In ITA No.212/SRT/2023 -ITAT- ITAT (Surat) grants exemption under Section 11(1)(d) of Income Tax Act to assessee who runs school for students from lower strata of society, for funds earmarked for specific purposes
Members Pawan Singh (Judicial) & Dr. A.L. Saini (Accountant) [16-06-2023]

Read Order: Lok Bharati Mandal v. The ITO, (Exemption) Ward, Surat

Chahat Varma

New Delhi, June 20, 2023: The Surat bench of the Income Tax Appellate Tribunal has ruled in favor of Lok Bharti Mandal (assessee), stating that the Assessing Officer's (AO) treatment of earmarked funds as revenue receipts was a serious error. The Tribunal recognized that the assessee, which ran a school for students from the lower strata of society, heavily relied on donors for funding. The evidence presented had clearly demonstrated that the funds received were earmarked for specific purposes such as new building, room, and campus developments. As a result, the assessee was held entitled to the benefit of exemption under Section 11(1)(d) of the Income Tax Act.

Brief facts of the issue involved in the present case was that the AO observed during the re-assessment proceedings that the assessee had reported total additions of Rs. 51,38,851 as earmarked funds and claimed them as exempt under Section 11(1)(d) of the Act, considering them as corpus donations. However, the AO determined that in order to qualify as a corpus fund, there must be a specific direction from the relevant donor assigning it the status and purpose of a corpus fund. Since the earmarked fund donations did not have such specific directions, the AO denied the exemption and treated the donations as general donations, adding them to the assessee's total income. The assessee appealed against the AO’s decision to the Commissioner of Income Tax (Appeals) [CIT(A)], but the CIT(A) upheld the action of the AO.

The two-member bench of Pawan Singh (Judicial) and Dr. A.L. Saini (Accountant) held that the nature and character of a donation can be determined based on the intention of the donor and the directions given by the donor, rather than solely relying on the terms defined in the Trust Deed. The bench observed that clear evidence of donations received for a specific purpose can be established through receipts, letters, or resolutions.

The bench also held that it was an established law that when a Trust receives a particular sum which was earmarked for a specific purpose, it constituted nothing but capital receipt, which needed to be treated as forming part of the corpus.

The bench further referred to the decision of the High Court of Karnataka in the case of Director of IT and Others v. V. Ramakrishna Seva Ashrama [LQ/KarHC/2011/899], wherein it was held that when a donation received by an assessee-trust was kept in a deposit account and the income earned from it was utilized for charitable purposes, the assessee was entitled to the benefit of exemption under Section 11(1)(d) of the Income Tax Act in respect of that income.