BANK OF INDIA RETIRED EMPLOYEES MEDICAL ASSISTANCE TRUST,MUMBAI vs. ITO (E) - 1(1), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-1, Mumbai, dated. 07.09.2016, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟) dated 07.03.2015 for A.Y. 2012-13. The assessee has assailed the order of the CIT(A) by raising the following grounds of appeal before us :

During the course of the assessment proceedings it was observed by the A.O that the object of the assessee trust was to provide financial assistance to its members i.e the retired employees of the bank by reimbursing to them the medical expenses incurred on their self and his/her dependent spouse. On the basis of the aforesaid facts, it was observed by the A.O that as the assessee trust was not registered under Sec. 12A of the Act, therefore, the provisions of Sec. 11(1)(d) would not be applicable in its case and resultantly the voluntary contributions of Rs. 2,30,00,000/- received from Bank of India and the membership fees of Rs. 3,47,82,601/- were liable to be included in its total income.

On the basis of his aforesaid observations, the A.O being of the view that the assessee was not eligible for exemption under Sec. 11, thus called upon it to explain that as to on what basis the sum of Rs. 2,30,00,000/- received from bank and Rs. 3,47,82,601/- received on account of membership fees was claimed as exempt. The assessee submitted before the A.O that that on the basis of doctrine of mutuality the aforesaid receipts could not be held as its income. Though the A.O accepted the reply of the assessee that the amount of Rs. 3,47,82,601/- received from its members, being covered by the doctrine of mutuality could not be brought to tax, but he was not persuaded to subscribe to a similar claim raised by the assessee as regards the amount of Rs. 2,30,00,000/- received from the Bank of India. The A.O observed that „Income‟ as defined under Sec. 2(24)(iia) took within its sweep 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, or by an association or institution referred to in Clause (21) or Clause (23) or by a fund or trust or institution referred to in P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). sub-clause (iv) or sub-clause (v) [or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C), of Sec. 10 or by an electoral trust. The A.O was of the view that every contribution received by a trust was to be taken as its income. Further, it was observed by him that as per Sec. 12(1) any voluntary contribution received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of the Sec. 11 be deemed to be the income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly. It was further observed by the A.O that in a case where voluntary contribution would be received by a trust registered under Sec. 12A with a specific direction that the same shall form part of the corpus of the trust or institution, the same would be exempt under Sec. 11(1)(d) of the Act. On the basis of his aforesaid deliberations, it was observed by the A.O that as the assessee trust was not registered under Sec. 12A, thus, it would not be eligible for claim of exemption under Sec. 11 of the Act. In the backdrop of the aforesaid observations, it was concluded by the A.O that as the assessee trust was not entitled for claim of exemption under Sec.11 and 12 of the Act, therefore, the voluntary contributions received by it were to be held as its income under Sec. 2(24) of the Act. The A.O while concluding as hereinabove, that registration under Sec. 12A was a condition precedent for availing of benefit of Sec. 11 and Sec. 12, relied on the judgment of the Hon‟ble Supreme Court in the case of UP Forest Corpn. Vs. Dy. CIT (2008) 297 ITR 1 (SC). It was thus held by the A.O that as the assessee was declined registration under Sec. 12A and was thus not enjoying the status of a registered trust, therefore, the provisions of Sec.11(1)(d) would not be applicable in its case and the amount of Rs. 2,30,00,000/- received towards corpus from Bank of India would be liable to be added back to its total income.

