specifically grants exemption to capital contributions to make the fact of non-taxability clear beyond doubt. But it proceeds on the erroneous assumption that such contributions are of income nature – income in the form of voluntary contributions. This assumption should be disregarded.’

This supports the argument that corpus donations are capital receipts, which are not in the nature of income at all.

Taking a view as is canvassed by the Revenue would tantamount to interpreting a law in a manner that holds that where an exemption has been expressly provided for any income, then it needs to be presumed that in the absence of the specific provision the income is taxable otherwise; such a view also means that any receipt that is not expressly and specifically exempted is always taxable; that a deletion of an express admission of the exemption, as is the case under consideration, would automatically lead to its taxation irrespective of the position in law that such receipt even before introduction of the express provision for exempting it was never taxable. In this regard, a reference may be made to the decision in the case of CIT vs. Shaw Wallace 6 ITC 178 (PC) wherein it was held as under –

‘15. Some reliance has been placed in argument upon section 4(3)(v) which appears to suggest that the word “income” in this Act may have a wider significance than would ordinarily be attributed to it. The sub-section says that the Act “shall not apply to the following classes of income,” and in the category that follows, Clause (v) runs:
Any capital sum received in commutation of the whole or a portion of a pension, or in the nature of consolidated compensation for death or injuries, or in payment of any insurance policy, or as the accumulated balance at the credit of a subscriber to any such Provident Fund.
16. Their Lordships do not think that any of these sums, apart from their exemption, could be regarded in any scheme of taxation of income, and they think that the clause must be due to the over-anxiety of the draftsman to make this clear beyond possibility of doubt. They cannot construe it as enlarging the word “income” so as to include receipts of any kind, which are not specially exempted. They do not think that the clause is of any assistance to the appellant.’

Similarly, the Karnataka High Court in the case of International Instruments (P) Ltd. vs. CIT [1982] 133 ITR 283 held that a receipt which is not an income does not become income, for the years before its inclusion, just because it is later on included as one of the items exempted from income-tax. Thus, it was held that merely because the exemption has been provided it cannot be presumed that it would necessarily be taxable otherwise. Similarly, merely because the voluntary contributions which were capital in nature otherwise were specifically excluded from the definition of income, it cannot be presumed that they were otherwise falling within the definition of income. The Courts in several cases had already held that such voluntary contributions received with a specific direction that they should be forming part of the corpus are receipt of capital nature and not income chargeable to tax. In view of this, the omission of a specific exclusion, w.e.f. 1st April, 1989, provided to it from the definition of income till the date, should not be considered as sufficient to bring it within the scope of the term ‘income’ so as to make it chargeable to tax from the date of the amendment.

All the decisions cited above, wherein a favourable view has been taken, have been rendered for the A.Ys. beginning from 1st April, 1989 onwards post amendment in sub-clause (iia) of section 2(24). Reliance was placed by the Revenue, in these cases, on the amended definition of income provided in section 2(24)(iia) and yet the Tribunals took a view that the corpus donations did not fall within the scope of term ‘income’ as they were capital receipts and, hence, the fact that the exemption otherwise provided in section 11(1)(d) was not available due to non-registration, though argued, was not considered to be relevant at all.

In the case of Smt. Basanti Devi & Shri Chakhan Lal Garg Education Trust, the matter pertaining to A.Y. 2003-04 had travelled to the Delhi High Court and the Revenue’s appeal was dismissed by the High Court (ITA 927/2009, order dated 23rd September, 2009), by taking a view that the donations received towards the corpus of the trust would be capital receipt and not revenue receipt chargeable to tax. The further appeal of the Revenue before the Supreme Court has also been dismissed by an order dated 17th September, 2018, though on account of low tax effect. Therefore, the view as adopted in these cases should be preferred, irrespective of the amendment made with effect from 1st April, 1989.

The Chennai Bench of the Tribunal has disagreed with the decisions of the other Benches taking a favourable view which were cited before it, on the ground that the ratio of the Supreme Court’s decision in the case of U.P. Forest Corporation (Supra) had not been considered therein. Nothing could have turned otherwise even if the Tribunal, in favourably deciding those cases, had examined the relevance of the Supreme Court decision. On a bare reading of the decision, it is clear that the facts in the said case related to an issue whether the corporation in question was a local authority or not and, of course, also whether an assessee claiming exemption u/s 11 should have been registered under the Income-tax Act or not. The Court was pleased to hold that an assessee should be registered for it being eligible to claim the exemption of income u/s 11. The issue in that case was not related to exemption for the corpus donation at all and the Court was never asked whether such a donation was exempted or not because of non-registration of the corporation under the Act in that regard.

