Exemption under section 11 for charitable activities and passive interest income on mandated investments upheld; appeal allowed on corpus donations

Dispute concerns entitlement to income-tax exemption for a registered charitable institution on interest from mandated bank investments and corpus donations under the charitable purpose definition. The institutions 12A registration and approved objects create a presumption of charitable status unless shown contrary; passive interest earned on statutory mandated investments does not convert activities into commercial or mutual operations, so exemption applies. Allegations of private benefit under related-party provisions lacked cogent material and were rejected. Corpus donations were treated as capital receipts and exempt. Consequently, additions for interest and corpus receipts were deleted and the exemption claim allowed.

---

---

Issues: (i) Whether interest income earned on fixed deposits is exempt under section 11 of the Income-tax Act, 1961 or is hit by the proviso to section 2(15); (ii) Whether corpus donations claimed by the assessee are exempt under section 11(1)(d); (iii) Whether the assessee is disentitled to exemption under section 11 by reason of section 13(1)(c) / related-party benefits.

Issue (i): Whether interest on bank deposits is exempt under section 11 or falls within the proviso to section 2(15) as an activity in the nature of trade, commerce or business.

Analysis: The Tribunal examined the statutory scheme, including the mandated modes of investment in section 11(5), the character of the interest as passive income from prescribed bank deposits, and precedents (Bombay Presidency Golf Club line) holding that mandated deposit of surplus funds and resultant interest do not constitute trade, commerce or business. The Tribunal found no material to establish that deposit and receipt of interest involved carrying on an activity in the nature of trade, commerce or business; it also noted that registration under section 12A remained subsisting and that taxing such interest would frustrate the investment mandate in section 11(5).

Conclusion: The interest income on fixed deposits is exempt under section 11 and the proviso to section 2(15) does not apply. This conclusion is in favour of the assessee.

Issue (ii): Whether corpus donations claimed by the assessee qualify as capital receipts exempt under section 11(1)(d).

Analysis: The Tribunal reviewed the record, confirmations for corpus donations, and applicable authorities holding that corpus receipts, when supported, constitute capital receipts and are exempt under section 11(1)(d). The Assessing Officer's treatment of such receipts as ordinary revenue was examined and found unsupported by cogent material to displace the capital character.

Conclusion: The corpus donations are capital receipts and exempt under section 11(1)(d). This conclusion is in favour of the assessee.

Issue (iii): Whether exemption under section 11 is denied due to application of section 13(1)(c) because members are related parties and personally benefited.

Analysis: The Tribunal considered the AO's allegation of related-party benefit under section 13(1)(c) and found the contention unsupported by cogent material demonstrating personal benefit to related parties. The finding was treated as presumptive and insufficient to deny exemption, particularly in light of the assessee's registration under section 12A and absence of evidence of prohibited private inurement.

Conclusion: The assessee is not disentitled from exemption under section 11 by reason of section 13(1)(c). This conclusion is in favour of the assessee.

Final Conclusion: Applying the statutory provisions and binding jurisdictional precedents, the Tribunal dismissed the Revenue's appeal, holding that the interest on prescribed bank deposits is exempt under section 11, corpus donations are exempt under section 11(1)(d), and there is no sustainable denial of exemption under section 13(1)(c); accordingly the additions deleted by the lower authority are upheld.

Ratio Decidendi: Interest earned on surplus funds deposited in prescribed modes under section 11(5) constitutes passive income exempt under section 11 and does not amount to carrying on trade, commerce or business so as to attract the proviso to section 2(15), and corpus donations supported by confirmations are capital receipts exempt under section 11(1)(d).

---