On August 8, the Comptroller and Auditor General of India ( CAG) tabled a report on performance audit on exemptions to charitable trusts and institutions under the Income Tax Act. On August 10, the Central Board of Direct Taxes (CBDT) issued Notification 94/2022 which mandated trusts and charitable institutions to bare it all in their financial statements and disclosures. It is possible that the Notification was not a reaction to the CAG report issued two days earlier, but the report could have hastened the issue of the Notification.
The audit done by the CAG revealed numerous shortcomings in the exemptions granted. There were irregularities relating to internal audit of the registration process, ineffective monitoring of accumulation of income and its utilisation, ineffective monitoring of receipts and utilisation of foreign contribution, inadequacy of survey of educational trusts, absence of provision for disclosure of TDS in the audit report, etc. which were highlighted in the earlier Performance Audit Report No. 20 of 2013. And some of the specific recommendations of the Public Accounts Committee (PAC) against such irregularities were not satisfactorily addressed by the tax department.
Analysis of 6.89 lakh cases pertaining to ITRs for AY 2014-15 to AY 2017-18 revealed that the IT Department (ITD) scrutinised only 0.25 lakh (3.7 per cent) of the total cases while 6.30 lakh (91.4 per cent) cases were processed in summary manner in an automated environment. The CAG team noted certain deficiencies in the ITD system which led to incorrect claims of exemption along with the possibility of revenue leakage such as exemptions granted due to wrong input of data required for selection criteria in CASS (Computer Assisted Scrutiny Selection).
There were absence of adequate checks and validations to match the registrations/approvals data provided in the ITR Form-7 with the ITD systems database before allowing exemptions in case the returns were processed in a summary manner. In 42 assessment cases, exemption was allowed although the taxpayers did not mention their registration details under Section 12A/10(23C) of the Act in Form-7. In 10 assessment cases, taxpayers claimed exemptions for years together prior to registration or having no registration under the Act, and the same was allowed by the Department in the summary assessment.
Records to be maintained
Notification 94/2022 dispels the notion that trusts only need to maintain a proper receipts and payments account and details of contributions received.
They would also need to maintain record of properties held by them including (i) nature, address of the properties, cost of acquisition of the asset, registration documents of the asset; (ii) transfer of such properties, the net consideration utilised in acquiring the new capital asset; and (iii) movable properties including details of the nature and cost of acquisition of the asset.
One of the interesting observations made in the report is the lack of clarity on allowing deduction for donations made from CSR funds. The CAG has suggested that, “As a significant amount is spent by the companies toward CSR activities through the Trusts claiming exemptions under Section 80G, it requires urgent attention of the Department to bring clarity to the issue to ensure that the provisions are interpreted uniformly by the AOs and to minimise the possibility of litigation.”
Trusts and charitable institutions have been on the radar of the Ministry of Revenue for some time now. The Ministry of Home Affairs made it tougher for charitable institutions to get funds from abroad. Notification 94/2022 makes it tougher under the provisions of the Income Tax Act.
Instead of making these provisions applicable to all charitable trusts and institutions, the Ministry could have thought of a threshold limit since the small and medium-sized trusts are going to rue the costs of the additional information that needs to be given. The days of trusting trusts appear to be over.
The writer is a chartered accountant