Income Tax Case

IN THE HIGH COURT OF JUDICATURE AT MADRAS Reserved Date : 19.07.2021 Pronounced Date : 30.07.2021 CORAM THE HON'BLE MR.JUSTICE M. DURAISWAMYANDTHE HON'BLE MRS.JUSTICE R. HEMALATHA Tax Case Appeal Nos.281, 290 & 291 of 2016 Rasipuram Rotary Club Trust,Rotary Nagar,Namakkal Road,Rasipuram Taluk. ... Appellant/Appellantin TCA No.281 of 2016 (PAN No : AABTR 4516 K) Rasipuram Kannda Sainigar SamugaPradama Sangam Educational Trust,4/41, Dasa Street, Rasipural – Post & Taluk. ... Appellant/Appellant in TCANos.290 & 291 of 2016 (PAN No : AABTR 2734 F) Vs. The Income Tax Officer,Ward II (2),Salem. ... Respondent inall TCA's/Respondent COMMON PRAYER:Tax Case Appeals filed under Section 260A ofthe Income Tax Act, 1961 against the orders of the Income TaxAppellate Tribunal, Chennai " SMC" Bench, dated 20.11.2015 &13.11.2015 passed in ITA Nos.45/Mds/2015, 43/Mds/2015 &44/Mds/2015 for the assessment years 2007-2008, 2008-2009 and2009-2010 and order in I.T.A.No.43/2010-2011, I.T.A.No.26/2010-2011 and I.T.A.No.27/2010-2011 dated 28/10/2014 by thecommissioner of Income Tax (Appeals), Salem and against theorder of Income Tax Officer Ward II(2), Salem Assessment orderfor the year 2007-2008, 2008-2009 and 2009-2010. In all TCA's https://hcservices.ecourts.gov.in/hcservices/ For Appellant : M/s.G.Vardhini Karthikfor Ms.J.Sree Vidhyafor Ms.J.Sree Vidhya For Respondent : Mr.J.NarayanasamySenior Standing Counsel Senior Standing Counsel (Common Judgment of the Court was delivered by R.HEMALATHA, J.) The three appeals are filed by the appellants M/s.RasipuramRotary Club Trust and M/s.Rasipuram Kannada Saineegar SamugaPradama Sangam Educational Trust, Rasipuram against the ordersof the ITAT 'SMC' Bench, Chennai in ITA Nos.45/Mds/2015,43/Mds/2015 & 44/Mds/2015 for the assessment years 2007-2008,2008-2009 and 2009-2010 respectively. 2. The common issue in all the three appeals is whether thecorpus donations in the form of voluntary contributions madewith a specific direction would form part of the corpus of thetrust and are exempted under Section 11(1)(d) of the Income TaxAct in the absence of 12AA registration of the Trust. The amountof such donations was Rs.8,71,157/- in 2007-2008, Rs.5,55,607/-in 2008-2009 and Rs.3,00,477/- in 2009-2010. In all the threecases, the Commissioner of Income Tax (Appeals) who heard theappeals against the Assessment Orders held that registrationunder Section 12AA is a prerequisite for any exemption to beclaimed under Section 11(1)(d) of Income Tax Act and in theabsence of the registration of the trust under Section 12AA, thevoluntary contributions lose the exemption status, irrespectiveof whether such voluntary contributions are obtained withspecific directions or not. The Income Tax Appellate Tribunal inits orders had upheld the orders of the Commissioner of IncomeTax (Appeals) and hence these appeals in this Court. 3. These appeals were admitted on the following substantialquestions of law: Substantial Questions of Law in TCA No.281/2016 : i. Whether on the facts and circumstances of the case, thecontributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12Aa of the Act?contributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12Aa of the Act? ii.Whether on the facts and in the circumstances of the case,the conditions laid down in Sections 11 and 12 shall applyeven to trusts, which are not registered under Section 12AAof the Act, 1961? Substantial Questions of Law in TCA No.281/2016 : i. Whether on the facts and circumstances of the case, thecontributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12Aa of the Act?contributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12Aa of the Act? ii.Whether on the facts and in the circumstances of the case,the conditions laid down in Sections 11 and 12 shall applyeven to trusts, which are not registered under Section 12AAof the Act, 1961? iii.Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in holding that the corpusdonations, which are capital receipts, are liable to betaxed at normal rates, since the appellant trust is notregistered under Section 12AA, even though the appellant isnot claiming exemption under Section 11? and iv.Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in holding that donationsto a non registered trust will be treated as income underSection 56(2)(v) of the Income Tax Atc, unless receivedfrom the blood relatives?"the Appellate Tribunal was right in holding that donationsto a non registered trust will be treated as income underSection 56(2)(v) of the Income Tax Atc, unless receivedfrom the blood relatives?" Substantial Questions of Law in TCA Nos.290 & 291/2016 : i. Whether on the facts and circumstances of the case, thecontributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12AA of the Act?contributions towards the corpus fund with specificdirections can be treated as income under Section 2(24)(iia) in the case of the assessee, who is not registeredcharitable trust under Section 12AA of the Act?ii.Whether on the facts and in the circumstances of the case,the conditions laid down in Sections 11 and 12 shall applyeven to trusts, which are not registered under Section 12AAof the Act, 1961? andthe conditions laid down in Sections 11 and 12 shall applyeven to trusts, which are not registered under Section 12AAof the Act, 1961? and iii.Whether on the facts and in the circumstances of the case,the Appellate Tribunal was right in holding that the corpusdonations, which are capital receipts, are liable to betaxed at normal rates, since the appellant trust is notregistered under Section 12AA, even though the appellant isnot claiming exemption under Section 11?the Appellate Tribunal was right in holding that the corpusdonations, which are capital receipts, are liable to betaxed at normal rates, since the appellant trust is notregistered under Section 12AA, even though the appellant isnot claiming exemption under Section 11? 4. Ms.J.Sree Vidhya, learned counsel for the appellantswould contend that a) the trust has not claimed exemption under Section 11 of theIncome Tax Act which the Income Tax Appellate Tribunalfailed to note.Income Tax Act which the Income Tax Appellate Tribunalfailed to note. b) the accretion to the corpus fund has to be treated ascapital receipts and are not liable to tax.capital receipts and are not liable to tax. c) the voluntary contributions made with specific directions are not income under Section 2(24)(iia) of the Income TaxAct, 1961. d) the Income Tax Appellate Tribunal did not follow thedecisions of the other tax tribunals across the country. 5. To make the law provisions crystal clear let us first gointo the nitty gritty of the relevant sections. As per Section 2(24)(iia) of Income Tax Act, 1961 "Income" includes - a) the trust has not claimed exemption under Section 11 of theIncome Tax Act which the Income Tax Appellate Tribunalfailed to note.Income Tax Act which the Income Tax Appellate Tribunalfailed to note. b) the accretion to the corpus fund has to be treated ascapital receipts and are not liable to tax.capital receipts and are not liable to tax. c) the voluntary contributions made with specific directions are not income under Section 2(24)(iia) of the Income TaxAct, 1961. d) the Income Tax Appellate Tribunal did not follow thedecisions of the other tax tribunals across the country. 5. To make the law provisions crystal clear let us first gointo the nitty gritty of the relevant sections. As per Section 2(24)(iia) of Income Tax Act, 1961 "Income" includes - voluntary contributions received by atrust created wholly or partly for charitableor religious purposes or by an institutionestablished wholly or partly for such purposesor by an association or institution referredto in clause (21) or clause (23), or by a fundor trust or institution referred to in sub-clause (iv) or sub-clause (v) of clause (23C)of Section 10] or by an electoral trust.Explanation – For the purposes of this subclause, “trust” includes any other legalobligations” Section 11(1) (d) of Income Tax Act 1961, amended in 1995,reads as follows: “Income from property held for charitable orreligious purposes - 11.(1) Subject to the provisions of Sections 60to 63, the following income shall not be includedin the total income of the previous year of theperson in receipt of the income ......a...................b..................c..................d.income in the form of voluntary contributionsmade with a specific directions that they shallform a part of the corpus of the trust orinstitution.” Section 12 of the Act, reads that- Any voluntary contributions received by a trustcreated wholly for charitable or religiouspurposes or by an institution established wholly https://hcservices.ecourts.gov.in/hcservices/ for such purposes (not being contributions madewith a specific direction that they shall for apart of the corpus of the trust or institutions)shall for the purposes of Section 11 be deemed tobe income derived from the property held undertrust wholly for charitable or religiouspurposes ........ 