The A.O further deliberating on the application of the doctrine of the mutuality as regards the income earned by the assessee trust was concerned, observed that as the assessee was a mutual association and not a charitable one, therefore, applying the doctrine of mutuality, the amount received by the assessee from non-members and other sources such as interest income was to be treated as the income of the assessee and accordingly brought to tax. The A.O relying on the judgment of the Hon‟ble Supreme Court in the case of Bangalore Club Vs. CIT & Anr (2015) 350 ITR 509 (SC) concluded that the interest income earned by the assessee from the deposits held with the banks would not be covered by the doctrine of mutuality and would be liable to be brought to tax in the hands of the assessee. On the basis of his aforesaid observations, the A.O held the entire interest income of Rs. 2,31,23,086/- shown by the assessee in its Income & Expenditure account as the income of the assessee within the meaning of Sec. 2(15) of the Act. The A.O on the basis of his aforesaid deliberations assessed the income of the assessee trust at Rs. 4,61,23,090/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions of the assessee, observed that as the objects of the assessee trust were limited to the benefit of its employees, thus the A.O had rightly concluded that it was not a charitable trust but only a mutual association. It was further observed by the CIT(A) that as the registration under Sec. 12A of the Act was rejected by the DIT (Exemptions), Mumbai, vide his order dated 22.02.2011, therefore, the A.O had rightly added the sum of Rs. 2,30,00,000/- received by the assessee as corpus fund from Bank of India to the total income of the assessee. The CIT(A) further deliberating on the claim of the assessee that the A.O while assessing the gross receipts of the assessee under Sec. 56 of the Act had erred in not allowing the deduction contemplated under Sec. 57(iii), did not find merit in the same. The CIT(A) observed that the assessee had neither during the course of the assessment proceedings or before him had explained as to how the said expenditure was to be held as having been P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). incurred by the assessee wholly and exclusively for the purpose of earning the income on account of interest or donations. On the basis of the aforesaid observations the CIT(A) partly allowed the appeal of the assessee.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Authorized Representative (for short „A.R‟) for the assessee at the very outset of the hearing of the appeal submitted that as the voluntary contribution of Rs. 2,30,00,000/- received by the assessee trust towards corpus fund from Bank of India was in the nature of a capital receipts, therefore, the same was not liable to be taxed as the income of the assessee under Sec. 2(24) of the Act. It was submitted by the Ld. A.R that the lower authorities loosing sight of the said material fact, had erred in characterizing the receipt of Rs. 2,30,00,000/- as the income of the assessee. The Ld. A.R in support of his aforesaid contention relied on an order of a coordinate bench of the Tribunal viz. ITAT, Mumbai “D” Bench in the case of Chandrabahu Jain Swetamber Mandir Vs. ACIT (2016) 50 ITR (Trib) 355 (Mum) and the order of ITAT Calcutta “C” Bench in the case of Shri Shankar Bhagwan Estate Vs. ITO (1997) 61 ITD 196 (Cal). The Ld. A.R in order to drive home his contention that the contributions received by a charitable or religious trust or institution with a specific direction that the same would form part of the corpus of the trust or institution is not to be treated as income of the assessee, took us through the amendment to Sec. 2(24) as was made available on the statute vide the Finance Act, 1972 w.e.f 01.04.1973. It was further submitted by the Ld. A.R that involving similar facts as those in the case of the present assessee the ITAT, Chennai “B” Bench in the case of M/s Pentafour Software Employees Welfare Foundation Vs. ACIT, Company Circle V(2), Chennai (ITA No. 751/MDS/2007, dated 08.07.2008) had concluded that donations towards corpus of the trust were not to form part of its income, irrespective of the fact that the trust was not registered under Sec. 12A of the Act. The Ld. A.R further submitted that the lower authorities had erred in not allowing under Sec. 57(iii) the expenses which were incurred by the assessee for the objects P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). and administration of the trust viz. (i) demat charges :Rs. 386/-; (ii) legal expenses :Rs. 11,236/- ; and (iii) medical relief expenses :Rs. 3,09,66,723/-. It was further submitted by the Ld. A.R that a direction be issued to the lower authorities that in case if the registration of the assessee trust was restored under Sec. 12A then a consequential effect be given to the same. Per contra, the Ld. Departmental Representative (for short „D.R) relied on the orders of the lower authorities. It was submitted by the Ld. D.R that as the assessee trust was not registered under Sec. 12A of the Act, therefore, the corpus receipts had rightly been brought to tax by the lower authorities as the income of the assessee under Sec. 2(24)(iia) of the Act. It was further averred by the Ld. D.R that as the assessee had failed to establish that the expenses incurred by it were wholly and exclusively incurred for the purpose of earning the income on account of interest or donations, therefore, the CIT(A) had rightly declined such claim of the assessee.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We shall first advert to the validity of the orders of the lower authorities which had brought to tax an amount of Rs. 2,30,00,000/- received by the assessee trust from Bank of India. We find from a perusal of the lower authorities that it remains as a matter of fact that the aforesaid amount was admittedly received by the assessee towards corpus fund with a specific purpose of allocating such funds for different welfare activities. We find from the facts as emerges from the assessment order, that as per the decision of Bank of India Central Welfare Committee an amount of Rs. 170 lac and Rs. 60 lac were debited to the banks Staff Welfare Expenses account on 17.03.2012 and 30.03.2012, respectively, and were allocated by way of corpus fund to the credit of Retired Employees Medical Assistance Scheme account with a specific purpose for being utilised for different activities of the assessee trust. Rather, we find that the A.O while framing the assessment had categorically observed that the amount of Rs. 2,30,00,000/- received by the assessee trust from Bank of India was on account of corpus P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). fund. We thus, in the backdrop of the aforesaid admitted fact that the amount of Rs. 2,30,00,000/- received by the assessee trust from Bank of India was towards corpus fund, therein proceed with and adjudicate upon the validity of bringing the said amount to tax by the lower authorities.

