Charitable institutions generally receive donations (voluntary contributions) from various donors for carrying out their charitable activities. Earlier, till A.Y. 1972-73, section 12(1) provided that voluntary contributions would not be included in income, while section 12(2) provided that voluntary contributions from another trust referred to in section 11, would be deemed to be income from property held in trust for charitable purposes. These voluntary contributions now fall within the definition of ‘income’ by virtue of insertion of section 2(24)(iia) of the Income Tax Act, 1961, with effect from A.Y. 1973-74. Such contributions (other than corpus donations) are also deemed to be income from property held under trust for charitable purposes, by virtue of section 12(1) of the Act, since A.Y. 1973-74. The exemption under section 11 of a charitable trust, registered under section 12A/12AA (now section 12AB), is therefore now computed by considering such voluntary contributions and adjusting the same by the application and accumulation of income, for charitable purposes, by applying the various sub-sections of section 11.
At times, charitable institutions receive grants from other institutions or persons, Indian or foreign, Government or non-government, with the condition that such grants are to be utilised only for specific purposes (“tied-up grants”). In most such cases, there is also a stipulation that in case the tied-up grants are not used for the specified purposes within a specific period of time, the unutilised amounts are to be refunded to the grantor of the aid.
The issues in the context of taxation have arisen before the courts as to whether such tied-up grants could be termed as voluntary contributions and whether, where not utilized during the year, are income of the recipient institution, as the same are to be refunded and represent a liability to be discharged in the future. While the Bombay High Court has taken the view that such grants are voluntary contributions, the Delhi High Court has taken the view that such receipts are not voluntary contributions and are liabilities and not in the nature of income of the recipient institution. A similar view has been taken by the Gujarat High court following the Delhi High court decision.
GEM & JEWELLERY EXPORT PROMOTION COUNCIL’S CASE
The issue had first come up before the Bombay High Court in the case of CIT vs. Gem & Jewellery Export Promotion Council 143 ITR 579.
In this case relating to A.Y. 1967-68, the assessee was a company set up for the advancement of an object of general public utility, i.e., to support, protect, maintain, increase and promote exports of gems and jewellery, including pearls, precious and semi-precious stones, diamonds, synthetic stones, imitation jewellery, gold and non-gold jewellery and articles thereof, whose income was applied only for charitable purposes as defined in section 2(15).
The assessee received grants-in-aid from the Government of India for meeting the expenditure on specified projects. Some of the conditions on which those grants-in-aid were given were the following:
1. The funds should be kept with the State Bank of India, the total expenditure should not be more than the expenditure approved by the Central Government for each project; separate accounts should be kept for Code and non-Code projects and the accounts were to be audited by chartered accountants approved by the Government.
2. Any amount unspent was to be surrendered to the Government by the end of the financial year unless allowed to be adjusted against next year’s grant.
3. The grant should be spent upon the object for which it had been sanctioned. The assets acquired wholly or substantially out of grant-in-aid would not, without prior sanction of the Central Government, be disposed of, encumbered or utilised for purposes other than those for which the grant was sanctioned.
At that point of time, relying on section 12(1), which provided that any income derived from voluntary contributions applicable solely to charitable or religious purposes would not be includible in the total income, the assessee claimed that the grants-in-aid were in the nature of voluntary contributions, and were therefore not taxable, whether spent or not. The assessing officer taxed such unspent grants-in-aid, allowing accumulation of 25% of such amount.
In first appeal, the assessee’s claim was allowed, holding that such grants-in-aid were not taxable, being voluntary contributions. Before the Tribunal, the Department argued that the grants-in-aid could not be considered as voluntary contribution for the purpose of section 12(1), having regard to the fact that the grants were made subject to conditions mentioned above. The Tribunal confirmed the first appellate order, holding that the amounts given by the Government were voluntary contributions and were not in the nature of any price paid for any benefit or privilege, nor were they for any consideration. According to the Tribunal, the conditions imposed by the Government did not change the nature of the payment, which was initially a voluntary contribution.
Before the Bombay High Court, on behalf of the revenue, it was argued that while making contributions, the Government imposed certain conditions and having regard to the fact that the conditions governed the grants, the grants could not be considered to be a donation or a voluntary contribution or, in other words, it was not a pure and simple gift by the Government.