6. Under Section 12A of the Income Tax Act, 1961, Non-profit organisations like charitable trusts, welfare societies,non-governmental organisations, religious institutions etc., areentitled to tax exemptions. This tax relief was introducedkeeping in consideration that non-profit entities work forsocial welfare and not for generating profit. Owing to theirselfless contributions towards the society they are exemptedfrom taxes that come under the purview of Section 11 and Section12. Nevertheless, to claim such tax benefits individuals need toget registered as per the norms of Section 12A of Income TaxAct. In case a non-profit organisation fails to register underSection 12A, all their future financial transactions andreceipts will be deemed taxable. All these make it essential fornon-profit entities to become familiar with the components ofSection 12A of Income Tax Act in detail. They should also findout more about the eligibility requirements and documents amongothers. 7. Thus in the light of the above it can be inferred that-a) voluntary contributions received with a specific directionthat it forms a part of the corpus of the trust is treatedas follows : i. If the trust or charitable institution is registeredunder Section 12 AA of Income Tax Act, 1961 thevoluntary contributions are not taxable as perSection 11(1)(d) of Income Tax Act, 1961 ii.If the trust or institution is not registered underSection 12AA, the voluntary contributions aretaxable as per Section 2 (24) (iia) of the IncomeTax Act, 1961 7. Thus in the light of the above it can be inferred that-a) voluntary contributions received with a specific directionthat it forms a part of the corpus of the trust is treatedas follows : i. If the trust or charitable institution is registeredunder Section 12 AA of Income Tax Act, 1961 thevoluntary contributions are not taxable as perSection 11(1)(d) of Income Tax Act, 1961 ii.If the trust or institution is not registered underSection 12AA, the voluntary contributions aretaxable as per Section 2 (24) (iia) of the IncomeTax Act, 1961 b) voluntary contributions received without direction that itforms part of corpus is generally taxable in all cases. 8. The learned counsel for the appellants tried todifferentiate between Section 2 (24) (iia) and Section 11 (1)(d) of Income Tax Act, 1961. Her contention is that since theSection 2(24)(iia) is silent about the contribution to corpus https://hcservices.ecourts.gov.in/hcservices/ fund, it has to be construed as eligible for exemption. But theanalysis of these Sections reveal that both these Sections areinterlinked and it cannot be said to operate independently. Thisis like claiming tax exemption available for senior citizenswithout attaining the age of 60. The appellant assessee hadadduced letters expressing the intent of the donors that thedonations were with specific directions (of application). Thelearned counsel for the appellants also relied on the followingdecisions of various Income Tax Appellate Tribunals, High Courtof Andhra Pradesh, High Court of Karnataka and this Court. I. In the decision in "[2019] 110 taxmann.com 69 (Madras),Commissioner of Income-tax, Chennai Vs. Pentafour SoftwareEmployees, Welfare Foundation" the facts are totallydifferent for the simple reason that the assessee was not acharitable trust. Moreover, the assessee had onlyquestioned the re-opening of the assessment under Section148 after four years of the assessment. II.In the decision in "[1997] 92 Taxman 0431, Commissioner ofIncome Tax Vs. S.R.M.T. Staff Association", the High Courtof Andhra Pradesh held that the assessee was not acharitable institution and therefore did not fall under thedefinition of Section 2(24)(iia) of the Income Tax Act. III.In ITA No.233 of 2017 order dated 19.07.2019 in"Pr.Commissioner of Income Tax - (E) and another Vs.M/s.Vishwa Bharati Education Trust", High Court ofKarnataka held that the assessee trust's application forregistration under Section 12 AA was rejected for want ofdocuments and the exemption was denied. It was further heldthat the voluntary contributions received for a specificpurpose cannot be considered as income under Section 2 (24)(iia) since they are capital receipts. However, it wasobserved that the said voluntary contributions wasconsidered as a loan and refunded to the donors. Thesefacts are different from the facts of the present case. In all the cases relied upon by her the non-registration underSection 12AA was not the issue. In some cases, the applicationswere made for registration of the trust but the registration waspending, and therefore the facts were different. 