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