Over the past few years, the income tax department has increased the record-keeping, reporting, and audit-related requirements for organisations seeking tax reliefs and exemptions. It has tightened the rules in order to scrutinise the abuse of tax benefits available to charitable institutions.
To curb tax evasion in the name of charity and social work, the Central Board of Direct Taxes recently mandated maintenance of records for the past ten years.
The notification inserts Rule 17 AA to the Income Tax Rules, 1962, requiring qualifying institutions (such as trusts, educational institutions and hospitals) to maintain records of the name, address, PAN, and Aadhaar number of every donor or person for whom an exemption application or claim is made.
Apart from cash books, journals, ledgers, invoices, and so on, the institution is required to maintain records of contributions, details of contributors, their identification documents, their income and assets, loans taken by the charitable institution, and borrowings. The institution must also keep track of how its earnings are spent. Furthermore, all the assessee’s assets, both movable and immovable, as well as transactions involving immovable property shall be recorded.
The documents and other paperwork must be retained for ten years from the end of each assessment year and stored at the registered offices of the entity, failing which tax exemption shall be withdrawn.
The amendment rationalises the provisions, and the rules provide a framework for the maintenance of records, which is essential for ensuring transparency in the working of the trusts.
Need for rule
The income tax law prescribes that all donations amount to income. Only donations to charitable funds are eligible for deductions.
All donations to a charitable institution amount to income, but not all income are donations. But there have been instances where charitable institutions have treated the same money as both donation and income, gaining tax advantages under both.
Also, these institutions utilise borrowed money for their operations and claim deduction and make similar claims again when the loans are repaid — a classic case of double deduction.
It is now imperative for charitable institutions such as trusts to obtain detailed information for all opening balances. Maintaining such detailed records would certainly be cumbersome and require considerable resources.
This trend of amendments and addendums requires charitable institutions to review and rethink their risk management and compliance processes.
From overhauling the registration process to strengthening the powers of authorities to scrutinise the activities of institutions, the law applicable to charities needs to have all loose ends tied.
(Pardeshi is a law officer at a REIT; Shreyashi is a legal professional and panellist at HBR Advisory Council)