With utmost respect, one fails to understand how this important fact was not comprehended by the Chennai Bench. The Bench was seriously mistaken in applying the ratio of the Supreme Court decision which has no application to the facts of the case before it. The issue in the case before the Bench was whether receipt of a corpus donation was a capital receipt or not which was not liable to tax in respect of such a receipt, not due to application of section 11, but on application of the general law of taxation which cannot tax a receipt that is not in the nature of income. Veeravel Trust may explore the possibility of filing a Miscellaneous Application seeking rectification of the order.

The issue under consideration here and the issue that was before the Supreme Court in the case of U.P. Forest Corporation were distinguished by the Bengaluru Bench of the Tribunal in the case of Vokkaligara Sangha (Supra) as follows –

‘5.3.6 Before looking into the facts of the case, we notice that Revenue has relied upon a judgment of the Hon’ble Apex Court in the case of U.P. Forest Corporation & Another vs. DCIT reported in 297 ITR 1 (SC). According to the aforesaid decision, registration under section 12AA of the Act is mandatory for availing the benefits under sections 11 and 12 of the Act. However, the question that arises for our consideration in the case on hand is not the benefit under sections 11 and 12 of the Act, but rather whether voluntary contributions are income at all. Thus, with due respects, the aforesaid decision, in our view, would not be of any help to Revenue in the case on hand.’

The Chennai Bench, with due respect, has looked at the issue from the perspective of exemption u/s 11(1)(d). Had it been called upon to specifically adjudicate the issue as to whether the corpus donation was an income at all in the first place, and not an exemption u/s 11, the view could have been different.

Further, if a view is taken that the corpus donations received by a religious or charitable trust would be regarded as income under sub-clause (iia), then it will result in a scenario whereunder treatment of corpus donations would differ depending upon the type of entity which is receiving such corpus donations. If they are received by a religious or charitable trust or institution then it would be regarded as income, but if they are received by any other entity then it would not fall under sub-clause (iia) so as to treat it as income, subject, of course, to the other provisions of the Act.

In the case of CIT vs. S.R.M.T. Staff Association [1996] 221 ITR 234 (AP), the High Court held that only when the voluntary contributions were received by the entities referred to in sub-clause (iia), such receipts would fall within the definition of income and the receipts by entities other than the specified trusts and associations would not be liable to tax on application of sub-clause (iia). In the case of Pentafour Software Employees Welfare Foundation (Supra), a case where the assessee was a company incorporated u/s 25 of the Companies Act, the Madras High Court in the context of the taxability or otherwise of the corpus donations, held that the receipt was not taxable, more so where it was received by a company. An interpretation which results in an illogical conclusion should be avoided.

Reference can also be made to the Memorandum explaining the provisions of the Finance Bill, 2017 wherein, while explaining the rationale of inserting Explanation 2 to section 11(1), it was mentioned that a corpus donation is not considered as income of the recipient trust. The relevant extract from the Memorandum is reproduced below –

‘However, donation given by these exempt entities to another exempt entity, with specific direction that it shall form part of corpus, is though considered application of income in the hands of donor trust but is not considered as income of the recipient trust. Trusts, thus, engage in giving corpus donations without actual applications.’

The issue may arise as to why a specific exemption is provided to such corpus donations under section 11(1)(d) which applies only when the trust or institution receiving such donations satisfies all the applicable conditions, including that of registration with the income-tax authorities. In this regard, as explained by Mr. Palkhivala in the commentary referred to above, this specific exemption should be regarded as having been provided out of abundant caution though not warranted, as such corpus donations could not have been regarded as income in the first place.

The Finance Act, 2021 with effect from 1st April, 2022 requires that such voluntary contributions are invested or deposited in one or more of the forms or modes specified in sub-section (5) maintained specifically for such corpuses. In our view, the amendment stipulates a condition for those who are seeking an exemption u/s 11 of the Act but for those who hold that the receipt of the corpus donation at the threshold itself is not taxable in view of the receipt being of a capital nature, need not be impressed by the amendment; a non-taxable receipt cannot be taxed for non-compliance of a condition not intended to apply to a capital receipt.

In any case, if there exist divergent views on the issue as to whether or not a particular receipt can be regarded as income, then a view in favour of the assessee needs to be preferred.

It may be noted that in one of the above-referred decisions (Serum Institute of India Research Foundation), the Department had made an argument that such corpus donations received by an unregistered trust be brought to tax u/s 56(2). The Tribunal, however, decided the matter in favour of the assessee, on the ground of judicial discipline, following the earlier Tribunal and High Court decisions.

The better view is therefore that corpus donations received by a charitable or religious trust, registered or unregistered, are a capital receipt, not chargeable to income-tax at all.