The Bombay High Court observed that it was well known that grants-in-aid were made by the Government to provide certain institutions with sufficient funds to carry on their charitable activities. The institutions or associations to which the grant was made had no right to ask for the grant. It was solely within the discretion of the Government to make grants to institutions of a charitable nature. The Government did not expect any return for the grants given by it to such institutions. There was nothing which was required to be done by these institutions for the Government, which can be considered as a consideration for the grant.
The Bombay High Court noted the meaning of the words ‘voluntarily contributed’ as held in Society of Writers to the Signet vs. CIR 2 TC 257, as “the meaning of the word ‘voluntary’ is ‘money gifted voluntarily contributed in the sense of being gratuitously given’.” The Bombay High Court held that the conditions attached to the grant did not affect the voluntary nature of the contribution. The conditions were merely intended to see that the amounts were properly utilised, and therefore did not detract from the voluntary nature of the grant.
The Bombay High Court accordingly held that the grants-in-aid were voluntary contributions, and were exempt under section 12(1), as it then stood.
SOCIETY FOR DEVELOPMENT ALTERNATIVES’ CASE
The issue again came up before the Delhi High Court in the case of DIT vs. Society for Development Alternatives 205 Taxman 373 (Del).
In this case, relating to A.Y. 2006-07 and 2007-08, the assessee was a society, which was registered under Section 12A and Section 80G. It was undertaking activities relating to research, development and dissemination of (i) Technologies for fulfillment of basic needs of rural households (ii) Solutions for regeneration of natural resources and the environment and (iii) Community based institution strengthening methods to improve access to for the poor.
It had received grants for specific purposes/projects from the government, non-government, foreign institutions etc. These grants were to be spent as per the terms and conditions of the project grant. The amount, which remained unspent at the end of the year, got spilled over to the next year and was treated as unspent grant. The Assessing Officer treated such unspent grants as income of the assessee, invoking the provisions of section 12(1). This section then provided that any voluntary contributions received by a trust created wholly for charitable or religious purposes (other than corpus donations) were, for purposes of section 11, deemed to be income from property held under trust wholly for charitable or religious purposes.
The Commissioner (Appeals) deleted the addition, noting that:
1. The amounts were received/sanctioned for a specific purpose/project to be utilized over a particular period.
2. The utilisation of the said grants was monitored by the funding agencies who sent persons for inspection and also appointed independent auditors to verify the utilisation of funds as settled terms.
3. The assessee had to submit inter/final progress/work completion reports along with evidences to the funding agencies from time to time.
4. The agreements also included a term that separate audited accounts for the project would be maintained.
5. The unutilised amount had to be refunded back to the funding agencies in most of the cases.
6. All the terms and conditions had to be simultaneously complied with, otherwise the grants would be withdrawn.
7. The assessee had to utilise the funds as per the terms and conditions of the grant. If it failed to utilise the grants for the purpose for which grant was sanctioned, the amount was recovered by the funding agency.
The Commissioner (Appeals) was therefore of the view that the assessee was not free to use the funds voluntarily as per its sweet will and, thus, these were not voluntary contributions as per Section 12. He concluded that these were tied-up grants, where the appellant acted as a custodian of the funds given by the funding agency to channelise the same in a particular direction. The Tribunal upheld the order passed by the Commissioner (Appeals).
The Delhi High Court agreed with the findings of the Tribunal, holding that these were not voluntary contributions, and were therefore not income under section 12(1).
A similar view has been taken by the Gujarat High Court in the case of DIT(E) vs. Gujarat State Council for Blood Transfusion, 221 Taxman 126, for AY 2009-10, holding that the grant received from the State Government was not income of the trust for the purposes of section 11.
OBSERVATIONS
Though both the Bombay and Delhi High Court decisions were decided in favour of the assessee and held that the tied-up grants were not taxable, since the law in both the years was different, the ratio of these decisions is opposite to that of each other – while the Bombay High Court has held that tied-up grants are ‘voluntary contributions’, the Delhi High Court has taken the view that these tied-up grants are not ‘voluntary contributions’.
The Bombay High Court, in examining whether the tied-up grants were voluntary contributions or not, looked at the receipt from the perspective of the grantor – was the grant voluntary, or was it for some consideration, and held that since it was voluntary from the viewpoint of the donor, the receipt was a voluntary contribution; and applying the then applicable law, it held that voluntary contributions were not income, as the definition of ‘income’ at the relevant time did not include voluntary contributions. The Bombay High Court did not have to consider the subsequent amendment, under which such amounts were independently in the nature of income.
