ORIENTAL CHARITABLE FOUNDATION,KOLKATA vs. CIT(EXEMPTIONS), KOLKATA

This appeal filed by the assessee is against the revision order of the Ld. Commissioner of Income Tax (Exemptions), Kolkata, (hereinafter referred to as “the Ld. CIT(E)” passed u/s 263 of the Income tax Act, 1961 (hereinafter referred to as the “Act”) vide M. No.CIT(E)/Kol/263/2021-22/193-195 dated 16.03.2022.

Grounds of appeal raised by the assessee read as under :

That in the facts and circumstances of the case, the Ld. CIT (Exemption), Kolkata has erred in disallowing application of income of Rs.66,67,929/- which was made out of income of the trust for the instant year on the ground that said income represent Capital gains and hence cannot be utilised for the purpose of charitable activities. The Ld. CIT (Exemption), Kolkata has erred in coming to conclusion that in terms of Section 11 (1A) of the Act, utilization of capital gains should be made to acquire another capital asset.

We have heard rival submissions and carefully perused the material available on record and have also gone through the written submissions filed during the course of the hearing and also subsequently on 10.05.2024 after

The assessee responded that as per the above clause of the Trust Deed, the trustees were within their powers to utilise the corpus fund for charitable purpose and by necessary implication, the fund is deemed to have been utilised as per the desires of the respective donors. The reply was considered but the Ld. CIT(E) noted that inspite of the repeated opportunities afforded to the assessee Trust, the assessee failed to come out explicitly regarding the purpose for which the corpus fund was received by it from various donors from time to time. Thus, he was of the view that the absence of any clear explanation of the assessee implied contravention of section 11(1)(d) of the Act and utilisation of the corpus fund for non-specified purposes could not be treated as application of income. He further concluded as under: “Thus, It is evident from the perusal of the Balance Sheet ended on 31st March, 2017 that the donation was made out of the Accumulated Corpus fund of Rs. 54,81,90,652 received by assessee. Since, this Corpus fund of Rs. 54,81,90,652 received by assessee for specific purpose is exempted u/s 11(1)(d) of the I.T. Act, 1961 and not included in the gross receipts of assessee, the assesse’s claim of donation of Rs. 9,37,71,775/- towards application of fund is irregular. 7.2 The assessee has reported capital gains out of sale of investments in mutual funds to the tune of Rs. 66,67,929/-. The computation of capital gains exemption has to be made in accordance with the provisions of section 11(lA). However, the assessee has not computed income in this manner. In the case of institutions covered by Section 11, the amount kept under corpus fund has been exempted in the year of receipt. Since investment in mutual fund is a valid mode of investment u/s.11(5), there is always the possibility to incur gain or loss. In case of the investments, the corpus fund is reduced. On the other hand, the profit out of the Oriental Charitable foundation, AY 2017-18 investment enriches the fund. The gain or loss out of the corpus fund would not have any impact on revenue account that is why in the exemption cases profit out of the investment is computed u/s. 11(1A). In spite of the requisition for producing directions from the donors to the effect of forming corpus, the assessee failed to produce the same. In view of the above, the corpus fund equivalent to Rs. 9,37,71,775/- (Rs. 8,71,03,846/-+ Rs.66,67,929/-) required to be credited to the revenue as income. Accordingly, the application of income to the tune of Rs.8,71,03,846/- and the application made out of the corpus fund growth to the tune of Rs. 66,67,929/- are disallowed as revenue applications. The issue is therefore, set aside and restored back to the assessing officer to compute income in the light of the above discussions and pass necessary order accordingly.”

