Month: May

ISSUE FOR
CONSIDERATION

Section 145
requires the assessee to compute his income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” in
accordance with either cash or mercantile system of accounting, which is
regularly followed by the assessee. The assessee following cash system of
accounting would be offering to tax only those incomes which have been received
by him during the previous year. On the other hand, most of the provisions of
Chapter XVII-B provide for deduction of tax at source at the time of credit of
the relevant income or at the time of its payment, whichever is earlier.
Therefore, often tax gets deducted at source on the basis of the mercantile
system of accounting followed by the payer, which requires crediting of the
amount to the account of the assessee in his books of account. However, the
underlying amount on which the tax has been deducted at source is not
includible in the income of the assessee till such time as it has been received
by him.

Section 198
provides that all sums deducted in accordance with the provisions of Chapter
XVII shall be deemed to be income received, for the purposes of computing the
income of an assessee.

Till Assessment Year 2007-08, section 199 provided for grant of credit
for tax deducted at source to the assessee from income in the assessment made
for the assessment year for which such income is assessable. From Assessment
Year 2008-09, section 199 provides that the CBDT may make rules for the
purposes of giving credit in respect of tax deducted or tax paid in terms of
the provisions of Chapter XVII, including rules for the purposes of giving
credit to a person other than the payee, and also the assessment year for which
such credit may be given.

The corresponding
Rule 37BA, issued for the purposes of section 199(3), was inserted with effect
from 01.04 2009. The relevant part of this Rule, dealing with the assessment
year in which credit of TDS can be allowed, is as follows:

(3) (i) Credit
for tax deducted at source and paid to the Central Government, shall be given for
the assessment year for which such income is assessable.

(ii) Where tax
has been deducted at source and paid to the Central Government and the income
is assessable over a number of years, credit for tax deducted at source shall
be allowed across those years in the same proportion in which the income is
assessable to tax.

After the amendment, though the section does not expressly provide for
the year of credit as it did prior to the amendment, Rule 37BA effectively
provides for credit  similar to the erstwhile
section. In fact, under Rule 37BA, more clarity has now been provided in
respect of a case where the income is assessable over a number of years.

In view of these
provisions, an issue has arisen in cases where the assessee’s income is
computed as per the cash system of accounting regarding the year in which the
TDS amount is taxable as an income, and the year of credit of such TDS to the
assessee, when the underlying income from which tax has been deducted is not
received in the year of deduction. The Delhi bench of the Tribunal took a view
that the income to the extent of TDS has to be offered to tax as an income as
provided in section 198 in the year of deduction, and the credit of TDS is
available in such cases in the year of deduction, irrespective of Rule 37BA. As
against this, the Mumbai bench of the Tribunal did not concur with this view,
and denied credit of TDS in the year of deduction.

CHANDER SHEKHAR
AGGARWAL’S CASE

The issue had come
up before the Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal vs. ACIT [2016] 157 ITD 626.

In this case, the
assessee was following cash system of accounting. He filed his return of income
for A.Y. 2011-12, including the entire amount of TDS deducted during the year
as his income, claiming TDS credit of Rs. 80,16,290.

While processing
the return u/s. 143(1), the Assessing Officer allowed credit of only Rs.
71,20,267, on the ground that the income with respect to the balance amount was
not included in the return filed by the assessee. The assessee appealed to the
CIT (A), disputing the denial of credit of the differential amount of TDS.
Placing reliance on Rule 37BA, the CIT (A) concluded that the assessee was not
entitled to credit for the amount though mentioned in the certificate for the
assessment year, if income relatable to the amount was not shown and was not
assessable in that assessment year.

The assessee
contended before the Tribunal that the amount equivalent to the TDS had been
offered as income by him in his return of income. This was in accordance with
the provisions of section 198, which mandates that all sums deducted under
Chapter XVII would be deemed to be income received for the purposes of computing
the income of an assessee. It was argued that the provisions of Rule 37BA are
not applicable to assessees following cash system of accounting. Since, as per
provisions of section 199, any deduction of tax under Chapter XVII and paid to
the Central Government shall be treated as payment of tax on behalf of the
person from whose income deduction of tax was made, it was pleaded that the
credit of the disputed amount should be allowed to the assessee.

The Tribunal duly
considered the amended provisions of section 199 as well as Rule 37BA. It
concurred with the view that once TDS was deducted by the deductor on behalf of
the assessee and the assessee had offered it as his income as per section 198,
the credit of that TDS should be allowed fully in the year of deduction itself.
Once an income was assessable to tax, the assessee was eligible for credit,
despite the fact that the remaining amount would be taxable in the succeeding
year.

With regard to Rule
37BA(3)(ii) providing for proportionate credit across the years when income was
assessable over a number of years, the Tribunal held that it would apply where
the entire compensation was received in advance but was not assessable to tax
in that year, but was assessable over a number of years. It did not apply where
the assessee followed cash system of accounting.

This was supported by an illustration – suppose an assessee who was
following cash system of accounting raised an invoice of Rs. 100 in respect of
which deductor deducted and deposited TDS of Rs. 10. Accordingly, the assessee
would offer an income of Rs. 10 and claim TDS of Rs. 10. However, in the
opinion of the Revenue, the assessee would not be entitled to credit of the
entire TDS of Rs. 10, but would be entitled to proportionate credit of Re. 1
only. Now let us assume that Rs. 90 was never paid to the assessee by the
deductor. In such circumstances, Rs. 9 which was deducted as TDS by the
deductor would never be available for credit to the assessee though the said
sum stood duly deposited to the account of the Central Government. Therefore,
as per the Tribunal, Rule 37BA(3) could not be interpreted so as to say that
TDS deducted at source and deposited to the account of the Central Government,
though it was income of the assessee, but was not eligible for credit of tax in
the year when such TDS was offered as income.