The law presently applicable provides that a ‘voluntary contribution’ is an income, and hence it has become necessary to examine whether a tied-up grant, not spent by the year end or not accumulated, is a voluntary contribution, more so where it is attached with the condition of refunding the unspent amount. Following the Bombay High Court, the receipt is a voluntary contribution, and once so accepted, the same has to be subjected to the rules of application and accumulation. In contrast, where the Delhi High court is followed, the receipt in the first place shall not be construed as a voluntary contribution and would not be subjected to the rules of application and accumulation.
In order for a receipt to be regarded as a voluntary contribution and for it to bear the character of income, the recipient has to have some element of domain over the receipt – the freedom to apply such income as it desires. If the recipient has to necessarily spend the receipt as per the directions of the grantor, and under the supervision of the donor, it has no control over such spending and over such amounts. Such receipts should be considered as held in trust for the grantor and when spent, the expenditure be held to be the expenditure of the grantor, and not that of the recipient trust, which disburses the amounts. Besides, where the unspent amount is refundable, it is a liability and cannot be regarded as income at all.
The Hyderabad bench of the Tribunal has therefore held, in the case of Nirmal Agricultural Society vs. ITO 71 ITD 152, that ‘The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated.’
According to the Tribunal, such unspent grants should be shown as a liability, and the expenditure incurred for the specified purposes adjusted against such liability, and not be treated as the expenses of the assessee. Only any non-refundable credit balance in the liability account of the grantor would be treated as income in the year in which such non-refundable balance was ascertained.
A similar view has been taken by the Mumbai bench of the Tribunal in the case of NEIA Trust v ADIT ITA No 5818-5819/Mum/2015 dated 24th December 2019 (A.Y. 2011-12 and 2012-13), where the Tribunal has held:
‘upon perusal of stated terms & conditions, it could not be said that the funds received by the assessee were not in the nature of voluntary contributions rather they were more in the nature of specific grants on certain terms and conditions and liable to be refunded, in case the same were not utilized for specific purposes. It is trite law that entries in the books of accounts would not be determinative of the true nature / character of the transactions and the same could not be held to be conclusive. Therefore, the mere fact that the assessee credited the receipts as corpus contribution, in our considered opinion, would not make much difference and would not alter the true nature of the stated receipts. The said funds / receipts, as stated earlier, were more in the nature of specific grants and represent liability for the assessee and liable to be refunded in case of non-utilization.’
The Hyderabad Bench decision in Nirmal Agricultural Society’s case has also been followed by the Tribunal in the cases of Handloom Export Promotion Council vs. ADIT 62 taxmann.com 288 (Chennai) and JB Education Society vs. ACIT 55 taxmann.com 322 (Hyd).
Besides, in the cases of various Government Corporations set up to implement Government policies, grants received from the Government by such corporations have been held not to constitute income of the Corporation, since the Corporation acts as an agency of the Government in spending for the Government schemes. The funds therefore really belong to the Government, until such time as the funds are spent. This view has been taken by the High Courts in the following cases:
• CIT vs. Karnataka Urban Infrastructure Development and Finance Corpn. 284 ITR 582 (Kar.)
• Karnataka Municipal Data Society vs. ITO 76 taxmann.com 167 (Kar)
The position may be slightly different in case of grants from the Government and a few specified bodies, with effect from A.Y. 2016-17. Clause (xviii) of section 2(24) has been inserted in the definition of ‘income’, which provides for taxation of grants from the Central Government, State Government, any authority, body or agency as income. Such grants would therefore be taxable as income of the recipient trust, and the fact anymore may or may not be material that the receipt is not a voluntary contribution. This inserted provision in any case would not apply to grants received from other non-governmental organisations.
In case the Government tied-up grant is refundable if not spent, can it be regarded as income at all post insertion of clause (xviii)? One way to minimize the harm on the possible application of clause (xviii) of section 2(24) could be to tax such unspent receipts in the year in which the fact of the non-utilisation is final; even in such a case, a possibility of claiming deduction for the refund of unspent amount should be explored. Alternatively, in that year, the expenditure, where incurred, should be treated as an application of income. The other possible view is that clause (xviii) applies only to recipient persons, other than charitable organisations, to whom the specific provisions of clause (iia) of section 2(24) applies, rather than generally applying the provisions of clause (xviii) to all and sundry.
The better view therefore seems to be that of the Delhi and Gujarat High Courts, that tied-up grants are not voluntary contributions and/or income of the recipient institution.