We have perused the orders of the lower authorities and find that the amount of Rs. 2,30,00,000/- received by the assessee towards corpus fund from the bank was brought to tax for the reason that as the assessee was not registered under Sec. 12A of the Act, therefore, the provisions of Sec. 11(1)(d) would not be applicable in its case. We find that it remains as a matter of an admitted fact that the assessee trust having been declined registration by the DIT(E), Mumbai, vide his order passed under Sec. 12AA(3) of the Act, dated 22.02.2011, was thus not registered under Sec. 12A of the Act. We are persuaded to be in agreement with the observations of the lower authorities that as the assessee trust was not registered under Sec. 12A, hence it was disentitled from taking recourse to Sec. 11(1)(d) and seek exclusion from its total income the amount of Rs. 2,30,00,000/- received towards corpus fund from the bank. However, we find from a perusal of the orders of the lower authorities that the assessee had at no stage sought exclusion of the amounts received by it towards corpus fund from the scope of its total income by invoking the provisions contemplated under Sec. 11(1)(d) of the Act. Rather, the contention of the assessee before the lower authorities as well as before us was that the registration of a trust under Sec. 12A would not change the character of the receipt in its hands. We find that the assessee had throughout canvassed that the corpus receipts being in the nature of a capital receipt in the hands of the assessee trust, would thus not be liable for being taxed as the income of the trust. We have perused the orders of the lower authorities and the material available on record and find that undisputedly the amount of Rs. 2,30,00,000/- was received by the assessee trust from Bank of India towards corpus fund. The said amount was specifically directed to be kept as a tied-up fund and only interest earned from the same was to be utilised for the furtherance of the P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). objects of the trust. We have deliberated on the issue under consideration and are of the considered view that a corpus fund denotes a permanent fund kept for the basic expenditures needed for the administration and survival of an organization. The corpus fund is generally not to be utilized for the attainment of the objects of the trust, however the interest/dividend generated from such fund can either be utilized or accumulated. We have perused the objects of the assessee trust and find that it was established for providing medical assistance to the retired employees of Bank of India. The assessee trust as observed by us hereinabove, was duly registered with the Charity Commissioner, Mumbai. On a perusal of the trust deed, it emerges that as the main object of the assessee trust was not for the benefit of the general public, but was solely dedicated for the welfare of the retired employees of the bank, thus, the same could not be held as a charitable trust as contemplated under Sec.2(15) of the Act. We find that our aforesaid view that where a trust had been set up not for the benefit of the general public or any section of the general public at large, but for the benefit and welfare of the employees of an institution, the same cannot be held to be a charitable trust but only a mutual association with its objects limited to the benefit of its employees, is supported by the following judicial pronouncements:

