2017 (9) TMI 1232 - HC - Income Tax

Treating the interest on corpus funds received as corpus donations u/s 11(1)(d) - Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations? - Held that - A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income. The person in receipt of the income, insofar as these cases are concerned, is the respondent assessee. One of the income that is enumerated in clause (d) of sub-Section (1) of the Section is the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution. The fact that the donors had instructed that the interest earned shall be added to the corpus of the trust is undisputed. If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust. If that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act. No question of law

Summary

Issues:
1. Interpretation of Section 11(1)(d) of the Income Tax Act regarding the treatment of interest on corpus funds received by the assessee.
2. Whether interest accruing on voluntary contributions with specific directions to form part of the corpus qualifies for exemption under Section 11(1)(d).

Analysis:
1. The High Court of Kerala addressed the issue of whether the ITAT erred in treating interest on corpus funds as corpus donations under Section 11(1)(d) of the IT Act. The court noted that Section 11 provides for specific conditions for income exemption, particularly in the case of voluntary contributions forming part of the corpus of a trust or institution. The court observed that the interest earned on contributions, when added to the corpus based on donor instructions, also falls under the category of income in the form of voluntary contributions with specific directions. Therefore, the court upheld the ITAT's decision that the interest earned qualifies for exemption under Section 11(1)(d), dismissing the Revenue's appeal.

2. The court further examined whether interest accruing on voluntary contributions with specific directions to form part of the corpus is eligible for exemption under Section 11(1)(d). The court considered the argument of the Revenue that the interest earned is taxable income. However, the court, after analyzing Section 11 and the nature of the contributions and interest involved, concluded that the interest earned, when directed by donors to be added to the trust's corpus, aligns with the conditions for exemption under Section 11(1)(d). Therefore, the court dismissed the Revenue's appeal and affirmed the Tribunal's decision in this regard.

In conclusion, the High Court of Kerala clarified the interpretation of Section 11(1)(d) of the Income Tax Act regarding the treatment of interest on corpus funds received by the assessee. The court emphasized that when interest earned on voluntary contributions is added to the corpus based on specific directions, it qualifies for exemption under Section 11(1)(d). The court's decision highlights the importance of adhering to donor instructions and the conditions outlined in the Act for income exemption in such cases.