The Tribunal also
placed reliance upon the decisions of the Visakhapatnam bench in the case of ACIT
vs. Peddu Srinivasa Rao Vijayawada [ITA No. 234 (Vizag.) of 2009, dated
03.03.2011] and of the Ahmedabad bench in the case of Sadbhav
Engineering Ltd. vs. Dy. CIT [2015] 153 ITD 234. In these cases, it was
held that the credit of tax deducted at source from the mobilisation advance
adjustable against the bills subsequently was available in the year of
deduction, though it was not considered while computing the income of the
assessee.

Accordingly, the
Tribunal held that the assessee would be entitled to credit of the entire TDS
offered as income in the return of income.

SURENDRA S. GUPTA’S
CASE

A similar issue
recently came up for consideration before the Mumbai bench of the Tribunal in
the case of Surendra S. Gupta vs. Addl. CIT [2018] 170 ITD 732 .

In this case, the assessee, following cash system of accounting, did
not offer consultancy income of Rs. 83,70,287 to tax, since the same was not
received during the relevant A.Y. 2010-11. However, he offered corresponding
TDS to tax in respect of the same, amounting to Rs. 8,41,240, and claimed the
equivalent credit thereof in the computation of income. The  Assessing Officer, applying Rule 37BA(3)(i),
restricted the credit to proportionate TDS of Rs. 84,547, against income of Rs.
8,41,240 offered to tax by the assessee, and disallowed the balance credit of
Rs. 7,56,693.

The assessee contested the denial of TDS credit before the CIT (A),
who upheld the order of the Assessing Officer, and directed that credit for the
balance amount should be given in the subsequent years in which income
corresponding to such TDS is received.

On the basis of
several decisions of the co-ordinate bench on the issue, the Tribunal noted
that there were two lines of thought on the issue; one which favours grant of
full TDS credit in the year of deduction itself, and the other which, following
strict interpretation, allows TDS credit in the A.Y. in which the income has
actually been assessed / offered to tax. Reference was made to the following
decisions wherein the former view was taken –

 (i). Chander
Shekhar Aggarwal vs. ACIT (supra)

(ii).  Praveen Kumar Gupta vs. ITO [IT Appeal No.
1252 (Delhi) of 2012]

(iii). Anil Kumar Goel vs. ITO [IT Appeal No. 5849
(Delhi) of 2011]

The Tribunal found
that in none of the above cases was the decision of the Kerala High Court in
the case of CIT vs. Smt. Pushpa Vijoy [2012] 206 Taxman 22 considered by
the co-ordinate bench. In this case, the Kerala High Court had held that the
assessee was entitled to credit of tax only in the assessment year in which the
net income, from which tax had been deducted, was assessed to tax. Following
this decision, the Tribunal rejected the claim of the assessee to allow the
full credit of TDS.

OBSERVATIONS

There are two
aspects to the issue – the year in which the amount of TDS should be regarded
as income of the assessee chargeable to tax (the year of deduction, or the year
in which the net income is received by the assessee), and accordingly accounted
for under the cash system of accounting; and secondly, to what extent credit of
the TDS is available against such income.

Therefore, it
becomes imperative to analyse the impact of the provisions of section 198 with
respect to the assessment of the income of an assessee who is following cash
system of accounting. Section 198 provides as under:

All sums
deducted in accordance with the foregoing provisions of this Chapter shall, for
the purpose of computing the income of an assessee, be deemed to be income
received.

It can be seen that
section 198 creates a deeming fiction by considering the amount of TDS as
deemed receipt in the hands of the deductee, though it has not been received by
him. This deeming fiction operates in a very limited field to consider the
unrealised income as realised. It appears that the legislative intent behind
this provision is to negate the probability of exclusion of the amount of TDS
from the scope of total income by the assessee, on the ground that it amounted
to a diversion of income by overriding title. It also precluded the deductee
from making a claim on the payer for recovery of the amount which had been deducted
at source in accordance with the provisions of Chapter XVII-B. But, this
section, by itself, does not create a charge over the amount of tax deduction
at source.

A careful reading
of this provision would reveal that it does not provide for the year in which
the said income shall be deemed to have been received. In contrast, reference
can be made to section 7, which also provides for certain incomes deemed to be
received. It has been expressly provided in section 7 that “the following
incomes shall be deemed to be received in the previous year….” unlike section
198. Therefore, it would not be correct to say that, once the sum is deducted
at source, it is deemed to be the income received in the year in which it has
been deducted and assessable in that year, de hors the other provisions
determining the year in which the said income can be assessed.

For instance, the
buyer of an immovable property may deduct tax at source u/s. 194-IA on the
advance amount paid to the assessee transferring that property. In such a case,
the capital gain in the hands of the transferor is taxable in the year in which
that immovable property has been transferred as provided in section 45.
Obviously, tax deducted at source u/s. 194-IA cannot be assessed as capital
gain in the year of deduction merely by virtue of section 198, if the capital
asset has not been transferred in the same year.

