Taxation of charitable and religious trusts is becoming more and more complicated and at times too harsh. Ever since the present Income-tax Act was enacted in 1961, there has been some amendment or the other every year; avowedly to plug certain loopholes and to avoid misuse of the exemptions. No doubt, in the recent Finance Bill, 2009, there were a couple of liberal proposals such as allowing some threshold limit for S. 115BBC (anonymous donations); removal of requirement of renewal of certificate u/s.80G, etc. However, I would like to point out two of the existing provisions which are rather problematic and unfair. These are :
(i) proviso to S. 2(15) — ‘charitable purpose’, and
(ii) S. 272A(2)(e) — Penalty for belated filing of returns.
In the past, I had written about the latter, in the context of trusts enjoying exemption u/s.10(23C) — exclusively educational and exclusively medical.
2. Let me explain the practical difficulties faced in respect of the said two provisions :
2.1 Proviso to S. 2(15) :
2.1.1 S. 2(15) defines the expression ‘charitable purpose’ to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The proviso inserted by Finance Act, 2008 qualifies the last limb — i.e., general public utility. The proviso reads as follows :
‘Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity’.
2.1.2 Basically, this proviso was brought to nullify the effect of the Gujarat High Court and Supreme Court decision in the case of Commissioner of Income-tax v. Gujarat Maritime Board, 289 ITR 139 (Gujarat HC), 295 ITR 561 (SC), respectively, where it was al-leged that under the garb of ‘Charitable Trust’, a clearly commercial activity was carried out. In the process, many small genuine charitable trusts who do something for generating the revenue are unduly hit.
2.1.3 It is interesting to note that the Income-tax Act is not averse to a trust doing business. Ss.(4) and Ss.(4A) of S. 11 expressly make it permissible. The proviso then appears to be somewhat contradictory to this position of law.
2.1.4 Last year, when this proviso was inserted, it was not clear as to its exact import and scope. However, two proposals in Finance Bill, 2009 give a message that the Government is very serious about the said proviso. The two proposals are :
(a) amendment in S. 2(15) to include preservation of environment and preservation of monuments. The memorandum states that this amendment is specifically to protect these two activities from the effect of the proviso.
(b) a clarification in S. 80G that even if a trust has lost 80G due to the proviso, the donor would get deduction u/s.80G if he has given the donation in good faith, on the belief that there is 80G deduction.
2.1.5 Against this background, consider genuine cases like :
(a) Old-age homes or women welfare association selling the products of the inmates.
(b) Associations of physically or mentally challenged people (not necessarily poor) charging for their musical programmes.
(c) Hobby centres.
(d) Library.
2.1.6 The only saving grace — or a limitation inbuilt in the proviso is that such activity should be in relation to ‘trade, commerce or business’. However, it gives good deal of nuisance value to the Administration.
2.2 Penalty u/s.272A(2)(e) :
2.2.1 It prescribes a penalty of Rs.100 per day for a delay in filing the returns U/ss.(4A) or (4C) of S. 139. S. 139(4A) requires any trust claiming exemption u/s.11 to file a return if the income before giving effect to S. 11 and S. 12 exceeds the maximum amount which is not chargeable to tax.
2.2.2 Small trusts having total collection of just marginally exceeding the prescribed limits — and having a meager surplus (or even deficit) are subjected to such penalty.
2.2.3 Interestingly, the penalty u/s.271F for other persons is just Rs.5000 and that too, if the return is filed after the end of the assessment year. Admittedly, the others are required to pay interest u/s.234A. However, by all standards, the penalty of Rs.100 per day is too much of a burden. Further, there is not much leniency in the Department in respect of even these small trusts.
3. Suggestions :
Regarding proviso to S. 2(15), there should be more clarity. There should be a clear distinction between an ‘object’ vis-à-vis an ‘activity’. As regards penalty u/s.272A(2)(e), it should be on par with S. 271F, particularly in respect of small trusts. Small trusts may be defined suitably in a practical manner.
