2011 (10) TMI 369 - HC - Income Tax

Deduction under 80G - Assessee charitable and religious trust - Exemption denied under Sec 11(1) as 85% amount set aside not used for purpose of accumulation - Tribunal Donation collected from Rural Project Fund is in nature of capital receipt directly forming part of Corpus Fund , non-spending of 85% of such capital fund cannot be said to be non-spending of 85% of the income of the trust - Held That - Donation were received with a specific direction that it is meant to use for the Leprosy patients - even for contributions in cash oral directions has been received which is in compliance with Section (1) (b) of the Act. It is too late in the day for the Commissioner for Directorate of Income Tax (exemptions) to ignore all these undisputed facts which are available in the record and to refuse to renew the registration. Decided in favour of assessee. Unfortunate litigation - held that - Unfortunately, the persons who took a decision to file an appeal, before this Court are wasting the precious time of the trust which could have been used in the social service. Public money and the time of this Court is also wasted. This attitude on the part of the department cannot be countenanced. Therefore, we feel it appropriate to impose cost incurred by the assessee for fighting litigation so that the department would be more careful in future in taking decision to file appeal in such frivolous cases by ignoring the policy of the Government, viz., National Litigation Policy, 2011. - Cost of Rs. 1,00,000/- - Department to deposit the amount in favour of the Rural Project Fund of the assessee-trust.

Issues Involved:
1. Rejection of application for approval under Section 80-G of the Income Tax Act.
2. Nature and purpose of the Rural Project Fund.
3. Compliance with the requirement of spending 85% of income for charitable purposes under Section 11(1) of the Income Tax Act.
4. Specific direction for voluntary contributions to form part of the corpus of the trust.

Issue-wise Detailed Analysis:

1. Rejection of Application for Approval under Section 80-G of the Income Tax Act
The revenue challenged the Tribunal's order which set aside the Director of Income-tax (Exemptions)'s rejection of the assessee's application for approval under Section 80-G. The Tribunal directed the Director to pass an order granting recognition to the assessee for the purpose of Section 80-G.

2. Nature and Purpose of the Rural Project Fund
The assessee, a charitable trust, had been receiving specific donations for the Rural Project Fund. These donations were credited to the fund and not utilized immediately. The Director of Income Tax (Exemptions) did not accept these as corpus donations, arguing that they were not credited to the corpus account and no details of donors were furnished. The Tribunal found that these donations were indeed corpus donations intended for specific rural projects and thus should not be treated as expendable income.

3. Compliance with the Requirement of Spending 85% of Income for Charitable Purposes under Section 11(1) of the Income Tax Act
The Director of Income Tax (Exemptions) argued that the assessee did not spend 85% of the income for charitable purposes and thus did not comply with Section 11(2). The Tribunal held that the Director made a mistake in treating the capital fund as expendable income. The funds collected under the Rural Project Fund were capital funds and not part of the income of the trust, thus the non-spending of 85% of such funds did not violate Section 11(1).

4. Specific Direction for Voluntary Contributions to Form Part of the Corpus of the Trust
The revenue argued that for contributions to be considered part of the corpus, there must be a specific direction from the donors. However, the Tribunal and the High Court found that the law does not require such direction to be in writing. The intention of the donor and the treatment of the funds by the trust were sufficient to classify these contributions as corpus funds. The High Court emphasized that the voluntary contributions were intended to be treated as capital and the income derived from them was used for charitable purposes, thus satisfying Section 11(1)(d).

Judgment Summary:
The High Court upheld the Tribunal's decision, stating that the Director of Income Tax (Exemptions) erred in not recognizing the Rural Project Fund donations as corpus donations. The court clarified that the voluntary contributions made with the intention of being treated as capital for the trust's charitable activities fall under Section 11(1)(d) and are not liable for tax. The court criticized the revenue authorities for being overly technical and hampering the trust's social activities by denying them the deserved tax exemptions. The appeal was dismissed with costs of Rs. 1,00,000/- to be deposited by the department in favor of the Rural Project Fund of the assessee-trust.

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