DHARMADA COLLECTION AND OVERRIDING TITLE

[C.A. DEV KUMAR KOTHARI]

Relevant link:

CIT Vs. Bijli Cotton Mills Pvt. Limited 2008 -TMI - 5191/ [1979] 116 ITR 60 (SC)

Business and incidental expenses in nature of charity:

Every business is a part of society and as a member of society business is also required to contribute some amount to social cause of local and nearby areas where business has operations. Therefore, some expenses incurred for certain social and welfare measures in local area are incidental to business. Many of such expenses are incurred on request of employees, suppliers, customers, and other business associates. Some part of such expenses may be regarded as charity but still they are related with business.

Regularity of expenses:

Some of such expenses are regularly incurred on different occasions. Even if in some year there is loss or lesser profit, the expenses need to be incurred. Therefore, it is desirable that some funds can be maintained for these purposes.

Contribution from customers:

Obtaining some contribution from customers on account of charity and donation / dharmada is also a method of creating a fund for such purposes. In some trade there is practice of such collection. The amount so collected is credited or maintained in separate account and contributions are made from such account. The amount credited to dharmada account or charity fund account is not income of assessee, as it is diverted at source for specified purposes.

Companies and Dharmada collection:

Business is carried through instrumentality of companies. Companies are also required to make contributions to local people and institutions. Companies can also decide to collect from customers a contribution for Dharmada as a part of price of product or as a separate charge. In case of large number of customers, a general policy decision and its announcement and communication can be made that a certain amount of sale price is for Dharmada.    

Dharmada collection is diverted at source by way of overriding title:

Dharmada collection is for specific purposes and it is received for those purposes. Therefore, it is diverted at source by way of overriding title and is therefore not in nature of income. However, one should be careful to establish bonafide on the basis of reasonableness, and expenses being really incurred for stated purposes and a suitable mechanism of internal check and control etc. The receipt in such case will be diverted by overriding title by virtue of seller having decided to charge a certain amount for Dharmada. Therefore, it will make no difference whether the customer pays the sum voluntarily by his own wish or as required from him as buyer of goods either due to terms and conditions of the seller or by way of any trade practices.

Illustrative discussion and Resolution in Board meeting of companies:

Shri… Director informed that every year company is required to make some contributions for charitable and philanthropic purposes on request of employees, local people, suppliers, customers, agents, bankers, financiers etc. Such payments are made out of commercial expediency and to maintain goodwill. It is desirable that for such purposes a separate fund and account be maintained and some charge can be made from customers.  In this regard he has also discussions with customers, distributors and agents regarding some contribution for charitable purpose. They are agreeable to pay certain specified part of price of product towards charity/ dharmada. The best course suggested in this regard is to charge separately Dharmada in bill or account sale statement (though it will be subject to VAT). However, it may not be possible always. Therefore, as an alternate and for administrative convenience, it is suggested to quote price including dharmada in the quotation or in instructions to salespersons and agents. These are modalities to be worked out as per specific requirement or trade practice in different area. However, it is desirable that price of …. be quoted inclusive of dharmada @ Re. per quintal / KG / piece of  …….(product) so that company can collect about Rs. per year to be used  for charitable purposes. After discussion the following matters were decided in terms of the following resolutions:

Resolved that price of…… be quoted per quintal / KG / piece of …….(product) inclusive of contribution for charitable purposes @ Rs.  ……. Per quintal/ kg./ piece. Accordingly instructions be issued to sales persons and agent. In the invoices, account sale statement and other relevant documents it be mentioned that "price is inclusive of Dharmada @ Rs. …..per Kg or the amount be shown separately.

Resolved that the amount collected for and on account of  Dharmada be credited to a separate account titled  "Dharmada Account" and the same can be used only for charitable purposes  including inter alia relief and help to poor and needy people, education and training facilities, medical treatment, self-employment,  mass recreation of communities and colonies, games and sports, contributions to public institutions, NGO's and general public utility purposes of philanthropy and charity,  at the discretion of directors and any senior officer of company duly authorized by the Board in this regard.

Resolved that in case balance in Dharmada account exceeds Rs. -----  lakh, then interest @ 1% per month be credited to the Dharmada Account on such excess amount and interest so credited also be applied for specified purposes of charity.

Resolved that in case balance in Dharmada Account exceeds Rs.---- lakh, then such excess be invested in separate deposit accounts with any scheduled bank.

CIT Vs. Bijli Cotton Mills Pvt. Limited 2008 -TMI - 5191/ [1979] 116 ITR 60 (SC):

In this case the assessee has as per trade practice and in terms of Board Resolution collected certain amount per bail towards Dharmada which was credited in a separate account and spent for charitable purposes. The Supreme Court held that the amount cannot be considered as income of assessee as it is received with an obligation and is therefore diverted at source by way of overriding title. The major aspects which governs the issue are discussed below:

About compulsory nature of the levy the court held that dharmada amounts cannot be said to have been paid involuntarily by the customers and in any case the compulsory nature of the payments, if there be any, cannot impress the receipts with the character of being trading receipts.

It is not possible to accept the submission that the customers being illiterate did not appreciate that they were paying the amounts with a view to create a trust, especially when it has been found that such payments were made pursuant to a custom which obtained in the commercial and trading community.

Being a customary levy the constituents or customers, whether literate or illiterate, would be knowing that the additional payments over and above the price were meant for being spent by the assessee for charitable purposes.

Assessee  having some discretion as regards the manner in which and the time when it should spend the dharmada amounts for charitable purposes would not detract from the position the assessee held qua such amounts, namely, that it was under an obligation to utilize them exclusively for charitable purposes.

Assessee did not keep these amounts in a separate bank account but admittedly a separate dharmada account was maintained in the books in which every receipt was credited and payment made there out on charity was debited and the High Court has clearly found that these amounts were never credited in the trading account nor were carried to the profit and loss statement.

Tribunal's finding that no trust could be said to have been created by the customers in respect of the impugned amounts will have to be regarded as erroneous in view of facts.

Impugned realizations made by the assessee from its customers for dharmada being validly earmarked for charity or charitable purposes could not be regarded as the assessee's income chargeable to income-tax.

Conclusion:

In view of the above judgment and as discussed above creation of Dharmada account can be a useful method to have some funds so that irrespective of profitability the business can make some contributions out of funds separately earmarked and used for specified purposes. Care should however be taken to establish bonafide about collection, maintaining funds, accounting and use of funds for specific purposes. So far as possible separate charge in bill is advisable. Separate bank account can be maintained to avoid revenues argument on that score. For detailed discussion about various contentions likely to be raised by the revenue readers are advised to read  CIT Vs. Bijli Cotton Mills Pvt. Limited 2008 -TMI - 5191/ [1979] 116 ITR 60 (SC) and to ensure that weak points are not left unattended while planning Dharmada Account contributions.