A public trust has been constituted for advancing the cause of education. In the course of its activities, it was requested by an educational institution to organize a fete for raising funds for the library of the institution on the clear understanding that the surplus generated by the event would, in entirety, belong to the said institution and the trust would not derive any income from the same. The trust handed over the entire surplus to the educational institution, In such a situation could the income generated by the trust taxed in the hands of the trust?

XYZ trust (pseudo name) Delhi

It would be a case of diversion of income at source as such diversion can be created even by a contract between two parties. The trust very well knew that the right to receive the surplus was vested with the educational institution and the collections were earmarked for the benefit of the said institution. Hence the trust cannot be taxed on the amount handed over to the educational institution which can be said to have been diverted at source. Support for this view can be taken from the decision of the Madras High Court in CIT v. Madras Race Club (1996) 219 ITR 39 (Mad).

I am engaged in the business of whole sale trade in oils and grains. I own an ancestral house. I entered into an agreement with a person who gave me a sum of Rs. 25,000 as advance against the deal. Subsequently the intending purchaser could not generate funds to complete the deal. Hence I forfeited the advance of Rs. 25,000. Kindly indicate whether this sum can be treated as my income for income tax for purposes?

Raghubans Mahta, Baroda

In almost similar situation, the Madras HC has decided in the case of CIT v. Seshasayee Bros (P) Ltd. (1996) 89 Taxman 13 (Mad) that the contract of sale was not entered into in the course of the business done by the assessee as the assesse was doing business in grains. Thus , the forfeited amount would go to increase the cost of acquisition ofthe capital assets and it could not bear the character of revenue receipt. The assessee's business was not buying and selling of real estates. The assessee was doing grain business.

Therefore, by no stretch of imagination, it could be said that agreement to sell an immovable property which was one of the assets of the company would relate to the assessee's business. Therefore, the forfeited amount could be considered neither as a capital gain nor as a revenue receipt amenable to tax.