1985 (4) TMI 134 - AT - Income Tax

Charitable trust wins appeal for tax exemption due to valid earmarked donations

NA Ramachandra Raja Charity Trust. Versus First Income-Tax Officer.

The Tribunal allowed the appeal of a charitable trust for the assessment year 1978-79, finding that the donations received were validly earmarked for ... Religious Trust, Voluntary Contributions ISSUES PRESENTED AND CONSIDERED 1. Whether voluntary contributions described in receipts as 'towards corpus only' constituted contributions 'made with a specific direction that they shall form part of the corpus of the trust' within the meaning of section 12 of the Income-tax Act, 1961. 2. Whether evidence in the form of counterfoils of receipts and certificates from donors sufficed as proof of specific direction by donors at the time of donation. 3. Whether, if contributions qualified as corpus donations under section 12, the trust's income for the assessment year stood exempt and assessment to tax was precluded (with related application of the prescribed percentage left open by the Tribunal). ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether receipts stating 'towards corpus only' satisfy section 12's requirement of a specific direction by donors Legal framework: Section 12 treats voluntary contributions received by a trust (not being contributions made with a specific direction that they shall form part of the corpus) as income for the purposes of section 11; thus, to attract exemption a contribution must be made with a specific direction that it shall form part of the corpus of the trust. Precedent Treatment: The Tribunal examined prior judicial treatment which held that amounts validly earmarked by donors for charitable purposes, as shown by the manner of recording or earmarking, are to be regarded as received under an obligation to spend for that purpose and therefore not income of the recipient. Interpretation and reasoning: The Tribunal analysed whether a statement in receipts issued by the trust - rubber-stamped 'towards corpus only' on counterfoils - constituted a direction by the donors at the time of making the donations. The revenue had relied on a finding that a mere resolution by trustees or the trust's description in receipts would not suffice; however, the assessment order concurrently recorded that certificates from some donors had been produced but were rejected as not constituting directions by donors at the time of donation. The Tribunal gave weight to the contemporaneous receipts containing the corpus designation and observed that where, at the moment of payment, donors or the collecting agent earmark amounts as for corpus, the amounts are received and held under an obligation to appropriate them to corpus from inception. Ratio vs. Obiter: Ratio - a contemporaneous marking on receipts by which donations were expressly designated 'towards corpus only' can constitute the requisite specific direction under section 12, thereby excluding such sums from the trust's income for section 11 purposes. Obiter - comments on trustee resolutions or later-produced certificates being inadequate were considered but not necessary to decide beyond reliance on the receipts. Conclusions: The Tribunal concluded that the receipts' clear statement that donations were 'towards corpus only' established that the contributions were made with a specific direction to form part of the corpus. Consequently, those contributions qualified under section 12 and were not includible in taxable income for the assessment year. Issue 2: Sufficiency of donor certificates and contemporaneous evidence as proof of donor direction Legal framework: Proof that a contribution was made with a specific direction must demonstrate the donor's intention at the time of donation; the statutory test is objective - whether the contribution was directed to corpus when made. Precedent Treatment: Earlier authorities recognise that earmarking or earmarking-like documentary manifestations contemporaneous with payment are effective to show a restricted purpose and thus create an obligation to apply sums to that purpose. Interpretation and reasoning: The Tribunal noted the assessment order's rejection of certain certificates produced by the assessee as not constituting directions at the time of donation, but emphasised that independent corroboration existed in the form of the counterfoils of receipts bearing the corpus endorsement. The Tribunal treated the contemporaneous receipts as direct evidence of the donor's direction at the moment of payment, rather than post hoc assertions or trustee resolutions. Ratio vs. Obiter: Ratio - contemporaneous receipts bearing an express corpus endorsement are admissible and sufficient evidence that donors directed the funds to corpus at the time of payment. Obiter - rejection of other forms of certificates by the revenue is noted but not determinative where contemporaneous receipts exist. Conclusions: The Tribunal held that the counterfoils of receipts with the rubber stamp 'towards corpus only' provided adequate proof of the donors' specific direction at the time of donation, rendering additional certificates unnecessary to establish corpus-direction for those donations. Issue 3: Consequence of donations qualifying as corpus contributions under section 12 - effect on assessment and application of income Legal framework: If voluntary contributions are shown to be made with specific direction to form part of corpus, section 12 deems them not to be income for the purposes of section 11, and thus they are not assessable as the trust's income; separate statutory provisions govern application of income and prescribed percentages. Precedent Treatment: Authorities indicate that sums earmarked for corpus are not to be included as income and that the prescribed percentage test (application of income for charitable purposes) is relevant only to income chargeable under sections 10-13 framework where contributions are not corpus-directed. Interpretation and reasoning: Having found that the contributions were corpus donations under section 12, the Tribunal determined that there could be no assessment to tax in relation to the year concerned. The Tribunal expressly declined to decide the separate question of application of income (the prescribed percentage), as that issue was rendered unnecessary by the primary finding on corpus-direction. Ratio vs. Obiter: Ratio - where contributions are corpus-directed and thus covered by section 12, they do not form part of the trust's income for the assessment year and assessment to tax is precluded. Obiter - remarks on the application of income and calculation of prescribed percentage were not adjudicated as they were unnecessary to the decision. Conclusions: The Tribunal concluded that, because the contributions qualified as corpus donations under section 12, the trust's income for the assessment year was not assessable and the appeal was allowed; ancillary issues regarding application of income were not decided.