Similarly, in case
of an assessee who is following cash system of accounting, it cannot be said
that the amount of tax deducted at source is deemed to have been received in
the very same year in which it was deducted. Section 145 governs the
computation of income, which is in accordance with the method of accounting
followed by the assessee. The income equivalent to the amount of tax deducted
at source cannot be charged to tax de hors the method of accounting
followed by the assessee. In case of cash system of accounting, unless the
balance amount is received by the assessee, the amount of tax deducted at
source cannot be included in the income on the ground that it is deemed to be
received as per section 198. The reference to ‘sums deducted’ used in section
198 should be seen from the point of view of the recipient assessee and not the
payer. The ‘deduction’, from the point of view of the recipient, would happen
only when he receives the balance amount, as prior to that, the concerned
transaction would not be recognised at all in the books of account maintained
under the cash system of accounting.

In the context of
section 198 and the pre-amended provisions of section 199, in a Third Member
decision in the case of Varsha G. Salunkhe vs. Dy CIT 98 ITD 147, the
Mumbai Bench of the Tribunal has held as under:

“Both the sections, viz., 198 and 199, fall within
Chapter XVII which is titled as ‘Collection and recovery – deduction at
source’. In other words, these are machinery provisions for effectuating
collection and recovery of the taxes that are determined under the other
provisions of the Act. In other words, these are only machinery provisions
dealing with the matters of procedure and do not deal with either the
computation of income or chargeability of income….

Sections 198 and
199 nowhere provide for an exemption either to the determination of the income
under the aforesaid provisions of sections 28, 29 or as to the method of
accounting employed under section 145 which alone could be the basis for
computation of income under the provisions of sections 28 to 43A. Section 198
has a limited intention. The purpose of section 198 is not to carve out an
exception to section 145. Section 199 has two objectives – one to declare the
tax deducted at source as payment of tax on behalf of the person on whose
behalf the deduction was made and to give credit for the amount so deducted on
the production of the certificate in the assessment made for the assessment
year for which such income is assessable. The second objective mentioned in
section 199 is only to answer the question as to the year in which the credit
for tax deducted at source shall be given. It links up the credit with
assessment year in which such income is assessable. In other words, the
Assessing Officer is bound to give credit in the year in which the income is
offered to tax.

Section 199 does
not empower the Assessing Officer to determine the year of assessability of the
income itself but it only mandates the year in which the credit is to be given
on the basis of the certificate furnished. In other words, when the assessee produces
the certificates of TDS, the Assessing Officer is required to verify whether
the assessee has offered the income pertained to the certificate before giving
credit. If he finds that the income of the certificate is not shown, the
Assessing Officer has only not to give the credit for TDS in that assessment
year and has to defer the credit being given to the year in which the income is
to be assessed. Sections 198 and 199 do not in any way change the year of
assessability of income, which depends upon the method of accounting regularly
employed by the assessee. They only deal with the year in which the credit has
to be given by the Assessing Officer.

It could not be
disputed that according to the method of accounting employed by the assessee,
the income in respect of the three TDS certificates did not pertain to the
assessment year in question but pertained to the next assessment year and, in
fact, in that year, the assessee had offered the same to tax. Therefore, the
credit in respect of those three TDS certificates would not be given in the
assessment year under consideration, but in the next assessment year in which
the income was shown to have been assessed.”

Following this
decision, the Bilaspur bench of the Tribunal, in the case of ACIT vs. Reeta
Loiya 146 TTJ 52 (Bil)(URO), has held as under:

“It is a settled
proposition that the provisions of s. 198 are merely machinery provisions and
are not related to computation of income and chargeability of income as held by
the Bombay Tribunal in the case of Smt. Varsha G. Salunke (supra). In
the absence of the charging provisions to tax such deemed income as the income
of the assessee, the provisions of s. 198 of the Act cannot by themselves
create a charge on certain receipts.”

The Mumbai bench of
the Tribunal, in the case of Dy CIT vs. Rajeev G. Kalathil 67 SOT 52
(Mum)(URO), observed:

“It is a fact
that deduction of tax for the payment is one of the deciding facts for
recognising the revenue of a particular year. But TDS in itself does not mean
that the whole amount mentioned in it should be taxed in a particular year,
deduction of tax and completion of assessment are two different things while
finalising the tax liability of the assessee and Assessing Officer is required
to take all the facts and circumstances of the case not only the TDS
certificate.”

In the case of ITO
vs. Anupallavi Finance & Investments 131 ITD 205, the Chennai bench of
the Tribunal, while dealing with the controversy under discussion, has dealt
with the impact of section 198 as follows:

We are unable to
understand as to how the said provision assists the assessee’s case. All the
section says, to state illustratively, is that if there is deduction of tax at
source out of income of Rs. 100 [say at the rate of 10 per cent], crediting or
paying assessee Rs. 90, the same, i.e., Rs. 10 is also his income. It nowhere
speaks of the year for which the said amount of TDS is to be deemed as income
received. The same would, understandably, only correspond to the balance 90 per
cent. As such, if 30 per cent of the total receipt/credit is assessable for a
particular year, it shall, by virtue of section 198 of the Act be reckoned at
Rs. 30 [Rs. 100 × 30 per cent] and not Rs. 27 [Rs. 90 × 30 per cent]. Thus,
though again a natural consequence of the fact that tax deducted is only out of
the amount paid or due to be paid as income, and in satisfaction of the tax
liability on the gross amount to that extent, yet clarifies the matter, as it
may be open to somebody to say that TDS of Rs. 10 has neither been credited nor
received, so that it does not form part of income received or arising and,
thus, outside the scope of section 5 of the Act. That, to our mind, is sum and
substance of section 198.

