ITAT Chennai Clears Educational Trust of Tax Liability on Voluntary Donations

Tribunal Overturns Revenue's Decision, Upholds Section 11 Exemption for Lakshmiammal Progressive Educational Trust

In a significant judgment, the Income Tax Appellate Tribunal (ITAT) Chennai has ruled in favor of M/s. Lakshmiammal Progressive Educational Trust, determining that donations received by the trust were voluntary in nature and thereby not taxable under Section 11 of the Income Tax Act, 1961. This decision overrules the previous assessment by the Income Tax Officer which categorized the donations as compulsory, denying the trust the benefit of tax exemption.

The case revolved around a sum of Rs.31,60,400 received as donations by the trust, which operates an educational institution. The Revenue had initially treated these as anonymous donations, subjecting them to taxation under Section 115BBC. However, upon the trust's appeal, the First Appellate Authority (FAA) acknowledged the donations were not anonymous but still held them as non-voluntary, thus maintaining the tax addition.

In its appeal to the ITAT, the trust contended that the FAA's reliance on a stayed judgment by the Madras High Court in the case of MAC Public Charitable Trust was erroneous. The tribunal noted the absence of concrete evidence or independent inquiry by the FAA to substantiate its claim that donations were compulsory or akin to capitation fees.

The ITAT's Vice President, Shri George George K, emphasized that the Revenue failed to demonstrate any compulsory link between the donations and the admission process. The tribunal observed that the average donation amount was Rs.3,911 per donor, which is insufficient to be considered as capitation fees. Furthermore, evidence presented by the trust indicated that donations were indeed voluntary and not tied to school admissions.

Supporting the trust's position, the ITAT referred to donor letters and financial records showing sporadic donations rather than consistent annual collections, which undermined the FAA's assertions of compulsory donations. The tribunal further recognized the Supreme Court's stay on the relevant High Court judgment, thereby nullifying the FAA's legal basis for its decision.

This ruling not only grants tax relief to the Lakshmiammal Progressive Educational Trust but also sets a precedent in distinguishing voluntary donations from those deemed as capitation fees. Legal observers believe this decision underscores the importance of evidentiary support in tax assessments concerning charitable contributions.

The judgment reiterates that unless the Revenue can definitively prove donations are compulsory, educational trusts can claim exemptions under Section 11, preserving their financial resources for educational purposes.

Bottom Line:

Income Tax - Donations received by an educational trust were held to be voluntary in nature and not liable for taxation under Section 11 of the Income Tax Act, 1961, as the revenue failed to prove otherwise.

Statutory provision(s): Income Tax Act, 1961 Sections 11, 115BBC

M/s. Lakshmiammal Progressive Educational Trust v. Income Tax Officer, (ITAT)('A' (SMC) Bench, Chennai) : Law Finder Doc Id # 2803057