High Court upholds Tribunal: Building fund donations are corpus, Section 263 revision time-barred

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Case Name

Commissioner of Income Tax (Exemption) vs M/s Choice Foundation (High Court of Kerala)

ITA No. 180 of 2019

Date: 11th November 2021

Key Takeaways

• Limitation Period Matters: Section 263 revision proceedings must be initiated within the prescribed time limits, and courts will strictly enforce these deadlines
• Corpus Donations are Protected: Voluntary contributions specifically designated for infrastructure/building purposes qualify as corpus donations under Section 11(1)(d) of the Income Tax Act
• Tribunal’s Factual Findings: High Courts generally won’t interfere with factual findings of the Tribunal unless there are exceptional circumstances
• Legal Issues Can Be Raised Anytime: Pure legal issues like limitation can be raised for the first time even before the Tribunal

Issue

The central legal questions were:

1. Whether the order passed by the Commissioner under Section 263 was barred by limitation?
2. Whether building fund contributions of Rs.2,08,91,000/- constitute corpus donations exempt under Section 11(1)(d) of the Income Tax Act?

Facts

• October 18, 2010: M/s Choice Foundation filed their income tax return for assessment year 2010-11
• January 21, 2014: The Income Tax Department issued a notice under Section 148, alleging the foundation violated Section 11(5) and was conducting business activities
• March 10, 2015: The Assessing Officer completed the assessment, initially rejecting the foundation’s explanations
• August 6, 2015: Under Section 154, the total income was reduced by Rs. 2,08,91,000/- (the building fund amount)
• May 2, 2016: The Commissioner issued a notice under Section 263 to revise the assessment
• December 22, 2016: The Commissioner passed an order under Section 263, directing fresh assessment and treating the building fund as taxable income

The foundation had received Rs.2,08,91,000/- as building fund donations from various donors who specifically mentioned their contributions were for infrastructure development.

Arguments

Revenue’s Arguments:

• The building fund of Rs.2,08,91,000/- was voluntary contribution and therefore constituted income under Section 2(24)(iia) of the Income Tax Act
• Even if treated as corpus donation, it couldn’t be excluded due to Section 13(8) of the Income Tax Act
• The assessment order was erroneous and prejudicial to revenue interests

Assessee’s Arguments:

• The Section 263 proceedings were time-barred as they should have been initiated by March 31, 2014, but were actually started in May 2016
• The donations were voluntary contributions specifically for infrastructure development, making them corpus donations
• Donors had specifically mentioned their donations were towards infrastructure development, and receipts were issued accordingly

Key Legal Precedents

The judgment referenced several important cases:

1. Alagendian Finance Limited (Supreme Court): This case established that when revisional jurisdiction under Section 263 is exercised for matters not subject to reassessment proceedings under Sections 147/148, the limitation period begins from the date of intimation under Section 143(1), not from the reassessment order
2. National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)]: This Supreme Court decision held that Tribunals are duty-bound to consider pure legal issues even if raised for the first time, as they don’t require examination of fresh facts
3. ACIT VS. M/s Rajesh Jhaveri Stock Brokers Pvt. Limited: This Supreme Court case held that intimation under Section 143(1)(a) is not an order of assessment
4. Chandraprabhu Jain v. ACIT [(2016) 50 ITR (Trib.) 355 (Mum-Trib)]: The Mumbai Tribunal held that building fund forms part of corpus fund eligible for deduction under Section 11(1)(d)

Judgement

The High Court dismissed the Revenue’s appeal and ruled in favor of M/s Choice Foundation. Here’s the court’s reasoning:

On Limitation: The court agreed with the Tribunal that the Section 263 proceedings were time-barred. Since the revision related to corpus donations not covered in the original reassessment proceedings, the limitation period should have been calculated from the Section 143(1) intimation date, making the 2016 proceedings invalid

On Corpus Donations: The court found that the building fund donations were indeed voluntary contributions specifically designated for infrastructure development. The donors had clearly mentioned this purpose, and the foundation issued appropriate receipts. This qualified the donations as corpus donations exempt under Section 11(1)(d)

Final Decision: The court held that the Tribunal’s findings were both factually and legally correct, and no substantial question of law arose for consideration. The appeal was dismissed with no order as to costs

FAQs

Q1: What does this case mean for other charitable organizations receiving building funds?

A: This case establishes that if donors specifically designate their contributions for infrastructure or building purposes, and the organization properly accounts for these as corpus donations, they can claim exemption under Section 11(1)(d) of the Income Tax Act.

Q2: Why was the limitation period so important in this case?

A: The limitation period under Section 263 is crucial because it prevents the tax department from indefinitely reopening assessments. In this case, since the revision related to an issue not covered in the original reassessment, the clock started ticking from the initial intimation date, not the reassessment date.

