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Saturday, Sep 14, 2002

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Opinion - Taxation

Why tar-brush the trusts?

R. Anand

While trusts need monitoring, subjecting them to undue hardship for routine procedures is not welcome, says R. Anand

THE law on taxation of trusts has a long history, dating back to 1860 when income-tax itself was first introduced in the country. Even at that time, income from property solely employed for religious or public charitable purposes was exempt from tax. Though the Act was amended from time to time (in fact, no annual budgetary exercise is complete without altering any one of the provisions relating to trusts) since, tax exemptions on income derived from property held under a trust continued. Several committees in the past considered the tax treatment of trusts but, by and large, left the main fabric untouched.

The Parthasarathy Shome Committee Report (2001) also examined the issue of trusts in detail and observed that "the income-based deduction for donations under Sections 80G and 80GGA should be converted to a tax credit at the lowest marginal tax rate of 10 per cent — for equity reasons — without any limit as a fraction of gross income as set under Section 80G. Second, the exemptions under Sections 10 and 11 to 13 of the Income-Tax Act in respect of income of charitable trusts and institutions of various categories should be restricted only to donative NPOs, to be defined as those in which 90 per cent of the receipts are through donations. Third, the non-distribution constraint should be made explicit and universal."

There are reports that some of the trusts are not being run strictly on charitable lines. But then, in any sphere of activity, there are few black sheep and the whole industry or activity cannot be painted with the same tarred brush. Since tax concessions enjoyed by trusts involve sacrifice of public revenues, it became imperative to put in place several approvals/conditions in the functioning and administration of trusts and the basis on which tax exemptions are to be granted to them. Recently, the Gujarat High Court, in Orpat Charitable Trust vs CIT (2002 256 ITR 690), had to consider a case of refusal to grant renewal of Section 80G certificate.

Facts, issues

The petitioner, Orpat Charitable Trust (OCT), had approached the Commissioner of Income-Tax (CIT) seeking renewal of certificate under Section 80G(5), as OCT had already been certified to be a charitable trust right from June 10, 1993, till March 31, 2000.

That OCT had fulfilled all other requirements as stipulated under the provisions of the Act for being entitled to certificate under Section 80G of the Act was an undisputable fact.

The CIT, in his order of February 23, 2002, refused to grant approval under Section 80G(5) for the financial year April 1, 2000, to March 31, 2001, because, according to the CIT, the petitioner-trust had acted in contravention to Section 11(5) when it invested Rs 4,50,000 each as deposits in Modern Denim Ltd and Modern Teri Towels Ltd.

Also, the said companies were not approved institutions in which investments could be made by a charitable trust.

OCT approached the court by way of Special Civil Application No.1899 of 2001. And the court, vide order dated March 29, 2001, directed the CIT to consider the matter afresh without being influenced by the order passed by him earlier as well as by the court, keeping in mind the decision of the Division Bench of the court in N. N. Desai Charitable Trust vs CIT (2000 246 ITR 452).

Accordingly, the CIT passed an order on April 16, 2001, the subject matter of the current petition.

Provisions, court decision

Deduction under Section 80G is available to donations made after March 31, 1992, only if the institution or fund is approved by the Commissioner and a maximum period of five years is stipulated in the section.

The Gujarat High Court allowed OCT's writ petition and directed the Commissioner to grant renewal of Section 80G for the period April 1, 2000 to March 31, 2001.

In arriving at the decision, the court relied heavily on key observations made by the same jurisdictional court in the Desai Charitable Trust case (supra):

In the present case, it was pointed out to the CIT that the deposits in question were not repaid by the two limited companies because of financial difficulties, but in the light of the fact that one of the trustees through whom the deposits had been placed, owning up the moral responsibility had paid up the funds to the trust on his own. Insofar as the petitioner-trust was concerned, its funds having been recovered, a mere technical breach ought not to have weighed with the CIT.

Controls, conditions

For administering the mechanism of trusts and granting income-tax exemptions, the approvals/conditions are provided in the statute.

No doubt trusts have to be monitored to ensure that public funds are not misapplied or misdirected. The fact is that several genuine trusts face unnecessary harassment and delays in getting their Section 80G certificate registered or renewed. There are cases where trusts, in existence for several decades, have to wait anywhere between six months and 1 years for renewal.

It this era of technology, it is rather odd that even for something as simple as approval for renewal, which can be granted in Chennai itself, the matter is taken to Kolkata and thereafter to Delhi.

Time has come for a complete relook at the administration of trusts, particularly from the taxation point of view. Localised jurisdictional hierarchies for registration, approval, renewal, and so on, could be considered.

The lead-time for approval/renewal cannot, and should not, exceed one month.

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