Similar
observations have been made by the Mumbai bench of the Tribunal in the case of ITO
vs. PHE Consultants 64 taxmann.com 419 which are reproduced hereunder:

It is pertinent
to note that the provisions of sec. 198, though states that the tax deducted at
source shall be deemed to be income received, yet it does not specify the year
in which the said deeming provision applies. However, section 198 states that
the same is deemed to be income received “for the purpose of computing the
income of an assessee.” The provisions of section 145 of the Act state
that the income of an assessee chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”
shall be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee. Hence a combined reading of
provisions of section 198 and section 145 of the Act, in our view, makes it
clear that the income deemed to have been received u/s. 198 has to be computed
in accordance with the provisions of section 145 of the Act, meaning, thereby,
the TDS amount, per se, cannot be considered as income of the assessee by
disregarding the method of accounting followed by the assessee.

The Kerala High
Court has also expressed a similar view as extracted below in the case of Smt.
Pushpa Vijoy (supra), although without referring expressly to section 198.

We also do not
find any merit in the contention of the respondents-assessees that the amount
covered by TDS certificates itself should be treated as income of the previous
year relevant for the assessment year concerned and the tax amount should be
assessed as income by simultaneously giving credit for the full amount of tax
remitted by the payer.

Further, deeming
the amount of tax deducted at source as a receipt in the year of deduction and
assessing it as income of that year would pose several difficulties. Firstly,
the assessee might not even be aware about the deduction of tax at source on
his account while submitting his return of income. This may happen due to delay
on the part of the deductor in submitting the TDS statement and consequential
reflection of the information in Form 26AS of the assessee. Secondly, the tax
might be deducted at source while making the provision for the expenses by the
payer following mercantile system of accounting. For instance, tax is deducted
at source u/s. 194J while providing for the auditor’s remuneration. In such a
case, treating the amount of tax deducted at source as income of the auditor in
that year, would result into taxing the amount, even before the corresponding
services have been provided by the assessee.

Moreover, for an
amount to constitute a receipt under the cash method of accounting, it should
either be actually received or made available unconditionally to the assessee.
As held by the Supreme Court in the case of Keshav Mills Ltd. vs. CIT 23 ITR
230, “The ‘receipt’ of income refers to the first occasion when the
recipient gets the money under his own control.” In case of TDS, one can
take a view that such TDS is not within the control of the payee until such
time as he is eligible to claim credit of such TDS. That point of time is only
when he receives the net income after deduction of TDS, when he is eligible to
claim credit of such TDS.

Since the amount of
tax deducted at source cannot be charged to tax in the year of deduction merely
by virtue of section 198, no part of that income is assessable in that year, in
the absence of any receipt, in view of the cash system of accounting followed
by the assessee. The Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal (supra) has decided the whole issue on the basis of the fact
that the amount equivalent to TDS was being offered to tax by the assessee in
accordance with the provision of section 198. Since the income was assessed to
that extent, the Tribunal opined that the assessee was eligible for full credit
of TDS, notwithstanding Rule 37BA(3)(ii), which provided for allowance of
proportionate TDS credit when the income was not fully assessable in the same
year. Thus, the very foundation on the basis of which the Delhi bench of the
Tribunal has allowed the full credit of TDS to the assessee in the case of
Chander Shekhar Aggarwal (supra) appears to be incorrect.

Having analysed the provisions of section 198, let us now consider the
issue about the year in which the credit for tax deducted at source is
allowable. As per section 4, the tax is chargeable on the ‘total income’ of the
assessee for a particular previous year. When the assessee pays the income-tax
under the Act, he does not pay it on any specific income but he pays it on the
‘total income’. Thus, it cannot be said that a particular amount of tax has
been paid or payable on a particular amount of income. However, when it comes
to TDS, the erstwhile provision of section 199 expressly provided that its
credit shall be given for the assessment year in which the relevant income is
assessable. After its substitution with effect from 01.04.2008, new section 199
has authorised CBDT to prescribe the rules which can specifically provide for
the assessment for which the credit may be given. As per the mandate given in
section 199, Rule 37BA provides that the credit shall be given for the
assessment year for which the concerned income is assessable. In view of such
express provisions, the credit cannot be availed in any year other than the
assessment year in which the income subject to deduction of tax at source is
assessable.

The Delhi bench of the Tribunal took a view that Rule 37BA does not
apply where the assessee follows cash system of accounting insofar as it
provides for the year in which the credit is available. In order to support its
view, it has been pointed out that the credit would not be available otherwise
in a case where the assessee does not receive the underlying income at all.
Certainly, the law does not provide about how the credit would be given for
that amount of TDS which was deferred for the reason that the relevant income
is assessable in future but, then, found to be not assessable at all for some
reason. However, this lacuna under the law can affect both types of assessees,
i.e., assessees following cash system of accounting, as well as assessees
following mercantile system of accounting.