Before us in the appeal as well, the assessee has stated that it had made donations to the tune of Rs.9,37,71,775/- for charitable purposes in keeping with the objects of the assessee trust. However, during the year, as is evident from the perusal of the income and expenditure account for the relevant period, the trust had an excess of expenditure over income of Rs.8,69,42,118.91, thereby implying that the donations made by the assessee were done out of the accumulated corpus fund of Rs.54,81,90,652/-, as has been pointed out by the Ld. CIT(E) at para 7.1, page 14 of his order. The assessee further states that it has restricted its claim of application of income to the gross income for the relevant period in its computation of taxable income relating to the previous year ended at 31.03.2017 and not taken benefit of carry forward of loss in relation to the total application of Rs.9,37,84,046/- and the taxable income has been shown as NIL and no carry forward loss has been shown for the relevant period. It is stated that Explanation 5 to section 11(1) of the Act has been inserted by the Finance Act, 2021 with prospective effect from 01.04.2022. However, this explanation is clarificatory in nature as the set off of loss is allowed as per the provisions of Chapter VI, which relates to computation of loss under various heads e.g. house property, business loss, capital gains etc. while the income of the trust is to be computed as per the normal commercial principles by considering the receipt and expenditure for the relevant period. It is also stated that out of total receipts received in the relevant year at Rs.68,41,927/-, only Rs. 80,000/- was on account of donations received and a substantial sum of Rs.66,67,929/- was on account of the profit on sale of Oriental Charitable foundation, AY 2017-18 Mutual Funds. The voluntary contribution that formed part of corpus and thereby claimed as exempt u/s. 11(1)(d) in the years of receipt, was received earlier and accordingly treated as part of corpus fund of the trust in the preceding years. It is further stated that corpus funds were received by the assessee in the preceding years with the direction that such contributions formed part of the corpus funds of the assessee trust and no other direction towards specific project/activities were received. Thus, the utilisation of the corpus funds was made in subsequent years as per the objects of the Trust as per para 5(i) of the Trust Deed dated 14.01.1978. The AO had made proper enquiries and verification in the original assessment order framed u/s. 143(3) dated 06.09.2019. It is further stated that where a corpus donation has been made with the direction by the donor that such contribution shall form part of corpus but without a specific direction towards a project/activity, the scheme of section 11(1)(d) stands unviolated in so far as if such corpus contribution has been utilised subsequently towards the objects of the assessee Trust, as is discernible through its Trust Deed and such corpus donation shall not form part of the total income of the previous year of the trust in receipt of such income in so far as such corpus contributions shall be exempt to tax as per the provisions of sec. 11(1)(d) in the year of its receipt and shall form part of the corpus fund of the assessee trust. The assessee has raised a question as to whether such corpus fund, which is claimed as exempt in a preceding year being the year of its receipt and thus not includible as per the provisions of sec. 11(1)(d), can be treated as income of the assessee trust in the year of its application, which is a subsequent year and not the year of receipt but which is the year of its utilisation. It has been stated that wherever it has been desired to withdraw the benefit of any provision availed in a preceding year, specific provisions to tax the benefit in the subsequent year have been enacted when the conditions stipulated for availing the benefit have been violated and a reference has been made to the provisions of section 47A(2) of the Act in this regard as an illustration. It is stated that if the conditions stipulated in sub-

We have heard the rival submissions and also gone through the written submissions filed. In order to address the controversy, it is imperative to refer to provisions of sections 11(1)(a) and 11(1)(d) of the I. T. Act, 1961, which are reproduced as under: “ [11. Income from property held for charitable or religious purposes.— (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income— [(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 4 [fifteen per cent.] of the income from such property; 1 [(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.”

Explanation (2) though applicable from 01.04.2018 prohibits donation to another trust or institution being contribution with the specific direction that it shall form part of the corpus, which is not equivalent to application for charitable or religious purposes. The assessee, by making donation to other trust/individual has not only reduced the corpus and thereby acted against the wishes of the donor and converted the nature of the donation exempt u/s. 11(1)(d) of the Act in the year of receipt as no longer being part of the corpus and, therefore, the donation made to other trusts are also not Oriental Charitable foundation, AY 2017-18 to be treated as the application of the income in the year under consideration. Although there is an amendment by insertion of Explanation (4) w.e.f. 01.04.2021 which treats the application from corpus also as income applied for charitable or religious purposes but the same would be treated as application in the year in which such corpus is invested or deposited in to bank in one or more of the forms or modes specified in sub-section (5) mentioned specifically for such purpose, thereby implying that even under the amended provisions, the assessee is required to maintain the corpus and the same cannot be reduced by making any irretrievable expenditure like donations made by the assessee. Therefore, the donations out of the corpus fund, not being in accordance with the direction of the donors and withdrawn in the year, to this extent the corpus fund lost its character as capital receipt and thereby not only became subject to inclusion in the income by virtue of section 12(1) in the year in which such conversion has taken place but also the application out of such withdrawal being donation to other trust/institution does not qualify as application for charitable or religious purposes and, therefore, the income was liable to be subjected to tax and the order of the AO was erroneous to such an extent as has been rightly held by the Ld. CIT(E).

