2021 (7) TMI 1341 - HC - Income Tax

Exemption u/s 11 - corpus donations - absence of 12AA registration of the Trust - Scope of amendment brought in Section 12A by Finance Act 2014 with effect from 01.10.2014 by way of insertion of first proviso to Section 12A (2) - whether the corpus donations in the form of voluntary contributions made with a specific direction would form part of the corpus of the trust and are exempted under Section 11(1)(d) of the Income Tax Act in the absence of 12AA registration of the Trust? - HELD THAT - As amendment in Section 12A, the intention of the statute is to confer the benefits of exemption under Section 11 of the Act on genuine trusts which are registered under Section 12AA. It is true that equity and taxation are strangers. They cannot co-exist together . It may also be argued that equity has to prevail over the taxation even if the literal constructions of law attempts to cause such an interpretation. But philanthropy in taxation of trusts gets complicated due to the complex situation in our country. If the provision of law is interpreted in such a manner to allow all donations to corpus as exempted from tax, it would certainly open the floodgates to all and sundry, making it difficult for the Income Tax authorities to differentiate between the original and fake. The registration of trust, in case the trust has to accept donations and build corpus, is one way of regulating the flow of money into the trust and avoid unscrupulous elements trust from evading tax by seeking exemptions indiscriminately. - Decided against assessee.

Summary

Issues:
- Interpretation of Section 11(1)(d) of the Income Tax Act regarding corpus donations and exemption eligibility without 12AA registration.

Detailed Analysis:

Issue 1: Interpretation of Section 11(1)(d) of the Income Tax Act regarding corpus donations and exemption eligibility without 12AA registration:

The appeals involved the question of whether corpus donations with specific directions should be exempt under Section 11(1)(d) of the Income Tax Act without 12AA registration. The appellants contended that the Income Tax Appellate Tribunal failed to consider their non-claim for exemption under Section 11 and argued that the accretion to the corpus fund should be treated as capital receipts, not taxable income. However, the Commissioner of Income Tax (Appeals) and the Tribunal upheld that registration under Section 12AA is a prerequisite for claiming exemption under Section 11(1)(d), regardless of specific directions for the donations. The Tribunal's decisions were challenged in the High Court.

The substantial questions of law admitted for consideration included whether contributions to the corpus fund without 12AA registration could be treated as income under Section 2(24)(iia), and if the conditions of Sections 11 and 12 apply to unregistered trusts. The Tribunal's decision to tax corpus donations at normal rates due to lack of 12AA registration was also challenged.

The Court analyzed the relevant sections of the Income Tax Act, emphasizing the importance of Section 12A registration for tax exemptions for non-profit organizations. The Court highlighted that unregistered trusts face tax liabilities on all transactions if not registered under Section 12A. It was clarified that voluntary contributions with specific directions are exempt under Section 11(1)(d) only if the trust is registered under Section 12AA.

The Court rejected the appellants' arguments that corpus donations should be exempt based on Section 2(24)(iia) and emphasized that Sections 2(24)(iia) and 11(1)(d) are interconnected. The Court referred to various tribunal decisions and High Court rulings to support its interpretation. Additionally, the Court discussed the 2014 amendment to Section 12A, highlighting the mandatory nature of trust registration for claiming exemptions under Section 11.

In conclusion, the Court ruled in favor of the revenue, emphasizing the importance of trust registration under Section 12AA for claiming exemptions under Section 11. The judgment highlighted the need for regulation to prevent misuse of tax exemptions and ensure genuine philanthropic contributions.

Overall, the judgment clarified the legal requirements for tax exemptions on corpus donations under the Income Tax Act, emphasizing the significance of trust registration under Section 12AA for claiming such benefits.