Unspent amount of donations shown as current liabilities not income if received with stipulation to their use – HC

Unspent amount of donations shown as current liabilities not income if received with stipulation to their use by the Charitable Trust-High Court

ABCAUS Case Law Citation
ABCAUS 2377 (2018) 06 HC

The instant appeal was filed by the Revenue u/s 260-A of the Income Tax Act 1961against the order passed by the Income Tax Appellate Tribunal (ITAT). The substantial question of law  raised was as to whether donations received by the respondent assessee in the mid of the Financial Year with the stipulation from the donors that part of the said money may be utilized for the specified charitable purpose in the next financial year can be treated as the income for year of receipt of the donation or not?

The assessee was a Charitable Trust. During the middle of the financial year, it had received donation with specific stipulation from the donor regarding its use over a period of time which spread over to more than one year.

Accordingly, the assessee had treated the donation as income of the year only to the extent to it was utilised during the year under consideration. Rest of the

donation amount had been shown as unearned income grouped under “current liabilities” in the balance sheet being the proportionate amount to be utilized in the subsequent year .

However, the Assessing Officer (AO) denied the claim of the assessee and treated the whole amount of fonation as income for the relevant assessment year.

The CIT(A) held in favour of the assessee.

The Tribunal  observed that the Assessing Officer had denied the claim of the

Assessee without disputing that the donations in question had been received with stipulation regarding its use over a period of time.

The ITAT opined that when the donations was received in the mid of the financial year and the same was to be used over a further period of 12 months then only half of the donations to be used for the year under consideration and the balance half of the donation to be used in the next financial year.

It was observed that the donation received with a stipulation to be used over a period of time extending into succeeding year cannot be treated the income of the year under consideration alone but it had to be divided in proportion as per its use over the period of time spreading over the year under consideration and subsequent year. Hence the part of the donation was treated as income by the assessee in the year in which the obligation to spend the amount had been conditioned by the donor with a stipulation regarding the use over a period of time.

The Tribunal observed that when the assessee was complying with the specific condition of utilizing the amount of donation for a particular purpose and for a particular period of time, then it could not be given a different treatment which is contrary to the conditions of donation. Therefore the treatment given by the assessee was proper and as per the conservative accounting policy.

The Tribunal held that the donation which pertained and to be used and spent

during the next Financial Year cannot be treated as the income of the year under consideration when there was a specific condition stipulated by the donor.

The Hon’ble High Court observed that both the Appellate Authorities had concurrently held in favour of the respondent-assessee that the unspent amount of donations to be spent in the next financial year had been rightly described as

“current liabilities” and therefore, cannot be treated as income.

The Hon’ble High Court opined that findings and reasons assigned by the two Appellate Authorities below in this regard were justified and in accordance with the consistent accounting practice followed by the assessee. Accordingly the appeal was dismissed.

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