Is interest on a charitable trust's fixed deposits exempt under Section 11(1)(d) of the Income-tax Act in the absence of specific donor directions?

This Tax Case Appeal is filed under Section 260A of the Income-tax Act, 1961. The assessee/appellant challenges the order dated 29.12.2023, passed by the Income Tax Appellate Tribunal, 'A' Bench, Chennai, in I.T.A.No.588/CHNY/2023 for the Assessment Year 2017–18. By the impugned order, the Tribunal upheld the addition of Rs.94,66,848/- as taxable interest income.

The assessee/trust raised the following substantial questions of law for consideration: (i) Whether the Tribunal was correct in law in confirming the order of lower authorities applying Section 11(1)(d) of the Income Tax Act, holding that the amount of interest from deposits is assessable in the hands of assessee? (ii) Whether the Tribunal was justified in law in holding that the SJDT funds belonging to the SHGs are income of assessee and liable to tax? (iii) Whether the Tribunal was correct in law in confirming the addition of interest on bank deposits held by assessee as a custodian of the SHG funds and duly returnable as per the agreements between assessee and SHGs?

Section 11(1)(d) of the Act exempts voluntary contributions only when made with a specific written direction from the donor that they shall form part of the corpus. Interest earned from investing these capital funds constitutes income generated by the trust. The trust relied on foreign donor correspondence, such as letters from Secours Catholique, CBM, and Kinder Not Hilfe. These documents show that the original grants were given for micro-credit programmes and revolving loan funds. 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 reliance placed by the appellant on the decision of the Kerala High Court in CIT (Exemptions) v. Mata Amrithanandamayi Math¹ is misplaced. In Mata Amrithanandamayi Math (supra), the donors had issued explicit written instructions that the interest earned on their specific contributions should be added back to the corpus. 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.

The appellant contended that it acted merely as a custodian of the funds for SHGs and had a legal obligation to return the principal and interest. This argument cuts no ice with the court. The appellant accumulated these funds from refunded micro-credit assistance and deposited them in fixed bank deposits under its own name. The interest was generated by the appellant trust's own financial investments. Furthermore, the trust claimed credit for the Tax Deducted at Source (TDS) of Rs.16,45,460/- deducted on the total interest income. The appellant trust cannot claim tax credit for TDS on interest income, while simultaneously excluding the underlying interest from its gross revenue receipts.

The judgment of the Delhi High Court in Director of Income Tax v. Society for Development Alternatives² does not assist the appellant. In that case, unspent project grants from tied-up funding agencies were held as unutilized grants under strict agency terms, where unspent amounts were returnable to the donors. In the instant case, the funds represent interest earned on fixed deposits held by the assessee trust, which the trust is free to use towards its general charitable objects.

The appellant trust argued that the Assessing Officer should have followed the re-assessment order for AY 2009–10. In the facts of the present case, it is clear that the interest accrued directly to the trust from its bank deposits. Any subsequent obligation or agreement to spend or allocate those funds for SHGs constitutes an application of income, not a diversion at source. Each assessment year is a separate unit. The failure of the Assessing Officer to tax similar interest in AY 2009–10 does not bar the Revenue from correctly applying Section 11(1)(d) of the Act in AY 2017–18.

For the reasons aforegiven, we are of the firm view that 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. The substantial questions of law are answered in favor of the Revenue and against the assessee. In fine, the tax case appeal is dismissed, by affirming the impugned order dated 29.12.2023 passed by the Tribunal. There shall be no order as to costs. (SUSHRUT ARVIND DHARMADHIKARI, CJ) (G.ARUL MURUGAN,J) 17.08.2026