2018 (8) TMI 1245 - AT - Income Tax

Nature of receipt - additions towards receipt of Corpus Fund - additions on account of Corpus contribution received by the appellant being a Trust - revenue receipt or capital receipt - Exemption u/s 11 - Trust was not registered u/s. 12A - Held that - The amount was received by the assessee towards corpus fund with a specific purpose of allocating such funds for different welfare activities. The assessee had at no stage sought exclusion of the amounts received by it towards corpus fund from the scope of its total income by invoking the provisions contemplated under Sec. 11(1)(d) of the Act. Rather, the contention of the assessee before the lower authorities as well as before us was that the registration of a trust under Sec. 12A would not change the character of the receipt in its hands. On a perusal of the trust deed, it emerges that as the main object of the assessee trust was not for the benefit of the general public, but was solely dedicated for the welfare of the retired employees of the bank, thus, the same could not be held as a charitable trust as contemplated under Sec.2(15) of the Act. As the amount of ₹ 2,30,00,000/- received by the assessee trust from Bank of India towards corpus fund is in the nature of a capital receipt , therefore, the same could not have been brought to tax as the income of the assessee under Sec. 2(24)(iia) of the Act. - Decided in favor of assessee. Claim of expenditure against interest income u/s 57 - Held that - in case of interest income earned by an assessee, only the expenditure (not being in the nature of a capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is to be allowed as a deduction under Sec. 57(iii) of the Act. - as the expenditure of 3,09,78,345.30, viz. (i) D-mat charges of ₹ 386/- ; (ii) Legal expenses of ₹ 11,236/-; and (iii) Medical Relief Expenses ₹ 3,09,66,723/- incurred by the assessee cannot be construed as having been laid out or expended wholly and exclusively for the purpose of making or earning of the interest income on the aforesaid FDR s and bank account of the assessee, therefore, the same cannot be allowed as a deduction as against the interest income of the assessee. - Decided against the assessee.

Issues Involved:
1. Taxability of Corpus Fund received by the Trust.
2. Applicability of Doctrine of Mutuality.
3. Allowability of Expenses under Section 57(iii).
4. Addition of Interest Income.
5. Direction for Consequential Effect in case of Restoration of Registration under Section 12A.

Issue-wise Detailed Analysis:

1. Taxability of Corpus Fund received by the Trust:
The primary issue revolves around the taxability of ?2,30,00,000 received by the assessee trust from Bank of India towards the corpus fund. The trust, not being registered under Section 12A, was denied exemption under Section 11(1)(d) by the Assessing Officer (A.O). The A.O contended that every contribution received by a trust is to be taken as its income under Section 2(24)(iia). However, the tribunal observed that the amount received towards the corpus fund is in the nature of a capital receipt and thus not taxable as income, even if the trust is not registered under Section 12A. This view was supported by various judicial pronouncements, including the Hon’ble High Court of Delhi in DIT (Exemption) Vs. Smt. Basanti Devi and Shri Chakhan Lal Garg Education Trust.

2. Applicability of Doctrine of Mutuality:
The A.O accepted that the membership fees received from members amounting to ?3,47,82,601 were covered by the doctrine of mutuality and thus not taxable. However, the A.O did not extend this doctrine to the corpus fund received from Bank of India, which was treated as taxable income. The tribunal upheld the A.O’s view that the trust was not a charitable trust but a mutual association, and hence, the doctrine of mutuality did not apply to the corpus fund.

3. Allowability of Expenses under Section 57(iii):
The assessee claimed deductions for expenses incurred for the objects and administration of the trust, including demat charges, legal expenses, and medical relief expenses. The A.O and CIT(A) disallowed these expenses on the grounds that they were not incurred wholly and exclusively for the purpose of earning interest income. The tribunal upheld this view, citing the necessity of an inextricable nexus between the expenditure and the income earned for it to be deductible under Section 57(iii).

4. Addition of Interest Income:
The assessee contended that the A.O had erroneously added an excess interest income of ?28,03,868. The CIT(A) directed the A.O to expeditiously dispose of the assessee’s application under Section 154 for rectification of this error. The tribunal found no merit in the assessee’s contention to challenge the CIT(A)’s direction, as the assessee itself had requested such directions.

5. Direction for Consequential Effect in case of Restoration of Registration under Section 12A:
The assessee requested directions for giving consequential effect in case of restoration of its registration under Section 12A. The tribunal declined to issue such directions in the absence of a specific ground of appeal but clarified that its observations would not preclude giving consequential effects if the registration is restored.

Conclusion:
The appeal was partly allowed. The tribunal deleted the addition of ?2,30,00,000 received towards the corpus fund from Bank of India, recognizing it as a capital receipt not taxable as income. The tribunal upheld the disallowance of expenses claimed under Section 57(iii) and dismissed the ground regarding the addition of interest income due to the procedural direction already provided by the CIT(A). The tribunal also declined to issue directions for consequential effects in case of restoration of registration under Section 12A, emphasizing the absence of a specific ground of appeal.

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