Circular No. 5
dated 02.03.2001 has addressed one such situation wherein the tax has been
deducted at source on the rent paid in advance u/s. 194-I and subsequently the
rent agreement gets terminated or the rented property is transferred due to
which the balance of rent received in advance is refunded to the tenant or to
the transferee. It has been clarified that in such a case, credit for the
entire balance amount of tax deducted at source, which has not been given
credit so far, shall be allowed in the assessment year relevant to the
financial year during which the rent agreement gets terminated / cancelled or
rented property is transferred and balance of advance rent is refunded to the
transferee or the tenant, as the case may be. Similarly, in a few cases, the
Courts and Tribunal have held that where income has been offered to tax in an
earlier year, but tax has been deducted at source subsequently, credit for the
TDS should be allowed in such subsequent year [CIT vs. Abbott Agency,
Ludhiana 224 Taxman 350 (P&H), Societe D’ Engineering Pour L’ Industrie Et.
Les Travaux Publics, (SEITP) vs. ACIT 65 SOT 45 (Amr)(URO)].

Therefore, in our
view, the mere probability of income not getting assessed in future cannot by
itself be the reason for not applying the express provision of the law, unless
suitable amendment has been carried out to overcome such difficulty. Taking a
clue from the CBDT’s clarification vide aforesaid Circular, it is possible to
take a view that the credit of TDS should be made available in the year in
which the assessee finds that the relevant income would not be assessable at
all due to its irrecoverablity or any other reasons.

The view taken by the Mumbai bench of the
Tribunal in the case of Surendra S. Gupta (supra) by following the
decision of Kerala High Court in the case of Pushpa Vijoy (supra)
therefore seems to be the more appropriate view. The amount of tax deducted at
source is neither assessable as income nor available as credit in the year of
deduction, if the assessee is following the cash system of accounting, and has
not received the balance amount in that year. The taxation of the entire
amount, as well as credit for the TDS, would be in the year in which the net
amount, after deduction of TDS, is received. In case the net amount is received
over multiple years, the TDS amount would be taxed proportionately in the
multiple years, and proportionate TDS credit would also be given in those
respective years.

shailesh.kwebmaker

Issue for
Consideration

Voluntary contributions received by a
charitable or religious trust are taxable as its income, by virtue of the
specific provisions of section 2(24)(iia) of the Income-tax Act, 1961, subject
to exemption under sections 11 and 12. Section 12(1) provides that any
voluntary contribution received by a trust created wholly for charitable or religious
purposes (not being contributions made with a specific direction that they
shall form part of the corpus of the trust), shall be deemed to be income
derived from property held under trust wholly for charitable or religious
purposes for the purposes of section 11. Section 11(1)(d) provides for a
specific exemption for income in the form of voluntary contributions made with
a specific direction that they shall form part of the corpus of the trust.
Therefore, on a comprehensive reading of sections 2(24), 11 and 12,  it can be inferred that corpus donations are
entitled to the benefit of exemption, irrespective of whether the trust has
applied 85% of the corpus donations for charitable or religious purposes, or not.

Many charitable or religious trusts keep
donation boxes on their premises for donors to donate funds to such trusts.
Such donation boxes can be seen in various temples, hospitals, etc. At
times, some of the donation boxes have an inscription or a sign nearby stating
that the donation made in that particular box would be for a particular capital
purpose, or that it is for the corpus of the trust. The question has arisen
before the various benches of the Tribunal as to whether such amounts received
through the donation boxes having such inscription or sign would either not be
regarded as income, being receipts in the nature of contributions to corpus, or
even otherwise be eligible for exemption as corpus donations u/s. 11(1)(d), or
whether such amounts of box collection would be voluntary contributions in the
nature of regular income of the trust.

While the Chandigarh bench of the Tribunal
has taken the view that such box collections are corpus donations, and
therefore not income of the trust, the Mumbai and Calcutta benches of the
Tribunal have taken the view that such box collections could not be regarded as
corpus donations.

Prabodhan Prakashan’s case

The issue first came up before the Bombay
bench of the Tribunal in the case of Prabodhan Prakashan vs. ADIT 50 ITD
135.

In that case, the main object of the
assessee was promotion and propagation of ideologies, opinions and ideas for
furtherance of national interest, and for this purpose, publishing of books,
magazines, weeklies, dailies and other periodicals, as also establishing and
running printing presses for this purpose. Contributions were invited by the
assessee from the public towards the corpus fund of the trust through an appeal
as under:

“Establishing a firm financial foundation
for Dainik Saamana and Prabodhan Prakashan is in your hands. For this strong
foundation, we are establishing a Corpus Fund. Offeratory boxes for the corpus
will be placed in today’s meeting and meetings to be held in future. In order
to assist our activities, which will always have a nationalistic fervour and social
relevance, it is our earnest request that you contribute to the Corpus Fund
Offeratory boxes to the best of your ability”.

The words “donations towards corpus” were
written on the offeratory boxes. The boxes were opened in the presence of
Trustees, and the amount of Rs. 13,77,465 found in these boxes was credited to
the account “Donations Towards Corpus”.

Before the assessing officer, it was claimed
that the donations were made to the corpus of the trust, and were therefore
exempt u/s. 11(1)(d). The assessee was asked to furnish specific letters from
the donors confirming that they had given directions that the donations were to
be utilised towards the corpus of the trust. Such letters could be furnished
only for donations of Rs. 3,90,277, but not for the balance of Rs. 9,86,188.
For such balance amount, it was submitted that the Income-tax Act did not
specify that the directions of the donors should be in writing. It was claimed
that in view of the appeal issued for donations, and the words “donations
towards corpus” on the offeratory boxes, it should be held that specific
directions were indeed given by the donors. The assessing officer did not
accept this contention, and treated donations of Rs. 9,86,188 as ordinary
contributions, which were taxable.

