Interest on corpus funds is taxable revenue absent an explicit donor direction to add it to corpus.

The appellant, a public charitable trust registered under Section 12AA of the Income-tax Act, 1961, filed returns for Assessment Year 2017–18 declaring nil income. During scrutiny, the Assessing Officer noted that the trust had received fixed-deposit interest of approximately ₹1.81 crore. While ₹87,44,300 was credited to the Income and Expenditure Account, ₹94,39,503, together with savings-bank interest and other income aggregating to ₹94,66,848, was credited directly to the Balance Sheet under the “SJDT Sustainable Fund” account.

The trust contended that the funds represented amounts received from Self-Help Groups and foreign donors for micro-credit programmes, which were held in a fiduciary or custodial capacity and were returnable with accrued interest. The Assessing Officer treated ₹94,66,848 as taxable revenue income, and the NFAC and Income Tax Appellate Tribunal affirmed the addition. The trust consequently filed the present appeal under Section 260A of the Act.

1. Whether interest earned on fixed deposits out of funds allegedly held for Self-Help Groups and foreign donors was assessable as income of the assessee-trust under the Income-tax Act.

2. Whether the “SJDT Sustainable Fund” constituted funds belonging to the Self-Help Groups and was therefore not income of the assessee.

3. Whether the interest on bank deposits, allegedly held by the trust as custodian and returnable under agreements with the Self-Help Groups, was taxable in the hands of the trust.

The Court applied Section 11(1)(d) of the Income-tax Act, 1961, under which voluntary contributions qualify for corpus exemption only where there is a specific written direction from the donor that the contribution forms part of the corpus.

Interest earned from investing such funds is income generated by the trust and, absent an express donor direction that the interest itself should form part of the corpus, constitutes revenue receipt requiring appropriate accounting through the Income and Expenditure Account.

The Court distinguished CIT (Exemptions) v. Mata Amritanandamayi Math, 2017 (9) TMI 1232, because that case involved express written donor directions concerning interest, and Director of Income Tax v. Society for Development Alternatives, 2012 (1) TMI 77, which concerned unspent project grants returnable under strict agency terms.

The Court further applied the principles that a subsequent obligation to utilise income generally amounts to application of income rather than diversion at source, and that each assessment year is a separate assessment unit.

The Court found that the foreign-donor correspondence referred to micro-credit and revolving-loan programmes and permitted the distribution of refunded funds to Self-Help Groups, but did not expressly direct that interest earned on fixed deposits should be added to the trust’s corpus.

The fixed deposits were maintained in the trust’s name and the interest accrued directly from the trust’s investments; accordingly, the interest was treated as income generated by the trust rather than as funds held outside its income stream.

The trust’s assertion that it was merely a custodian was also weakened by its claim for TDS credit on the entire interest income, which was inconsistent with excluding that interest from its gross receipts.

Any later obligation or arrangement to use the interest for Self-Help Groups constituted application of income and not diversion at source.

The Court also held that the Revenue was not precluded from adopting the correct legal position for AY 2017–18 merely because similar interest had allegedly not been taxed in an earlier assessment year.

The appeal was dismissed, and the Tribunal’s order dated 29.12.2023 was affirmed, with no order as to costs.