2013 (4) TMI 761 - AT - Income Tax

Test of charitable institution - Corpus donation - whether contribution to development fee was not a voluntary contribution? - Held that - The fact that the donations were given by students who joined the educational institution of the Assessee as in return for admission granted would not affect the character of the contribution as voluntary contribution. The reason why clause (d) to Sec.11(1) of the Act was inserted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 1st April, 1989 and Section 2(24) amended by the same amending Act to include voluntary contribution with direction that they would form of corpus of the trust as income, was to treat them as income in the hands of the recipient, but in the case of trusts or institutions, who comply with the requirements for exemption under section 11 of the Act and not tax such receipts. Prior to the insertion of the above provisions, they were treated as capital receipts not chargeable to tax. However, in case the trust or institution loses the exemption under section 11 of the Act, either by not complying with the conditions laid down in section 12A or by falling within the mischief of section 13, corpus donations will be included in its income and taxed. Therefore the question whether the donations were voluntary or not becomes irrelevant and what becomes relevant is the application of such contributions for the objections of the trust which are admittedly charitable. The application of such contributions for objects of the trust is not in dispute. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the donations received by the assessee from students for securing seats are voluntary contributions eligible for exemption under section 11 of the Income Tax Act.
2. Whether the application of such donations for the purposes of the trust qualifies for exemption under section 11.

Issue-wise Detailed Analysis:

1. Voluntariness of Donations:
The Assessing Officer (AO) scrutinized the books of accounts and concluded that the donations collected as 'development fee' from students at the time of admission were not voluntary. The AO referred to the statutory provisions under sections 11(1)(d) and 12(1) of the Income Tax Act, which exempt voluntary contributions made with a specific direction to form part of the corpus of the trust. The AO cited the Hon'ble Allahabad High Court's decision in CIT v. Chhadami Lal Jain Trust (1977) and the Hon'ble Supreme Court's decision in Islamic Academy of Education v. State of Karnataka (2003), concluding that the donations were not voluntary but were given under compulsion and for quid pro quo, thus not qualifying for exemption.

2. Application of Donations for Trust Purposes:
The CIT(A) and various judicial precedents emphasized the application of the funds rather than the nature of the donations. The CIT(A) noted that the donations were used for educational purposes, and there was no surplus indicating profit. The CIT(A) relied on decisions such as Sri Adichunchanagiri Mahasamsthana Muth and Sri Adichunchanagiri Shikshana Trust, Director of IT (Exemptions) vs. Sri Belimatha Mahasamsttyma Socio Cultural & Educational Trust, and Assistant Commissioner of Income Tax Vs. Balaji Educational & Charitable Public Trust, which highlighted that the application of funds for charitable purposes is the key criterion for exemption under section 11, irrespective of whether the contributions were voluntary or involuntary.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, emphasizing that the key issue is the application of the donations for the trust's objectives, which are charitable in nature. The Tribunal noted that the AO's presumption about the non-voluntary nature of the donations was not relevant. The Tribunal referred to the purpose of amendments made by the Direct Tax Laws (Amendment) Act, 1987, which aimed to treat corpus donations as income but exempt them if applied for charitable purposes. The Tribunal concluded that the donations, whether voluntary or not, should be exempt as long as they are applied for the trust's charitable objectives.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming that the donations received by the assessee, applied for educational purposes, are eligible for exemption under section 11 of the Income Tax Act. The focus was on the application of funds rather than the voluntariness of the contributions.