Q3: Can the tax department still challenge corpus donations?

A: Yes, but they must do so within the prescribed time limits and must have valid grounds. The donations must genuinely be voluntary and specifically designated for corpus purposes with proper documentation.

Q4: What’s the difference between regular donations and corpus donations?

A: Corpus donations are capital in nature and form the permanent fund of the trust/foundation. They’re typically used for creating assets like buildings or infrastructure, while regular donations are used for day-to-day charitable activities.

Q5: Can legal issues like limitation be raised for the first time before the Tribunal?

A: Yes, according to the National Thermal Power Company case cited here, pure legal issues that don’t require examination of fresh facts can be raised for the first time before the Tribunal.

Heard Mr. Christopher Abraham, the learned Standing Counsel for appellant.

2. The Commissioner of Income Tax (Exemptions), Kochi/Revenue is the appellant. M/s. Choice Foundation, C/o. M/s. Kuruvilla & Jose/assessee is the appellant. The Revenue being aggrieved by the order dated 29.01.2018 in I.T.A No.20/Coch/2017 has filed the instant appeal under Sec.260A of the Income Tax Act, 1961 (for short, 'the Act'). The subject matter of the appeal relates to the issues arising out of the return filed by the assessee for the assessment year 2010-11.

3. The circumstances surrounding the controversy in the appeal are summarily stated thus:

3.1 On 18.10.2010 the assessee filed the return of income for the assessment year 2010-11. On 21.01.2014 notice under Sec.148 was issued to the assessee on the ground that the assessee violated the provisions of Section 11(5) of the Act and in substance, the nature of activity undertaken by the assessee is in the nature of business.

4. The Assessing Officer made the assessment order through Annexure-A dated 10.03.2015 rejecting the explanation offered by the assessee. By order dated 06.08.2015 made under Sec.154 of the Act the total income of the assessee has been reduced to Rs.1,60,56,579/-. The Commissioner of the Income Tax (Exemptions) had taken up proceedings under Sec.263 of the Act. In the proceedings initiated under Sec.263, the Commissioner noted the details concerning Rs.2,08,91,000/- which was reduced from the total income of the assessee vide order dated 06.08.2015 and which constituted building fund stated to have been collected by the assessee from the donors. The consideration before the Commissioner was whether the receipt of the amount shown as building fund represents income and/or a donation given for establishment of the capital asset by the assessee. Through order in Annexure-B order 22.12.2016, the Commissioner held as follows:

“4. I have gone through the submissions made by the assessee during the course of the proceedings u/s 263 of the Income Tax Act and I find that the assessee has not adduced any convincing reply to the proposed revision under section 263 of the Income Tax Act. As already mentioned, It is a voluntary contribution and, therefore, income of the assessee within the meaning of section 2(24)(iia) of the Income Tax Act, 1961. If it is to be treated as a

corpus donation, the same can only be excluded in computing the total income under the provisions of section 11 & 12 of the Income Tax Act, 1961. By virtue of section 13(8) of the Income Tax Act, the Assessing Officer had held that nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total income of the assessee for the assessment year 2010-11. Accordingly, I am of the opinion that the income

assessed for the assessment year 2010-11 is short by Rs.2,08,91,000/-.

5. In the light of the above discussion, I find that the

assessment order passed by the Assessing Officer u/s 143(3) of

the Income Tax Act dated 10/03/2015 for the assessment year

2010-11 is erroneous in so far as it is prejudicial to the interests

of revenue. Accordingly, invoking the provisions of section 263 of

the Income Tax Act, 1961, the assessment order dated

10/03/2015 is set aside with a direction to the Assessing Officer

to redo the same afresh after considering all issues raised herein

above and after affording an opportunity of being heard to the

assessee.”

5. The assessee filed I.T.A No.20/Coch/2017 before the Tribunal

questioning the directions issued by the Commissioner of Income Tax

(Exemptions) under Sec.263 of the Act, directing reopening of assessment

and redoing the assessment for the assessment year 2010-11 afresh. The

Tribunal through the order in Annexure-C allowed the appeal filed by the

assessee. The Tribunal on the consideration of building fund by the

assessee whether constitutes corpus donation, has recorded the following

findings:

“5.5 In view of the judgment of the Hon'ble Apex Court in the

case of Alagendian Finance Limited (supra), since the revisional

jurisdiction to reopen the order of assessment was exercised in

respect of corpus donation received, which was not subject

matter of reassessment proceedings u/s 147 r.w.s. 148 of the

I.T.Act, the period of limitation provided u/s 263(2) of the I.T.Act

would begin to run from the date of intimation u/s 143(1) of the

I.T.Act and not from the date of order of reassessment. As

mentioned earlier, if the period of limitation is to be reckoned

from the date of intimation u/s 143(1) of the I.T.Act, the

Commissioner ought to have initiated revisionary proceedings on

or before 31.03.2014. In the instant case the notice u/s 263 of the

I.T.Act was issued much subsequently, i.e., on 02.05.2016 and

order u/s 263 of the I.T.Act was completed on 22.12.2016. Hence

the revisional jurisdiction is beyond the period of limitation u/s

263 of the I.T.Act and is a nullity.