The Commissioner(Appeals) referred to the
provisions of section 11(1)(d), according to which, income in the form of
voluntary contributions made with the specific direction that they shall form
part of the corpus of the trust, would not be included in the total income of
the person in receipt of the income. According to him, a specific direction of
the donor was necessary, and the circumstances relevant to prove such direction
included the need to establish the identity of the donor, which was not established
in this case. According to the Commissioner(Appeals), merely writing “donations
towards corpus” on the offeratory boxes was not sufficient, since many of the
donors might not even know as to what was the corpus of the trust. The
Commissioner(Appeals) was of the view that the burden lay upon the assessee to
prove that the donations were received towards the corpus of the trust, and
that burden had not been discharged. He therefore, upheld the action of the
assessing officer in treating the donations of Rs. 9,86,188 as voluntary
contributions in the nature of income.

Before the Tribunal, on behalf of the
assessee, it was argued that the appeal had been issued for donations towards
the corpus, and the offeratory boxes had the inscription that the donations
were towards the corpus. The trust records of collection showed that the
donations were credited to the corpus account. It was argued that there was no
provision in the Act that the specific directions from the donor should be in
writing, and that the directions were to be inferred from the facts and
circumstances.

Considering the provisions of section
11(1)(d), the Tribunal noted that it was true that there was no stipulation in
that section that the specific directions should be in writing. It agreed that
it should be possible to come to a conclusion from the facts and circumstances
of the case, whether a specific direction was there or not, even where there
were no written directions accompanying the donation. However, according to the
Tribunal, at the same time, it needed to be kept in mind that the specific
direction was to be that of the donor, and not that of the donee. It was not
sufficient for the donee alone to declare that the voluntary contributions were
being allocated to the corpus, and there should be evidence to show that the
direction came from the donor.

In the opinion of the Tribunal, when there
was no accompanying letter to the effect that the donation was towards corpus,
at least such subsequent confirmation from the donor was a necessity. In the
case before it, such subsequent confirmation was also absent, and all that was
there, according to the Tribunal, was the intention of the donee and the actual
carrying out of that intention.

The Tribunal therefore held that the facts
did not fulfil the requirement of section 11(1)(d), and that it could not be
said that there was a specific direction from the donor to use the contribution
towards the corpus of the trust. It accordingly held that the amount was not
exempt u/s. 11(1)(d).

A similar view was taken by the Calcutta
bench of the Tribunal in the case of Shri Digambar Jain Naya Mandir vs. ADIT
70 ITD 121, which was the case of a religious trust running a temple, which
had kept two boxes in the premises of the temple, one marked “Corpus Donations”
and the other marked as “Donations”. In that case, the Tribunal held that the
assessee had not made out that the donors were able to give the direction
before/at the time of donation, and that for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds.

Shree Mahadevi Tirath Sharda Ma Seva Sangh’s
case

The issue again came up before the
Chandigarh bench of the tribunal in the case of Shree Mahadevi Tirath Sharda
Ma Seva Sangh vs. ADIT 133 TTJ 57(Chd.) (UO).

In the case, the assessee was a society
registered under the Societies Registration Act, 1860 and u/s. 12AA of the
Income-tax Act, 1961, running a temple, Vaishno Mata Temple, at Kullu. A
resolution had been passed whereby the different boxes were decided to be kept
in the temple premises for enabling the devotees to make donations according to
their discretion. It included keeping of a box for collection of donations,
which were to be used for undertaking construction of building. Any
devotee/donor desirous of making a donation towards construction of buildings
would put the money in this box. In the temple premises, donation boxes were
kept with different objectives. One donation box was kept for “Construction of
Building”, and other boxes for donations meant for langar and general purposes.
At specified intervals, the boxes were opened and the amounts collected were
put into respective accounts. The donations were duly entered in either the
building fund donation register or the normal donation account, and thereafter
entered in the books of account accordingly.

The return of income was filed, claiming
exemption for donations received in the box kept for donations for construction
of building. The donations were reflected in the balance sheet under the head
“Donation for Building Construction with Specific Directions from Individuals”.

The assessing officer however, treated such
donations of Rs. 40,55,480 as donations, and not as receipts towards corpus,
and included the donations in the total income liable to tax. It was done on
the reason that the assessee did not possess any evidence to show that the
donation credited under the Building Fund had been donated by donors with the
specific direction to utilise the same for building construction only.

The Commissioner(Appeals) rejected the
appeal of the assessee, on the ground that the assessee failed to provide the
requisite details or any documentary evidence to prove that the donations were
made with specific directions for construction of building.

Before the Tribunal, it was pointed out that
the assessee had collected donations earmarked for being spent on construction
of building in the same manner as in the past years. It was pointed out that
the amount was credited to the Building Fund in the balance sheet, which also
included the opening balance, and, on the assets side, the assessee had shown
the expenditure on construction of the building. The amount had been spent
exclusively towards construction of the building, on which there was no
dispute. The fact that the donation boxes were kept with different objectives
in the temple premises was demonstrated with the help of photographs and
certificates from the local gram panchayat, Councillor, etc. It was
claimed that the certificates testified the system evolved by the assessee
since earlier years for collection of donations towards construction of
building.

