Karnataka H.C : “Building fund’ received as donations are treated as income and brought to tax u/s.68 of the Act, the same would be allowable u/s. 11 of the Act

High Court Of Karnataka

CIT, Central Circle vs. MBA Nahata Charitable Trust

Assessment Year : 2001-02

Section : 11

Dilip B. Bhosale And B. Manohar, JJ.

IT Appeal Nos. 466 & 467 Of 2007

February 14, 2014

JUDGMENT

B. Manohar, J. – The Revenue has filed these two appeals under Section 260A of the Income Tax Act, 1961 (for short the Act’), being aggrieved by the order dated 23-11-2006 passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘A’ (for short ‘the Tribunal’) in ITA Nos.118 and 120/Bang/2006 dismissing the appeal filed by the Revenue and confirming the order dated 09-12-2005 passed by the Commissioner of Income Tax (Appeals)-IV, Bangalore (for short ‘the First Appellate Authority’) for the assessment years 2001-02 and 2002-03.

2. The brief facts of the case are as follows:

The respondent-assessee is a Charitable Trust duly registered under Section 12A of the Act. The income of the Trust was exempted under Section 11 of the Act. For the assessment year 2001-02, the assessee had received the donations towards building fund amounting to Rs.54,38,999/- and for the assessment year 2002-03, the assessee had received a sum of Rs. 12,74,672/-. The return filed by the assessee under Section 139 of the Act for those assessment years was accepted by the Assessing Authority. However, notice under Section 148 of the Act was issued to the assessee on 11-03-2004 for reopening the assessment. Notices under Sections 143(2) and 142(1) were served on assessee. In response to the said notices, an authorized representative of the assessee appeared before the Assessing Authority and produced all the details. The assessee also objected for reopening of the assessment under Section 148 of the Act. In the balance sheet filed along with the returns, the assessee had made known the donations received towards the building fund and he also furnished the details of the donors, such as their address, mode of payment and date of payment etc. The bank accounts were also made available and contended that major payment was received by way of cheques. There is no cause of action to treat the said receipts as unexplained credit under Section 68 of the Act. The Assessing Officer over-ruling the objections raised by the assessee, assessed the donations received towards the building fund as unexplained credit under Section 68 of the Act and held that the assessee has failed to produce the donors before the Assessing Officer. Further, the letters issued to 60 – 70 donors were returned unserved with a shara that “incomplete address”. Hence, the donations received was assessed for income and interest and penalty was imposed by reassessment order dated 30-03-2005.

3. The assessee, being aggrieved by the assessment order passed by the Assessing Officer under Section 143(3) r/w Section 147 of the Act preferred an appeal before the First Appellate Authority challenging the same. It is mainly contended that reopening of the assessment is contrary to law and no reason has been assigned for reopening of the assessment which was already concluded and it is barred by limitation. The major portion of donations towards building fund have been received through cheques. The bank accounts have been made available to the Assessing Authority and the Assessing Officer got verified those matters through the Bankers. Apart from that, the amount received was utilized for the construction of the building and other charitable purposes of the Trust. Hence, the order passed by the Assessing Authority treating the said amount as undisclosed income is contrary to law. The Appellate Authority after considering the matter in detail found that major portion of the donations were received through cheques and that the amount received was utilized for construction of the building and other charitable purposes. Hence, the said amount is entitled for exemption under Section 11 of the Act. However, the issue of reopening of the assessment was held against the assessee. Accordingly, by its order dated 09-12-2005, allowed the appeal and set aside the order passed by the Assessing Authority in respect of the building donation received.

4. Being aggrieved by the order passed by the Appellate Authority, the Revenue has preferred these two appeals challenging the same on various grounds. The Tribunal after examining the matter in detail found that the amount received as donations has been utilized for construction of the building and other charitable purposes of the Trust. Hence, the assessee is entitled for exemption under Section 11 of the Act. Accordingly, dismissed the appeals by the order impugned in these appeals. Being aggrieved by the order passed by the Tribunal, the Revenue has filed these appeals.

5. Sri Jeevan J Neeralgi, learned counsel appearing for the Revenue contended that the order passed by the Tribunal confirming the order passed by the First Appellate Authority is contrary to law. The respondent-assessee received the donation towards building fund for the assessment years 2001-02 and 2002-03. The assessee has not disclosed the sources of the said income and failed to furnish the correct names and addresses of the donors. In order to verify with regard to the donations, letters were addressed to the donors; however, none of them appeared. The Trustee of the assessee was also not able to bring any of the donors before the Assessing Officer. In the absence of proof of donation and identity of the donors, these donations towards building fund will be taxed as income from other sources being unexplained credit under Section 68 of the Act. Hence the order passed by the Tribunal is contrary to law.

6. On the other hand, Sri A Shankar, learned counsel appearing for the assessee supported the order passed by the Tribunal and First Appellate Authority and contended that the major portion of donations were received through cheques. He also submitted that the bank statements along with the account numbers were made available to the Assessing Officer for verification. Some of the donors did not want to disclose their names. The amounts received were utilized for the purpose of construction of the building and other charitable purposes. Hence, there is no violation of Sections 11 and 12 of the Act. In support of his contention, he relied upon the judgment in DIT (Exemptions) v. Sri Belimatha Mahasamsthana Socio Cultural & Education Trust [20011] 336 ITR 694/[2012] 20 taxmann.com 694 (Kar.), DIT (Exemptions) v. Keshav Social & Charitable Foundation [2005] 278 ITR 152/146 Taxman 569 (Delhi); CIT v. Trustees of Visha Nima Charitable Trust [1982] 138 ITR 564/10 Taxman 10 (Bom.) and sought for dismissal of the appeal.

