Interest On Trust's FDs Taxable Without Specific Donor Direction For Corpus: Madras High Court

The Madras High Court on 17 August held that interest earned on fixed deposits maintained by a Trust is taxable revenue receipt where donors have not specifically directed that such interest form part of the Trust's corpus.

A Bench comprising Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan dismissed an appeal filed by St. Joseph's Development Trust, upholding the addition of Rs. 94.66 lakh as taxable interest income for Assessment Year (AY) 2017-18. The judges held:

"...The letters permitted the appellant to distribute refunded funds to SHGs. However, none of the original donation letters contained an explicit direction from the donors instructing that bank interest earned on fixed deposits must automatically form part of the appellant trust's corpus."

The Trust, registered under Section 12AA of the Income Tax Act, had filed its return declaring nil income for AY 2017-18. During scrutiny, the Assessing Officer noticed that the Trust had received Rs. 1.81 crore as interest on fixed deposits.

While Rs. 87.44 lakh was credited to the Income and Expenditure Account, Rs. 94.39 lakh, along with other interest and income, was credited directly to the Balance Sheet under the “SJDT Sustainable Fund.”

The Trust contended that the funds originated from Self-Help Groups (SHGs) and foreign donors under micro-credit programmes and were required to be returned with accrued interest. It argued that the funds and interest were held in its capacity as a custodian and therefore did not constitute taxable income.

The Assessing Officer rejected the claim and treated Rs. 94.66 lakh as revenue income. The National Faceless Assessment Centre (NFAC) and the Income Tax Appellate Tribunal (ITAT) subsequently upheld the addition.

The Court held that Section 11(1)(d) of the Income Tax Act, which covers voluntary contributions made with a specific direction that they form part of a trust's corpus, requires an express direction from the donor.

It distinguished the Kerala High Court's decision in CIT (Exemptions) v. Mata Amrithanandamayi Math, noting that the donors in that case had expressly directed that interest earned on contributions should be added to the corpus. It stated:

"...In the case at hand, no such express direction issued by the donor exists. In the absence of an explicit direction from the donor at the time of contribution, interest earned on bank deposits constitutes revenue receipt and must be routed through the Income and Expenditure Account."

Rejecting the custodian argument, the Bench observed that the fixed deposits were maintained in the Trust's own name and the interest was generated from its investments. It also noted that the Trust had claimed Tax Deducted at Source (TDS) credit of Rs. 16.45 lakh on the interest income and therefore could not simultaneously exclude the interest from its gross receipts.

It further held that any subsequent obligation to utilise the funds for SHGs would amount to application of income and not diversion of income at source. It noted:

"...the Tribunal correctly held that the interest income of Rs.94,66,848/- earned on bank fixed deposits constitutes taxable revenue receipt. It does not qualify for exemption under Section 11(1)(d) of the Act due to the absence of specific donor directions..."

Further, the Bench also held that treatment of similar income in an earlier assessment year could not prevent the Revenue from taxing it in AY 2017-18, as each assessment year is a separate unit.

Accordingly, the High Court held that the Rs. 94.66 lakh interest earned on fixed deposits was taxable revenue receipt, answered the substantial questions of law in favour of the Revenue and against the Trust, and dismissed the appeal.

For Appellant: T. Vasudevan