It was further argued that in view of the
nature of collection undertaken by the assessee, which was supported by past
history, the assessing officer was not justified in insisting on production of
specific names of donors.

On behalf of the revenue, it was pointed out
that the assessee could not furnish the complete names and addresses of the
donors who had made the donations with specific directions for building
construction, though such details were asked for during the course of
assessment proceedings. It was only because such information was not available
that the amounts had been treated as voluntary/general donations, and not as
corpus donations.

The Tribunal considered the various facts
placed before it, supported by photographs, testimony of the local gram
panchayat, resolution, the fact that different boxes were kept for separate
purposes, the utilisation of the Building Fund, etc. It noted the fact that the
assessee had received general donations of Rs. 19,53,094 and other incomes,
which were credited to the income and expenditure account.

Analysing the provisions of section 12(1),
the Tribunal noted that any voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust were not to be
treated as income for the purposes of section 11. It observed that the moot
question was whether or not the manner in which the assessee had collected the
donations could be said to signify a direction from the donor that the funds
were to be utilised for the construction of building. It noted that the manner
in which the specific direction was to be made had not been laid down in the
Act or the Rules; there was no method or mode prescribed by law of giving such
directions. Therefore, according to the Tribunal, it was in the fitness of
things to deduce that the same was to be gathered from the facts and
circumstances of each case.

The Tribunal noted that the resolution of
the Society clearly showed that a donation box had been kept in the temple
premises with the appeal that the amount collected would be spent for building
construction. The devotees visiting the temple or other donors were depositing
money in the donation box, which was to be utilised for construction of
building only. The assessing officer had not disputed the manner in which such
donations had been collected by the assessee. The only dispute was that the
assessee could not provide the names and addresses of individual donors who had
contributed towards Building Fund. According to the Tribunal, since the
donations were being collected from the devotees at large, the insistence of
the assessing officer of production of individual names and addresses was not
justified. Further, the bona fides of such practice being carried out by the
assessee, either in the past or during the year under consideration, was not doubted.

Therefore, in the opinion of the Tribunal,
having regard to the facts and circumstances of the case, the donations of Rs.
40,55,480 collected by the assessee were to be considered as carrying specific
directions for being used for construction of the building. Ostensibly, the
devotees putting money in the donation box did so in response to the appeal by
the society that the amounts collected would be used for construction of
building. Under such circumstances, the Tribunal was of the view that the assessee’s
plea, that these amount should be taken as donations towards corpus, was
reasonable.

The Tribunal accordingly held that such
amounts received in the box for construction of building would form part of the
corpus of the Society, and would not constitute income for the purposes of
section 11.

Observations

When one analyses both these decisions
(Prabodhan Prakashan & Shree Mahadevi Tirath Sharda Ma Seva Sangh), one
realises that the common thread running through both these decisions is that
both confirm that the direction of the donors, that the amount of donation is
towards corpus need not be in writing, and that it is sufficient if the
surrounding circumstances indicate that the donors intended to give the funds
put in the boxes for corpus/capital purposes, for such amounts to be treated as
corpus donations. In Prabodhan Prakashan’s case, the Tribunal went further and
held that there should be evidence to show that the direction came from the
donor, while in Shri Digambar Jain Naya Mandir’s case, the Tribunal observed
that the assessee had not made out that the donors were able to give the
direction before or at the time of donation to the corpus funds. Both the
Bombay and Calcutta decisions, therefore, placed the onus on the assessee to
show the existence of the directions from the donors.

A view similar to the Chandigarh bench’s
view has been taken by the Karnataka High Court in the case of DIT vs. Sri
Ramakrishna Seva Ashrama 357 ITR 731, where the High Court held that it was
not necessary that a voluntary contribution should be made with a specific
direction to treat it as corpus. If the intention of the donor was to give that
money to a trust, which would be kept in a deposit, and the income from the
same was to be utilised for carrying on a particular activity, it satisfied the
definition part of the corpus. It further held that whether a donation was in
the nature of corpus or not was to be gauged from the intention of the donor
and how the recipient treated the receipt. In that case, the assessee had
received various donations for Rural Health Project, which were kept in fixed
deposits. The income derived from those deposits was utilised for carrying on
its various rural activities.

Similarly, in
the case of Shri Vasu Pujiya Jain Derasar Pedhi vs. ITO 39 TTJ (Jp) 337,
the receipts by the trust were issued under the head “Mandir Nirman”, and the
dispute was whether the donations could be said to be received with specific
directions that they shall form part of the corpus of the trust. It was held by
the Jaipur bench of the Tribunal that the donations were to be treated as
corpus donations.

In the case of Agnel Charities (Agnel
Sewa Sang) vs. ITO 31 TTJ (Del) 160, the assessee had staged a drama for
raising funds for construction of a school building. The circular issued
relating to the drama mentioned that the assessee was inviting subscriptions
and donations for school building. The Delhi bench of the Tribunal held that
such donations received were corpus donations, entitled to exemption.