Thus, a bare reading of the provisions show that if the trust receives any income which is computed as per the commercial principle [(CIT Vs. PSG & Sons Charity (1197) 223 ITR 831 (Mad)] the same shall not be included in the total income of the previous year of the person in receipt of the income subject to the provisions of sections 60 to 63, if the conditions in clauses (a) and (d) are fulfilled. Clause (a) refers to income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purpose in India and in case the same is accumulated or set apart for application to such purpose in India, it is not in excess of 15% of the income from such property. Thus, clause (a) refers to the income derived from property held under trust and application of such Oriental Charitable foundation, AY 2017-18 income to the extent specified being 85% in order to avail the exemption. Clause (d) refers to income in the form of voluntary contributions made under the specific direction that they shall form part of the corpus of the trust or institution. There is an amendment requiring investment or deposit in one or more of the forms in sub-section (5) to be maintained specifically for such corpus. However, we are not concerned with the amendment as the same is inserted w.e.f 01.04.2022 and is not relevant for the year under consideration. Explanation (1) to sub-section (1) of section 11 mentions that in computing the 15% of the income which may be accumulated or set apart, any such voluntary contributions as are referred to section 12 shall be deemed to be part of the income. Section 12(1) relating to voluntary contributions is reproduced as under: “12. Income of trusts or institutions from contributions.—5 [(1)] Any voluntary contributions 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 section 11 be deemed to be 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.]”

We have also gone through the order of the Ld. CIT(E) and have reproduced the relevant extracts in the preceding paragraphs. The word “corpus” is not defined in the Income Tax Act, 1961. However, in the case of DIT Vs. Shri Ramkrishna Seva Ashram (2012) 18 taxmann.com 37 (Kar.) it has been held that where intention of the donor is to give money to a trust which they will keep in trust account in deposit and the income from the same is utilised for carrying on charitable and religious activities, it satisfies definition part of the corpus and in such a situation assessee would be entitled to the benefit of exemption from payment of tax u/s. 11(1)(d) of the Act. Thus, corpus refers to the capital of the trust which is to be utilised for incurring capital expenditure or acquiring income generating or capital assets, the income from which can be used for the objects of the trust. The corpus is thus the tree and income therefrom are the fruits which can be utilised for Oriental Charitable foundation, AY 2017-18 achieving the objects of the trust with the tree being kept intact. Thus, the corpus can be utilised for creation of income yielding assets e.g. investment in capital assets, investment in funds yielding income in future so that the working of the trust is not affected and it has a regular source of income for meeting its requirement. If the corpus is utilised for revenue purposes, it not only violates the condition of the donors by virtue of which it was to be treated as a capital receipt and, therefore, exempt from tax, but it also dwindles the resources of the trust. It is in this context that while clause (a) to sub-section (1) of section 11 requires 85% of the income derived from property held under trust wholly for charitable or religious purposes to be applied to such purpose in India and limiting the accumulation thereof not in excess of 15% of the income from such property as exempt, being the current income, which also includes voluntary contributions except those for corpus fund, clause (d) thereof treats the corpus donation as capital receipt if the income is in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust and such corpus receipt is not subjected to the requirement of application of 85% unlike in clause (a) and is also not treated as income of the trust or the institution from contributions as per sub-section (1) of section 12. This is so because the specific direction of the donor may relate to acquisition of certain assets or forming part of the capital requirement of the trust so as to achieve its objective and meet its day to day requirement out of the income generated from such corpus. It is also judicially settled that exemption provisions are to be construed strictly as has been held in the case of the Hon’ble Supreme court by the decision of Chekmate Services Private Limited, Civil Appeal No. 2833 of 2016 which are as under: “10. One of the rules of interpretation of a tax statute is that if a deduction or exemption is available on compliance with certain conditions, the conditions are to be strictly complied with Eagle Flask Industries Ltd. v. CCE 2004 taxmann.com 350 (SC)/2004 Supp. (4) SCR 35. This rule is in line with the general principle that taxing statutes are Oriental Charitable foundation, AY 2017-18 to be construed strictly, and that there is no room for equitable considerations.

In our view, an exception or an exempting provision in a taxing statute should be construed strictly and it is not open to the court to ignore the conditions prescribed in the industrial policy and the exemption notifications.

In our view, the failure to comply with the requirements renders the writ petition filed by the respondent liable to be dismissed. While mandatory rule must be strictly observed, substantial compliance might suffice in the case of a directory rule.

