Interest on charitable trust fixed deposits: whether taxable under proviso to s.2(15) or exempt u/s11(5)/s.13 - held exempt

Whether interest on bank fixed deposits of a charitable trust constitutes taxable income under the proviso to s.2(15) or is exempt under s.11(5) read with s.13. The Tribunal held depositing surplus funds in banks is not trade or business; construing the proviso to s.2(15) to tax such interest would negate the statutory mandate of s.11(5)/s.13 requiring specified investments for charitable institutions, a contradiction avoided by rejecting that interpretation. Outcome: interest on FDs complying with s.11(5) is exempt; proviso to s.2(15) does not apply and the AO's addition is deleted.

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Issues Involved:
1. Taxation of bank interest as income from other sources.
2. Applicability of the proviso to Section 2(15) of the Income Tax Act.
3. Denial of benefits under Section 11(1)(a) and Section 11(2) of the Income Tax Act.
4. Validity of the withdrawal of registration under Section 12A by the DIT (Exemptions).

Detailed Analysis:

Issue 1: Taxation of Bank Interest as Income from Other Sources
The assessee, a charitable organization registered under Section 12A, declared NIL income for AY 2009-10, claiming exemptions under mutuality and Section 11. The AO observed that the interest income of Rs. 2,17,92,167 was from non-members and thus taxable, following the Bombay High Court decision in CIT V/s. Common Effluent Treatment Plant (Thane Belapur) Association (2010) 328 ITR 362. The AO computed the total income as Rs. 2,17,92,167.

Issue 2: Applicability of the Proviso to Section 2(15)
The AO held that the assessee was not set up for charitable purposes as it violated the proviso to Section 2(15). The proviso states that the advancement of any other object of general public utility is not a charitable purpose if it involves trade, commerce, or business activities. The AO argued that the interest earned from bank deposits constituted such activities. However, the Tribunal found that the investments made with banks are mandated under Section 11(5)(iii) and do not constitute trade, commerce, or business. The Tribunal cited several judicial precedents, including GS 1 India Vs. DGIT 360 ITR 138 (Del) and Institute of Chartered Accountants of India Vs. DCIT 358 ITR 91 (Del), to support this view.

Issue 3: Denial of Benefits under Section 11(1)(a) and Section 11(2)
The AO denied the benefits under Section 11(1)(a) and Section 11(2) based on the proviso to Section 2(15) and the withdrawal of registration under Section 12A. The Tribunal held that the interest income earned on fixed deposits with banks, complying with Section 11(5), is exempt and that the proviso to Section 2(15) does not apply. The Tribunal emphasized that the compliance with Section 11(5) should not result in the denial of the status of a charitable institution.

Issue 4: Validity of the Withdrawal of Registration under Section 12A
The AO's assessment was based on the withdrawal of registration under Section 12A by the DIT (Exemptions). However, the Tribunal had already set aside this withdrawal in its order dated 30th May 2012. The Tribunal reiterated that the registration under Section 12A was valid, and the AO's reliance on its withdrawal was not justified.

Conclusion:
The Tribunal concluded that the interest earned on fixed deposits with banks is exempt under Section 11(5) and that the proviso to Section 2(15) does not apply. The Tribunal set aside the orders of the lower authorities and directed the AO to delete the addition of interest income. The appeal of the assessee was allowed.

Order:
The appeal of the assessee is allowed, and the order was pronounced in the open court on 29/02/2016.

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