We thus, in the backdrop of the aforesaid facts shall first advert to the validity of the orders of the lower authorities that the amount received by the assessee trust towards corpus fund, san registration under Sec. 12A of the Act would be liable to be taxed as its income. We find that as observed by us hereinabove, a similar issue had came up before a coordinate bench of the Tribunal, viz. ITAT, Mumbai “D” bench, Mumbai, in the case of Chandrabahu Jain Swetamber Mandir Vs. ACIT (2016) 50 ITR (Trib) 355 (Mum). In the aforementioned case, the corpus donations of Rs.4,55,446/- P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). received by the assessee trust which was not registered under Sec.12A/12AA of the Act, were brought to tax as the income of the assessee within the meaning of Sec.2(24)(iia) r.w. Sec. 11 of the Act. The A.O while subjecting the aforesaid corpus donations to tax as the income of the assessee, had observed that as the assessee trust was not registered under Sec.12A, therefore, the provisions of Sec.11(1)(d) excluding from the income of the trust the funds received towards corpus fund with specific directions for its utilization, would not be applicable. However, on appeal the Tribunal observing that as the aforesaid corpus donations of Rs.4,55,446/- received by the assessee trust were capital receipts, therefore, the same could not be brought to tax, despite the fact that the assessee trust was not registered under Sec.12A/12AA of the Act. We further find that a similar view was also arrived at by the ITAT, Delhi in the case of ITO (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust (ITA No. 5082/Del/2010, dated 19.01.20110. In the aforementioned case the Tribunal had concluded that the amount received by the assessee trust from its settlor towards infrastructure fund was not liable to be brought to tax as its income, despite the fact that the trust was not registered under Sec.12A of the Act. We further find that the revenue being aggrieved with the aforesaid order of the Tribunal had carried the matter in appeal before the Hon‟ble High Court of Delhi, which had vide its order passed in DIT (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust [ITA No. 927 of 2009, dated 23.09.2009] had dismissed the appeal of the revenue and upheld the aforesaid view of the Tribunal. We further find that a similar view had also been taken by a coordinate bench of the Tribunal i.e ITAT, Agra in the case of ITO Vs. Gaudiya Granth Anuved Trust (2013) 28 ITR (Trib) 161 (Agra). Still further, the ITAT, Chennai “B” bench had also in the case of Pentafour Software Employees Welfare Foundation Vs. ACIT (ITA No. 751 and 752/(Mad)/2007, dated 08.07.2008) had held that corpus donations being in the nature of capital receipts were not chargeable to income tax. In this regard it would also be relevant to point out that the ITAT, Delhi while passing the order in the case of Smt Basanti Devi and Chakhan lal Garg P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). Education Trust (supra) had relied on the aforesaid order of the ITAT, Chennai in the case of Pentafour Software Employees Welfare Foundation (supra). We further find that the ITAT, Kolkata had also in the case of Shri Shankar Bhagwan Estate Vs. ITO (1997) 61 ITD 196 (Cal) concluded that the assessment of the corpus donations as the income of the assessee trust could not be sustained and was liable to be vacated.

We have deliberated al length on the issue under consideration in the backdrop of the aforesaid judicial pronouncements and are of the considered view that as the issue involved in the present appeal before us is covered by the view taken by the Hon‟ble High Court of Delhi in the case of DIT (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust [ITA No. 927 of 2009, dated 23.09.2009] and the aforementioned orders of the coordinate benches of the Tribunal, therefore, respectfully follow the same. We thus, in terms of our aforesaid observations are of the considered view that as the amount of Rs.2,30,00,000/- received by the assessee trust from Bank of India towards corpus fund is in the nature of a „capital receipt‟, therefore, the same could not have been brought to tax as the income of the assessee under Sec. 2(24)(iia) of the Act. Before parting, we may herein observe that the revenue being aggrieved with the order of the High Court of Delhi in the case of DIT (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust [ITA No. 927 of 2009, dated 23.09.2009], had assailed the same before the Hon‟ble Supreme Court, which however was dismissed for non-prosecution by the Hon‟ble Apex Court, vide its order dated 28.01.2013 passed in civil appeal no. 7036 of 2011. We thus, in terms of our aforesaid observations delete the addition of Rs. 2,30,00,000/- sustained by the CIT(A) in respect of the corpus donations received by the assessee trust from Bank of India. The Grounds of appeal Nos. 1 to 3 raised by the assessee are allowed in terms of our aforesaid observations.

