2010 (10) TMI 105 - HC - Income Tax

Dharmada Account funds for charity not taxable: Apex Court clarifies

The case involved the taxability of amounts received from customers through bills and credited to the Dharmada Account during the assessment year 1987-88. ... Dharmada Account - assessee received amount from the various customers through bills and credited to the Dharmada Account in the nature of revenue receipt - Assessing Officer treated the amount as income of the assessee - Held that: - assessee had failed to bring on record any material to indicate contribution on regular basis to some of the institutions - answered against the applicant-assessee and in favour of the revenue Issues involved:1. Taxability of the sum received from customers through bills and credited to the Dharmada Account as revenue receipt during the assessment year 1987-88.2. Interpretation of the law laid down by the Apex Court in Commissioner of Incometax vs. Bijli Cotton Mills regarding Dharmada amounts earmarked for charitable purposes.3. Review of a previous judgment in MCC 668/1993 regarding the nature of amounts received from customers through bills and credited to the Dharmada Account.Analysis:Issue 1:The case involved the taxability of a sum received from customers through bills and credited to the Dharmada Account during the assessment year 1987-88. The company maintained a separate Dharmada Account where the amount collected was credited. The Assessing Officer treated this amount as revenue receipts and added it to the company's income. The CIT(A) and the Income Tax Appellate Tribunal upheld this decision. The company contended that the amount was collected voluntarily from customers with the intention of utilizing it for charitable purposes and hence should not be taxed. The Apex Court's decision in Commissioner of Incometax vs. Bijli Cotton Mills supported the company's argument that Dharmada amounts earmarked for charitable purposes are not taxable as income.Issue 2:The interpretation of the law laid down by the Apex Court in Commissioner of Incometax vs. Bijli Cotton Mills was crucial in this case. The Apex Court held that Dharmada payments, being earmarked for charitable purposes, cannot be considered revenue receipts chargeable for income tax. The Court emphasized that such payments are not part of the price of goods purchased by customers but are specifically meant for charitable purposes. The Court also highlighted that the company's discretion in utilizing the Dharmada amounts for charity does not change the fact that the amounts were received under an obligation to be spent exclusively for charitable purposes.Issue 3:In a previous judgment in MCC 668/1993, a similar question regarding the nature of amounts received from customers through bills and credited to the Dharmada Account was considered. However, the Division Bench decided the case without taking into account the judgment of the Apex Court in Commissioner of Incometax vs. Bijli Cotton Mills. As a result, the matter was referred for consideration by a Larger Bench to determine if the previous judgment was in line with the Apex Court's decision and the correct interpretation of the law regarding Dharmada amounts earmarked for charitable purposes.