In the case of N. A. Ramachandra Raja
Charity Trust vs. ITO 14 ITD 230 (Mad), the receipts given to the donors
had a rubber stamp “towards corpus only” on each of the receipts. In addition,
certificates were obtained from some of the donors confirming the fact that the
donations were towards corpus. In that case, the Madras bench of the tribunal
held that it was clear from the inception that the amounts received by the
assessee and held by it were under an obligation to appropriate the same
towards the corpus of the trust alone. While so holding, the tribunal relied
upon the decision of the Supreme Court in the case of CIT v. Bijli Cotton
Mills 116 ITR 60, whereof the Supreme Court confirmed that certain amounts
received by the assessee and shown in the bills issued to the customers in a
separate column headed “Dharmada” was not income of the assessee, since right
from inception, these amounts were received and held by the assessee under an
obligation to spend the same for charitable purposes only, being earmarked by
the customers for Dharmada.

In Prabodhan Prakashan’s case, the
Tribunal, perhaps, was not justified in inferring  that the specific direction in that case was
that of the donee, and not that of the donor. Perhaps, in that case, the
tribunal was not convinced by the evidence placed before it that the donor was
aware of the fact that the donation was being given for a capital purpose.

The observation of the Tribunal in Shri
Digambar Naya Mandir’s case that, for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds did not seem to be
justified. While a devotee may not know what is the meaning of corpus, a
devotee would certainly be aware of the purpose for which his donation into a
particular box would be used, particularly when there are clear indications in
the form of inscription or signs on the box or near the box stating the
purpose. This would be all the more relevant when there are boxes for more than
one purpose placed in the same premises, some for corpus purposes and others
for non-corpus purposes. By putting his donation in a particular box, the
devotee should be regarded as having exercised his option as to how his
donation is to be used.

Therefore, where a trust receives certain
box collections for capital purposes, the surrounding circumstances clearly
indicate that the donor intended the amounts deposited in the box to be
utilised for such capital purposes, and such receipts are bona fide for
such capital purposes (as perhaps indicated by fairly large collection for
non-corpus purposes as well), such collections should certainly be
regarded  as   corpus 
donations  eligible  for  
exemption u/s. 11(1)(d).

All the above decisions were rendered in the
context of the law prior to the insertion of section 56(2)(x), and therefore
the Tribunals did not have the opportunity to consider taxation of such box
collections under that section. Section 56(2)(x) provides that where any person
receives any sum of money aggregating more than Rs. 50,000 in a year from any
persons, such amount is chargeable to income-tax as Income from Other Sources.
There is no exemption for amounts received by a charitable or religious trust.
After the insertion of section 56(2)(x), would such box collection be taxable
under that section?

If one looks at section 2(24)(iia) and
section 12(1), these operate specifically to tax voluntary contributions
received by a charitable or religious trust as its income. Being specific
sections, these would prevail over the general provisions of section 56(2)(x),
which apply to all assessees. Therefore, in our view, section 56(2)(x) would
not apply to a charitable or religious trust, the specific exclusions u/s.12(1)
cannot be taxed by roping in the general provisions of section 56(2)(x).

One more section which needs to be kept in
mind, in the context of box collections, is section 115BBC. This section, which
does not apply to wholly religious trusts, provides that, where the total
income of an assessee referred to in section 11, includes any anonymous
donations, such anonymous donations in excess of the specified limit, shall be
chargeable to tax at the rate of 30%. Box collection of wholly religious trusts
would not be taxable under this section, whereas only donations made for the
purposes of a medical institution or educational institution would be taxable
in case of partly charitable and partly religious trusts. While this section
would apply to normal box collections of charitable trusts, the issue is
whether it would apply to box collections for a capital purpose of such
charitable trusts, which would otherwise be regarded as corpus donations?

Given the specific exclusion in section
12(1) for corpus donations, a view is possible that such corpus donations (box
collections) are capital receipts, which do not fall within the domain of
income of a charitable trust at all, and that therefore, the provisions of
section 115BBC do not apply to such box collections for capital purposes. In
fact, in DCIT vs. All India Pingalwara Charitable Society 67 taxmann.com
338, the Amritsar bench of the Tribunal took a view that section 115BBC
does not apply at all to box collections of genuine charitable trusts.
According to the Tribunal, the object of the section was to catch the
‘unaccounted money’ which was brought in as tax free income in the hands of
charitable trusts, and this section was never meant for taxing the petty
charities. The Legislature intended to tax the unaccounted money or black money
which was brought in the books of charitable trusts in bulk, and not to tax the
small and general charities collected by genuine charitable trusts.

In Gurudev Siddha Peeth vs. ITO 59
taxmann.com 400, the Mumbai bench of the Tribunal also held that amount of
offerings put by various devotees in donation boxes of the assessee-trust, a
sidh peeth/deity, could not be treated as anonymous donations taxable u/s.
115BBC merely on ground that assessee had not maintained any records of such
offerings. According to the Tribunal, it is clear that the provisions of
section 115BBC(1) will not apply to donations received by the assessee in
donation boxes from numerous devotees who have offered the offerings on account
of respect, esteem, regard, reference and their prayer for the deity/siddha
peeth. Such type of offerings are made/put into the donation box by numerous
visitors and it is generally not possible for any such type of institutions to
make and keep record of each of the donors, with his name, address etc.
This section is meant to curb the flow of unaccounted money into the system,
with a modus operandi to introduce such black money into accounts of
institutions such as university, medical institutions, where there is a problem
relating to the receipt of capitation fees, etc.

Therefore, a view is possible that section
115BBC does not apply at all to box collections of genuine charitable trusts.

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