The assessee had further assailed before us the order of the CIT(A) on the ground that he had erred in not deleting the addition of interest income P a g e | Bank of India Retired Employees Medical Assistance Trust Vs. ITO(E)-1(1). of Rs.28,03,868/- that was wrongly made by the A.O. The ld. A.R taking us through the income and expenditure account of the assessee trust for the year under consideration viz. A.Y 2012-13, had drawn our attention to the fact that the assessee during the year under consideration was in receipt of total interest income of Rs.2,03,19,218/- [interest on bank account Rs.8,51,776/- (+) interest on FDR: Rs.1,91,85,184/- (+) Accrued interest :Rs.2,82,258/-]. It was averred by the ld. A.R that the A.O while framing the assessment had wrongly made an addition of the bank interest by taking the same at Rs.2,31,23,886/-. It was submitted by the ld. A.R that pursuant to the aforesaid mistake on the part of the A.O the assessee had suffered an excess addition of Rs.28,03,868/-. The grievance of the assessee before us is that despite the fact that the entire facts and figures were available before the CIT(A), but the latter despite specific ground of appeal No.6 raised by the assessee before him had failed to adjudicate the same by way of a speaking order.

We have perused the records and find that as emerges from the order of the CIT(A), the assessee had submitted before him that it had by way of an application filed with the A.O under Sec. 154, dated 07.09.2016, sought rectification of the aforesaid clerical mistake. In perusal of the order of the CIT(A) it transpires that the assessee had requested the CIT(A) to issue suitable directions to the A.O. We find that the CIT(A) acting upon the aforesaid request of the assessee, had directed the A.O to expeditiously dispose of the application filed by the assessee under Sec. 154. We are of the considered view that now when the assessee had itself requested the CIT(A) to issue suitable directions to the A.O, therefore, it would not be permissible for it to assail the order of the CIT(A) on the ground that the latter had erred in merely issuing directions to the A.O to expeditiously dispose of the application filed by the assessee under Sec. 154 and not adjudicating the said issue on merits. We thus, not finding any force in the aforesaid contention of the assessee, decline to accept the same. The Ground of appeal No. 4 filed by the assessee is dismissed.

We shall now advert to the claim of the assessee that the lower authorities had erred in not allowing the expenses which were incurred for the attainment of the objects and administration of the assessee trust, as under :

We have deliberated on the issue under consideration and find that the deductions allowed against the income chargeable under the head “Income from other sources” are circumscribed in Sec. 57 of the Act. Still further, in case of interest income earned by an assessee, only the expenditure (not being in the nature of a capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is to be allowed as a deduction under Sec. 57(iii) of the Act. We thus, in the backdrop of the facts of the case before us, are of the considered view that as the expenditure of 3,09,78,345.30, viz. (i) D-mat charges of Rs.386/- ; (ii) Legal expenses of Rs.11,236/-; and (iii) Medical Relief Expenses Rs.3,09,66,723/- incurred by the assessee cannot be construed as having been laid out or expended wholly and exclusively for the purpose of making or earning of the interest income on the aforesaid FDR‟s and bank account of the assessee, therefore, the same cannot be allowed as a deduction as against the interest income of the assessee. We are of the considered view that the existence of an inextricable nexus between the incurring of the expenditure and earning of the interest income is a pre-requisite condition for allowability of the same as a deduction under Sec. 57(iii) of the Act. We find that our aforesaid view stands fortified by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Dr. V.P Gopinathan (2001) 248 ITR 449 (SC). The Hon‟ble Apex Court deliberating on the issue under consideration, had observed as under:

The appeal of the assessee is partly allowed in terms of our aforesaid observations.