2012 (12) TMI 58 - AT - Income Tax

Corpus donation alleged that corpus donations were utilized for the objects of the Trust and, therefore, to that extent the assessee was not entitled to exemption under section 11 of the Act Held that - In the light of the confirmation letters of the donors, donations in question were towards corpus funds - addition deleted - there was utilization of funds for the objects of the Trust the action of the AO in taxing the donations received was not proper In favor of assessee Whether expenditure on cultural activities like shows rath yatra, art festivals etc. are application of income in accordance with the objects of the trust alleged that donations were made to institutions which were not related with the cultural activities or for promotion and advancement of culture Held that - Same are various donations given to organizations which have organized events for celebration of festivals and for arts festivals etc. - this is nothing but an expenditure for promotion of arts, culture and literature. Hence to the extent of the details produced for Rs.4,78,0751- Officer has erred in coming to the conclusion that this is not an application of income towards its objectives. Hence to this extent the addition is deleted and the ground is partly allowed Addition on account of donation alleged that assessee has invested donations in a manner contrary to sec.11(5) thereby violating the provisions of sec.11(5) - Held that - Donations have been received as corpus donation towards the end of the previous year. They were invested in the manner prescribed in the subsequent month i.e. April 2005 - there is no provision which contemplates making of investment of donation within any particular period or a provision which says that absence of making investment will result in the trust losing exemption u/s.11 of the Act - these donations have been invested in the manner required in the month of April, 2005 in favor of assessee

Summary

Issues Involved:
1. Taxability of corpus donations under Section 11 of the Income Tax Act.
2. Expenditure on cultural activities and its qualification as application of income for charitable purposes.
3. Investment of donations in compliance with Section 11(5) of the Income Tax Act and its impact on exemption eligibility.

Detailed Analysis:

Issue 1: Taxability of Corpus Donations
The primary issue concerns whether corpus donations received by a charitable trust are taxable under Section 11 of the Income Tax Act. The Assessing Officer (AO) contended that the corpus donations, amounting to Rs. 1,64,07,410/-, were utilized for the trust's objectives and thus should not be exempt under Section 11. The AO also questioned the authenticity of donor letters confirming these donations as corpus funds.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled that the donations were indeed towards corpus funds, referencing the confirmation letters from donors. The CIT(A) relied on the decision of the ITAT Delhi Bench in the case of Dharma Prasthanam vs. ITO, which held that corpus donations spent on running expenses do not result in loss of exemption under Section 11. The Tribunal upheld the CIT(A)'s decision, noting that the donations were used for the trust's objectives and thus should not be taxed.

Issue 2: Expenditure on Cultural Activities
The second issue pertains to whether expenditures on cultural activities, such as shows, rath yatra, and art festivals, qualify as application of income for charitable purposes. The AO added Rs. 5,44,186/- to the trust's total income, arguing that these expenditures were not related to the promotion and advancement of culture as stipulated in the trust deed.

The CIT(A) found that the trust deed allowed donations for promoting education, literature, arts, science, and culture. The CIT(A) observed that the expenditures were indeed for cultural activities and thus should be considered as application of income for charitable purposes. The Tribunal confirmed the CIT(A)'s decision, noting that the expenditures were in line with the trust's objectives.

Issue 3: Investment of Donations and Compliance with Section 11(5)
The third issue revolves around whether the donations received towards the corpus funds were invested as required under Section 11(5) of the Income Tax Act. The AO argued that since the donations were not invested in the prescribed manner before the end of the previous year, they should be treated as taxable income.

The CIT(A) held that there is no provision mandating immediate investment of corpus donations under Section 11(5). The donations were received towards the end of the year and were invested in the prescribed manner in April 2005. The CIT(A) concluded that the trust should not lose its exemption due to the timing of the investment. The Tribunal upheld this decision, stating that the donations were indeed invested in the prescribed manner shortly after receipt, and thus the trust retains its exemption under Section 11.

Conclusion:
The Tribunal dismissed both appeals by the revenue, confirming the CIT(A)'s decisions on all issues. The corpus donations were correctly treated as exempt, expenditures on cultural activities were rightly considered as application of income for charitable purposes, and the timing of investment of corpus donations did not affect the trust's exemption status.