5.6 The learned Departmental Representative had submitted that

the issue of limitation was not raised before the CIT, hence

cannot be raised before the Tribunal. This contention of the

learned DR cannot be entertained since the issue of limitation is

a pure legal issue going into the root of the case and does not

require examination of fresh fact. Therefore, going by the dictum

laid down by the judgment of the Hon'ble Apex Court in the case

of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR

383 (SC)], the Tribunal is duty bound to consider the legal issue

though raised before it for the first time.

5.7 Even on merits, we find that the amount received by the

assessee was voluntary in nature and the donors had specifically

mentioned that their donations are towards infrastructure

development. A copy of the specimen letters from the donors

confirming their voluntary contribution and partaking the

nature of corpus of the trust, is enclosed at page 65 of the paper

book filed by the assessee. A copy of the receipt issued by the

assessee is also enclosed at page 66 of the paper book filed by the

assessee. The building fund is capital in nature and forming part

of corpus of the trust. The words "Corpus Fund" are not defined

in the Income-tax Act. Normally, "Corpus Fund" denotes a

permanent fund separately accounted and capital in nature.

Therefore, the receipt of voluntary contributions towards

"infrastructure fund" is a voluntary contribution towards the

corpus fund and is therefore exempted u/s 11(1)(d) of the I.T.Act.

The Mumbai Bench of the Tribunal in Chandraprabhu Jain v.

ACIT [(2016) 50 ITR (Trib.) 355 (Mum-Tri.)] had held that the

building fund is forming part of the corpus fund eligible for

deduction u/s 11(1)(d) of the I.T.Act. Therefore, the initiation of

the proceedings u/s 263 of the I.T.Act for disallowing the claim

u/s 11(1)(d) of the corpus donation on the ground that it is not

voluntary and not capital in nature is not in accordance with law

and hence void. It is ordered accordingly.”

6. The above findings are under challenge in this appeal. The

substantial questions of law framed by the Revenue reads thus:

“1. Whether on the facts and circumstances of the case and

particularly in the context of the Supreme Court decision in the

case of ACIT VS.M/s Rajesh Jhaveri Stock Brokers Pvt.Limited

holding that the intimation under section 143(1)(a) is not an

order of assessment ,is the ITAT right in holding that the order

passed by the Commissioner of Income Tax(Exemptions)under

section 263 of the IT Act is barred by limitation?

2. Whether on the facts and circumstances of the case and in

law, the ITAT is right in treating the order of the Commissioner of

Income Tax (Exemptions) passed under section 263 of the IT Act as

not in accordance with law and hence invalid by holding that

contributions to the building fund amounting to Rs.20891000 are

in the nature of corpus donations especially when there are no

specific directions from the donors regarding the quantum of

contributions to be part of the corpus of the trust or institution as

required u/s 11(1)(d) of the IT Act ?”

7. Mr. Christopher Abraham argued substantially on the very

lines which found favour with the Commissioner of Income Tax

(Exemptions) for setting aside the assessment order dated 10.03.2015 and

directing reassessment by the Assessing Officer.

8. We are of the view that the grounds canvassed in support of

the substantial questions are not touching upon the reasons weighed with

the Tribunal for interdicting the order in Anneuxre-B dated 22.12.2016.

In other words, this Court examines the order of the Tribunal and

whether a ground is made out warranting interference under Sec.260A of

the Act. Briefly stated, the Tribunal found that the order in Annexure-B

is barred by limitation, secondly, the nature of receipt amounting to

Rs.2,08,91,000/- is found as building donation fund/corpus fund received

by the assessee for the purpose of building fund.

9. The findings recorded by the Tribunal firstly are findings of

fact, the Tribunal being final authority on an issue of fact, a few grounds

are available to challenge even the findings of fact recorded by the

Tribunal. The question that falls thereafter for our consideration is

whether any of the exceptional grounds available in this behalf are put

forward to assail the findings of the Tribunal. For convenience, we have

excerpted the findings recorded by the Tribunal. This Court since is in

agreement with the findings recorded both in law and fact of the

Tribunal, is also not pursuaded to restate the same conclusion in a

different way. We accept the findings recorded by the Tribunal and

further hold that the no substantial question of law arises for

consideration. The questions are answered against the Revenue and in

favour of the assessee.

The appeal fails, dismissed accordingly. No order as to costs.

Sd/-

S.V.BHATTI

JUDGE

Sd/-

BASANT BALAJI

JUDGE