7. These appeals are admitted for considering the following substantial questions of law:

1. Whether the Appellate Authorities were correct in holding that ‘building fund’ received as donations are treated as income and brought to tax u/s.68 of the Act, the same would be allowable u/s. 11 of the Act.

2.Whether Appellate Authorities failed to appreciate that the exemption u/s.11(1)(a) of the Act is allowable only on income derived from property held under Trust wholly for charitable or religious purposes (Section 11(4) defines property held under trust) and consequently no exemption is allowable in the case of the assessee?

3. Whether Tribunal failed to examine and record a finding regarding the various issues/ground raised before it being the last fact finding authority before approving the finding recorded by the Appellate Commissioner who had proceeded on mere conjectures and surmises and not on admitted facts as erroneously held in the course of the order?

8. We have carefully considered the arguments addressed by the learned counsel for the parties.

9. The records clearly disclose that the assessee is a Charitable Trust duly registered under Section 12A of the Act. For the assessment years referred to above the assessee had filed return of income showing receipt of donations towards the building fund. Originally, the return filed was accepted under Sections 143(1) of the Act, subsequently, the Assessing Authority issued notice under Section 148 for reopening of the said assessment. In pursuance of the notices issued under sections 143(2) and 142(1) of the Act, the authorized representative of the assessee appeared before the Assessing Authority and produced all the documents including Bank accounts. The specific case of the assessee is. that the assessee received donations towards construction of the building and for other charitable purposes of the Trust. The major portion of the donation was received through Cheques. Some of the amounts were received in cash, since some of the donors were not willing to furnish their names. The amount received by way of donations was disclosed in the returns filed and also claimed exemption under Section 11 of the Act. The Assessing Authority however, treated the donations received as unexplained credit under Section 68 of the Act and assessed for tax, on the ground that the assessee-Trust has failed to produce the donors before the Assessing Authority. Further, 60 to 70 letters addressed to the donors were returned unserved with a shara “insufficient address”. In view of that, the amount received towards donations was treated as unexplained credit and assessed for tax. On an appeal filed by the assessee, the Appellate Authority set aside the order passed by the Assessing Authority and held that the assessee is entitled for exemption under Section 11 of the Act with regard to the donations received towards building fund. The revenue being aggrieved by the order passed by the Appellate Authority preferred an appeal before the Tribunal, the Tribunal once again examined the matter in detail and held that even though the assessee failed to disclose the names of the donors, the amount which was received as building fund was utilized for charitable purpose. Hence, the assessee is entitled for exemption under Section 11 of the Act and dismissed the appeal.

10. The Division Bench of this Court in a judgment in Belimatha Mahasamsthana Socio Cultural & Education Trust (supra) held that “since the amounts received from the third party has been accounted and utilized for charitable purposes even though the assessee failed to disclose the names and addresses of the donors as well as the mode of payment, entitled for deduction under Section 11 of the Act.” A similar view has been taken by the Delhi High Court in a judgment in Keshav Social & Charitable Foundation (supra). Paragraph 10 of the said judgment reads as under:

“10. To obtain the benefit of the exemption under Section 11 of the Act, the assessee is required to show that the donations were voluntary. In the present case, the assessee had not only disclosed its donation, but had also submitted a list of donors. The fact that complete list of donors was not filed or that the donors were not produced, does not necessarily lead to inference that the assessee was trying to introduce unaccounted money by way of donation receipt. This is more particularly so, in the facts of the case where admittedly, more than 75% of the donations were applied for charitable purpose.”

Further, a similar view was taken by the Bombay High Court in a judgment in Trustees of Visha Nima Charitable Trust (supra).

11. During the pendency of the appeal, an opportunity was given to the Revenue to substantiate their contentions and asked to verify the Bank Accounts furnished by the assessee. However, the Revenue informed to us that the details of the donations received through Cheques is in accordance with law. Admittedly, the respondent-assessee is the charitable trust. Some of the donors do not want to disclose their names and some of the donations were received through cheques. The donations received for the assessment years 2001-02 and 2002-03 were disclosed in the accounts and while filing the returns those amounts were shown as income. Any voluntary contribution received by a Trust created wholly for charitable or religious purpose shall be deemed to be income derived from property held under the Trust wholly for charitable and religious purpose. However, the said amounts were used for charitable purposes even though the assessee failed to disclose the names and addresses of the donors. Since the amount was utilized by the Trust wholly for the charitable or religious purposes, the assessee has fulfilled the condition imposed under Section 11 of the Act. Section 11 contemplates that any income derived from property held under Trust wholly for charitable or religious purposes, to the extent to which, such income is applied to such purposes is exempted under Section 11(1)(a) of the Act. Hence, the assessee is a charitable Trust and its income is to be exempted under Section 11 of the Act.

12. We find no infirmity or irregularity in the order passed by the Tribunal as well as the Appellate Authority. Both the authorities concurrently held that there is no violation of any of the conditions of Sections 11 and 12 of the Act. Hence, the appellant has not made out a case to interfere with the same. Accordingly, the substantial questions of law is held against the Revenue. Accordingly, the appeals are dismissed.

[Citation : 364 ITR 693]