Whenever the statute prescribes that a particular act is to be done in a particular manner and also lays down that failure to comply with the said requirement leads to severe consequences, such requirement would be mandatory. It is the cardinal rule of interpretation that where a statute provides that a particular thing should be done, it should be done in the manner prescribed and not in any other way. It is also settled rule of interpretation that where a statute is penal in character, it must be strictly construed and followed. Since the requirement, in the instant case, of obtaining prior permission is mandatory, therefore, non-compliance with the same must result in cancelling the concession made in favour of the grantee, the respondent herein."

The assessee contends that there is no such mention of treatment of voluntary contribution as income, however, clause (d) of sub-section (1) of section 11 excludes such voluntary contribution only if they are made with the specific direction that they shall form part of the corpus of the trust thereby implying that if no such directions are given then they shall be included as income of the trust as per the provisions of section 12(1) and subject to the requirement of clause (a) to sub-section (1) of section 11. Thus, section 11 treats revenue and capital receipts differently. Since the computation of income of the trust is to be done as per the commercial principles, therefore, applying the commercial principles, if the capital receipt is no longer continuing as capital receipt because of the violation of the conditions, then it is liable to be included as a revenue receipt.

The Ld. CIT(E) examined the accounts of the assessee and found that the order of the AO was erroneous in so far as it was prejudicial to the interest of the revenue as the assessee had failed to give details of the corpus donation even in the course of the proceeding u/s. 263 and the AO had failed to examine the same by conducting the required enquiries. Further, he was Oriental Charitable foundation, AY 2017-18 of the view that the capital gains was to be computed as per the provisions of sub-section (1A) of section 11. While agreeing with the proposition that the corpus donation could not be utilised for making donation to other trust/institution in the absence of any direction from the donors as corpus funds was subjected to and governed by the wishes and desires of the donor, he was of the view that they could not be utilised for expenditure of revenue nature which could dwindle the capital of the trust. The assessee has placed reliance on clause 5(i) of the trust deed, which is reproduced as under: “(i) To apply the whole or part of the income or accumulation thereof or whole or part of the corpus of the trust properties for one or more of the objects of the Trust as the Trustees may from time to time determined.”

However, the assessee’s reliance on this clause to make payments for donations is misplaced. It is not implied by this clause even that the trustees can apply the corpus donation in violation of the specific direction of the donors and in the absence of any documentary evidence filed, the desires and wishes of the donors for the accumulated corpus cannot be ascertained. However, by making payments and donations out of the corpus fund, which apparently are irretrievable, the corpus fund has dwindled from year to year and the donations which were part of the corpus fund in the year of receipt, lose their character as capital receipt and exempt in the year in which it has gone out of the corpus of the trust. Hence, the view of the Ld. CIT(E) treating the order as erroneous in so far as it is prejudicial to the interest of the revenue as regard corpus fund is upheld.

This sub-section refers to the transfer of capital assets and utilisation of the net consideration for acquiring another capital asset and deems the same as application of income for the purpose of sub-section (1) of section 11. If the assessee utilises the net consideration for acquiring another capital asset, then the capital asset acquired from the sale consideration shall be deemed to have been applied to charitable or religious purpose to the extent specified therein for the purpose of sub-section (1) of section 11 of the Act. It implies that even though the net consideration being the income from capital account is not applied for the charitable purpose in terms of the object of the trust, however, if the same is utilised for acquiring capital assets to be held by the assessee, then investment in such capital assets acquired shall be deemed to be application of the income for charitable purposes, the calculation being made as per the provisions of section (1A) of section 11 of the Act. Hence, to this extent the assessee’s

The reliance upon the case cited by the assessee does not support its case. In the corpus fund was utilised for making capital expenditure for construction of hospital building, equipment and other capital expenditure and no revenue expenditure was made out of the same. Thus, the capital expenditure was for fulfilment of the objects of the trust and since corpus fund was used for making capital expenditure, therefore, the same was allowed, which is not the case of the assessee. Similarly, in the case of St. Joseph’s Monastery, ITA No. 840/2018 AY 2013-14 dated 23.11.2021, facts are different than the facts of the assessee and both the decisions are not applicable to the assessee being distinguishable on facts.

However, as regards ground no. 3 that the income from capital gains can also be applied for charitable purpose in Oriental Charitable foundation, AY 2017-18 accordance with the objects pof the trust, the assessee’s claim is justified and the ground is allowed in favour of the assessee.

Ground no. 5 is general in nature and does not require any adjudication.

In the result, the appeal of the assessee is partly allowed.