Can interest on corpus be added back to corpus?

Here is an interesting case and an even more interesting judgment regarding donations that were made to the trust by donors who had not only instructed the trust that the donations should be treated as corpus, but, also instructed that the interest accrued thereon should be ploughed back towards corpus of the trust. 

Is that possible? 

Is this good in law? 

Read on to find out!

Facts of the case

The Assessee is a charitable institution, entitled to exemption under Section 11 of the Income Tax Act. Such exemption is subject to the conditions prescribed therein.

During the assessment years in question, it was found that on the voluntary contributions that were received by the Assessee, interest was earned and the income earned on the contributions were added by the Assessee to its corpus, acting upon the instructions in that behalf issued by the donors themselves.

In other words, when the donations were made to the trust, the donors had not only instructed the trust that the donations should be treated as corpus, but, also the interest accrued thereon should be ploughed back towards corpus of the trust.

Case history

Commissioner of Income Tax (CIT) while assessing Mata Amrithandamayi Mata Trust had taken the view that section 11(1)(d) of Income Tax Act 1961 covers donations with specific direction that they shall form part of corpus and not interest thereon since it would result in exemption to interest in perpetuity, defeating legislative intent.

In appeal, Income Tax Appellate Tribunal (ITAT) held that funds received by a trust with specific direction that they shall form part of the corpus includes interest accruing/credited on deposits from above donations, if the donors had so intended

Now, Kerala High Court in an order dated August 22, 2017 (Appeal No. 34 of 2017) has also upheld Income Tax Appellate Tribunal’s (ITAT) Order that interest on corpus funds received by the Assessee as corpus donations u/s 11(1)(d) of the IT Act, should also be exempt from Income Tax.

Questions of law before the High Court

Revenue had filed the appeal before the High Court for the Assessment years from 2007-08 through 2012-13 and the common questions of law framed for the consideration of the Court were:

1. Whether the ITAT has erred on facts and law in treating the interest on corpus funds received by the Assessee as corpus donations u/s 11(1)(d) of the IT Act, to be exempt from Income Tax. 

2. While section 11(1)(d) covers donations with specific direction that they shall form part of corpus it cannot include the interest thereon as it would result in exemption to interest in perpetuity defeating the legislative intent?

3. Whether voluntary contributions received by a trust with specific direction that they shall form part of the corpus include interest accruing/credited on deposits from above donations?

Kerala High Court’s view

Having considered the submissions made by Revenue and the Assessee trust, the High Court was of the view that the questions which were framed had to be answered in the light of Section 11(1)(d) of the Act.

A reading of Section 11 shows that subject to the provisions of Sections 62 and 63, the incomes enumerated therein shall not be included in the total income of the previous year of the person in receipt of the income.

One of the incomes enumerated in clause (d) of sub-Section (1) of Section 11 is, “the income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution”.

• The High Court observed that the donors had instructed that the interest earned shall be added to the corpus of the trust and that this fact is undisputed. 

• If that be so, the interest earned on the contributions already made by the donors would also partake the character of income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust.

• And, if that be so, conclusion is irresistible that the Tribunal has rightly held that the interest earned would qualify for exemption under Section 11(1)(d) of the Income Tax Act.

The High Court did not find any question of law arising in this case for consideration. Accordingly the appeal of Revenue failed and was accordingly dismissed!