9.The various Income Tax Appellate Tribunals in thefollowing decisions also did not deal with an unregistered https://hcservices.ecourts.gov.in/hcservices/ trust: 10. It is relevant at this juncture to get into theamendment brought in Section 12A by Finance Act 2014 with effectfrom 01.10.2014 by way of insertion of first proviso to Section12A (2) of the Act which is reproduced below :- https://hcservices.ecourts.gov.in/hcservices/ Section 12A (2)(2)Where an application has been made on orafter the 1st day of June 2007, the provisionsof Section 11 and 12 shall apply in relation tothe income of such trust or institution from theassessment year immediately following thefinancial year in which such application ismade: 9.The various Income Tax Appellate Tribunals in thefollowing decisions also did not deal with an unregistered https://hcservices.ecourts.gov.in/hcservices/ trust: 10. It is relevant at this juncture to get into theamendment brought in Section 12A by Finance Act 2014 with effectfrom 01.10.2014 by way of insertion of first proviso to Section12A (2) of the Act which is reproduced below :- https://hcservices.ecourts.gov.in/hcservices/ Section 12A (2)(2)Where an application has been made on orafter the 1st day of June 2007, the provisionsof Section 11 and 12 shall apply in relation tothe income of such trust or institution from theassessment year immediately following thefinancial year in which such application ismade: Provided that where registration has beengranted to the trust of institution underSection 12AA, then, the provisions of Sections11 and 12 shall apply in respect of any incomederived from property held under trust of anyassessment year preceding the aforesaidassessmentyear,forwhichassessmentproceedings are pending before the AssessingOfficer as on date of such registration and theobjects and activities of such trust orinstitution remain the same for such precedingassessment year :Provided further that no action under Section147 shall be taken by the Assessing Officer incase of such trust or institution for anyassessment year preceding the aforesaidassessment year only for non-registration ofsuch trust or institution for the saidassessment year:Provided also that provisions contained in thefirst and second proviso shall not apply in caseof any trust or institution which was refusedregistration granted to it was cancelled at anytime under Section 12AA". Though this was a subsequent amendment, it is significant toestablish the need for registration of a trust to claimexemption under Section 11, registration of a trust ismandatory. 11. In the light of all the aforesaid discussions andinterpretations, and also the above amendment in Section 12A,the intention of the statute is to confer the benefits ofexemption under Section 11 of the Act on genuine trusts whichare registered under Section 12AA. It is true that equity andtaxation are strangers. They cannot co-exist together. It mayalso be argued that equity has to prevail over the taxation evenif the literal constructions of law attempts to cause such an https://hcservices.ecourts.gov.in/hcservices/ interpretation. But philanthropy in taxation of trusts getscomplicated due to the complex situation in our country. If theprovision of law is interpreted in such a manner to allow alldonations to corpus as exempted from tax, it would certainlyopen the floodgates to all and sundry, making it difficult forthe Income Tax authorities to differentiate between the originaland fake. The registration of trust, in case the trust has toaccept donations and build corpus, is one way of regulating theflow of money into the trust and avoid unscrupulous elementstrust from evading tax by seeking exemptions indiscriminately. 12. Thus substantial questions of law are answered infavour of revenue and against the assessee. 13. In the result, the appeals are dismissed. No costs. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar mtl To1.The Income Tax Officer,Ward II (2),Salem.2.The Commissioner of Income Tax (Appeals),No.3, Gandhi Road,Salem-7.3.The Income Tax Appellate Tribunal,SMC Bench,Chennai. +3ccs to M/s.J.Sree Vidhya, Advocate, S.R.No.36825,36826,36827. T.C.A.Nos.281, 290 & 291 of 2016 SJ(CO)HS(25/08/2021)