INTEREST RECEIVED FROM BANK DEPOSIT BY A TRUST – BUSINESS INCOME?

[DR.MARIAPPAN GOVINDARAJAN]

Trusts

Section 11 of the Income Tax Act, 1961 (‘Act’ for short) gives exemptions to the income of the trusts derived from property held under trust wholly for charitable and religious purposes to the extent to which such income is applied for such purposes in India. The Trust is to be registered under section 12AA of the Act.

Charitable purpose

Section 2(15) of the Act defines the expression ‘charitable purpose’ ( as amended) as including relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.

The advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

• such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and
• the aggregate receipts from such activity or activities during the previous year, do not exceed 25% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year.

Interest from deposit

The issue to be discussed with reference to decided case law is whether the interest received from deposits by a trust is to be treated as business income or not.

In ‘Karnataka Udhyog Mitra v. The Dy. Commissioner of Income Tax (Exemption), Circle – 1, Bangalore’ – 2021 (3) TMI 772 – ITAT, Bangalore, the assessee is a charitable society having registration under 12AA of the Act.  The assessee filed a NIL return for the assessment year 2013-14 on 28.03.2014, after claiming exemption under section 11 of the Act.   The Revenue took this case for scrutiny and issued notice under section 143(2) of the Act.  The Assessing Officer concluded his assessment vide his order dated 29.01.2016 vide section 143(3) of the Act.  In the said order the Assessing Officer denied the benefit of section 11 of the Act to the appellant.

The Assessing Officer recorded the reasons for such denial of exemption under section 11 of the Act which are as follows-

• The assessee acts as a single window facilitation for the purpose of setting up industries in the State of Karnataka. For this service the assessee is charging a fee from the prospective investors.
• Proviso to the section 2(15) of the Act applies in the case of the assessee which does not allow to treat the assessee being engaged in charitable activities if it is involved in the carrying of any activity in the nature of trade, commerce or business.
• Second proviso to section 2(15) which exempts an entity whose receipts from the activities mentioned in the 1st proviso is ₹ 25 lakhs or less does not apply to the assessee’s case because its gross receipt for the financial years 2011-12 and 2012-13 are ₹ 4,61,85,545/- and ₹ 11,45,42,500/- respectively.

Aggrieved against the order of the Assessing Officer the assessee filed an appeal before Commissioner of Income Tax (Appeals).  Before this First Appellate Authority the appellant assessee contended that-

• the assessee is a charitable society having registration under section 12AA of the . Act;
• the assessee was not carrying on any commercial activities with any profit motive;
• in absence of intention of profit the first proviso to section 2(15) of the Act does not apply.

The Commissioner of Income Tax (Appeals) rejected the contention of the assessee by referring to section 2(15) of the Act and the Board Circular No. 11 of 2008, dated 19.12.2008.   The Commissioner of Income Tax (Appeals)  concluded that from the clarification issued by the CBDT Circular, it is clear that the assessee is not entitled to the claim of exemption of its income on the ground that it does not fall under the proviso to section 2(15) of the Act.

Aggrieved against the order of Commissioner of Income Tax (Appeals), the appellant filed an appeal before Income Tax Appellate Tribunal (‘ITAT’ for short).  Before ITAT the appellant reiterated the submissions that the assessee is a charitable institution and there is no profit motive involved.  The Revenue supported the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals).

The ITAT heard the arguments put forth by both the parties.  The ITAT observed that-

• The assessee had been established by Government of Karnataka vide GO No.CI-69-SPC-92 dated 22.05.1992 as a society registered under the Karnataka Societies (Registration) Act, 1960.
• The assessee has been established for charitable purposes and is registered under section 12AA of the Act. 
• The assessee acts as a single window facilitation for the purpose of establishing industries in the State of Karnataka. 
• The income received during the assessment year 2013-2014 consisted of single window facilitation and interest on fixed deposit.
• The Assessing Officer had treated the entire income as commercial / business, falling under the first proviso to section 2(15) of the Act and denied exemption under section 11 of the Act. 

The ITAT observed that the appellant had relied on various case laws for the proposition that when the dormant object of the assessee is not to make profit, proviso to section 2(15) of the Act does not have application.   This specific plea of the assessee has not been adjudicated by the Assessing Officer or by the Commissioner of Income Tax (Appeals).  Therefore the ITAT was of the view that the matter needs to be examined de novo by the Assessing Officer.

The ITAT held that the issues raised in this appeal are restored to the files of the Assessing Officer.  The Assessing Officer shall afford a reasonable opportunity of hearing to the assessee and take a decision in accordance with law. It is ordered accordingly.

Conclusion

The ITAT observed that when the dormant object of the assessee is not to make profit then proviso to section 2(15) of the Act does not have application.  There is an implied conclusion that the decision of the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals), that the interest from deposits received by the trust is not business income.  However the case has been remanded to Assessing Officer to decide the case in accordance with law.